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PETITIONER: LARSEN & TOUBRO LIMITED

       Vs.

RESPONDENT: MAHARASHTRA STATEELECTRICITY BOARD & ORS.

DATE OF JUDGMENT13/09/1995

BENCH: VERMA, JAGDISH SARAN (J) BENCH: VERMA, JAGDISH SARAN (J) PARIPOORNAN, K.S.(J)

CITATION:  1996 AIR  334            1995 SCC  (6)  68  JT 1995 (7)    18        1995 SCALE  (5)342

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T PARIPOORNAN, J.      Leave granted.      The appellant, petitioner in arbitration petition Lodg. No.240/94  in  the  High  Court  of  Judicature  at  Bombay, initiated under Section 41 of the Arbitration Act, has filed this appeal  by special  leave against  the order  passed by N.D. Vyas,J.  dated 20.10.1994.  The appellant’s  prayer for injunction against  the first  respondent (Maharashtra State Electricity Board) from invoking or claiming or demanding or releasing  any   amount  whatsoever   under   certain   bank guarantees given  by respondent Nos, 2 to 5 was dismissed by the aforesaid  order by the learned Judge. Respondent Nos. 1 to 5 in the arbitration petition Lodg. No. 240/94 as also in this appeal  are -  (1) Maharashtra State Electricity Board, Bombay, (2)  Standard Chartered  Bank,  branch  Bombay,  (3) Grindlays Bank  p.l.c., branch  Bombay, (4) Citi Bank, N.A., branch Bombay and (5) Bank of Baroda, branch Bombay.      The first  respondent invited  tenders for  supply  and commission of  Coal Handling  Plant. The appellant’s tender, which was  accepted,  culminated  in  a  contract,  executed between the  parties,  dated  9.3.1989.  The  value  of  the contract was Rs. 61,11,07,200/-. The appellant furnished the following five Bank Guarantees : Name of   No of the Bank  Nature of Amount of  Last the Bank  Guarantee       the Bank  the Bank   extended                           Guarantee Guarantee  date.                                     in Rs. ------------------------------------------------------------ 1. Standard 529/88/153    Security  5,50,30,000  31.5.94 Chartered                 against Bank/Respondent           advance No. 2                     payment 2. ANZ     1101/88/384/G  Performance 6,17,28,000 31.3.95 Grindlays

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Bank, PLC Respondent No. 3. 3.Citi Bank, 26247        Partial   2,72,39,850   19.11.94 N.A.                      release Respondent                of reten- No. 4                     tion money 4. Bank of   73/309       Security   6,13,40,978  26.9.94 Baroda,                   against Respondent                liquidated No. 5                     damage 5. Standard  529/92/380   Partial    1,12,00,000  31.12.94 Chartered                 release of Bank                      retention Respondent                money No. 2. ------------------------------------------------------------                          (Vol.II page 4 of Paper Book) The completion  of the Plant seems to have been delayed. The parties are  blaming each  other for the delay. After taking the trial  and performance test, the Plant was taken over by the first  respondent on  10.6.1994. On the same day a take- over certificate was also issued. It is seen that earlier on 29.3.1994,  the   appellant  lodged  its  claim.  The  first respondent denied  the claims so made. They did not make any counter-claim then.  On 4.6.1994,  the appellant invoked the arbitration clause  as per  the contract.  A meeting  of the Arbitrators took  place on  14.9.1994. The  Arbitrators gave certain directions. In pursuance thereto the appellant filed its claim  on 30.9.1994.  The Arbitrators  gave time  to the first respondent  to file  their counter  claim on or before 30.11.1994.  In   the  mean-while  on  1.10.1994  the  first respondent invoked  all the Bank Guarantees except Guarantee No. 2  mentioned herein-above  (Performance Guarantee).  The Court passed  an  order  directing  the  status  quo  to  be maintained  on   17.10.1994.  Appellant   filed  arbitration petition Lodg.  No.  240/94  and  contended  that  the  Bank Guarantees have  been fraudulently  and dishonestly invoked. Regarding Guarantees  in respect  of advance  and liquidated damages, it was further alleged that they were invoked after the date  of expiry of the said Guarantees. Vyas,J. rejected the above  pleas and declined to grant the interim relief as prayed for by the appellant. As agreed to by counsel on both sides, the  interim order  was made  the order  in the  main petition itself.  Arbitration Petition  Lodg. No. 240/94 was dismissed. Hence this appeal by special leave.      We heard  appellant’s Counsel  Mr.  B.M.  Naik,  Senior Advocate, and  Mr. Harish  N. Salve,  Senior  Advocate,  who appeared for  the respondents.  At the outset we should make it clear  that the  Bank Guarantee  relating to performance, item No.  2 mentioned  in the  preceding paragraph,  was not invoked and  is not  covered by  the subject  matter of this proceeding.      Before we adjudicate the rival pleas urged before us by Counsel for  the parties,  it will be useful to bear in mind the salient  principles to  be borne in mind by the Court in the matter of grant of injunction against the enforcement of a Bank  Guarantee/irrevocable Letter of Credit. After survey of the  earlier decisions of this Court in United Commercial Bank v.  Bank of  India and  ors., 1981  (2) SCC  766,  U.P. Cooperative Federation Ltd. v. Singh Consultants & Engineers (P) Ltd.,  1988 (1)  SCC  174,  General  Electric  Technical Services Company  Inc. v.  Punj Sons (P) Ltd. and anr., 1991 (4) SCC  230 and  the decision  of the  Court of  Appeal  in England in  Elian and Rabbath v. Matsas and Matsas, 1966 (2)

