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TMI Blog2014 (9) TMI 1252X X X X Extracts X X X X X X X X Extracts X X X X ..... k guarantees invoked by it issued by the 2nd respondent and also restraining the 2nd respondent from honouring/disbursing the guarantee amount under both bank guarantees shown in the schedule furnished by the bank to the 1st respondent. In O.P. No.178 of 2014 filed under Section 9 of the very same provision, petitioner sought the relief to restrain the 1st respondent from presenting the D.D. No.169498, dated 31-12-2014 for Rs. 10,00,00,000/- issued by the State Bank of India, Commercial Branch, Secunderabad - 2nd respondent payable at State Bank of India, Main Branch, Mumbai and D.D. No.169498, dated 31-01-2014, for a sum of Rs. 16,72,50,000/- issued by the 2nd respondent payable at the State Bank of India, Main Branch, Mumbai for encashment of the same and also to restrain the 2nd and 3rd respondents or any of their branches from honouring the said two D.Ds. and paying the amounts on presentation of the same by the 1st respondent for encashment and also to pass an injunction restraining the 2nd respondent from enforcing the securities deposited by the petitioner with them. 3. During the pendency of both the petitions before the Court below, the interim orders passed on 03-02-2014 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the petitioner for the said sum. The petitioner presented the said bank guarantee to the 2nd respondent with a request to issue a back-to-back guarantee in favour of the 1st respondent and executed a power of attorney in favour of the 2nd respondent empowering it to encash the bank guarantee lodged with them by the petitioner in the event of back-to-back guarantee issued by them is encashed. It is also stated that the banks had a cushioning period of one month where the bank guarantee of the 2nd respondent would expire first, and the other bank guarantees would follow. Along with that performance bank guarantee, the 2nd respondent issued another bank guarantee for Rs. 10,00,00,000/- on stand alone basis in favour of the 1st respondent to secure the advance payment made to the petitioner by the 1st respondent under the contract. iv) It is stated owing to the inability of the 1st respondent to provide the land under Trichy by-pass (17 Kms.), the scope of the contract value was reduced by about Rs. 120 Crores, and had the said stretch also been made available to the petitioner, there would have no out-standing under the mobilization advance. The details of bank guarantees issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... project. viii) The petitioner states that the extension of the bank guarantee by the State Bank of India, Overseas Branch, Mumbai was delayed by a few days, as the request for the extension went up to the extent of Managing Director which fact was informed by the petitioner to the 1st respondent with reasons, but the 1st respondent replied that the delay can be done away with if a letter on the official letter head of the 2nd respondent addressing the reasons for the delay was sent to it. Pursuant to the same, the petitioner requested the appropriate officer of the 2nd respondent seeking a letter to that effect. But, while the things stood thus, to its surprise, a letter of encashment of bank guarantee, dated 30-01-2014, was received from the 2nd respondent wherein the 1st respondent asked the 2nd respondent to honour the bank guarantee and disburse the amount. ix) Thus, the petitioner sets out the 'fraud' in paragraph Nos.13 and 14, alleging that dispute has arisen when the 1st respondent fraudulently invoked the bank guarantees in spite of being aware of the fact that there was a lapse on its part, and the fact that the petitioner had already extended the additional bank gua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, there was no section-wise division of the project envisaged in the construction of contract and the contract was awarded on item rate basis for the construction of the entire Project Highway. It is according to the 1st respondent, the concession agreement is an independent contract between NHAI and the Concessionaire (TK Toll Road Pvt. Ltd.) and the date of commencement of work under the concession agreement was 15-01-2008 and the work for the project commenced on 12-01- 2008 based on the terms of the letter of intent issued to the petitioner by it and the construction work was formally executed subsequently on 14-03-2008 which incorporated the actual commencement date as 12-01-2008. iii) The 1st respondent also states that Clause 4.1 of the construction contract records the commencement date as 12- 01-2008 and it is also evident from the Scheduled Project Completion Date referred as 11-04-2010 in clause 25.1 of the contract and, therefore, the statement of the petitioner that there was delay of three months in commencement of work and that the construction period of 27 months was fixed due to that delay is not correct. Even, Schedule 'H - Site Handing Over and Project Complet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 10.00 Crores. Thus, the outstanding amount under various advances yet to be paid by the petitioner, stands at Rs. 28.19 Crores (Mobilization Advance - Rs. 8.09 Crore; Material Advance - Rs. 8.1 Crore; Ad hoc Advance - Rs. 2.00 Crore; and Additional Advance - Rs. 10.00 Crore). vii) The letters repeatedly addressed by the 1st respondent to the petitioner