SMS LIMITED Vs ONGC LIMITED
O.M.P.(I) (COMM.) 428/2020 Page 1 of 55
$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 5th
Pronounced on: 12 January, 2021
th
January, 2021
+ OMP (I) (COMM) 428/2020 & I.A. 12771/2020
SMS LIMITED ….. Petitioner
Through: Mr. Vikram Nankani, Sr. Adv.
with Mr. Naresh Thacker, Mr. Abhileen
Chaturvedi, Mr. Rohit Sharma and Mr.
Dhruv Jain, Advs.
versus
OIL & NATURAL GAS LIMITED …. Respondent
Through: Mr. Abhimanyu Garg, Adv.
CORAM:
HON’BLE MR. JUSTICE C. HARI SHANKAR
% (Video- Conferencing) J U D G M E N T
1. By this petition, under Section 9 of the Arbitration &
Conciliation Act 1996 (hereinaft er referred to as “the 1996 Act ” ), the
petitioner SMS Ltd . prays for pre -arbitral injunction, restraining the
respondent ONGC Lt d. from acting in furtherance of a letter dated 15th
“OIL AND NATURAL GAS CORPORATION LIMITED
December, 2020, issued by the latter to the former. The letter reads
thus:
Onshore Engineering Services
Materials Management Section
2nd
Nelson Mandela Road, Delhi-110070 Floor, Tower -B Deendayal Urja Bhavan, 5,
_________________________________________________
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 2 of 55
Ref No. DLH/OES/MM/ ETP-NADA &
AF/X11PC11001/2011 Dated: 15.12.2020
From: Office of GGM (MM) – i/c MM, Onshore
Engineering Services, DDU Bhawan, Delhi
TO:
M/s. SMS Limited (Formerly M/s.
SMS Infrastructure Limited)
(Consortium of M/s. SMS Limited,
Nagpur, M/s. Zen Marketin g &
Technologies, Kolkata and M/s.
Tolani Projects Pvt. Ltd.,
Ankleshwar)
IT PARK. 20 S.T.P.I GAYATRI NAGAR,
PARSODI, NAGPUR-
440022
Kind Attn:
Shri Hemant
Hathiwala, CEO
Sub: Amendment No. 1 1 to the Contract No.
DLH/OES/MM/ETP-NADA & AF/X11PC11001/2011 dtd.
27.06.2012 for the Project ‘Construction of ETP at Nada,
Additional Handling Facilities alongwith la ying of
associated Pipelines in Area-Nat Ankleshwar Asset (ETP-
Nada & AF)’
Dear Sir(s),
Please refer the Contract No. DLH/OES/MM/ETP-NADA &
AF/X11PC11001/2011 dated 27.06.2012 for the Project for
“Construction of ETP at Nada, Additional Handling Facilities
alongwith laying of associated Pipelines in Area-IV at
Ankleshwar Asset (ETP-Nada & AF)”. ONGC hereby extends
the scheduled completion period of the LSTK contract (Refer
clause 6.3 of General conditions of contract for LSTK portion,
Annexure-A, Part -A of the contract) from 31.07.2014 to
31.07.2018 with levy of 10 % Liquidated Damages amounting to Rs.12,09,83,122.10 as per the clause no.6.3.2 of General
conditions of contract for LSTK portion, Annexure-A Part-A
of the contract, plus GST thereon of Rs.2,17, 76,961.97 (as
per GST legislation effective from 01.07.2017) totalling to
Rs.14,27,60,084.00 as detailed below:
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 3 of 55
Delay solely attributable to
Consortium as on
18.07.2018 a) 3 Years 5 Months and 12
days in completion of
standalone facilities (at
Padra, Dabka, Jambusar,
North Gandhar, GGS -Nada
and ETP -Nada)
b) 3 Years 11 Months and
18 days in completion of
GRE Pipelines.
Liquidated Damages@ 0.5%
per week & part thereof for
the delay 10% (maximum)
Liquidated Damages amount Rs.12,09,83,122.10
GST on Liquidated
Damages amount @ 18% Rs. 2,17,76,961.97
Total Liquidated Damages +
GST Rs. 14,27,60,084.00
Accordingly, ONGC hereby requests you to remit the amount
of Rs. 14,27,60,084.00 towards Liquidated damages and GST
thereon to ONGC by 22.12.2020.
In case the amount of Rs. 14,27,60,084.00 is not remitted to
ONGC by 22.12.2020, then LD and GST shall be recovered
by invoking and encashing the Bank Guarantees submitted by
you towards Liquidated damages and GST thereon as per
provisions of the contract, as detailed below:
Bank Guarantee
particulars (i) Bank Guarantee No.
0713614BG0000139 for
Rs.12,09,90,000.00 issued
by SBI, Industrial Finance
Branch, Nagpur.
(ii) B ank Guarantee No.
3761ILG003620 for
Rs.2,66,17,800.00 issued
by Punjab National Bank,
Dharmpeth, Nagpur.
Total amount of bank Rs.14,76,07,800.00 (i.e.
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 4 of 55
Guara ntees Rs.12,09,90,000.00 +
Rs.2,66, 17,800.00)
GST@ 18% on the total amount
of Bank Guarantees Rs. 2,65,69,404.00
Balance available after deposit
of GST to Government
authorities wh ich is equivalent
to LD to be recovered . Rs.12,10,38,396.00
All other terms and conditions of the contract shall remain
unchanged.
Sd/- 15/12/20
(Sunil Bhatia)
GGM-i/c, MM, OES”
2. For the sake of convenience, the petitioner and the respondent
would be referred to, hereinafter in this judgment, as “SMS” and
“ONGC ” respectively.
3. On 27Facts
th
June 2012, a contract, for construction of an effluent
treatment plant, was executed between a consortium led by SMS and
ONGC, where under the consortium was to cons truct the plant for
ONGC.
4. Mr. Vikram Nankani, learned S enior Counsel appearing for
SMS, invited my attention to C lauses 2.2.2.1, 2.2.2.2, 3.1, 6.3.2 and
6.3.2.2 of the contract which may, therefore be reproduced thus :
“2.2.2.1 Access to Work Site
The Company’s Representative upon receipt of request from
the Contractor intimating commencement of
Erection/construction work at site shall give to the Contractor
access to as much of the Site as may be necessary to enable
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 5 of 55
the Contractor to commence and proceed with the
construction/erection of the Works in accordance with the
program of Work in terms of Clause 2.3.4 . Any reasonable
proposal of the Contractor for access to Site to proceed with the construction/erection of work in accordance with the
program of work in terms of
Clause 2.3.4
will be considered
for approval and shall not be unreasonably withheld by the
Company. Such requests must be made to the Company’s
Representative in writing at least 7 days prior to start of the
Work.
2.2.2.2 If the Company fails to give access to Site in
accordance with the terms of this Section, resulting in delay or
expenses for the Contractor, the Contractor shall subject to
provision of Clause 5.19
be entitled to appropriate extension
of time for completion of the Works.
3.1 Contract Price
The Company shall pay to the Leader of Consortium ( as the
contractor is consortium) (as per MOU between the parties)
and as per the price break up given in the price bid, in
consideration of satisfactory completion of all the works
covered by the scope of under the contract price of
₹144,00,00,000.00 (Rupees One forty four crores only)
[(LSTK-₹ 120,98,31,220.63 (Rupees One Hundred Twenty
Crores Ninety Eight Lakhs Thirty One Thousand Two
Hundred Twenty And Paise Sixty Three Only) and O&M
₹ 23,01,68,779.37 (Rupees Twenty Three Crores One Lakh
Sixty Eight Thousand Seven Hundred Seventy Nine And
Paise Thirty Seven Only)] as per the details and break-up of
prices given in schedule of prices. The Contract price is a firm
price and the Contractor shall be bound to keep the same firm
and without escalation on any ground whatsoever until
completion of entire works against this Contract. Unless
otherwise specified in the Contract, cost of execution of
Works on turnkey basis and test etc. as specified in Contract
and all expenses, duties, taxes, fees charges in relation to or in
connection therewith including insurance risk of weather,
Constructional Plant and Equipment breakdown and Site
conditions etc. as per provisions of the Contract, shall be
deemed to be included in the Contract Price. Payment shall be
made in the currency or currencies given in the schedule of
prices for the work executed as per the procedure set forth in
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 6 of 55
Clause 3.2
. Adjustment to Contract Price, if any, shall be
made in accordance with provisions of Contract.
6.3.2 Liquidated Damages
Time is the essence of the contract. If the Contractor fails to
complete the entire work by the schedule completion date,
ONGC may without prejudice to any other right or remedy
available to it as under the Contract/Law:
i) Recover from the Contractor as ascertained and
agreed Liquidated Damages and not by way of penalty,
sum equivalent to ½% percent of the Total Contract
Price for each week of delay occurred or part thereof
beyond the schedul ed completion date subject to a
maximum of 10% of the Total Contract Price even
though ONGC may except delay in Completion of work after the expiry of the Scheduled completion
date. However, if contractor has completed certain part
of the work within the scheduled completion date and the said apart is ready for use and is accepted by
ONGC pursuant to clause No 6.3.1, then in that event,
Liquidated Damages shall be leviable only on the Contract Price for the balance work remaining
incomplete as on the scheduled date of completion.
AND/OR
ii) Terminate the Contract or a portion or part of
the Work thereof. ONGC shall give 14 days notice to
the contractor of its intention to terminate the Contract
and shall so terminate the contract unless during the 14 days notice period, the Contractor initiates remedial
action acceptable to ONGC.
In case the Contractor is unable to complete the work by the
schedule co mpletion date, it may request ONGC before expiry
of the scheduled completion date, to allow further time for performance of the contract, indicating its willingness to pay
the LD amount as agreed at(i) above. ONGC may at its
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 7 of 55
discretion allow further time as requested by the Contractor
with or without levy of LD.
The parties agree that the amount of LD provided herein is a
genuine pre -estimate of the loss/damage which will be
suffered on account of delay on the part of the Contractor and
the said amount shall be payable on demand without there
being any proof of the actual loss or damage caused by such
delay/breach.