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Lloyd’s Report  495 and a few American decisions, this Court in Svenska  Handelsbanken v.  M/s. Indian  Charge Chrome And Others, 1994 (1) SCC 502, laid down the law thus :-      "......  in   case  of   confirmed  bank      guarantes/irrevocable letters of credit,      it  cannot  be  interfered  with  unless      there   is   fraud   and   irretrievable      injustice involved in the case and fraud      has to  be an established fraud. ......"      (p.523)      "....... irretrievable  injustice  which      was  made   the  basis   for  grant   of      injunction really was on the ground that      the guarantee  was not encashable on its      terms......." (p.524)      "...... there should be prima facie case      of fraud  and special  equities  in  the      form   of    preventing    irretrievable      injustice  between   the  parties.  Mere      irretrievable  injustice  without  prima      facie case of established fraud is of no      consequence    in     restraining    the      encashment of  bank guarantee." (pp.526-      527)      In the  order appealed  against the  learned Judge  has referred to the decisions aforesaid and has held thus:-      "...... only  in the  event of  fraud or      irretrievable injustice, the Court would      be   entitled    to   interfere   in   a      transaction involving  a bank  guarantee      and under  no other  circumstances.  The      petitioners have  failed on  both  these      counts."      (Paper Book - Vol.I p. 7)      Appellant’s Counsel  contended that the Bank Guarantees have been  fraudulently and dishonestly invoked by the first respondent. It  was  submitted  that  so  far  as  the  Bank Guarantee towards  advance was  concerned, no amount remains as balance towards advance and in fact a sum of Rs. 27,000/- is recoverable from the first respondent. With regard to the two Bank Guarantees, dealing with retention money (Item Nos. 3 and  5) it  was contended  that the trial was taken by the first respondent  after which performance test was also done and thereafter  the take-over  was completed  and so, on the basis of  the contract,  the first  respondent was  bound to return  the   Retention  Guarantees.   Regarding  liquidated damages (Item  No.  4)  it  was  contended  that  the  first respondent should  prove  that  they  suffered  damages  and quantify the same before invoking the Guarantee. It was also contended that  the invocation of the Guarantees relating to advance and  liquidated damages  was after the expiry of the period.  The   learned  Judge   found  that   no  fraud   or irretrievable injustice  has been  made out.  The Court also held that  the appellant will be able to claim relief before the Arbitrators  by way  of  damages,  for  amounts  wrongly recovered, and  so no irretrievable injustice can be said to exist. The learned Judge also held that the first respondent by separate  letters dated 14.9.1994 and 10.5.1994 addressed to  the   Bank  of   Baroda  and   Standard  Chartered  Bank respectively, while requesting to extend the Bank Guarantee, specifically stated  that,  if  it  was  not  so  done,  the communication should  be treated as notice for encashment of the Bank Guarantee and these communications addressed to the respective banks  prior to  the Guarantees  would serve  the purpose of notice to the banks and so it cannot be held that