would reflect the tardy progress of the work that the petitioner was obligated under the contract to mitigate for completion and the petitioner deliberately did not file the said letters, despite fully aware of the fact that the delays in execution of work were only on its part. viii) the 1st respondent specifically averred that since the petitioner could not execute the work at its own capacity, it (1st respondent) had to get some of the works executed by other contractors and payment was made to them directly by it on behalf of the petitioner, that too, since the petitioner has given its consent for payment by it (1st respondent) to the subcontractors directly. The 1st respondent also filed a copy of the letter reflecting the consent given by the petitioner to make payment to the subcontractors by the 1st respondent. ix) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of National Highways (Land Traffic) Act,2002 to the extent directed by NHAI/Govt agency under Concessionaire Agreement". The 1st respondent, therefore, states that the petitioner was not prevented from carrying on work and completing the construction in the land handed over to it and the non-completion was on account of its own inefficiency and lethargy. xiii) Concerning the statement of the petitioner that it is entitled for Rs. 175 Crores towards compensation, 1st respondent states that it is without any basis and fanciful which requires to be substantiated with adequate evidence. xiv) The details as regards the amount paid by the 1st respondent to the petitioner expressing that with a view to support the petitioner in early completion of the works such advances were paid which were already referred to in the above. xv) The 1st respondent states that since the petitioner started demobilizing its resources, despite addressing various notices by it not to do so, as the works were not yet completed, it (1st respondent) was left with no other option but to encash the bank guarantee. xvi) While summing up, the 1st respondent contends that the petitioner is not in the defects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... project is not complete and, therefore, claims that the said circumstance is sufficient enough to show the fraudulent intent of the 1st respondent which is an egregious nature. ii) It is contended that earlier, the petitioner mentioned in its affidavit that the claims may amount to Rs. 175.00 Crores, but on computation of cost and time over runs on the basis of well-established trade practices applicable to the business of Engineers and Contractors Claims and Compensations, the figure went up to Rs. 421.80 Crores and the petitioner has undertaken to keep the bank guarantee in force and valid till such time the arbitral award is passed by the Arbitrator and the petitioner should have no objection whatsoever for accepting the proposal and proposition put forth by the petitioner. iii) The petitioner also states that the 1st respondent has made a serious insinuation that the petitioner is guilty of suppressing material facts. The petitioner states that in fact, the 1st respondent is guilty of suppressing the material facts, inasmuch as in their counter affidavit they stated about letters written by the 1st respondent to the petitioner, but failed to list out the letters written by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r unauthorized action on the part of the petitioner on this count and the 1st respondent attempted to deliberately mislead the Court that they have made such payments in view of petitioner's failure to make those payments. vii) According to the petitioner, the 1st respondent has admitted that the land in the project road chainage, that too, only 87% of the total chainage is given over a period of 60-66 months, as against the original contract tenor of 27 months, that too, in 168 installments which by itself would establish that delivery of land was not only delayed, but has taken place in such small bits and pieces, which is technically non-viable to ensure optimum and economic use of heavy plant and equipment. But, despite heavy odds including financial constraints, the petitioner continued and completed the work. viii) It is, according to the petitioner, that on account of unprecedented time and cost over runs in the project, it suffered heavy financial losses in the project and all loan accounts with the Financiers and Banks turned irregular and non-performing assets attracting punitive recovery action from. The petitioner once again reiterated that its readiness to keep the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ked the bank guarantees only under the terms and conditions set out in clauses of the bank guarantees held otherwise. It is also stated that despite the factual aspect establishing that the bank guarantees were invoked by the 1st respondent in a fraudulent manner even after completion of the project and after entering into a supplementary agreement with NHAI for collecting toll taxes, still, rejected the request. It is, still, further contended that the appellant would suffer irretrievable loss as it has already completed the project and the notification would also have adverse effect on the future projects of the appellant apart from incurring huge monetary losses, still, the Court below, did not appreciate the said vital aspect of the case. It is, further more, contended that the Court below overlooked the fact that the central issue of the dispute