6.3.2.2 Bank guarantee toward Liquidated Damages.
In case of delay in completion of the Project, if the Contractor
so desires, then ONGC may accept a Bank Guarantee from
the Contractor towards the maximum amount of LD
applicable as per Clause No 6.3.2 & 6.3.2.1. The
unconditional and irrevocable Bank Guarantee shall be drawn
in favour of the ONGC from a Scheduled Bank as per the
Performa given at Appendix B-17. The Bank Guarantee shall
be initially valid from the date of submission upto a period of
one year beyond the revised completion date and shall be kept
valid till the final settlement is arrived either mutually or
through Conciliation/Arbitration/Court. Upon submission of
the Bank Guarantee and its acceptance by ONGC, the amount
withheld on account of Liquidated Damages as per Clause No
6.3.2.1, shall be released to the Contractor. In case such Bank
Guarantee has been issued by a foreign bank (the same should
be issued from any of the banks indicated at Appendix A- 8 of
Vol Part III of this bid document) the same shall be accepted
only with collateral security/guarantee/ confirmation from any
scheduled Indian Bank.
After final settlement of the issue regarding levy of LD as per
the provisions of the contract, the application LD shall be
remitted by the Contractor to ONGC, failing which the
amount of LD shall be recovered by invoking the Bank
Guarantee.
Note: For the purpose of LD only, the “total contract
Price” in the clause 6.3.2.1 shall mean LSTK contract
price ( without O & M) including in surance and taxes {
which is = A= Total (P.1+ P.2+B+C) amount as per Price
Proforma ( Annexure C)}.”
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 8 of 55
(Emphasis in original)
Mr. Nankani points out that Clause 6.3.2.2 entitled ONGC to accept
the bank guarantee from SMS, towards the maximum liquidated
damages (LD) applicable as per Clauses 6.3.2 and 6.3.2.1. Clause
6.3.2(i) entitled ONGC to charge LD upto a maximum of 10% of the
total contract price. The note below C lause 6.3.2.2 clarified that, for
the purpose of LD, the total contract price would be the LSTK
contract price, without O & M.
5. Clause 3.1 stipulated the LSTK contract price to be ₹
120,98,31,220.63. As such, Mr. Nankani submits that the bank
guarantee, which could be sought from SMS under C lause 6.3.2.2
could not be for an amount in excess of ₹ 12.09 crores.
6. The scheduled completion date of the contract was 31
st
“5.1.8 Review Procedure July,
2014. SMS al leges that ONGC failed to provide encumbere d right of
use and right of way to the work site to SMS and further, that there
were various other disturbances on the site, which hindered SMS in performing its obligations under the contract. This, alleges SMS,
contravened Clause 2.2.2.1 of the contract. Further, Mr. Nankani
submits that there was delay in granting requisite approvals by ONGC,
which amounted to non-compliance with the obligation of ONGC
under Clause 5.1.8 of the contract, which read thus;
The following procedures will be utilized in Company’s
review:
a) Contractor will forward copies of all
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 9 of 55
preliminary drawings and specifications in accordance
with the correspondence schedule and procedure.
Distribution of all documents etc. is the responsibility
of the Contractor.
b) In the event that Contractor does not receive
Company’s comments on items within 10 working days [(excluding intervening Saturday(s) and Sunday(s)] from the date of receipt by the
Company/Company’s Consultant then it may be
assumed that there are no comments and the items may
be issued for construction.
c) Where marked up drawings or comments on
drawings and specifications are returned, Contractor
shall make the corrections and obtain Company’s
approval before issuing the same for construction,
transmitting copies in accordance with the correspondence procedure.
d) Should any item shown on plans issued for
construction be changed due to any reason whatsoever
after the plans have been approved, new or corrected
plans shall be made and new prints furnished for
review and approval of Company. The above will also
apply to site changes during fabrication and Erection.”
7. On 2nd July, 2014, SMS wrote to ONGC, stating that owing to
(i) slow rate of de sign and engineering progress, (ii) delay in handing
over of encumbered free land of the requisite size and (iii) unprecedented rains, it would not be possible to complete the contract
work by the stipulated date of completion, which was 31
st July, 2014.
Even so, SM S assured ONGC that work was co ntinuing at full pace,
and that 75% of the Design & E ngineering works already stood
completed. The remaining work, it was submitted, would require nine
additional months’ time to complete the project and that
commissioning of the complete project was expected on 30th April,
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 10 of 55
2015. As such, the letter requested ONGC to grant extension of time,
till 30th
April, 2015, to complete the project.
8. On 8th
“Ref. No.: SMS/ONGC/20014-15/236 July, 2014, the following communication was addressed
by SMS to ONGC:
Date: 08/07/14
To,
Incharge MM-OES
M/s Oil & Natural Gas Corporation Ltd.,
10th
South Tower, Laxmi Nagar. Floor, Core-3, Scope Minar,
Delhi-110092
Sub.: – Request to Approve Bank Guarantee against
LD Amount.
Ref.:- DLH/OES /MM/ETP-NADA & AF/XIIPCll001/2011
for Construction of ETP at Nada, Additional Handling
facilities along with lying of associated pipelines in
Area-IV at Ankleshwar Asset (ETP – NADA & AF)
R/Sir,
This is with reference to the above referred contract
execu ted by us with Project completion Date of 31st
July
2014. The Project is delayed in completion and we expect to
get the project Completed by April 2014.
As per paragraph 11.0 of NOA and clause 2.2.1 of
GCC the effective date of contract coming into force and the
commencement of works is 01.05.2012. As per paragraph
5.0 of NOA and clause 6.3.1 of GCC the Schedule Project
Completion for the LSTK portion is 31.07.2014 (27 months
from issue of NOA). However, looking to the prevailing
circumstances the completion of the work is expected to get
completed by April 2015 and we have submitted the Time
Extension Request and Reschedule vide Letter
No.SMS/ONGC/2014- 15/235 Dated 2 July 2014.
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 11 of 55
As per clause 6.3.2 “Liquidated Damages”, the
extension of time may be granted with liquidated damage. In
such case, as per clause 6.3.2.2 “Bank Guarantee towards
Liquidated Damages”, the ONGC may accept the
Unconditional Irrevocable Bank Guarantee from the
contractor towards the maximum amount of LD applicable as
per clause 6. 3.2 & 6.3.2.1.
We propose to submit a Bank Guarantee of the amount
equivalent to the applicable LD up to the period of proposed
completion date. We request you to kindly accept the
proposal and not to deduct the LD amount which will affect
the cash flows of the project.
Thanking you,
Your’s faithfully,
For SMS Infrastructure Ltd.,
Sd/-
B.P.Barbate”
9. As ONGC required corrections in the B ank Guarantee furnished
by SMS towards the liquidated damages chargeable under the
contract, SMS collected the original Bank Guarantee, from the b ank,
and replaced the Bank Guarantee after incorporating the changes
suggested by the ONGC. This fact was intimated by SMS to ONGC
vide letter dated 17th
September, 2014.
10. On 22nd
January, 2018, a meeting took place between ON GC
and the consortium, in which SMS was represented by its Chief
Executive Officer (CEO). The salient features of the discussions
which took place during the said meeting, and the decision arrived at,
as a result thereof, may be enumerated thus:
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 12 of 55
(i) The first item which was discussed was the status of the
project. The project group of ONGC informed that the plant
was “under 720 hours operation which (was) scheduled to be
completed by 11.02.2018” and that all other facilities envisaged
in the project had been commissioned. The project group further
informed that, out of 67.6 km, 58.80 kms of the GRE pipeline had been laid, and that laying of the remaining 8.80 km of
pipelines could not be completed due to non- availability of RoU
and ag itation by farmers.
(ii) The next aspect which was discussed was regarding short
closing of the contract. ONGC informed that the issue of long
delays in acquisition of RoU for the pipeline was discussed during project review in the 27
th Project Review Committee
(PRC) meeting, on 26th December, 2017. As, owing to non-
availability of RoU, seven extensions had already been granted
in the past, ONGC informed the PRC that no further extension
was being considered, a nd that the project was required to be
short closed after 31st
January, 2018.
(iii) In view of the uncertainty in the time taken in obtaining
the RoU, it was decided that the remaining length of the
pipeline would be completed through other contractors as and
when RoU became available.
11. After the aforesaid decision to short close the contract, ONGC,
vide letter dated 31st January, 2018, granted further time to complete
the remaining work till 31st July, 2018, reserving its right to levy
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 13 of 55
liquidated damages for the delay on the part of SMS in completing the
works. The said letter reads thus:
“OIL AND NATURAL GAS CORPORATION LIMITED
Onshore Engineering Services
Materials Management Section
2nd
Nelson Mandela Road, Delhi-110070 Floor, Tower -B Deendayal Urja Bhavan, 5,
Tel: +91-11- 26752377, Fax:91-11 -26129091
No. DLH/OES/MM/ETP -NADA
& AF/X11PC11001/2011 Dated: 31.1.2018
From: Office of GM (MM) – Incharge MM, Onshore
Engineering Services, ONGC, Delhi
TO:
M/s. SMS Infrastructure
ltd.
(Consortium of M/s SMS
Infrastructure ltd. , Nagpur,
M/s. Zen Marketin g &
Techno logies, Kolkata and
M/s. Tolani Projects Pvt.
Ltd., Ankleshwar)
267,Ganesh Phadnavis
Bhavan,Nr. Traingular
Park,
Dharampeth,Nagpur –
440010, Maharashtra Fax No.: 0712 -6665100
Email: balkrishna.barhate@
smsl.co.in
Kind Attention: Mr. B.P.
Barhate, VP
Sub: 8th
______________________________________________ Provisional time extension on Contractual
Completion Period for “Construction of ETP at NADA,
Additional Handling Facilities along with laying of associated
Pipelines in Area- IV at Ankleshwar Asset (ETP -NADA &
AF) against Contract No. DLH/OES/MM/ETP -NADA &
AF/X11PC11001/2011 dated 27/06/2012
Ref: 1. Amendment No. VIII vide letter No.
DLH/OES/MM/ETP-NADA & AF/X11PC11001/2011 dated
29.11.2017
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 14 of 55
2. Your lett er No. SMS/ONGC/2017-18/627 dtd. 30.01.2018
________________________________________________
Amendment No. IX
Dear Sir(s),
1. You failed to complete the entire works within the
extended contract completion period of 30.11.2017. In your
letter under ref erence, you have asked for further extension of
time for completion of the works. In view of the
circumstances stated in your above referred letter, the time for
completion of the works (LSTK portion) is extended from
31.01.2018 to 31.07.2018, reserving ON GC’s right to levy
liquidated damages from you for delay in the completion of works after the expiry of the works completion period as
mentioned in clause 6.3 of GCC for the extended period,
notwithstanding the grant of this extension.