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the invocation  was after  the date  of expiry  of the  said Guarantees.      Having heard  Counsel  and  on  perusing  the  relevant records, we  are of  the view  that the  order of  the Court below regarding  Item No.  3 -  Partial relase  of retention money in  the sum  of Rs.  2,72,39,850/-, Guarantee given by the Citi Bank alone requires modification. We will deal with the various items in seriatim : ITEM NO. 1:          Security against advance payment                      (Advance Bank Guarantee).      The Guarantee  given on  this  count  by  the  Standard Chartered Bank  for a sum of Rs. 5,50,30,000 is contained in paper book  Volume II  at pages 109 to 113. It was agreed at the bar that the Bank Guarantee has not been invoked for the entire sum of Rs. 5.50 crores but is limited to a sum of Rs. 8 lakhs only. We find that dispute exists with regard to the said subject  matter, as is evident from the relevant papers -- (Volume  II pages  312 and  316). It  is  seen  from  the communication  dated   10.5.1994  addressed   by  the  first respondent to  the appellant,  with an  endorsement  to  the Standard Chartered  Bank, that  a request was made to extend the validity of the Bank Guarantee for a further period of 6 months, i.e.,  30.11.1994 and  in case  the extension is not received before  that date,  the communication be treated as notice for  encashment (Vol.II  pages 33  to 34 of the paper book). We  are of  the  view  that  the  invocation  of  the Guarantee is  in time.  We hold  that in  the light  of  the dispute pending  before the  Arbitrator, the Court below was justified in  declining to  grant an  injunction against the invocation of the Bank Guarantee on this count. Item Nos. 3 & 5 : Partial release of retention money :      Items 3 and 5, though come under the same category, are not similar  in content  and scope.  Item 3, relates to Bank Guarantee furnished by the Citi Bank, N.A. in the sum of Rs. 2.72 cores.  It is  a conditional  Guarantee.  Copy  of  the document is  available in  paper book Volume II at pages 122 to 126.  The relevant portions in the Guarantee in Volume II at pages 124 and 125 of the paperbook, are as follows:      "AND  WHEREAS  at  the  request  of  the      contractors,   we,    CITI   BANK   N.A.      (hereinafter referred  to as  "The Bank"      has  agreed   to  guarantee  2,72,39,850      (Rupees Two  crores, Seventy  Two lakhs,      Thirty  Nine   thousand,  Eight  hundred      fifty only)  covering the  amount of the      said payments till successful completion      of trial operations.      In pursuance  of the  said agreement and      in consideration of the board making the      said payment  to  the  contractors,  the      Bank hereby  agree  with  the  Board  as      follows:      1.   The Bank hereby agree unequivocally      and uncondition  to guarantee  the  said      amount  released   by  the   Board  till      successful    completion     of    trial      operations in  due  performance  of  the      contract and  undertakes  to  at  Bombay      within 48 hrs. on demand in writnig from      MSEB, or any officer authorised by it in      this behalf  of any  amount upto and not      exceeding Rs.  2,72,39,850/- (Rupees Two      crores, Seventy  two  lakhs,  Thirtynine      thousand, Eight  hundred fifty  only) to      the Maharashtra  State Electricity Board

