* high court of delhi : new delhi - delhi district courtsdelhidistrictcourts.nic.in/jul09/sainath...

21
CS (OS) No.1780/2008 Page 1 of 21 * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008 in CS(OS) No.1780/2008 % Judgment reserved on: 16 th January 2008 Judgment pronounced on: 1 st July, 2009 Sainath Enterprises …Plaintiff Through: Mr. Valmiki Mehta and Mr. Siddharth Luthra, Sr. Advs. with Mr.Vaibhav Gaggar, Mr. Ankur Mittal and Mr. Maninder Singh Charak, Advs. Vs. National Building Construction Corporation Ltd & others . …Defendants Through: Mr. Neeraj Kishal Kaul, Sr. Adv with Manoj Kumar Das, Adv. Coram: HON'BLE MR. JUSTICE MANMOHAN SINGH 1. Whether the Reporters of local papers may be allowed to see the judgment? Yes 2. To be referred to Reporter or not? Yes 3. Whether the judgment should be reported Yes in the Digest? MANMOHAN SINGH, J. 1. By this order, I shall dispose of the plaintiff’s application under Order 39 Rules 1 & 2 read with Section 151 CPC being I.A.No. 10529/08 in CS(OS) No.1780/08. 2. The brief facts are that the plaintiff has filed the suit for declaration and mandatory injunction. By means of the present application, the plaintiff has sought injunction against Defendant No.2 restraining it from making payment to Defendant No.1 or its officers,

Upload: duongnguyet

Post on 21-Mar-2018

222 views

Category:

Documents


3 download

TRANSCRIPT

Page 1: * HIGH COURT OF DELHI : NEW DELHI - Delhi District Courtsdelhidistrictcourts.nic.in/Jul09/SAINATH ENTERPRISES VS. NATIONAL... · * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008

CS (OS) No.1780/2008 Page 1 of 21

* HIGH COURT OF DELHI : NEW DELHI

IA No. 10266/2008 in CS(OS) No.1780/2008 % Judgment reserved on: 16

th January 2008

Judgment pronounced on: 1st July, 2009

Sainath Enterprises …Plaintiff Through: Mr. Valmiki Mehta and Mr. Siddharth Luthra, Sr. Advs. with Mr.Vaibhav Gaggar, Mr. Ankur Mittal and Mr. Maninder Singh Charak, Advs.

Vs.

National Building Construction Corporation Ltd & others . …Defendants

Through: Mr. Neeraj Kishal Kaul, Sr. Adv with Manoj Kumar Das, Adv.

Coram:

HON'BLE MR. JUSTICE MANMOHAN SINGH 1. Whether the Reporters of local papers may be allowed to see the judgment? Yes 2. To be referred to Reporter or not? Yes 3. Whether the judgment should be reported Yes in the Digest?

MANMOHAN SINGH, J.

1. By this order, I shall dispose of the plaintiff’s application

under Order 39 Rules 1 & 2 read with Section 151 CPC being I.A.No.

10529/08 in CS(OS) No.1780/08.

2. The brief facts are that the plaintiff has filed the suit for

declaration and mandatory injunction. By means of the present

application, the plaintiff has sought injunction against Defendant No.2

restraining it from making payment to Defendant No.1 or its officers,

Page 2: * HIGH COURT OF DELHI : NEW DELHI - Delhi District Courtsdelhidistrictcourts.nic.in/Jul09/SAINATH ENTERPRISES VS. NATIONAL... · * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008

CS (OS) No.1780/2008 Page 2 of 21

agents, employees, representatives and successors etc on the basis of

invocation letter dated 7th

March 2008, 12th

March 2008, 30th

April 2008

and 29th

August 2008 in respect of Bank Guarantee No. BOL-1254/BG-

24/2005-06 dated 29th

April 1995 for Rs.1,12,91,755/-. Alternatively a

prayer is sought against Defendant No.2 restraining it from making

payment to Defendant No.1 on the basis of invocation letters as well as

bank guarantee.

3. The plaintiff is a sole proprietorship concern which claims to

be duly recognized and government approved civil contractor firm

which has carried out successfully a number of housing projects over the

years. The Defendant No.1 is a Public Limited Company incorporated

in 1960s and functions under the aegis of Ministry of Urban

Development with the sole object, inter-alia, of execution of civil

engineering projects, running project management service and

development of real estate projects.

4. Defendant No.2 is the Bank of Maharashtra who stood as

guarantor for the plaintiff and executed the performance and

mobilisation guarantee on behalf of the plaintiff.

5. Defendant Nos. 3,4 and 5 are the Assistant Manager

(Finance), Additional General Manager (Engineering) and Project

Manager of Defendant No.1 Company.