2. The above extension of time for completion of works
shall also be subject to the right of ONGC to claim a
reduction in prices on account of reduction in statutory
duties/taxes etc. which may take place during the extended
period of works completion i.e. beyond original scheduled
completion for works (31.07.2014). However, increase in
prices during extended completion period on account of
increase in statutory duties/taxes etc. admissible under
Change in law clause of this contract shall be granted, only if
extension is due to delay on the part of ONGC.
3. Please note that in accordance with the provisions
under GST legislation implemented w.e.f. 01.07.2017, GST shall also be payable on the amount of transaction pertaining
to recovery of LD, which shall be to the account of contractor.
Sd/-31/1/18
(Sunil Bhatia)
GM(MM)- 1/c MM
”
12. On 18th July, 2018, a joint statement was prepared, which
concluded with the comment that “the delays for the period of 3 Years
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 15 of 55
5 Months and 12 days in completion of standalone facilities (at Padr a,
Dabka , Jambusar, North Gandhar, GGS -Nada and ETP -Nada) and
delays for period of 3 years 11 Months and 18 days in completion of
GRE Pipelines (were ) solely attributable to the consortium”. This
joint statement was signed by the CEO of SMS, on behalf of the
consortium, af ter recording the reservations of SMS to the delay
analysis prepared by ONGC. The caveat further stated that SMS was
reiterating the contents of its earlier communications to ONGC, in
which it had alleged that ONGC was responsible for the delays.
13. Under the cover of an email dated 21
st September, 2018, SMS
forwarded, to ONGC, its reply to the delay analysis statement prepared by ONGC, along with its own delay analysis statement dated
18
th
July, 20 18, in which ONGC was alleged to be respon sible for the
delay in completion of the project.
14. On 4th
April, 2019, the joint delay statement prepared by
ONGC, containing at the foot thereof, the signature of CEO of SMS,
with the caveat as already stated hereinabove, was emailed by SMS to ONGC under protest.
15. As a result, there were clear disputes and difference s of opinion,
between SMS and ONGC, with respect to the responsibility for the delay in completi on of the project.
16. On 16
th March, 2020, ONGC wrote to SMS, informing SMS
that Goods and Service Tax (GST) was payable on liquidated damages
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 16 of 55
and that, as per revised guidelines of ONGC on this issue, SMS was
required to submit a bank guarantee covering 1.22 times the applicable LD. As such, the bank guarantee of ₹ 12,09,90,000/ -, furnished by
SMS, was required to be revised to ₹ 14,75,99,408/ -. SMS w as,
therefore, requested to submit the revised bank guarantee, or additional bank guarantee for the differential amount.
17. SMS responded, on 17
th
March, 2020, complaining that the
demand, of ONGC, for additional bank guarantee to cover GST on the LSTK cont ract price would have cascading tax effect and that,
therefore, the request was not justified.
18. ONGC wrote back, on 17
th
March, 2020, clarifying that, as GST
on LD was leviable at source and credit of the GST could be availed
by SMS, the apprehension, of SMS, regarding cascading tax effect,
was misguided. The request, to SMS, to furnish additional bank
guaran tee, was reiterated.
19. On 17th March, 2020, SMS addressed two e -mails to ONGC,
raising further objections to the request of ONGC, to SMS, to furnish additional bank guarantee, resulting in ONGC again writing to SMS
on 17
th
March, 2020, reiterating its request for additional bank
guarantee, failing which it was stated the differential amount would have t o be withheld from future invoices of SMS.
20. SMS r esponded, on 21
st July, 2020, stating that it was
increasing the value of the bank guarantee at the request of ONGC,
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 17 of 55
only to maintain “commercial terms”. However, in view of the
difficulties that had arisen owing to the intervention of COVID
pandemic, SMS submitted that renewal of the bank guarantee would
take more th an 15 days.
21. Further communications were addressed, by SMS to ONGC,
expressing difficulty in furnishing the additional bank guarantee, on
account of imposition of nationwide lockdown by the Go vernment, in
the wake of the COVID pandemic.
22. After the lockdown had been lifted, SMS wrote to ONGC on
18th May, 2020, stating that the enhanced bank guarantee would be
submitted by 15th June, 2020. This was followed by a communication
dated 29th
July, 2020, stating that, as furnishing of fresh bank
guarantee for a revised amount was proving to be difficult, SMS was
arranging for an additional bank guarantee “against LD of ₹
2,66,09,408.91”.
23. On 5th
August, 2020, ONGC responded, informing SMS that the
additional bank guarantee required to be submitted by SMS, ha d to be
for ₹ 2,66,17,800/- .
24. SMS forwarded , vide courier dated 28th
August, 2020, an
additional b ank guarantee for the said amount.
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 18 of 55
25. In view thereof, vide subsequent communication dated 28th
August, 2020, SMS requested ONGC to release the payment of its 56th
Running Account (RA) bill.
26. In this fashion, a second bank guarantee, for ₹ 2,66,17,800/ –
was furnished by SMS to ONGC.
27. The necessity of setting out, communication by communication ,
the correspondence between SMS and ONGC , leading upto the
submission, by SMS, of the second Bank Guarantee of ₹ 2,66,17,800/ –
was necessitated on account of the submission, of Mr. Nankani, on
behalf of SMS, that the said second Bank Guarantee was completely
unjustified and contrary to the te rms of the contract between SMS and
ONGC.
28. Mr. Sandeep Sethi, learned Senior counsel for the ONGC, by
referring to the aforesaid trail of communications, sought to
demonstrate that these allegations were incorrect and that, in fact, though SMS had expressed certain reservations regarding the legitimacy of the request of ONGC for an additional bank guarantee,
the additional Bank Guarantee, was finally, voluntarily furnished by
SMS, as the contract required SMS to furnish an additional bank
guarantee towards GST.
29. On 14
th December, 2020, ONGC wrote to SMS, requiring SMS
to extend the validity of the first Bank Guarantee for ₹ 12,09,9 0,000/ -,
furnished by it, up to 28th February, 2021. This, submits Mr. Nankani,
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 19 of 55
has been done and the first Bank Guarantee is, therefore, now valid up
to 28th
February, 2021, as required by ONGC.
30. It is in these circumstances that, on 15th December, 2020,
ONGC addressed the impugned communication to SMS, essentially
calling on SMS to remit ₹ 14,27,60,084/ – towards liquidated damages
and GST thereon, to ONGC, by 22nd
December, 2020, failing which
ONGC threatened to recover the liquidated damages and GST by
encashing the Bank Guarantee s submitted by SMS.
31. SMS, in these circumstances, has appro ached this Court, by
means of the present petition under Section 9 of the 1996 Act, seeking
pre-arbitral interim relief against ONGC, restraining ONGC from acting in furth erance of the impugned letter dated 15
th
December,
2020.
32. The arbitration clause, in the contract between SMS and ONGC
(to the extent it is relevant) , reads thus:
“1.3
Laws/Arbitration
1.3.1.
Applicable laws
All questions, disputes or differences arising under, out of or
in connection with this Contract shall be settled in accordance
with laws of India (both procedural and substantive) from
time to time in force and to the exclusive jurisdiction of the
Courts in Delhi in India, subject to the provisions of
clause
1.3.2
1.3.2 Arbitration
Arbitration (Applicable in case of supply orders/Contracts
with firms, other than Public Sector Enterprises) (Not
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 20 of 55
applicable in cases valuing less than Rs 5 lakhs)
Except as otherwise provided elsewhere in the contract, if any
dispute, difference, question or disagreement arises between
the parties hereto or their respective representatives or
assignees, in connection with construction, meaning,
operation, effect interpretation of the contract or breach
thereof which parties are unable to settle mutually, the same shall be referred to Arbitration as provided hereunder.
1. A party wishing to commence arbitration
proceeding shall invoke Arbitration Clause by giving
60 days notice to the other party. The notice invoking
arbitration shall specific all the points of disputes with
details of the amount claimed to be referred to
arbitration at the time of invocation of arbitration and
not thereafter. If the claim is in foreign currency, the
claimant shall indicate its value in Indian Rupee for the
purpose of constitution of the arbitral tribunal.
*****
12. The Arbitration shall be held at the place from where
the contract has been awarded. However, parties to the contract can agree for a different place for the convenience of
all concerned.
*****
14. Subject to the aforesaid conditions, provisions of the
Arbitration and Conciliation Act, 1996 and any statutory modifications or re-enactment thereof shall apply to the
arbitration proceedings under this clause.”
33. Having addressed the impugned communication to SMS on 15th
December, 2020, granting SMS time till 22nd December, 2020 , to pay
the demanded amount of ₹ 14,76,07,800/ – ONGC wrote, to the State
Bank of India (SBI) on 21st December, 2020, calling on SBI to honour
the aforesaid Bank Guarantee furnished by SMS and credit the
amounts covered thereby into the account of ONGC.
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 21 of 55
34. The present petition came up for hearing before this Court on
22nd December, 2020, on which date SMS vociferously objected to the
very propriety of the aforesaid communication dated 21st December,
2020, from ONGC to SBI, even before the “deadline” of 22nd
December, 2020.
35. Taking a view that the issuance of the communication dated 21st
December, 2020 to SBI, by ONGC, even while ONGC had earlier
granted time to SMS till 22nd
December, 2020, was ex facie unfair and
could also be treated as an attempt to over reach the court, I had
restrained ONGC from acting on the basis of the said letter and had also directe d ONGC to immediately write to SBI withdrawing the said
instructions.
36. Happily, ONGC has complied with the said directions, and has,
apparently, written to SBI withdrawing the earlier communication
dated 21
st
December, 2020.
37. That, however, puts the clock back to the stage when the
impugned letter dated 15th
December, 2020 was issued.
Rival Contentions
38. I have heard, at length, Mr. Vikram Nankani, learn ed Senior
Counsel for the petitioner and Mr. Sandeep Sethi, learned Senior Counsel for the respondent.