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    on behalf of the contractors..........      2.   That  the  guarantee  hereby  given      shall be  continuing guarantee  upto  19      May, 1990.  The validity  of  this  Bank      Guarantee will  be  extended  one  month      prior to  its present  validity  at  the      request  of   the  Board   for  suitable      period(s) till  successful completion of      trial operations."                          (emphasis supplied)      Volume II,  pages 46  to 108,  contains a  copy of  the Agreement executed  between  the  appellant  and  the  first respondent  Board.   The  following   clauses   therein   at paragraphs 70.1,  70.2, 70.3 and 70.4.01, appearing at pages 92 to  95, are  relevant in  this connection.  They  are  as follows : "70.1     i)..........      ii)..........      iii) After  the  precommissioning  tests      are satisfactorily  completed  equipment      shall be  considered ready  for  initial      operation. During initial operation, the      complete  equipment  shall  be  operated      integral with  sub-system and supporting      equipment as a complete plant. 70.2 TRIAL OPERATION:      i)   After     satisfactory      initial      operation, the  Plant shall  then be put      on trial  operation. The period of trial      operation shall be 30 days from the date      of  completion   of  initial  operation.      During the  period of  trial  operation,      all the  necessary  adjustments  in  the      plant/equipments shall  be made  by  the      Contractor and  make ready  the same  in      all   respects   for   performance   and      guarantee test.  Out of the total period      of 30 days of trial operation, the plant      shall run  for atleast  a period  of 100      hours at  the  rated  capacity.  Out  of      these 100  hrs. a minimum of 20 hours of      operation at  the rated  load  shall  be      established for  the mode  of  operation      from wagon tippler to the bunker. 70.3 PERFORMANCE TESTS AT SITES:      i)   The  performance   test  shall   be      conducted at  site  by  the  Contractor,      after  successful  completion  of  trial      operation.   The    duration   of    the      performance test  of the  plant  at  the      rated capacity  shall  be  of  2  hours.      Performance Guarantee  test shall in any      case be  conducted  within  45  days  of      successful completion of trial operation      or within  the extended period as can be      mutually agreed. In case the performance      test cannot be conducted within a period      of 75  days after  successful completion      of trial operation due to reasons solely      attributable to  owner, the  time  frame      and method  of conductance  of the  same      shall   be    discussed   mutually   and      finalised.      v)   Any special  equipment,  tools  and      tackles  required   for  the  successful

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    completion  of   the  performance  tests      shall be provided by the Contractor free      of cost."      "70.4.01  Upon successful  completion of      all the  performance tests  at site, the      owner shall  issue to  the Contractor  a      "Taking Over  Certificate" as a proof of      the    final     acceptance    of    the      equipment........"                          (emphasis supplied) The  first  respondent  Board  intimated  the  appellant  by communication dated 10.6.1994 thus:      "After reasonable completion of the Coal      Handling plant works as per the contract      2 M  part-A, capacity  operation of  the      various  equipments   of   C.H.P.   were      planned from  15th January,  1994. Rates      as well  as design  capacity trials also      tried. Certain  points for stabilisation      which were pointed to L&T were attended.      Since   these   trials   are   generally      satisfactory as  per Clause  no. 70.2  &      70.3, all  the  commissioned  equipments      under the  contract  of  2M  Part-A  are      taken over by MSEB for regular operation      and maintenance  from 10th June, 1994 as      per  Clause   No.   70.4   of   Contract      Agreement Vol. I."                          (emphasis supplied) The appellant  wrote to  the first  respondent on  21.2.1994 that the plant was completed and so all Bank Guarantees have served their  contractual requirements.  On a perusal of the relevant clauses  in  the  contract,  executed  between  the appellant and the first respondent, and the communication of the first  respondent dated  10.6.1994, it  is fairly  clear that the stipulations or conditions mentioned as per clauses 70.2, 70.3 and 70.4 have been successfully fulfilled and the Plant was admittedly taken over by the first respondent. The Guarantee given  by the  Citi Bank,  N.A. dated 10th of May, 1989 appearing  in Volume  II at pages 122 to 126 will enure only till  successful completion of the trial operations and the plant  is taken  over. That  event  having  ensued,  the invocation of  the Guarantee  given by  the Citi  Bank dated 10.5.1985 in the sum of Rs. 2.72 crores is not encashable on its terms  and in  order to prevent irretrievable injustice, an injunction as prayed for, to respondents 1 and 4 deserves to be  issued on that score. The Court below was in error in not doing  so. We  hereby restrain  respondents 1 and 4 from invoking the Bank Guarantee aforesaid.      But item  No. 5 partial release of retention money, for which the  second respondent,  Standard Chartered  Bank  has given a Bank Guarantee for Rs. 1,12,00,000 (Rs. 1.12 crores) stands on  a different  footing. The  relevant Guarantee  is contained in  paper book  Volume II at pages 134 to 138. The first respondent  made an  ad hoc payment of Rs. 1.11 crores out of  the total  retention amount  for which the Guarantee was furnished  by the  Standard Chartered  Bank.  It  is  an unequivocal and  unconditional Guarantee.  We hold  that  no fraud or  irretrievable injustice  has been  made out by the appellant. The  court below  was justified  in declining  to issue an order of injunction on this count.      The last  item is covered by the Guarantee specified as No. 4 hereinabove. It was furnished by the Bank of Baroda as a security  against ‘liquidated  damages’. The  Guarantee is contained in paper book Volume II at pages 129-131.