6. The Defendant No.6 is the joint venture company which has

been given the contract to finish the remaining work of the plaintiff

qua the contract granted by defendant No.1 to the plaintiff. The

Ministry of Defence, Government of India with an intention to provide

Page 3: * HIGH COURT OF DELHI : NEW DELHI - Delhi District Courtsdelhidistrictcourts.nic.in/Jul09/SAINATH ENTERPRISES VS. NATIONAL... · * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008

CS (OS) No.1780/2008 Page 3 of 21

married accommodation to the Armed Forces as part of Married

Accommodation Project (MAP) at various stations including at Nasik

wanted to construct dwelling units of various categories on the Defence

lands.

7. The plaintiff was awarded the contract by Defendant No.1 on

28th

March, 2005 for about Rs.22.58 crores and an agreement was

entered on 24th

April, 2005. The total contract price was fixed at

Rs.22,58,35,492.33. As per the contract, the time was the essence of the

contract and completion period of the work was 25 months expiring on

7th

May, 2007 (date of completion).

8. The letter of intend was issued to the plaintiff by Defendant

No.1 on 29th

March, 2005. However, as per plaintiff, the clearance to

commence work at the site was given only on 30th

April, 2005.

9. According to the plaintiff, the plaintiff has complied all the

conditions of the contract, deposited security amount as well as given

performance bank guarantee from Bank of Maharashtra, defendant No.2

for an amount of Rs.1,12,91,775/- to the Defendant No.1 on 29th

April,

2005 which was extended from time to time.

10. The plaintiff’s case is that from the very beginning the

defendant No.3 and 4 were antagonistic towards the plaintiff as they

wanted their own persons/agents to take over the contract and they

deliberately and malafidely started creating difficulties qua the

execution of the project to ensure that the plaintiff did not meet its target

in time. Defendant No.1,3, 4 and 5 in order to ensure that the plaintiff

did not execute the work in time created many problems for the plaintiff.

Page 4: * HIGH COURT OF DELHI : NEW DELHI - Delhi District Courtsdelhidistrictcourts.nic.in/Jul09/SAINATH ENTERPRISES VS. NATIONAL... · * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008

CS (OS) No.1780/2008 Page 4 of 21

They delayed issuance of clearance certificate, design and drawings,

bills, change of location of the laboratories, non supply of copies of

drawings, non appointment of authorised officer and many other

problems were created by them. The plaintiff states that the defendant

No.1 extended the time for six months vide letter dated 9th

February

2008 appreciating the difficulties faced by the plaintiff.

11. At the same time due to non clearance of various bills, the

details of which are mentioned in Paras 21 to 23 of the plaint, which was

with-held by defendant No.1 without any reason, the progress of the

work was adversely affected and it was the malafide, arbitrary and

illegal motive by defendants 1,3, 4 and 5 to prevent the plaintiff from

not completing the work within time.

12. Correspondences were exchanged between the parties

pertaining to the completion of work, non payment of the bills raised by

the plaintiff and a letter was issued to the plaintiff recommending

termination of the entire contract between the parties.

13. The plaintiff submitted that the dishonest and fraudulent act

of defendant No.4 in collusion with defendant No.3,5 and 6 is apparent

from the fact that the letter dated 26th

February 2008 threatening

termination of contract by the plaintiff was issued within 15 days of the

defendant No.1 granting six months extension to the plaintiff.

14. The contract was terminated vide letter dated 7th

March 2008

causing the performance bank guarantee bearing No.BOM-1254/BG

24/2005-06 to be fraudulently invoked contrary to the terms of the

contract.

Page 5: * HIGH COURT OF DELHI : NEW DELHI - Delhi District Courtsdelhidistrictcourts.nic.in/Jul09/SAINATH ENTERPRISES VS. NATIONAL... · * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008

CS (OS) No.1780/2008 Page 5 of 21

15. The plaintiff submits that the defendants 3 to 5 without any

authority and competence and contrary to the terms of the contract of

bank guarantee through written communication to the Chief Manager of

Defendant No.2 invoked the bank guarantee dated 29th

April 2005 for

Rs. 1,12,91,775/- furnished by the plaintiff while entering into the

contract.

16. The plaintiff submits that the invocation of bank guarantee

by the notice seeking to invoke the same did not even mention the

breach by the plaintiff, let alone giving reasons for invoking the same

and the same was invoked only in order to cause damage to the plaintiff

and the notice seeking to invoke the same was patently illegal and

insufficient and it was violative of the contract between the defendant

No.1 and 2 in respect of the bank guarantee.