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 22 of 55
39. Before adverting to the contentions advanced by learned Senior
Counsel , it would be appropriate to set out the opening paras 1 and 2
of the Bank Guarant ees dated 21st August, 2014 and 21st August,
2020 , thus:
Bank guarantee dated 21st August, 2014
“1. In consideration of Oil and Natural Gas Corporation
ltd. incorporated under the Companies Act 1956 having its
registered office at JeevanBharati, Tower -II, 124 Indira
Chowk, New Delhi – 110 001, India its Onshore Engineering
Service Office located at 8th Floor, Scope Minar, Core-3,
laxminagar New Delhi 110092 (India) and its office located at
ONGC Ankleshwar-393Q10 Dist Bharuch Gujrat (hereinafter
referred to as “Company” which expression shall unless
repugnant to the context or meaning thereof includes all its
successors, administrators, executors and assigns) having
entered into a Contract No. DLH/OES/MM/ETP –
NADA&AF/Xll PC11001/201I dated 27 -06-2012 (hereinafter
called “The Contract” which expression shall include all the amendments thereto) with M/s SMS lnfrastructure Ltd ,
having its registered head office at 267, Ganesh Phadnavis
Bhavan, Near Triangular Park, Dharampeth, Nagpur
(hereinafter referred to as “The Contractor which expression
shall unless repugnant to the context or meaning thereof
include all its successors, administrators, executors and
assigns) and Company having agreed that the Contractor shall
furnish to Company a bank guarantee for Indian
Rs.12,09,90,000/- (Rupees twelve Crore Nine lac Ninety
Thousand Only) to cover the amount of liquidated Damages
as per clause6.3.2 and 6.3.3 of the Contract. [Suitable clause
nos. to be indicated by the work center)
2. We, State Bank of India Industrial Finance Branch,
Sai Complex, Bharat Nagar, Nagpur (name of the Bank)
registered under the laws of India (name of the country)
having head/registered office at Nariman Point Mumbai
(hereinafter referred to as “The Bank” which expression shall,
unless repugnant to the context or meaning thereof include all
its successors, administrators, executors and permitted
assigns) do hereby guarantee and undertake to pay
immediately on first demand in writing and any/all
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 23 of 55
money(ies) to the extent of Indian Rs.12,09,90,000/- (Rupees
Twelve Crore Nine Lac Ninety Thousand Only) without
any demur, reservation, context or protest and/or without any reference to the Contractor. Any such demand made by
Company on the Bank by serving a written notice shall be
conclusive and binding, without any proof, on the bank as
regards the amount due and payable, notwithstanding any
dispute(s) pending before any Court, Tribunal, Arbitrator or any other authority and/or any other matter or things
whatsoever, as liability under these presents being absolute
and unequivocal. We agree that the guarantee herein
contained shall be irrevocable. This guarantee shall not be
determined, discharged or affected by the liquidation, winding
up, dissolution or insolvency of the Contractor and shall
remain valid, binding and operative against the Bank.”
(Emphasis supplied)
Bank guarantee dated 21st
August, 2020
In consideration of Oil and Natural Gas Corporation Ltd.
incorporated under the Companies Act 1956 having its
registered office at Deendayal Urja Bhawan 5, Nelson
Mandela Marg , Vasant Kunj , Delhi – 110070 (India) its
Onshore Engineering Service Office located at Deendayal
Urja Bhawan 5, Nelson Mandela Marg ,Vasant Kunj,
Delhi- 110070 (India) and its Asset office located at ONGC
Ankleshwar-393010 Dist Bharuch, Gujrat (hereinafter
referred to as “Company” which expression shall unless
repugnant to the context or meaning thereof includes all its
successors, administrators, executors and assigns),having
entered into a Contract No. DLH/OES/MM/ETP –
NADA&AF/X11 PC11001 /2011 dated 27-06- 2012
(hereinafter called “The Contract” which expression shall
include all the amendments thereto) with Consortium of M/s
SMS Limited. (Leader of the consortium), a company
established and existing under the law of India, having its
registered office at IT Park, 20 S.T.P.I Gayatri Nagar,
Parsodi, Nagpur; M/s Zen Marketing & Technologies, a
dealer established and existing under the law of India having
its registered office at Mrinalini Apartment. Block A, 46,
New Ballygaunge Road, Kolkata-700039 and M/s Tolani
Projects Pvt Ltd a company established and existing under
the law of India, having its registered office at Tolani House,
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 24 of 55
New Meghna Petrol Pump, Chautanaka, Ankleshwar-
393001 (hereinafter referred to as ‘Contractor’),which
expression shall, unless repugnant to the context or meaning
thereof include all its successors, administrators, executors
and assigns) and Company having agreed that the Contractor
shall furnish to Company a bank guarantee for Indian Rs.
2,66,17,800/- (Rupees Two Crore Sixty Six Lac Seventeen
Thousand Eight Hundred Only) to cover the amount of
Liquidated Damages as per clause 6.3.2 and 6.3.3 of the
Contract. (Suitable clause nos. to be indicated by the work
center)
We, PUNJAB NATIONAL BANK, 290 Nashine
Enclave, Dharampeth Extn, WHC Road, Nagpur (name of
the Bank) registered under the laws of India (name of the country) having head/registered office at 7, Bhikaji Cama
Place, Africa Avenue, New Delhi – 110066 (hereinafter
referred to as “The Bank”, which expression shall, unless repugnant to the context or meaning thereof include all its
successors, administrators, executors and permitted assigns)
do hereby guarantee and undertake to pay immediately on first
demand in writing and any/all money(ies) to the extent of
Indian Rs.2,66,17,800/ – (Rupees Two Crore Sixty Six Lac
Seventeen Thousand Eight Hundred Only) without any
demur, reservation, contest or protest and/or without any
reference to the Contractor. Any such demand made by
Company on the Bank by serving a written notice shall be
conclusive and binding, without any proof, on the bank as
regards the amount due and payable, notwithstanding any
dispute(s) pending before any Court, Tribunal, Arbitrator or
any other authority and/or any other matter or things
whatsoever, as liability under these presents being absolute
and unequivocal. We agree that the guarantee herein
contained shall be irrevocable. This guarantee shall not be
determined, discharged or affected by the liquidation, winding
up, dissolut ion or insolvency of the Contractor and shall
remain valid, binding and operative against the Bank.”
(Italics supplied)
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 25 of 55
40. Mr. Nankani prayed for issuance of notice in the petition and
for grant of ad interim relief, staying operation of the impugned letter
dated 15th
December, 2020.
41. Mr. Sandeep Sethi, learned Senior counsel for the respondent,
submits that there was no merit, whatsoever, in the petition which
deserves to be dismissed outright, especially in view of the well settled
law regarding judicial restrain ts on invocation of unconditional bank
guarantees which, according to him, may well be treated as fossilized by this point in time.
42. The submission s of Mr. Nankani may be enumerated as under:
(i) The facts, as recited hereinabove, reveal that the dela y, in
execution of the contract, was, admittedly, owing to default on
the part of ONGC, in providing RoU, and in containing the
agitation of farmers.
(ii) The joint statement dated 18
th July, 2018 was clearly
incorrect in attributing blame on SMS, for delay in completion
of the work, as was apparent from the position emanating from
the minutes of the earlier meeting held on 22nd
January , 2018.
(iii) In any event, the request of ONGC, to SMS, for the
additional Bank Guarantee of ₹ 2,66,17,800.00, was completely
unjustified, as the contract did not contemplate the furnishing of
any additional bank guarantee.
43. Mr. Nankani submitted, further, that, while he was well
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 26 of 55
conscious of the restrain ts, placed by various decisions of the Supreme
Court on interdiction of invocation of unconditional bank guarantees
by courts, these restraints would not inhibit grant of relief as sought in
the present case by the petitioner. This, he submits, is essentially owing to the foll owing two reasons:
(i) The Bank Guarantees are not unconditional . Mr.
Nankani has invited my attention, for this submission, to the concluding recital in the first paragraph to each of the aforesaid two Bank Guarantees, to the effect (in the case of the first Bank
Guarantee) that SMS had agreed that “the contractor shall
furnish to Company a bank guarantee for Indian ₹ 2,66,17,800/ –
(Rupees Two Crore Sixty Six Lac Seventeen Thousand Eight Hundred Only) to cover the amount of Liquidated Damages as per clause 6.3.2 and 6.3.3 of the Contract”. This, according to
Mr. Nankani, resulted in incorporation, by reference, of clauses
6.3.2 and 6.3.3 of the contract into the aforesaid Bank
Guarantees. He submits that this understanding was also
reflected in the communications from ONGC to SMS. Even de
hors the said communications, Mr. Nankani submits that, in
view of the aforesaid avowal , which forms the concluding
recital in the opening paragraph in each of the two Bank
Guarantees under consideration, the Bank Guarantees could not
be tre ated as unconditional in nature, and ONGC could not,
therefore, straightway invoke the Bank Guarantees. In view of
the incorporation of the condition of infraction, by SMS, of
clauses 6.3.2 and 6.3.3 of the contract, as a sine qua non for
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 27 of 55
invocation of th e Bank Guarantees, in the body of the B ank
Guarantees themselves – as Mr. Nankani would seek to contend
– Mr. Nankani submits that the well recognized restraint s
against grant of stay of invocation of unconditional bank
guarantees would not apply in the pr esent case. Mr. Nankani
placed reliance, in this context, on the judgment of the Supreme Court in Hindustan Construction Company Ltd. v. State of
Bihar
1
“9. What is important, therefore, is that the bank
guarantee should be in unequivocal terms,
unconditional and recite that the amount would be paid
without demur or objection and irrespective of any
dispute that might have cropped up or might have been
pending between the beneficiary under the bank
guarantee or the person on whose behalf the guarantee
was furnished. The terms of the bank guarantee are,
therefore, extremely material. Since the bank guarantee
represents an independent contract between the bank
and the beneficiary, both the parties would be bound
by the terms thereof. The invocation, therefore, will
have to be in accordance with the terms of the bank
guarantee, or else, the invocation itself would be bad.”
, specifically on para 9 thereof, which read thus:
(ii) The second ground, on which Mr. Nankani seeks to
dispute the applicability, to the present case, of the law relating
to stay of invocation of bank guarantees, is that, according to
him, SMS is not, in a sense, seeking stay of invocation of the Bank Guarantee, furnished by it to ONGC. He submits that the
prayer in the petition is not for stay of invocation of the Bank
Guarantees by ONGC, but for a restraint against ONGC from
acting in furtherance of the letter dated 15
th
1 (1999) 8 SCC 436 December, 2020.
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 28 of 55
Mr. Nankani submits that the impugned letter dated 15th
December, 2020, properly read, reveals this to be in a nature of
demand, by ONGC, against SMS, with invocation of the Bank
Guarantees furnished by SMS being merely held out as a threat,
in the event of non-compliance, by SMS, with the – allegedly
unjustified – demand of ONGC. The justifiability of the
deman d made by ONGC on SMS, submits Mr Nankani, was
required to be adjudicated in arbitration, as there was counter –
charges by SMS and ONGC against eac h other. Mr. Nankani
submits that a case, such as the present, would be governed by
the principles of grant of interlocutory injunction i.e. existence of a prima facie case , balance of convenience, and irreparable
loss, as enunciate d in American Cyanamid Company v .
