M/S Bses Ltd. (Now Reliance Energy Ltd.) vs M/S Fenner India Ltd. & Anr

The Facts M/s Godavari Sugars Ltd. awarded a contract for a captive power plant to M/s BSES Ltd. (now Reliance Energy Ltd.) (hereinafter "the Appellant"). The Appellant, in turn, awarded a part of that work to M/s Fenner India Ltd. (hereinafter "the First Respondent"). In connection with this, the Appellant issued to the First Respondent, four work orders/ purchase orders, as follows:

On 10.5.2000, the Appellant and the First Respondent entered into a "wrap-around agreement", under which it was agreed that the First Respondent would perform its contractual obligations on a turnkey basis viz. as a composite one. This principle was also made applicable to the bank guarantees. Thus, Clause (4) of this agreement in terms says:

On 22.3.2004, the learned Principal District Judge, Madurai, dismissed the First Respondent's petition by holding that this was not a case where "irretrievable injustice" would be done by enforcement of the bank guarantees, nor was it a case where a strong prima facie case of fraud had been made out. Despite this finding, the learned District Judge took the view that, although the Appellant was not entitled to an order of injunction, the Appellant's rights would have to be safeguarded till the matter was disposed of in the arbitration proceedings. Accordingly, the learned District Judge directed the Appellant to maintain status quo for a period of one month (from the date of the order), within which the arbitral proceedings were to be disposed of. The parties were directed to seek their remedies before the arbitrator.

Sometime in April 2004, an application was made under Section 17 of the Arbitration Act before the Arbitral Tribunal. The First Respondent preferred an appeal before the High Court of Madras challenging the order and judgment dated 22.3.2004 of the learned District Judge. On 24.5.2004, even while the arbitral proceedings were pending, the High Court made an interim order. Further, by the impugned judgment dated 30.7.2004, the High Court allowed the appeal preferred by the First Respondent and granted the injunction as prayed for, and set aside the order of the learned District Judge.

Irretrievable Injury As we have stated repeatedly, the First Respondent can succeed only if the case can be brought under the two accepted exceptions to the general rule against intervention. Evidently, there is no "egregious fraud" so as to fall within the first exception. Hence, only one more point remains: whether encashment of the guarantees will create special equities (in particular, "irretrievable injury") in favour of the First Respondent? We are not satisfied on facts that such is the present situation.

There is no dispute that arbitral proceedings are pending. In fact, we were shown that one of the disputes referred to arbitration is whether the bank guarantees are null and void. Further, one of the substantive prayers in the arbitration made on behalf of the First Respondent, is to make an award declaring the four bank guarantees unenforceable, illegal, void and liable to be discharged. Further, there is also a prayer for permanent injunction to restrain the Appellant from encashing the bank guarantees. Therefore, since this prayer is already pending before the Arbitral Tribunal, we see no situation of "irretrievable injustice" if, at the present moment, the Appellant is allowed to encash the bank guarantees. For justice can always be rendered to the First Respondent, if he succeeds before the Arbitrators. Nor do we see any special equity in favour of the First Respondent, when there is in fact a dispute that performance was prima facie not satisfactory, which enabled the Appellant to encash all or any of the four bank guarantees.

The Final Findings In this view of the matter, we see no merit in the stand taken by the First Respondent. In our judgment, the Madras High Court erred in interfering with the bank guarantees and in granting injunction as sought for. In the result, the impugned judgment of the High Court is set aside and the judgment of the learned District Judge, Madurai is affirmed, except with regard to the maintenance of status quo directed on the encashment of guarantees. It is made clear that the Appellant is entitled to encash the bank guarantees and the Second Respondent-Bank shall be free to honour its guarantees, subject to adjustment in the arbitral proceedings.

The appeal is accordingly allowed with costs quantified at Rupees Twenty Thousand.