17. Therefore, the defendant No.2 bank was/is not authorised or

permitted to make the payment under the bank guarantee. The

fraudulent attempt on the part of defendant No.3 and 4 to encash the

performance bank guarantee once again caused letters dated 12th

March

2008 and 5th

June 2008 to be issued to the bank to invoke the

performance bank guarantee dated 29th

April 2005. In view of the above

facts and circumstances the present suit has been filed.

18. In view of the decisions cited by learned Senior counsel for

the plaintiff, he submits that the plaintiff is entitled for interim

injunction as prayed for. The learned counsel for the defendant has also

cited various judgments in support of its submission.

19. The suit as well as the present application under Order 39

Page 6: * HIGH COURT OF DELHI : NEW DELHI - Delhi District Courtsdelhidistrictcourts.nic.in/Jul09/SAINATH ENTERPRISES VS. NATIONAL... · * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008

CS (OS) No.1780/2008 Page 6 of 21

Rules 1 & 2 CPC came up before the court on 27th

August 2008 when

the summons and notices were issued. Upon service on 1st September

2008, a statement was made by the plaintiff before the court that the

bank guarantee in question was invoked by defendants on 4th

June 2008

and the same has not been encashed as defendant No.1 has not taken any

steps in this regard.

20. Counsel for the defendant disputed the said position and

sought leave to file reply to the application. Considering the above

mentioned circumstances, the court passed the status quo order in

respect of the bank guaranee.

CONTENTION OF THE DEFENDANTS

21. The contention of the defendants, interalia, is that the

progress of the work by the plaintiff was very slow from the very

beginning till the termination of the contract on 4th

June 2008 as the

plaintiff did not possess adequate infrastructure facilities and resource

mobilization at the site by executing the project of this value of

magnitude. The main areas of concern were inadequacy of manpower

both skilled and unskilled, non procurement of construction material

and even after the defendant reminded the project periodically through

numerous correspondence as well as the meetings and discussions, the

plaintiff was never ready to improve upon their system and style of

functioning and to streamline the activities.

22. It is contended by the defendant that despite all possible

assistance and cooperation, the plaintiff was not willing to take any

remedial measures and concrete action to resolve the stalemate and there

Page 7: * HIGH COURT OF DELHI : NEW DELHI - Delhi District Courtsdelhidistrictcourts.nic.in/Jul09/SAINATH ENTERPRISES VS. NATIONAL... · * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008

CS (OS) No.1780/2008 Page 7 of 21

was hardly any progress and the work was inordinately delayed by about

one year.

23. The defendants submit that the correspondence exchanged

between the parties proves the same. It is further contended that there

was no work at all at the site from October 2006 to December 2006.

The defendants raised the mobilization advance to Rs.1.60 crores to the

plaintiff but the plaintiff failed to execute sufficient work as a result of

which the mobilization advance could not be recovered from the bills.

On the other hand, the plaintiff from time to time had given assurances

in various meetings to fully mobilize the work and to take remedial

measures to increase the work progress etc and to complete the same.

24. Since the plaintiff failed to complete the work as on

stipulated date i.e. 7th

May 2007 and had sought extension of time, the

provisional extension of time was given to the plaintiff till June 2007.

The total work till termination of contract dated 4th

June 2008 was done

only to the extent of Rs.9.80 crores (41% against the total work of

Rs.22.58 crores) within a span of 36 months as per the admitted case of

the parties.

25. It is also the contention of the defendants that the plaintiff

unilaterally stopped the whole work till January 2008wihout any reason

and subsequently in a joint meeting dated 5th

February 2008 the plaintiff

agreed to commence the work but it did not start the work despite letters

dated 26th

February 2008 and 7th

March 2008 of the defendants.

26. The defendant through officer issued a show cause notice

dated 30th

April 2008 for recession of the contract. The plaintiff vide

Page 8: * HIGH COURT OF DELHI : NEW DELHI - Delhi District Courtsdelhidistrictcourts.nic.in/Jul09/SAINATH ENTERPRISES VS. NATIONAL... · * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008

CS (OS) No.1780/2008 Page 8 of 21

letter dated 1st May 2008 sought 60 days time to restart the work in full

mobilization of the man and material at site. The defendants vide letter

dated 2nd

June 2008 did not accede to unjustified request as the

defendants found that the plaintiff was not interested in the project or its

completion.

27. Finally, the defendant No.1 terminated the contract on 4th

June 2008 in accordance with clause 71 and 72 of the contract due to

non performance of the plaintiff. The defendant has referred to various

letters in Para 8 of the written statement in order to prove its stand taken

in the written statement.

28. The stand of the defendant No.2 bank is that the plaintiff has

approached for issuance of bank guarantee for Rs. 1,12,91,775/- in

favour of defendant No.1. The defendant No.2 has received a letter of

invocation of bank guarantee for the said amount from defendants 3 and

4 to provide the original bank guarantee. On receiving the original bank

guarantee on 8th

July 2008, it issued DD No. 976530 for

Rs.1,12,91,775/- on 1st September 2008.