Ethicon Ltd.
2
, and not by the principles which govern prayers
for stay of unconditional bank guarantees.
44. In any event, submits Mr. Nankani, this is not a case which can
be dismissed outright, but that affidavits ought to be requisitioned
from the bank, so as to ascertain whether the bank regards the Bank
Guarantees as conditional or unconditional.
45. Responding to the submission s of Mr. Nankani, Mr. Sandeep
Sethi, learned Senior Counsel for the ONGC, submits that the present case is entirely covered by the judgment of the Division Bench of this
Court in CRSC Research & Design Institute Group Co. Ltd. v .
2 (1975) AC 396
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 29 of 55
Dedicated Freight Corridor Corporation of India Ltd.3 , which
upheld the judgment (authored by me) in CRSC Research & Design
Institute Group Co. Ltd. v. Dedicated Freight Corridor Corporation
of India Ltd.4
46. He submits, in the first instance, that the Bank Guarantees
forming subject matter of consideration in the present case are not
conditional, but are unconditional Bank Guarantees, invocable on
demand.
47. He, therefore, submits that all the proscriptions, which apply to
grant of restraint on invocation of unconditional bank guarantee s,
would ap ply mutatis mutandis in the present case. He relies, apart
from the decision in CRSC Research& Design Institute Group Co. Ltd.
3, in this context, on the judgment of the Supreme Court in U .P.
Cooperative Federation L td. v. Singh Consultants & Engineers5
“21. In the instant case, the learned Judge has proceeded on
the basis that this was not an injunction sought against the
bank but this was the injunction sought against the appellant.
But the net effect of the injunction is to restrain the bank from
performing the bank guarantee. That cannot be done. One
cannot do indirectly what one is not free to do directly. But a
maltreated man in such circumstances is not remed yless. The
respondent was not to suffer any injustice which was
irretrievable. The respondent can sue the appellant for
damages. In this case, there cannot be any basis for
apprehension that irretrievable damages would be caused if ,
specifically drawing my attention to para 21 of the said report, which reads thus:
3 2020 SCC OnLine Del 1526
4 MANU/DE/18 03/2020
5 (1988) 1 SCC 174
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 30 of 55
any. I am of the opinion that this is not a case in which
injunction should be granted. An irrevocable commitment
either in the form of confirmed bank guarantee or irrevocable
letter of credit cannot be interfered with except in case of
fraud or in case of question of apprehension of irretrievable
injustice has been made out. This is the well settled principle
of the law in England. This is also a well settled principle of
law in India, as I shall presently notice from some of the
decisions of the Hi gh Court and decisions of this Court.”
48. Mr. Sandeep Sethi disputes the applicability, to the present case,
of the principles laid down in American Cyanamid2, pointing out that,
in BSES Ltd. v. Fenner India Ltd.6, the Supreme C ourt has clearly
held that the law in other jurisdictions is irrelevant, when examining a
prayer for stay of invoca tion of unconditional bank guarantee s in our
country. He submits that, after 1998, when the judgment in UP
Cooperative Federation Ltd.5
was rendered by the Supreme Court,
there has, till date, not been a single instance in which the Supreme Court has interfered with, or approved the interference with, invocation of unconditional bank guarantees and that, in the sole
instance in which such restraint was approved , the bank g uarantee was
conditional .
49. Mr. Sethi submits that, even in law, there are only two
circumstances in which invocation of an unconditional bank guarantee
can be restrained, i.e. existence of egregious fraud or special equities
which result in the perpetration of irretrievable injustice on the applicant seeking stay. Neither of the said circumstances, submits Mr.
Sethi, obtains in the present case, as would justify grant of the prayer
of the petitioner .
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 31 of 55
50. Mr. Sethi has also drawn my attention to paras 23 to 26 of the
petition, which sets out the grounds on which the petition seeks a
restraint against ONGC taking action on the basis of the impugned letter dated 15
th
December, 2020, and points out that these paragraphs
do not, at any point, allege either fraud, or plead the existence of
special equities or irretrievable injustice resulting to SMS, were stay,
as sought, not granted.
51. With respect to the second Bank Guarantee, dated 21st
August,
2020, Mr. Sethi, while drawing my attention to the series of
communica tions between SMS and ONGC, to press the point that the
Bank Guarantee was voluntarily te ndered in accordance with the terms
of the contract, also points out that there is no plea, in the petition, that
the second Bank Guarantee was submitted in excess of the contract, or
beyond the requirement thereof. In fact, submits Mr . Sethi, it is
specifically acknowledged, even in the body of the second Bank
Guarantee, that the Bank Guarantee was covering the amount of
liquidated damages payable to ONGC by SMS.
52. Insofar as the allegation of SMS, that the joint statement of
delay, as forwarded by ONGC, was signed by the CEO of SMS under coercion, Mr. Sethi submits that this is a question of fact, which cannot be decided in a proceeding under Section 9 of the 1996 Act,
but would have to be adjudicated in arbitral proceedings.
6 (2006) 2 SCC 728
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 32 of 55
53. The judgment in Hindustan Construction Company1, on which
Mr. Nankani placed reliance, points out Mr. Sethi, has been
distinguished by the Supreme Court itself in Vinitec Electronics Pvt.
Ltd. v. HCL Infosystems L td.7
, and cannot, therefore, enure in favour
of SMS in the present case.
54. Mr. Sethi finally places reliance on the judgment of the
Supreme Court in O.N.G.C. v. S.B.I.8
, in which he submits that, the
Supreme Court not only set aside the order of the High Court,
restraining the invocation of the bank guarantee, furnished by the
contractor in that case, by ONGC, but went ahead, effectively, to
decree the suit, from which the appeal to the Supreme Court
emanated.
55. Having heard learned counsel for both parties at length, I am of
the opinion that, in view of the well- settled law regarding the
interdiction of invocation of unconditional bank guarantees, the
prayer, in this petition, cannot possibly be granted. In fact, the
Division Bench of this Court, in its recent decision in CRSC
ResearchAnalysis and c onclusion
2
, has critically commented on such issues being repeatedly
raised, despite the law in that regard, having been conclusively settled
by the Supreme Court time and again. The appeal, in that case, was dismissed by the Division Bench with costs of ₹ 5 lakhs.
7 (2008) 1 SCC 544
8 (2000) 6 SCC 385
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 33 of 55
56. Having noted this, it must be said that Mr . Nankani, with the
candour and fairness for which he is known, did not seek to question
the position, in law, that the scope for grant sta y of invocation of
unconditional bank guarantees was heavily circumscribed, and would be governed by the judgement in U.P. State Sugar Corpn. v. Sumac
International Ltd.
9 and its sequelae . There are only two submissions,
essentially, on the basis of whic h Mr. Nankani would submit that the
principles regarding stay of invocation of bank guarantees would not
be attracted in the present case . These are, firstly, that the petitioner is
not seeking stay of invocation of the bank guarantees per se , but is,
instead, seeking stay of taking of any action in furtherance of the
impugned letter dated 15th
December, 2020, and, secondly, that the
bank guarantees, forming subject matter of the present petition are not
unconditional, but conditional .
57. It would be appro priate, at the outset, to consider these two
submissions of Mr. Nankani.
58. The impugned letter dated 15th December, 2020, specifically
states that, in ca se SMS does not pay, to ONGC, ₹ 14,27,60,084/ – by
22nd December, 2020, LD and GST “shall be recovered by invoking
and encashing the bank guarantees submitted” by S MS. Undisputedly,
the impugned letter threatens invocation of the bank guarantees submitted by SMS only in the event of failure, on the part of SMS, to
make payment by 22
nd
December, 2020.
9 (1997) 1 SCC 568
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 34 of 55
59. Any restraint, against ONGC, from acting in furtherance of this
letter, would result in two consequences. Firstly, the requirement of
SMS of paying ₹ 14,27,60,084/ -, would stand stayed. Secondly,
ONGC would be injuncted from invoking/encashing the Bank
Guarantees dated 21st August, 2014 and 21st
August, 2020 submitted
by SMS.
60. It would be facile, therefore, to seek to treat the prayer , in the
present petition, as distinct from a prayer for stay of invocation of the
Bank Guarantees. The ine vitable consequence of grant of the prayer,
sought by the petitioner, would be a stay on ONGC from invoking the
Bank Guarantees furnished by SMS.
61. If the law does not permit the court to grant stay of invocation
of the Bank Guarantees furnished by SMS , equally, the law cannot
permit the court to stay the operation of the impugned letter dated 15
th
December, 2020. If the consequence of grant of stay of the impugned letter 15
th December, 2020 would be a restraint against ONGC from
invoking/encashing the Bank Guarantees furnished by SMS, and if
such stay of the invocation of the Bank Guarantees cannot be granted
in view of the extant legal position, it would be totally impermissible
for the court to stay the enforcement of the impugned letter dated 15th
December, 2020. A court cannot pass an order which results in grant of a relief which the court is not empowered to grant, in law. It is trite,
in law, that a court cannot grant, indirectly, that which the law does
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 35 of 55
not permit it to grant directly .10
62. The matter may also be viewed more simplistically. The
prayer, in the petition, is for a restraint against ONGC from “acting in
furtherance of” the impugned letter dated 15th
December, 20 20.
63. As such, the submission of Mr. Nankani, that the prayer in the
petition is not a prayer for stay of invocation of Bank Guarantees, but
a prayer for a restraint against ONGC from acting in furtherance of the
impugned letter dated 15th
December, 2020 , is, with respect,
essentially an exercise in semantics, and, is rejected.
64. The second submission of Mr. Nankani is that the Bank
Guarantees, forming subject matter of the present proceedings, are not
unconditional Bank Guarantees but conditional Bank Guarantees. In
this context, Mr. Nankani has placed reliance on the first two
paragraphs, which are identical, in both the Bank Guarantees, and
which already stands reproduced here in above.
65. Mr. Nankani has sought to capitalise on the recital, in the
conclud ing sentence of the first paragraph of the B ank Guarantees,
which, (in the case of the first bank guarantee dated 21st
10 Shiv Kumar Sharma v. Santosh Kumari (2007) 8 SCC 600; Mohd. Alauddin v. Karam
Thamarjit Singh (2010) 7 SCC 530; Teyma India Pvt. Ltd. v. JITF Water Inf rastructure Pvt.
Ltd., 2017 SCC OnLine Del 6580 (SLP against which dismissed) .