is as to whether the notification of the bank guarantee by the 1st respondent was in accordance with the terms of the bank guarantee itself. Therefore, sought to set aside the order under challenge in both these appeals and grant the reliefs prayed in both the O.Ps. 10. Heard Sri D. Prakash Reddy, learned senior counsel, appearing for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant in giving consent, but the 1st respondent taking undue advantage of the same, attempted to deliberately mislead the Court stating that they have made such payments in view of the appellant's failure to make those payments. It is also contended that on account of the lapse on the part of the 1st respondent in not making available the chainages and only 87% of total chainage was given over a period of 60 to 66 months and the fact that still, the balance was remaining on the date of filing of the petition, is sufficient enough to hold that 'special equities' favour the appellant for grant of injunctions. 12. Learned counsel for the 1st respondent, while refuting the contentions of the learned counsel for the appellant, reiterated the submissions made in the counter affidavit filed by the 1st respondent. Learned counsel also projected the well settled propositions of law touching the power of the Court to grant injunctions in situations like the one obtaining in the instant case. The learned counsel contends that the Courts are empowered to grant injunctions when there is clear established 'fraud' played by the beneficiary and such fraud must be of 'egregious nature' as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supp. 1210 15. The learned counsel also relied on the decision in U.P. Coop. Federation's Case (Supra 2), wherein while dealing with the case of 'fraud', it was held by the Hon'ble Supreme Court that the 'fraud' must be egregious nature, such as to vitiate the entire underlying transaction, further holding that while coming to a conclusion as to what constitutes 'fraud', quoted with approval the observations of Sir John Donaldson, M.R. in Bolivinter Oil SA v. Chase Manhattan Bank and Ors (1984) 1 A11E.R.351, in paragraph No.56, by extracting the observations, thus: "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 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." 16. Concerning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained in paragraphs '18' and '19' thus: "18. "Contract of guarantee" is defined under Section 126 of the Indian Contract Act in the following terms: "126. 'Contract of guarantee', 'surety', 'principal debtor' and 'creditor' - A 'contract of guarantee' is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the 'surety'; the person in respect of whose default the guarantee is given is called the 'principal debtor' and the person to whom the guarantee is given is called the 'creditor'. A guarantee may be either oral or written." 19. Bank Guarantee constitutes an agreement between the Banker and the Principal, albeit, at the instance of the promisor. When a contract of guarantee is sought to be invoked, it was primarily for the bank to plead a case of fraud and not for a promisor to set up a case of breach of contract." 18. In Himadri Chemicals's Case (Supra 4), the Hon'ble Supreme Court referring to the decision in U.P. State Sugar Corporation's Case (Supra 10) stated that two exceptions for grant of an order of injun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o pay the amounts under the guarantee, in the context of answering the question whether the bank guarantee is a conditional one or not. 21. In Vinitec Electronics's Case (Supra 6), the Hon'ble Supreme Court while reiterating the principles summarized in the decision in Himadri Chemicals Industries Ltd. (Supra 1), further held that the encashment of bank guarantee would cause any 'irretrievable injury' or 'irretrievable injustice' and special equities, if any, must be pleaded specifically to injunct the beneficiary from invoking the bank guarantee. 22. In Nangia Constructions's Case (Supra 7), the Hon'ble Supreme Court while dealing with invocation of bank guarantee in relation to banker and customer held in paragraph '12' thus: "12. It is unfortunate that a nationalized bank is finding excuses for refusing to make the payment on totally untenable and frivolous grounds. The Division Bench was fully justified in making observations regarding the conduct of the nationalized bank. The entire trust, faith and confidence of people depends on the conduct and credibility of the nationalised bank. In the present day world, the national and international commercial transactions largely d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... G OVER AND PROJECT COMPLETION SCHEDULE The Site handing over to the Construction Contractor shall be immediately upon the Concessionaire/EPC Contractor receiving the same from NHAI. The Project Completion Date shall be 27 months from the date of Notice to Proceed or as may be extended under the provisions of this Agreement." 