29. The main contention of the learned counsel for the plaintiff is

that the bank guarantee was invoked contrary to the terms of the

contract furnished by the plaintiff. It is argued that the bank guarantee

could only have been invoked by defendant No.1 in terms of the

contract of bank guarantee and the contract, interalia, in connection with

the execution of and performance of the work inclusive of any loss,

damages, charges, expenses and costs suffered by or which would be

caused to or suffered by defendant No.1 by reason of (a) any breach by

Page 9: * HIGH COURT OF DELHI : NEW DELHI - Delhi District Courtsdelhidistrictcourts.nic.in/Jul09/SAINATH ENTERPRISES VS. NATIONAL... · * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008

CS (OS) No.1780/2008 Page 9 of 21

plaintiff of any terms and conditions contained in the notice of demand,

if any, made by defendant No.1 to defendant No.2 and (b) by

satisfaction the sine qua non for invocation of the bank guarantee which

required there to be a breach of contract by the plaintiff and the clear

statement by defendant No.1 specifying the alleged breach.

30. Learned counsel for the Plaintiff has argued that the

invocation letter does not clearly fulfil the requirement agreed in the

bank guarantee for invoking the same and as such the bank guarantee

has not been validly invoked. He further argued that in the invocation

letter, the defendant has not clearly stated the terms and conditions of

the bank guarantee as also the fact whether they have suffered any loss

and damage and, if so, to what extent. He submits that as per well

settled law, the invocation of the bank guarantee must be according to

the terms of the bank guarantee. He has also referred the relevant

clauses of the bank guarantee as well as the invocation letter in support

of his submission. Lastly, he argued that the averment mentioned in the

letter of invocation is not in consonance with the terms of the bank

guarantee and under these circumstances, the said invocation is

defective and consequently the bank guarantee cannot be invoked by

defendant No.3 and 4 acting on behalf of defendant No.1.

31. It has been argued by plaintiff that the bank guarantee has

been invoked by defendant No.1 acting through defendant No.3 and 4

fraudulently against the plaintiff and it did not satisfy the sine qua non

for invoking the bank guarantee since the notice sent to invoke the same

did not mention the breach by the plaintiff. It is further argued that the

Page 10: * HIGH COURT OF DELHI : NEW DELHI - Delhi District Courtsdelhidistrictcourts.nic.in/Jul09/SAINATH ENTERPRISES VS. NATIONAL... · * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008

CS (OS) No.1780/2008 Page 10 of 21

bank guarantee was sought to be fraudulently invoked by defendants

only in order to cause damage to the plaintiff and a notice seeking to

invoke the same was illegal and was in violation of the contract

between defendant No.1 and 2 in respect of the guarantee contract,

therefore, the bank was not legally authorised or permitted to make the

payment under the said bank guarantee.

32. It is further argued by the defendant that there was no breach

committed by the plaintiff nor the same has been alleged by defendant

No.1 while invoking the bank guarantee and, therefore, it was a clear

violation of the terms of the contract and the plaintiff is entitled for

interim injunction as prayed for.

33. Learned counsel for the plaintiff has referred various

judgments in support of his submission including the decision in the

case of Hindustan Construction Co. Ltd vs. State of Harayana,

1999(8) SCC 436 Para 21, AIR 1980 174 and Harprasad & Co. Ltd

vs.Sudershan Steel Mills & Ors, AIR 1961 SC 990 wherein it was

observed that :-

“There is a distinction between absolute liability as when the money under the bank guarantee is payable on demand like a promissory note and the absolute liability which arises after the terms of the bank guarantee are fulfilled. In the instant case the intention of the parties according to the language of the bank guarantee was that the absolute liability should arise only after the terms of the bank guarantee are fulfilled. The duty of the beneficiary in making the demand on the bank is like the duty of the plaintiff to disclose the cause of action in the plaint. Just as a plaint is liable to be rejected for non-disclosure of the cause of action, a demand by the beneficiary of the bank guarantee is liable to be rejected by the bank if it does not state the facts showing that the conditions of the bank guarantee have been fulfilled. It is only after this obligation is performed by the beneficiary

Page 11: * HIGH COURT OF DELHI : NEW DELHI - Delhi District Courtsdelhidistrictcourts.nic.in/Jul09/SAINATH ENTERPRISES VS. NATIONAL... · * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008

CS (OS) No.1780/2008 Page 11 of 21

that the liability of the bank becomes absolute. The terms of the bank guarantee having not been fulfilled the amount under the bank guarantee has not become due for payment to the beneficiary.”