August, 2014)
states that “the contractor shall furnish to company a bank guarantee
of Indian Rs. 12,09,90,000/- (Rupees Twelve Crore Nin e Lac Ninety
Thousand Only) to cover the amount of liquidated damages as per
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 36 of 55
clauses 6.3.2 and 6.3.3 of the contract”. This, according to Mr.
Nankani amounts to incorporation into the B ank Guarantees, by
reference, of clauses 6.3.2 and 6.3.3 of the contra ct, which,
consequently, results in the exigencies, contemplated in these clauses,
being transmuted as conditions for invocation of the Bank Guarantees.
As such, submits Mr. Nankani, the issue of whether clauses 6.3.2 and
6.3.3 of the contract call for invocation, or not, becomes a material
consideration, while examining whether the Bank Guarantees could
legitimately be invoked.
66. I regret my inability to agree.
67. Incorporation by reference, in contractual instruments is, as Mr
Nankani correctly asserts, a w ell known phenomenon, in contractual
conveyancing. Incorporation by reference of the covenants of an
earlier contract into a later contract should not, however, be held to
have taken place, “unless such conclusion is inevitable”, as held in C.
Rudra v. France Indian Pharmaceuticals Ltd
11
11 (2000) ILR 2 Cal 179 (DB) [per S.B. Sinha, J. (as he then was)] . Any conclusion that
the covenants of one contract have been incorporated, by reference,
into another, would have to be preceded by material evidencing,
unequivocally, intent to so incorporate. Contracts are intended, as a
rule, to be self -contained, and the phenomenon of incorporation by
reference is normally encountered where multiple contracts are executed, between the same parties, in cognate transactions forming
part of an integrated whole, inter alia to ensure clarity and avoid
prolixity. Covenants, which are not to be found in contracts, cannot
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 37 of 55
readily be read thereinto, by applying the principle of incorporation by
reference. One of the principal considerations which would militate against any such conclusion of inc orporation by reference would be
where the incorporation results in conflict, or even disharmony, vis-a-
vis other covenants in the contract.
68. A statutory example of incorporation, by reference, is to be
found in Section 7(5) of the 1996 Act itself, which reads thus:
“7. Arbitration Agreement. –
*****
(5) The reference in a contract to a document
containing an arbitration clause constitutes an
arbitration agreement if the contract is in writing and
the reference is such as to make that arbitration clause
part of the contract.”
(Emphasis supplied)
Though we are not, in the present case, concerned with incorporation
of the arbitration clause in one contract, into another, by reference, the italicized words in Section 7(5) amount to a statutory recogniti on of
the guiding philosophy behind the principle of incorporation, by reference, of the covenants of one contract into another. To reiterate, the reference, to merit a conclusion of such incorporation, has to be such as to make the incorporated clause – unequivocally – a part of the
later contract.
69. As to when such incorporation may be said to have taken place,
albeit in the context of Section 7(5), the very first test, as postulated by
the Supreme Court, in M. R. Engineers & Contractors Pvt Ltd. v.
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 38 of 55
Som Datt Builders Ltd.12
“An arbitration clause in another document, would get
incorporated into a contract by reference, if the following
conditions are fulfilled : (i) The contract should contain a
clear reference to the documents containing arbitration clause, (ii) the reference to the other document should clearly
indicate an intention to incorporate the arbitration clause
into the contract, (iii) The arbitration clause should be
appropriate, that is capable of application in respect of
disputes under the contract and should not be repugnant to
any term of the contract.”
This test, though prescribed in the context in Section 7(5), in my
opinion, underscores two of the fundamental principles governing the answer to any question regardin g incorporation, by reference, of the
covenants of one contract into another, viz., firstly, that intent to
incorporate must be apparent from the face of the later contract, and,
secondly, that such incorporation should not result in repugnancy vis –
a-vis any other covenant of the later contract.
, was the following:
70. In my view, no such incorporation, of Clauses 6.3.2 and 6.3.3 of
the contract between ONGC and SMS can be said to have taken place in the Bank Guarantees furnished by SMS . Any submission of such
“bodily incorpor ation”, as advanced by Mr Nankani, stands
discredited even by a conjoint reading of the first two paragraphs of
the Bank Guarantees. The afore -extracted recital, at the conclusion of
the first paragraph of the Bank Guarantee, merely sets out the purpose
for which the Bank Guarantees were being issued, and is
fundamentally clarificatory in nature. By no stretch of imagination, in
my view, can the recital, that the Bank Guarantees were being
12 (2009) 7 SCC 696
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 39 of 55
furnished by SMS to cover the liquidated damages contemplated by
Clauses 6.3.2 and 6.3.3 of the contract, result in the said clauses
becoming conditions, to be borne by the bank while honouring the
Bank Guarantees.
71. Rather, as is usually the case in Bank Guarantees, the pre –
conditions for invoking Bank Guarantee s are to be found in para 2,
rather than para 1 thereof. For ready reference, para 2 of the subject
Bank Guarantees dated 21st August, 2014 and 21st
“August, 2020, are
reproduced, at the cost of repetition thus:
Bank guarantee dated 21st
August, 2014
2. We, State Bank of India Industrial Finance Branch, Sai
Complex, Bharat Nagar, Nagpur (name of the Bank)
registered under the laws of India (name of the country)
having head/registered office at Nariman Point Mumbai
(hereinafter referred to as “The Bank” which expression shall,
unless repugnant to the context or meaning thereof include all
its successors, administrators, executors and permitted
assigns) do hereby guarantee and undertake to pay
immediately on first demand in writing and any/all
money(ies) to the extent of Indian Rs.12,09,90,000/- (Rupees
Twelve Crore Nine Lac Ninety Thousand Only) without
any demur, reservation, context or protest and/or without any
reference to the Contractor. Any such demand made by
Company on the Bank by serving a written notice sh all be
conclusive and binding, without any proof, on the bank as regards the amount due and payable, notwithstanding any
dispute(s) pending before any Court, Tribunal, Arbitrator or
any other authority and/or any other matter or things
whatsoever, as liability under these presents being absolute
and unequivocal. We agree that the guarantee herein
contained shall be irrevocable. This guarantee shall not be determined, discharged or affected by the liquidation, winding
up, dissolution or insolvency of the Contractor and shall
remain valid, binding and operative against the Bank.”
(Emphasis supplied)
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 40 of 55
“Bank guarantee dated 21st
August, 2020
We, PUNJAB NATIONAL BANK, 290 Nashine Enclave,
Dharampeth Extn, WHC Road, Nagpur (name of the
Bank) registered under the laws of India (name of the
country) having head/registered office at 7, Bhikaji Cama
Place, Africa Avenue, New Delhi – 110066 (hereinafter
referred to as “The Bank”, which expression shall, unless
repugnant to the context or meaning thereof include all its
successors, administrators, executors and permitted assigns)
do hereby guarantee and undertake to pay immediately on first
demand in writing and any/all money(ies) to the extent of
Indian Rs.2,66,17,800/ – (Rupees Two Crore Sixty Six Lac
Seventeen Thous and Eight Hundred Only) without any
demur, reservation, contest or protest and/or without any
reference to the Contractor. Any such demand made by
Company on the Bank by serving a written notice shall be
conclusive and binding, without any proof, on the b ank as
regards the amount due and payable, notwithstanding any dispute(s) pending before any Court, Tribunal, Arbitrator or
any other authority and/or any other matter or things
whatsoever, as liability under these presents being absolute
and unequivocal. We agree that the guarantee herein
contained shall be irrevocable. This guarantee shall not be
determined, discharged or affected by the liquidation, winding
up, dissolution or insolvency of the Contractor and shall
remain valid, binding and operative against the Bank.”
(Emphasis in original)
72. A bare reading of para 2 of the Bank Guarantees makes it clear
that the bank has obligated itself to pay, to ONGC, the amounts
covered by the Bank Guarantees,
(i) “immediately on first demand in writing”,
(ii) “without any demur, reservation, conte st or protest”,
(iii) “without any reference to the Contractor”,
and has further covenanted that any such demand served, on the bank
by ONGC by a written notice,
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 41 of 55
(i) “shall be conclusive and binding, without any proof”,
(ii) “notw ithstanding any dispute/disputes pending before any
Court, Tribunal, Arbitrator or any other authority and/or any
other matter or things whatsoever”,
and that the liability of the bank in that regard is absolute and
unequivocal.
73. In the face of this rec ital, to which SMS has been a willing
signatory, it can hardly be contended that the Bank Guarantees are
conditional. The only conditions, subject to which the banks are
required to honour the Bank Guarantees, as is co ntained in para 2,
have already been set out hereinabove. The specific stipulation to the
effect that the Bank Guarantees would be honoured “without any reference to the Contractor” is particularly reflective of the intent, of the Bank Guarantees, to remain totally aloof from the inter se di spute
between ONGC and SMS.
74. The recital, at the conclusion of para 1 of the Bank Guarantees,
to the effect that guarantees were being furnished by SMS to cover the liquidated damages, as per Clauses 6.3.2 and 6.3.3 of the contract, in
my view, can , ther efore, neither result in incorporation, by reference,
bodily or otherwise, of the said Clauses in the Bank Guarantees, nor
result in the exigencies, contemplated under the said Clauses,
becoming conditions of the Bank Guarantees, fulfilment of which is
necessary before the Bank Guarantees can be invoked. The Bank
Guarantees furnished by SMS are therefore, in my view, absolute and
unconditional, making the Bank liable to pay “immediately and on
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 42 of 55
demand” by ONGC, without equivocation and “without any referenc e
to the contractor”.
75. Once these submissions of Mr. Nankani are found to be devoid
of merit, the legal position hardly requires recapitulation. The
authorities on the point have been exhaustively noted and analyzed in the judgments, both of the Single Be nch as well as the Division Bench
of this Court in CRS C Research & Design Institute Group Co. Ltd.
2
(i) Bank Guarantees are essentially contracts betwe en the
bank and the beneficiary,
and I do not de em it necessary to burden this decision therewith .
These authorities make it clear that
(ii) their invocation is not conditional on the merits of the
disputes between the parties in the main contract, unless and
until those conditions are specifically incorporated as
conditions, subject to which the bank guarantee would be
hono ured (which as I have already opined hereinabove, is not
the position in the present case),
(iii) the Bank is not concerned with the inter se dispute
betwe en the parties,
(iv) it is not open to a party, who has furnished the bank
guarantee, to se ek restraint of invocation thereof, on the ground
that the invocation is in contravention of the covenants of the
contract whereunder the bank guarantee was furnished or that
the appropriate stage for invocation of the bank guarantee, as per the covenants of the said contract, has not been reached and
(v) Courts are required to be mindful of the effect of
unchecked interdiction, by Courts, on Banks from honouring
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 43 of 55
unconditional bank guarantees, and that grant of such prayers
would result in loss of faith, i n the public, on the banking
system, and/or guarantees provided by banks, which seriously
affects public interest, as well as the dynamics of the country’s
econom y.