28. Concerning performance bank guarantee, Clause - 1.5.4 reads thus: 1.5.4: The construction Contractor shall, within 15 days from the date of notice to proceed, furnish to the EPC Contractor as its own cost the Performance Bank Guarantee to the extent of 5% of the Contract Price from a recognized bank in India and in the form acceptable to the EPC Contractor and for which the EPC Contractor has given his prior approval in writing. In the event of the Construction Contractor being in default in the due and diligent performance of its obligations under this Agreement and failing to remedy such default within the Cure Period, the EPC Contractor shall, without prejudice to its other rights and remedies hereunder, be entitled to encash and appropriate the Performance Guarantee as Damages for default. Upon encashment and appropriation of the Performance Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als brought by the construction Contractor to the site for incorporation in the Permanent Works, the Constructions Contractor shall (i) receive a credit in the month in which these materials are brought to the Site and (ii) be charged a debit in the month in which they are incorporation in to the Permanent Works, both such credit and debit to be determined by the EPC Contractor's representative in accordance with the provisions of article 39.2.2. 30. Concerning obligation cast on the appellant that the appellant has to work in optimising the use of site handed-over to it, Clause 7.1.5 (p) of the construction agreement stipulates thus: "(p) Work in optimizing the use of existing Site handed over to them;" 31. Further obligation cast on the appellant to assist the 1st respondent / NHAI / Government Agency in performing their respective functions, Clause 7.1.5 (ee) reads thus: "(ee) shall assistant the EPC Contractor / NHAI / Government Agency in performing functions under Control of National Highways (Land & Traffic) Act, 2002 to the extent directed by NHAI / Government Agency and under the Concession Agreement. Provided, however, the obligations, functions and all such acts al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceding month ("Monthly Period") which shall include: (a) The amounts which the Construction Contractor claims to be payable in respect of the Works Executed in the relevant Monthly Period; (b) The cumulative amount of the Monthly Sums certified till the preceding month; (c) Any amount, which the Construction Contractor considers himself to be otherwise entitled to; (d) The cumulative amount of any other amounts previously certified by the EPC Contractor's Representative; and (e) Any amounts due under Article 31; and (f) Any amount to be added in respect of any goods and materials which have been properly but not prematurely delivered to the Project Site in accordance with the Design Requirements for incorporation into the Permanent Works as per the requirement of the Article 39.3. The following amount shall be deducted from the Construction Contractors statement of claim before payment: a. the cumulative amount of payments made on account of previous certification by the EPC Contractor; b. any deduction against mobilisation advance and material advance; c. any amounts due and owing from the Construction Contractor to the EPC Contractor pursuant to this Agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f shows the deliberate negligence of the 1st respondent in cooperating with the petitioner in completion of the project. In view of the this default and breach, the Petitioner had suffered huge losses which have been quantified at Rs. 175 crores and the Petitioner has also raised these disputes with the respondent no.1, by way of letters dated 20.8.2010 and 17.10.212. The respondent No.1 having realized the huge liability which would have to be paid to the petitioner, has now embarked upon a fraudulent course of invoking the Bank Guarantees with a fraudulent motive of blocking the funds of the Petition and has now invoked the Bank Guarantees in a fraudulent manner and not for the purpose for which the Bank Guarantees have been given." 38. There is complete denial by the 1st respondent as to the allegations levelled against it touching the alleged fraud on its part by attributing total lapses on the part of the appellant that had compelled the 1st respondent to get the balance of work done through the third party - contractors with the consent of the appellant. 39. We have already adverted to in the above, the definition of 'fraud', extracted by the Hon'ble Supreme Court and as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of injunction based on 'special equities'. The attempt made by the appellant to take shelter under Clause - 8.1 relating to sub-contracting the works, gets completely condemned when the purport of the said sub-clause is examined. The obligations cast on sub-contractor/supplier, who is the appellant herein have been specifically mentioned in that sub-clause, which envisages that such consent shall not relieve the construction contractor from any liability or obligation under the agreement and that construction contractor shall be responsible for the acts, omissions, defaults and other contingencies referred to therein. Thus, the attempt of the appellant to deprive advantage under the said clause, in our view, is a concrete attempt to take undue advantage of the said clause to wriggle itself out of the obligations cast on it and consequences thereof. Therefore, in our considered view, the case of the appellant neither falls in the first exception nor in the second exception nor the appellant is successful in establishing 'special equities' favouring it to seek the equitable relief of injunction in these two appeals. 41. We also intend to point out that the 1st respondent has provi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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