34. Learned counsel for the plaintiff has also referred Ansal

Properties and Industries Ltd vs. Union of India, 1994 (54) DLT 307

Para 11 which lays down that “it is thus clear that the invocation of the

bank guarantee must be in accordance with the terms of bank

guarantee”. In another case reported in Puri International Pvt Ltd vs.

NBCC, 66(1997) DLT 698 and 67(1997) DLT 231, it is held that “the

invocation letter does not fulfill the requirements agreed in the bank

guarantee for invoking the same and as such this performance bank

guarantee has not been validly invoked.”

35. The next question before this Court is as to whether the

present case falls under any of or both the exceptions, namely, whether

there is a clear fraud of which the Bank has notice and a fruad of the

beneficairy from which it seeks to benefit and another exception

whether there are any “special equities” in favour of granting injunction.

36. Before referring the judgments cited by the learned Senior

counsel for the defendants, it would be appropriate to refer to the

relevant clause of the bank guarantee involved in the matter. The clause

of bank guarantee dated 29th

April 2005 reads as under:-

“We, Bank of Maharashtra, having its registered office at Lok Mangal, 1501, Shivajinagar, Pune-411005 and the branch office at Mahalaxmi Branch, Mumbai (hereinafter called the “Bank”) do hereby unconditionally and irrevocably undertake to pay NBCC immediately on demand in writing and without protest/or demur all moneys payable by the

Page 12: * HIGH COURT OF DELHI : NEW DELHI - Delhi District Courtsdelhidistrictcourts.nic.in/Jul09/SAINATH ENTERPRISES VS. NATIONAL... · * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008

CS (OS) No.1780/2008 Page 12 of 21

contractor to NBCC in connection with the execution and performance of the works inclusive of any loss, damages, charges, expenses and costs caused to be or suffered by NBCC by reason of any breach by the contractor of any of the terms and conditions contained in the contract as specified in the notice of demand made by NBCC to the bank. Any such payment made by NBCC or the bank shall be conclusive evidence of the amount due and payable by the bank under this guarantee. However, the bank’s liability under this guarantee shall be limited to Rs.1,12,91,775/- (Rs.One crore twelve lacs ninety one thousand seven hundred and seventy fine only) in the aggregate.”

37. Similarly, the operative portion of the letter of invocation

dated 5th

June 2008 written by defendant No.1 to defendant No.2 reads

as under:-

“We would like to inform you that the above mentioned bank guarantee executed by you in our favour on behalf of M/s.Sainath Enterprises, Nashik has expired on 28

th April 2009. M/s.Sainath

Enterprises have, however, not yet completed all their obligations under the terms of the contract so the above contract terminated by competent authority vide letter No. NBCC/GM/RBG(W & I) Deolati/2008 dated 4

th June 2008 against which the

above bank guarantee was executed by you and the said bank guarantee is required for encashment.

You are, therefore, requested to encash the above bank guarantee on the existing terms and conditions. If for any reason whatsoever such encashment before the expiry of existing validity i.e. has to be done immediately, please treat this letter as our invocation notice of this guarantee in terms of clause of the said bank guarantee and remit to us a sum of Rs.1,12,91,775/-, bank guarantee balance amount treating this as our final notice of demand as the Corporation would otherwise suffer a loss consequent on the non performance of the contractual obligation by the contractor in terms of the contract.”

38. Learned counsel has referred the letter of invocation which

Page 13: * HIGH COURT OF DELHI : NEW DELHI - Delhi District Courtsdelhidistrictcourts.nic.in/Jul09/SAINATH ENTERPRISES VS. NATIONAL... · * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008

CS (OS) No.1780/2008 Page 13 of 21

clearly contemplates that (a) the plaintiff has not yet completed all their

obligations under the terms of the agreement and; (b) the details of

termination of contract vide letter dated 6th

June 2008 against which the

bank guarantee was executed by defendant No.2 and (c) that in case the

bank guarantee is not invoked, the defendant would otherwise suffer a

loss and consequent on the non performance of the contractual

obligation by the contractor in terms of the agreement.

39. It is vehemently argued that there is no force in the

submission of the plaintiff at all as the letter of invocation contains all

the ingredients which are required as per terms and conditions of the

bank guarantee and it has been rightly invoked. The defendant No.1 has

given all the valid reasons.

40. The learned counsel has also argued that it is not necessary

to specify the particular clause of the agreement or to quantify the extent

of loss and damages in the letter invoking the bank guarantee. In

support of his contention, the following judgments have been relied

upon by learned counsel for the defendant.