76. The Bank Guarantees, in the present case, are, therefore,
unconditional Bank Guarantees. The impugned letter calls upon SMS
to pay to ONGC an amount of ₹ 14,27 ,60,084/ -, failing which ONGC
has the right for invocation of Bank Guarantees furnished by SMS.
There can be no restraint, against ONGC, from invoking the Bank
Guarantees, in view of the position, in law, noted hereinabove. In case
the Bank Guarantees are invoked without due justification, the remedy
with SMS would be to seek relief in arbitral proceedings, or otherwise
in accordance with law, and not to seek injunction against the Bank
from invoking the Bank Guarantees. Grant of the relief sought in the
petition wo uld necessarily have the effect of restraining ONGC from
invoking the Bank Guarantees furnished by SMS.
77. The attempt of Mr. Nankani, to divide the impugned letter into
two parts, one containing a demand against SMS, and the other
relating to the threat of invocation of Bank Guarantees, is, in my view ,
too hyperfine a contention to pass serious muster . ONGC has stated
that, in the event of non- payment, by SMS, of the amount demanded
in the letter, the Bank Guarantees would be invoked. Whether SMS
is, or is not, bound to pay the amount claimed by ONGC, is not an
issue which this Court can adjudicate upon, in a petition under Section
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 44 of 55
9 of the 1996 Act, as it relates to a pure demand of money. In case, the
demand is unjustified, SMS would have to seek appropriate relief in
the arbitral proceedings, which are yet to commence. To reiterate,
there can be no stay against ONGC from invoking the Bank
Guarantees furnished by SMS.
78. Hindustan Construction Company1
, in my view, cannot help
SMS. In fact, para 9 of the report in the said case is conclusive, of the present controversy, against the petitioner. The opening sentence of
para 9 of the judgment of the Supreme Court states that “what is important, therefore, is that the bank gua rantee should be unequivocal
terms, unconditional and recite that the amount would be paid without demur or objection and irrespective of any dispute that might have
cropped up or might have been pending between the beneficiary under the bank guarantee or the person on whose behalf the guarantee was
furnished”. This is, effectively, what para 2 of the bank guarantees, in
the present case, state.
79. In so far as the facts in Hindustan Construction Company
1
“In accordance with the provisions of the conditions of
contract, clause 9 (advance mobilisation loan) of the above –
mentioned contract, Hindusta n Construction Co. Ltd.,
incorporated in Bombay under the Companies Act, 1956, and
having their registered office at Construction House,
Walchand Hirachand Marg, Ballard Estate, Bombay -400 038
(hereinafter called ‘the contractor’) shall deposit with the
Executive Engineer, Kharkai Dam Division II, Icha,
were concerned, the opening paragraph of the bank guarantee forming
subject matter of the consideration therein, as reproduced in para 12 of
the report, read thus:
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 45 of 55
Chaliama, Post Kesargarhia, District Singhbhum, Bihar, a
bank guarantee to guarantee their proper and faithful
performance under the said clause of the contract in an
amount of Rs 10,00,000 (Rupees ten lakhs only).
We, State Bank of India, incorporated under the State
Bank of India Act, 1955, and having one of our branches at
Nyayamurti C.N. Vaidya Marg, Fort, Bombay -400 023
(hereinafter referred to as ‘the said Bank’), as instructed by
the contractor, agree unconditionally and irrevocably to
guarantee as primary obligator and not as surety merely, the
payment of the Executive Engineer, Kharkai Dam Division II,
Icha, Chaliama, Post Kesargarhia, District Singhbhum, Bihar,
on his first demand without whatsoever right of objection on
our part and without his first claim to the contractor, in the
amount not exceeding Rs 10,00,000 (Rupees ten lakhs
only) in the event that the obligations expressed in the said
clause of the above- mentioned contract have not been fulfilled
by the contractor giving the right of claim to the employer for
recovery of the whole or part of the advance mobilisation
loan from the contractor under the contract.”
(Italicised in original)
80. The conditions for invocation of the bank guarantee f orming
subject matter of consideration in Hindustan Construction Co. Ltd.1
are clearly distinct from those governing invocation of the bank
guarantees forming subject matter of the present dispute. In
Hindustan Construction Co. Ltd.1, non-fulfilment of his contractual
obligations, by the contractor, resulting in a right, on the employer, to
claim recovery of the advanced mobilization loan , in whole or in part,
had expressly been incorporated as a condition for invocation of the
bank guarantee. No such con dition is required to precede invocation
of the bank guarantees in the present case. Paras 13 and 14 of the
report highlight this distinction and read thus:
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 46 of 55
“13. The Bank, in the above guarantee, no doubt, has used
the expression “agree unconditionally and irrevocably” to
guarantee payment to the Executive Engineer on his first
demand without any right of objection, but these expressions
are immediately qualified by following:
“… in the event that the obligations expressed in the
said clause of the above-mentioned contract have not
been fulfilled by the contractor giving the right of
claim to the employer for recovery of the whole or part
of the advance mobilisation loan from the contractor
under the contract.”
14. This condition clearly refers to the original contract
between HCCL and the defendants and postulates that if the
obligations, expressed in the contract, are not fulfilled by
HCCL giving to the defendants the right to claim recovery of
the whole or part of the “advance mobilisation loan”, then
the Bank would pay the amount due under the guarantee to
the Executive Engineer. By referring specifically to clause 9,
the Bank has qualified its liability to pay the amount covered
by the guarantee relating to “advance mobilisation loan” to
the Executive Engineer only if the obligations under the contract were not fulfilled by HCCL or HCCL has misappropriated any portion of the “advance mobilisation
loan”. It is in these circumstances that the aforesaid clause
would operate and the whole of the amount covered by the
“mobilisation advance” would become payable on demand.
The bank guarantee thus could be invoked only in the
circumstances referred to in clause 9 whereunder the amount
would become payable only if the obligations are not fulfilled or there is misappropriation. That being so, the bank
guarantee could not be said to be unconditional or unequivocal in terms so that the defendants could be said to
have had an unfettered right to invoke that guarantee and
demand immediate payment thereof from the Ba nk. This
aspect of the matter was wholly ignored by the High Court and it unnecessarily interfered with the order of injunction, granted by the Single Judge, by which the defendants were
restrained from invoking the bank guarantee.
”
(Emphasis supplied)
The judgment in Hindustan Construction Company1, therefore, in
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 47 of 55
effect, discountenance s, rather than support s, the case being sought to
be set up by SMS.
81. For the sake of the record, though it is not particularly relevant,
it may be noted that Hindustan Cons truction Company1
also
adjudicated on a second appeal, dealing with a “performance
guarantee”, and set aside the invocation thereof, on the ground that, the bank guarantee was invoked by an officer not competent to do so.
No such controversy arises in the present case; accordingly, no further
reference need be made thereto.
82. Suffice it to state that, in view of the above, the judgment of the
Supreme Court in Hindustan Construction Company
1
cannot enure to
the benefit of SMS.
83. Mr. Sandeep Sethi has also pointed out that Hindustan
Construction Company1 stands distinguished by the Supreme Court in
Vinitec Electronics (P). Ltd.6
“11. The law relating to invocation of bank guarantees is by
now well settled by a catena of decisions of this Court. The
bank guarantees which provided that they are payable by the
guarantor on demand is considered to be an unconditiona l
bank guarantee. When in the course of commercial dealings,
unconditional guarantees have been given or accepted the
beneficiary is entitled to realise such a bank guarantee in
terms thereof irrespective of any pending disputes. In U.P.
State Sugar Corpn. v. Sumac International Ltd, (1997) 1
SCC 568, this Court observed that: (SCC p. 574, para 12) The said decision neatly encapsulates
the distinction between conditional and u nconditional bank
guarantees, in para 11 of the report, which reads thus:
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 48 of 55
“12. The law relating to invocation of such bank
guarantees is by now well settled. When in the course
of commercial dealings an unconditional bank
guarantee is given or accepted, the beneficiary is
entitled to realise such a bank guarantee in terms
thereof irrespective of any pending disputes. The bank
giving such a guarantee is bound to honour it as per its
terms irrespective of any dispute raised by its
customer. The very purpose of giving such a bank
guarantee would otherwise be defeated. The courts
should, therefore, be slow in granting an injunction to
restrain the realisation of such a bank guarantee. The
courts have carved out only two exceptions. A fraud in
connection with such a bank guarantee would vitiate
the very foundation of such a bank guarantee. Hence if
there is such a fraud of which the beneficiary seeks to
take advantage, he can be restrained from doing so.
The second exception relates to cases where allowing
the encashment of an unconditional bank guarantee
would result in irretrievable harm or injustice to one of
the parties concerned. Since in most cases payment of
money under such a bank guarantee would adversely
affect the bank and its customer at whose instance the
guarantee is given, the harm or injustice contemplated
under this head must be of such an exceptional and
irretrievable nature as would override the terms of the
guarantee and the adverse effect of such an injunction
on commercial dealings in the country. The two
grounds are not necessarily connected, though both
may coexist in some cases.”
(Emphasis supplied)
84. The facts in Vinitec Electronics (P). Ltd.6
are interesting and, in
the backdrop of the contentions of Mr. Nankani in the present case,
illuminating.
85. The relevant clause, obligating the bank to honour the bank
guarantee in the said case, originally read thus:
“Therefore, we, the Bank, hereby affirm that we are
guarantors and responsible on behalf of the supplier up to a
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 49 of 55
total of Rs 16,81,238.50 (Rupees sixteen lakhs eighty -one
thousand two hundred thirty -eight and paise fifty only) and
we undertake to pay any sum or sums within the limit of Rs
16,81,238.50 (Rupees sixteen lakhs eighty -one thousand two
hundred thirty -eight and paise fifty only) as aforesaid upon
receipt of written demand from the purchaser and Company
within the validity of this bank guarantee establishing the
supplier to be in default for the performance of their warranty
obligations under the contract. ”
(Emphasis supplied)
This clause was, later, substituted to read thus:
“Therefore, we, the Bank, hereby affirm that we are
guarantors and responsible on behalf of the supplier up to a
total of Rs 16,81,238.50 (Rupees sixteen lakhs eighty -one
thousand two hundred thirty -eight and paise fifty only) and
we undertake to pay any sum or sums within the limit of Rs
16,81,238.50 (Rupees sixteen lakhs eighty -one thousand two
hundred thirty -eight and paise fifty only) as aforesaid upon
receipt of written demand from the Company within the
validity of this bank guarantee.”
