Case: BSES Ltd Vs. Fenner India Ltd. and Anr

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:(i) Work Order No. 2245 dated 15.3.2000/ 4.5.2000 for a sum of(ii) Work Order No. 2246 dated 15.3.2000/ 4.5.2000 for a sum of(iii) Work Order No. 2247 dated 15.3.2000/ 4.5.2000 for a sum of Rs.90,00,000/-(iv) Work Order No. 2248 dated 15.3.2000/ 4.5.2000 for a sum ofAs required by the terms and conditions of the said work/ purchase orders, the First Respondent submitted four bank guarantees from the State Bank of India (hereinafter the Second Respondent-Bank), dated 23.3.2000 bearing Nos. 288/99, 289/99, 290/99 and 291/99 in sums of Rs. 7,00,000/-, Rs. 9,00,000/-, Rs. 55,70,000/- and Rs. 38,35,000 respectively. They were unconditional irrevocable bank guarantees, under which the Second Respondent-Bank agreed to pay to the Appellant the amount claimed or demanded by the Appellant. The amounts guaranteed thereunder were payable with or without any reason in writing from the Appellant, without protest or demur or proof of satisfaction, and without reference to the First Respondent, upon being called by the Appellant, irrespective of any dispute between the Appellant and the First Respondent with regard to or touching any of the contractual terms between them. They were, of course, subject to the aggregate limits stipulated in each of the bank guarantees.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: In case of any material breach of any or all the Contracts, BSES shall have the right to embark upon the retentions and encashment of Bank Guarantees of all the contracts.On 4.12.2003, the Appellant invoked the four bank guarantees. On 7.12.2003, the First Respondent invoked the arbitration clause, as provided in the work/ purchase orders. On 8.12.2003, the First Respondent moved a petition under Section 9 of the Arbitration and Conciliation Act, 1996 (hereinafter the Arbitration Act) before the District Court, Madurai, seeking a declaration that the Appellant was not entitled to invoke the four bank guarantees. The First Respondent also sought an interim injunction against the Appellant restraining them from encashing or receiving any amount under the bank guarantees, pending disposal of the arbitration proceedings.On 22.3.2004, the learned Principal District Judge, Madurai, dismissed the Firsts 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, thes 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.

Court's reasoning:
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 guarantees27. 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.