(i) In the case of Vinitec Electronics (P) Ltd. v. HCL

Infosystems Ltd.,(2008) 1 SCC 544 in paras 25 to 28, it was held as

under :

“25. This Court in more than one decision took the view that fraud, if any, must be of an egregious nature as to vitiate the underlying transaction. We have meticulously examined the pleadings in the present case in which no factual foundation is laid in support of the allegation of fraud. There is not even a proper allegation of any fraud as such and in fact the whole case of the appellant centres around the allegation with regard to the alleged breach of contract by the respondent. The plea of fraud in the appellant’s own words is to the following effect:

Page 14: * HIGH COURT OF DELHI : NEW DELHI - Delhi District Courtsdelhidistrictcourts.nic.in/Jul09/SAINATH ENTERPRISES VS. NATIONAL... · * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008

CS (OS) No.1780/2008 Page 14 of 21

“That despite the respondent HCL being in default of not making payment as stipulated in the bank guarantee, in perpetration of abject dishonesty and fraud, the respondent HCL fraudulently invoked the bank guarantee furnished by the applicant and sought remittance of the sums under the conditional bank guarantee from Oriental Bank of Commerce vide letter of invocation dated 16-12-2003.”

26. In our considered opinion such vague and indefinite allegations made do not satisfy the requirement in law constituting any fraud much less the fraud of an egregious nature as to vitiate the entire transaction. The case, therefore does not fall within the first exception.

27. Whether encashment of the bank guarantee would cause any “irretrievable injury” or “irretrievable injustice”. There is no plea of any “special equities” by the appellant in its favour. So far as the plea of “irretrievable injustice” is concerned the appellant in its petition merely stated:

“That should the respondent be successful in implementing its evil design, the same would not only amount to fraud, cause irretrievable injustice to the applicant, and render the arbitration nugatory and infructuous but would permit the respondent to take an unfair advantage of their own wrong at the cost and extreme prejudice of the applicant.”

28. The plea taken as regards “irretrievable injustice” is again vague and not supported by any evidence.”

(ii) In the case of Himadri Chemicals Industries Ltd. v. Coal

Tar Refining Co.,(2007) 8 SCC 110, in para 14 it was held as under :

“14. From the discussions made hereinabove relating to the principles for grant or refusal to grant of injunction to restrain enforcement of a bank guarantee or a letter of credit, we find that the following principles should be noted in the matter of injunction to restrain the encashment of a bank guarantee or a letter of credit:

(i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the beneficiary is entitled to realise such a bank guarantee or a letter of credit in terms thereof irrespective of any pending disputes relating to the terms of the contract.

(ii) The bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer.

(iii) The courts should be slow in granting an order of injunction to restrain the realisation of a bank guarantee or a letter of credit.

(iv) Since a bank guarantee or a letter of credit is an independent and a separate contract and is absolute in nature,

Page 15: * HIGH COURT OF DELHI : NEW DELHI - Delhi District Courtsdelhidistrictcourts.nic.in/Jul09/SAINATH ENTERPRISES VS. NATIONAL... · * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008

CS (OS) No.1780/2008 Page 15 of 21

the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of bank guarantees or letters of credit.

(v) Fraud of an egregious nature which would vitiate the very foundation of such a bank guarantee or letter of credit and the beneficiary seeks to take advantage of the situation.

(vi) Allowing encashment of an unconditional bank guarantee or a letter of credit would result in irretrievable harm or injustice to one of the parties concerned.”

(iii) In the case of Tata Teleservices Ltd., Hughes Ispat and

Essar Commvision Vs. Union of India, 1999 II AD(Delhi) 625, in para

16 it was held as under :

“16. That there are disputes between the parties or for that matter allegations of breach of the contract and/or a plea that no amount is due and payable by the petitioner to the respondent are all matters relating to the main agreement and have no relation and relevance so far the agreement of bank guarantees are concerned. That there are serious disputes between the parties which might even go to the root of the contract and that there are breaches committed by the beneficiary are not matters which could come within the ambit of the special equities resulting into irretrievable injury….."

(iv) In the case of U.P. State Sugar Corpn. v. Sumac

International Ltd., (1997) 1 SCC 568 in para 16 it was held as under :

“16. Clearly, therefore, the existence of any dispute between the parties to the contract is not a ground for issuing an injunction to restrain the enforcement of bank guarantees. There must be a fraud in connection with the bank guarantee. In the present case we fail to see any such fraud. The High Court seems to have come to the conclusion that the termination of the contract by the appellant and his claim that time was of the essence of the contract, are not based on the terms of the contract and, therefore, there is a fraud in the invocation of the bank guarantee. This is an erroneous view. The disputes between the parties relating to the termination of the contract cannot make invocation of the bank guarantees fraudulent.