(Emphasis in original)
86. The Supreme Court held that this substitution made a material
difference to the merits of the case of the petitioner before it. The
obligating covenant, as it originally read, by the use of the word
“establishing the supplier to be in default for the performance of their
warranty obligations under the contract”, initially envisaged default on
the part of the supplier, of its warranty obligations under the contract,
to be a sine qua non for the bank to honour the bank guarantee. In
case the supplier was not in default of its warranty obligation under
the contract, therefore, the bank was not required to honour the bank guarantee.
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 50 of 55
87. By amending the aforesaid clause, this pr e-requisite was done
away with. In the amended clause, the obligation of the bank to
honour the bank guarantee arose merely on receipt of a written
demand taken from the company, within the validity period of the
bank guarantee. The presence, or absence, of default on the part of the contractor, in complying with its warranty obligation under the contract became, therefore, immaterial as a consideration, to be borne
in mind by the bank while deciding whether or not to honour the bank
guarantee.
88. This dist inction has been specifically noted in para 19 of the
report, which reads as under:
19. In the unamended bank guarantee the Bank affirmed
that they are guarantors and responsible on behalf of the
supplier up to a total of Rs 16,81,238.50 (Rupees sixteen
lakhs eighty -one thousand two hundred thirty -eight and paise
fifty only) and had undertaken to pay any sum or sums within
that limit upon receipt of written demand from the purchaser
within the validity of bank guarantee provided it is established
that the supplier be in default for the performance of their
warranty obligations under the contract. This makes it
abundantly clear that what was furnished was a conditional
bank guarantee and the bankers were liable to pay the
amounts only upon establishing the fact that the supplier was
in default for the performance of their warranty obligations
under the contract. But by the subsequent letter dated 20- 8-
2001, the relevant clause in bank guarantee was amended
whereunder the Bank stood as guarantor and responsible on
behalf of the supplier up to a total of Rs 16,81,238.50 (Rupees
sixteen lakhs eighty-one thousand two hundred thirty-eight
and paise fifty only) and had undertaken to pay any sum or
sums within that limit “upon receipt of written demand from
the Company within the validity of this bank guarantee”. This
amended clause makes it abundantly clear that the Bank had
undertaken to pay amounts up to a total of Rs 16,81,238.50.
The condition that the amounts shall be paid only upon
establishing the supplier to be in default for the performance
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 51 of 55
of their warranty obligation under the contract has been
specifically deleted. In our considered opinion, the bank
guarantee as amended replacing Para 4 of the original bank
guarantee makes the bank guarantee furnished as
unconditional one. The bankers are bound to honour and pay
the amounts at once upon receipt of written demand from the
respondent.”
(Emphasis supplied)
89. Thereafter, paras 20 to 23 of the report in Vinitec Electronics
Pvt. Ltd.6 proceeded to distinguish the judgment in Hindustan
Construction Company Ltd.1
“20. The learned Senior Counsel, however, relying upon the
decision of this Court in Hindustan Construction Co.
Ltd. v. State of Bihar, (1999) 8 SCC 436 contended that the
bank guarantee could not be said to be unconditional or
unequivocal in terms so that the respondent could claim any
unfettered right to invoke the bank guarantee and demand
immediate payment thereof from the Bank. We find no
substance in the submission so made by the learned Senior
Counsel on behalf of the appellant. , which read s thus:
21. In Hindustan Construction , the appellant Company
was awarded a contract by the State of Bihar for construction of a dam. Clause 9 of the contract between the parties
provided that the State would m ake an advance loan to the
Company for the costs of mobilisation in respect of the works
on furnishing of a bank guarantee by the appellant for an
amount equal to the advance loan. The advance loan was
required to be used exclusively for mobilisation expenditure.
In case of misappropriation of the advance loan the loan at
once shall become due and payable immediately. In terms of
this clause bank guarantee was furnished by the bank agreeing
unconditionally and irrevocably to guarantee payment on
demand without any objection but with the qualification that
such payment shall be only in the event the obligations expressed in Clause 9 of the original contract have not been
fulfilled by the contractor giving the right of claim to the
employer for recovery of the whole or part of the advance
mobilisation loan. Clause 9 of the main contract was thus
incorporated and made part of the bank guarantee furnished
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 52 of 55
by the banker. It is under those circumstances this Court took
the view that the bank guarantee furnished was not an
unconditional one. Clause 9 in the bank guarantee refers to the terms and conditions of the contract between the parties.
The bank guarantee thus could be invoked only in the
circumstances referred to in Clause 9 wherein the amount
would become payable only if the obligations are not fulfilled
or there is misappropriation.
22. In the present case the amended clause does not refer
to any of the clauses specifically as such but on the other
hand the Bank had undertaken responsibility to pay any sum
or sums within the guaranteed limit upon receipt of written
demand from the Company.
The operative portion of the bank
guarantee furnished by the Bank does not refer to any of the
conditions for payment under the bank guarantee. It is true
that the bank guarantee furnished makes a reference to the
principal agreement between the parties in its preamble. Mere
fact that the bank guarantee refers to the principal agreement
in the preamble of the deed of guarantee does not make the
guarantee furnished by the Ba nk to be a conditional one
unless any particular clause of the agreement has been made
part of the deed of guarantee.
23. The recitals in the preamble in the deed of guarantee
do not control the operative part of the deed. After careful
analysis of the t erms of the guarantee we find the guarantee to
be an unconditional one.
(Emphasis and underscoring supplied) The appellant, therefore, cannot be
allowed to raise any dispute and prevent the respondent from
encashing the bank guarantee.”
90. The underscored wo rds, in the afore -extracted passage from
Vinitec Electronics Pvt. Ltd.6
91. In view of the law laid down by the Supreme Court in Vinitec
Electronics P vt. Ltd. also serve to discountenance,
definitively, the ground of “incorporation by reference”, urged by Mr.
Nankani.
6, nothing really survives for consideration in this
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 53 of 55
matter. The decision , clearly, cover s the present case on all fours. The
mere recital in the preambular paragraph of the Bank Guarantee s, to
the effect that the B ank Guarantees were being furni shed to cover the
liquidated damages envisaged in clauses 6.3.2 and 6.3.3 of the
contract, do not render the circumstances, contemplated in the said clauses, as conditions which have necessarily to precede honouring, by the Bank, of the Bank Guarantees. Ra ther, para 2 of the Bank
Guarantees made it clear that the Bank was bound to honour the Bank
Guarantees, on dema nd being made by the ONGC.
92. Mr. Nankani has not seriously argued the existence of any
egregious fraud, special equities or irretrievable injusti ce to SMS,
were the bank guarantees to be invoked and encashed. Indeed, in the facts of the present case, no such allegations can be raised.
93. Prima facie , no case of fraud, egregious or otherwise, is made
out.
94. Mr. Sandeep Sethi has correctly pointed out that “ special
equitie s” in order to constitute a legitimate ground to stay invocation
of a bank guarantee, ha ve to be such as res ult in irretrievable injustice
and injury to the party. In other words, the considerations of special equities and irretrieva ble injury are not independent and distinct
considerations, but are inextricably intertwined.
95. I entirely agree. It is only if irretrievable injustice – or
something to like effect – is found to result where stay of invocation
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 54 of 55
of the bank guarantee not granted, that the existence of “special
equities” can be inferred . This principle finds authoritative
enunciation in para 10 of the report in B.S.E.S. Ltd v. Fenner India
Ltd.6
“10. There are, however, two exceptions to this rule. The
first is when there is a clear fraud of which the bank has
notice and a fraud of the beneficiary from which it seeks to
benefit. The fraud must be of an egregious nature as to vitiate
the entire underlying transaction. The second exception to the
general rule of non-intervention is when there are ‘special
equities’ in favour of injunction, such as when ‘irretrievable
injury’ or ‘irretrievable injustice’ would occur if such an
injunction were not granted. The general rule and its
exceptions has been reiterated in so many judgments of this
Court, that in U.P. State Sugar Corpn. v. Sumac
International Ltd., (1997) 1 SCC 568 this Court, correctly
declared that the law was ‘settled’.” , which reads thus:
(Emphasis supplied)
96. Even if the B ank Guarantees were to be enforced in the pre sent
case, SMS would, were it to succeed in arbitral proceedings, be in a
position to recover the monies. It is not – and cannot be – the
contention of SMS that ONGC is in financial doldrums, or that, were
the Bank Guarantees to be enforced and encashed, the arbitral
proceedings would stand frustrated. No “irretrievable injustice”
would, therefore, ensue to SMS, were the Bank Guarantees furnished
by it invoked by ONGC.
97. None of the considerations which, therefore, govern grant of
interim protection, under Section 9 of the 1996 Act, can, therefore, be said to exist in the present case.
2021:DHC:116 O.M.P.(I) (COMM.) 428/2020 Page 55 of 55
98. In the above discussion, it is not possible to accede to the
prayer, in the present petition, to restrain ONGC from acting in
furtherance of the impugned letter dated 15th
December, 2020. The
only action, which the impugned letter envisages ONGC as taking, is invocation of the Bank Guarantees furnished by SMS, in the event of SMS not complying with the request, of ONGC, to pay the demanded
amount. The prayer in the petition, therefore, as much as directly
seeks an interdiction against such invocation of the Bank Guarantees
by ONGC. To contend otherwise would, in my view, miss the wood for the trees.
99. The Division Bench of this Court, in CRSC Research & Design
Institute Group Co. Ltd.
2
, has already observed that such challenges,
in the face of the well established law on the subject, should not be allowed to consume valuable court time. No occasion, in my view,
therefore arises for this Court to seek any affidavit from the ba nk, or
from ONGC which has, through Mr Sandeep Sethi, learned Senior
Counsel, unequivocally made its stand known. No justification for keeping the present proceedings pending, or for calling for counter affidavit, arises either.
100. In view thereof, the present petition , along with the applications
filed therewith, is dismissed in limine, with no order s as to costs.
C. HARI SHANKAR, J.
JANUARY 12, 2021
ss/dsn/kr/r.b araria
2021:DHC:116