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    The Bank  has  given  Guarantee  for  Rs.  6.13  crores against the  liquidated damages  recoverable  by  the  first respondent Board,  from the  appellant. The relevant clauses regarding levy  of liquidated  damages is contained at pages 99 and  100 of  the  Paper  book,  (Clause  75.01),  to  the following effect :      "75.01    If  the  Contractor  fails  to      complete the  works as  per  the  clause      72.01 item  1, 2  & 3 within a period of      25 months  from the  date of  letter  of      intent or  within any  extension of time      granted by the owner then the liquidated      damages shall  be levied by the Owner on      the Contractor  at the rate of 1/2% (one      half of  one per cent) per week of delay      of the  contract  price  for  the  works      limited to  10%  (ten  percent)  of  the      contract price of the works." Appellant’s Counsel  argued that  before invoking  the  Bank Guarantee  the  first  respondent  should  have  levied  the liquidated damages  and only  for the sum so determined, and intimated to  the  appellant,  the  Bank  Guarantee  can  be invoked. It  was further  argued that  the Guarantee was due for expiry  on 26.9.1994  and it  has been invoked after the expiry of  the said  period. There  is no force in the above pleas. It  is common  ground that the arbitration proceeding for resolving the dispute between the parties (appellant and the  respondent)  is  pending  before  the  Arbitrator.  The parties are  at issue  as to whether the Plant was completed in time  or was  delayed. They are blaming each othe for the delay.  That   is  a   matter  to   be  adjudicated  in  the proceedings. It is also brought to our notice that the first respondent has  claimed liquidated  damages  as  per  clause 75.01 of the contract of more than eight crores -- much more than the  amount of  Rs. 6.13  crores guaranteed.  Since the decision in  the arbitration  proceedings has  an impact  on this aspect,  we are of the view that no prima facie case of fraud or  irretrievable injustice  is made  out to  restrain respondents 1  and  5  from  invoking  the  Bank  Guarantee. Perusal of  the communication  dated 14.9.1994,  sent by the first respondent  to the  appellant and  also to the Bank of Baroda appearing  in paper  book Volume I at pages 35 to 36, will show  that a request to extend the validity of the Bank Guarantee which  was to expire on 26.9.1994, was made and if not so  done, the  communication was to be treated as notice for encashment  of the  Bank Guarantee.  The plea  that  the invocation was not in proper time is also without substance.      In the  result, we  hold that  the appeal  succeeds  in part. The  appellant is  entitled to an order of injunction, to a  limited extent,  against respondent Nos. 1 and 4 (Citi Bank,  N.A.),   restraining  them  from  invoking  the  Bank Guarantee given  by the  4th respondent  - Citi  Bank,  N.A. dated 1.5.1989 (item No. 3 stated hereinabove) (Volume II at pages 122  to 126  of the  Paper book). Subject to the above modification, the  order passed  by the  court  below  dated 20.10.1994 is affirmed. In the circumstances, there shall be no order as to costs.