Page 16: * HIGH COURT OF DELHI : NEW DELHI - Delhi District Courtsdelhidistrictcourts.nic.in/Jul09/SAINATH ENTERPRISES VS. NATIONAL... · * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008

CS (OS) No.1780/2008 Page 16 of 21

(v) In the case of Ansal Engineering Projects Ltd. v. Tehri

Hydro Development Corpn. Ltd., (1996) 5 SCC 450, in para 4 it was

held as under :

“4. It is settled law that bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the validity of the primary contract between the person at whose instance the bank guarantee was given and the beneficiary. Unless fraud or special equity exists, is pleaded and prima facie established by strong evidence as a triable issue, the beneficiary cannot be restrained from encashing the bank guarantee even if dispute between the beneficiary and the person at whose instance the bank guarantee was given by the bank, had arisen in performance of the contract or execution of the works undertaken in furtherance thereof. The bank unconditionally and irrevocably promised to pay, on demand, the amount of liability undertaken in the guarantee without any demur or dispute in terms of the bank guarantee. The object behind is to inculcate respect for free flow of commerce and trade and faith in the commercial banking transactions unhedged by pending disputes between the beneficiary and the contractor.”

(vi) In the case of Federal Bank Ltd. v. V.M. Jog Engg.

Ltd.,(2001) 1 SCC 663, in para 55 it was held as under :

“55. In several judgments of this Court, it has been held that courts ought not to grant injunction to restrain encashment of bank guarantees or letters of credit. Two exceptions have been mentioned — (i) fraud, and (ii) irretrievable damage. If the plaintiff is prima facie able to establish that the case comes within these two exceptions, temporary injunction under Order 39 Rule 1 CPC can be issued. It has also been held that the contract of the bank guarantee or the letter of credit is independent of the main contract between the seller and the buyer. This is also clear from Articles 3 and 4 of UCP (1983 Revision). In case of an irrevocable bank guarantee or letter of credit the buyer cannot obtain injunction against the banker on the ground that there was a breach of the contract by the seller.”

Page 17: * HIGH COURT OF DELHI : NEW DELHI - Delhi District Courtsdelhidistrictcourts.nic.in/Jul09/SAINATH ENTERPRISES VS. NATIONAL... · * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008

CS (OS) No.1780/2008 Page 17 of 21

(vii) In the case of Sikkim Subba Associates Vs. Union Bank of

India and Anr., 1993(2) ARB LR 140 (Delhi), in para 11 it was held as

under :

“11. Elaborating his contentions, Mr. Parikh urges, qua the first ground, that the letter invoking the bank guarantee is very general in its terms as it neither spells -out the breach of the agreement committed by the petitioner, nor avers that respondent No.2 has suffered loss, nor does it quantify the loss caused or would be caused to the said respondent and ts, according to the counsel, invocation of the. bank guarantee is not in accordance with the terms of the guarantee and is, therefore, bad and the said respondent is not entitled to encash it. In support, reliance is placed on a judgment of this Court in M/s Mahalingam Shetty &. Co. Ltd. V. National Projects Construction Corporation Ltd. 1990 (3) Delhi lawyer 110.”

41. Learned counsel for the defendants has argued that all the

requirements mentioned in the contract as well as in the bank guarantee

had been specified in the letter of invocation. According to him it is not

necessary that each and every term is used in the letter of invocation in

the same language. However, a clear substance has been mentioned in

the letter of invocation dated 5th

June 2008 which is the crux of the

dispute between the parties. Therefore, the contentions of the plaintiffs

cannot be accepted and uncalled for as none of the decisions cited by

the plaintiff are applicable to the facts and circumstances of the present

case.

42. From the above discussion, it can be conveniently said that

there is no res integra that the letter of credit is an independent contract

and the courts are in trend of not to interfere with the encashment of the

letter of credit unless the case falls within the purview of exceptions laid

Page 18: * HIGH COURT OF DELHI : NEW DELHI - Delhi District Courtsdelhidistrictcourts.nic.in/Jul09/SAINATH ENTERPRISES VS. NATIONAL... · * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008

CS (OS) No.1780/2008 Page 18 of 21

down by the Apex Court. Now, I shall go ahead with the discussion on

exceptions which empowers the court to interfere on the encashment of

letter of credit.

43. Therefore, as per various decisions it is determined that the

court should, therefore, be slow in granting the injunction to restrain the

realization of such a bank guarantee. As per well settled law there are

only two exceptions i.e. (i) fraud in connection with such a bank

guarantee that would vitiate the very foundation of such a bank

guarantee and (ii) cases where allowing the encashment of

unconditional bank guarantee would result in irretrievable harm or

injustice to one of the parties concerned.

Exceptions : Case of Fraud and Special Equities

44. The first exception which has been carved out by the courts

are the case of fraud of egregious nature meaning thereby that the said

fraud must be the fraud of gross nature which shakes the conscience of

the court and the said fraud must be known to the parties including party

representing as well as to the bank. Under the said circumstances, if the

said fraud is established, the court can interfere with the bank guarantee.

The legal proposition on the fraud has been laid down in the same case

of UP Cooperative Federation Ltd (Supra) which has been elaborated by

his Lordship Jagannath Shetty (as his Lordship then was) by stating the

following:

“The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear, both as to the fact of fraud and as to the bank's

Page 19: * HIGH COURT OF DELHI : NEW DELHI - Delhi District Courtsdelhidistrictcourts.nic.in/Jul09/SAINATH ENTERPRISES VS. NATIONAL... · * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008

CS (OS) No.1780/2008 Page 19 of 21

knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank's credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the bank to have it discharged.”

45. Under those circumstances, it was also held that the plea of

fraud must be of egregious nature so as to vitiate the entire underlying

transaction of the bank guarantee. It is fraud of the beneficiary and not

the fraud of somebody else that would make the Court to grant the order

of injunction as asked for. If the bank detects with the minimal

investigation, the fraudulent action of the seller, the payment could be

refused.

46. The said legal proposition has been reiterated by the Supreme

Court in the case of State Trading Corporation v. Jainsons Clothing

Corporation, (1994) 6 SCC 597, the relevant paragraphs of the

judgment are worth mentioning:

“8. The grant of injunction is a discretionary power in equity jurisdiction. The contract of guarantee is a trilateral contract which the bank has undertaken to unconditionally and unequivocally abide by the terms of the contract. It is an act of trust with full faith to facilitate free flow of trade and commerce in internal or international trade or business. It creates an irrevocable obligation to perform the contract in terms thereof. On the occurrence of the events mentioned therein the bank guarantee becomes enforceable. The subsequent disputes in the performance of the contract does not give rise to a cause nor is the court justified on that basis, to issue an injunction from enforcing the contract, i.e. bank guarantee. The parties are not left with no remedy. In the event of the dispute in the main contract ends in the party's favour, he/it is entitled to damages or other consequential reliefs.

9. It is settled law that the Court, before issuing the injunction under Order 39, Rules 1 and 2, CPC should

Page 20: * HIGH COURT OF DELHI : NEW DELHI - Delhi District Courtsdelhidistrictcourts.nic.in/Jul09/SAINATH ENTERPRISES VS. NATIONAL... · * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008

CS (OS) No.1780/2008 Page 20 of 21

prime face be satisfied that there is triable issue strong prima facie case of fraud or irretrievable injury and balance of convenience is in favour of issuing injunction to prevent irremediable injury. The court should normally insist upon enforcement of the bank guarantee and the court should not interfere with the enforcement of the contract of guarantee unless there is a specific plea of fraud or special equities in favour of the plaintiff. He must necessarily plead and produce all the necessary evidence in proof of the fraud in execution of the contract of the guarantee, but not the contract either of the original contract or any of the subsequent events that may happen as a ground for fraud.”

47. While going through the terms and conditions of the bank

guarantee as well as the letter of invocation dated 5th

June 2008, it

appears that the bank guarantee has been invoked substantially as per

the terms and conditions of the agreement between the parties. In my

view, it is not necessary to specify the particular clause of the agreement

or use the exact language of the bank guarantee. In the present case,

when terms and conditions of the bank guarantee and letter of credit are

read together, it is clear that terms and conditions of the agreement

have been referred in the letter of invocation.

48. After hearing learned counsel for the parties and having gone

through the pleadings and the decisions referred by learned counsel for

the parties and giving my careful consideration to the submissions

made at the bar, I am of the considered opinion that the plaintiff is not

entitled for injunction prayed for as the law relating to invocation of

bank guarantee is by now well settled by a catena of decisions rendered

by the Apex court.

49. I am of the view that the letter of credit has not violated the

terms and conditions as stipulated in the agreement. It appears that all

Page 21: * HIGH COURT OF DELHI : NEW DELHI - Delhi District Courtsdelhidistrictcourts.nic.in/Jul09/SAINATH ENTERPRISES VS. NATIONAL... · * HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008

CS (OS) No.1780/2008 Page 21 of 21

the ingredients mentioned in the letter of credit are fully satisfied with

the terms and conditions of the contract as well as the bank guarantee

and there is no fraud proved by the plaintiff. Therefore, the plaintiff is

not entitled for the interim injunction as prayed for. In view thereof,

the plaintiff’s application under Order XXXIX Rules 1 & 2 CPC is

dismissed. The interim order granted on 1st September, 2008 is vacated.

No costs.

MANMOHAN SINGH, J

JULY 01, 2009 SD