TACON INFRASTRUCTURE PVT LTD vs NATIONAL HIGHWAYS AUTHORITY OF INDIA & ORS.

* IN THE HIGH COURT OF DELHI AT NEW DELHI

% Date of Decision: 04.03.2025

+ O.M.P.(I) (COMM.) 75/2025, I.A. 5667/2025 and I.A. 5668/2025

TACON INFRASTRUCTURE PVT LTD …..Petitioner
Through: Mr. K.G. Sukhwani, Mr.Chirag Sukhwani, Mr.Anil K. Sharma, Mr.Amandeep Singh and Mr.Nandlal Kumar, Advocates

versus

NATIONAL HIGHWAYS AUTHORITY OF INDIA & ORS.
…..Respondents
Through: Mr.Santosh Kumar, Standing Counsel with Mr.Devansh Malhotra and Mr.Kartik Gupta, Advocates
Mr.Mridul Jain, Sr.Panel Counsel for respondent No.2

CORAM:
HON’BLE MR. JUSTICE MANOJ KUMAR OHRI

JUDGMENT (ORAL)

1. By way of present petition filed under Section 9 of the Arbitration and
Conciliation Act, 1996 (hereinafter, referred to as the ‘A&C Act’), the petitioner seeks the following reliefs with respect to Bank Guarantees (hereinafter, referred to as “BG”) :-
(a) By way of interim measure of protection, restrain the Respondent No.2 from invoking the Bank Guarantee No.3311IPEBG210004 dated 28.07.2023 issued by Respondent No.3 for an amount of Rs.1,23,45,444/- and also restrain the Respondent No.3 from making the payment of Bank Guarantee No. 3311IPEBG210004 dated 28.07.2023 for an amount of Rs.1,23,45,444/-.
(b) Awards cost(s) of the present petition to the Petitioner;

2. The Petitioner was awarded contract for repair and maintenance of Ahmedabad-Godhra Section (117.571 km) of National Highway-47 with overlay work at several locations on project stretch in the State of Gujarat by Letter of Acceptance No. NHAI/2021/RO-GNR/D-648 dated 26.04.2021 at a contract price of Rs.41,15,14,803/-. In accordance with Clause 33.1 of ITB of the bid document, the petitioner furnished BG No.3311IPEBG2100 dated 06.05.2021 for Rs.1,23,45,444/-. The aforesaid BG was extended up to 05.08.2025. The contract was concluded on 21.11.2022. As per Clause 33 of the Contract Data, the Defect Liability Period (“DLP”) will be 6 months for O&M works and 3 years in case of renewal and other improvement works.
3. According to respondent, the stretch of highway worked upon by the petitioner showed certain defects in form of slippage, potholes, undulations, etc. The respondent No.2 got the rectification work carried out by M/s Shiwalay Infra Projects Pvt. Ltd and M/s Hitesh Shah. Relying on Clause 34.1 of the contract, respondent No.2 vide letter dated 15.01.2025, called upon the petitioner to deposit Rs. 2,34,35,045/- for the costs incurred due to engaging third party contractors within 7 days, failing which the amount was to be recovered from the Performance Security.
4. Learned counsel for the petitioner submits that the claim for recovery by the respondent No.2 was unjustified and was not in accordance with the Contract between the parties. It is submitted that the petitioner had carried out the rectification work as and when pointed out. It is contended that the defects which arose were on account of base failure, whereas the petitioner had provided overlay with Dense Bituminous Macadam (DBM) and Bituminous Concrete (BC) as per design provided by the respondent No.2 and was responsible only for defects, if any, only in those surfaces. It is submitted that it was in fact the petitioner who had flagged the issue multiple times to the respondent No.2. It is contended that when the petitioner got a sample of the base and sub-base tested at an NABL approved lab as per the directions of respondent No.2, it was revealed that 90% of the collected samples are not fulfilling the requirements as per MORTH. It is stated that subsequently, IIT Gandhinagar was engaged for further investigation which also found issues with the base and sub-base layer. It is submitted that a dispute has arisen between the parties with respect to the petitioner’s liability to pay damages for the rectification and until the same is adjudicated upon, the bank guarantees should not be invoked as the same would cause great prejudice and irretrievable injustice to the petitioner. It is contended that special equities exist in the present case which merit restraint on the invocation of BGs, and in this regard relies on the decision of the Supreme Court in Standard Chartered Bank v. Heavy Engg. Corpn. Ltd.1 It is also informed that the petitioner has since invoked arbitration.
5. Learned counsel for the respondent No.2 has vehemently opposed the present petition and submits that the petitioner, despite various notices, failed to carry out the correction works. Reliance is placed on its letter dated 24.10.2023 addressed to the petitioner which records therein that the petitioner had been notified of the defects by the respondent No.2 vide letter no. 12435 dated 10.08.2023 and the Independent Engineer (IE) vide letter no. 1074 dated 04.10.2023, however, the same were not rectified. It is submitted that the answering respondent was well within its rights to appoint other contractors upon failure of petitioner to do the needful and the petitioner was liable to bear the costs for the same as per Clause 34.1 of the conditions of contract. In so far as the contention of the petitioner that the defects were only on account of base layer, the same is denied out rightly and it is contended that the report by IIT Gandhinagar notes problems with bonding of previous overlay to the present course and high moisture in the layers on account of poor drainage. It is also submitted that in any case, there was the provision of a site visit in Clause 7 of the Bid Document and the petitioner ought to have flagged the issues in base layer, if any, at that time. It is further submitted that the BG is unconditional in nature and unaffected by the dispute between the petitioner and respondent No.2 as the same is an independent contract between the respondent No.2 and respondent No.3. Reliance in this regard is placed on decisions in Vinitec Electronics (P) Ltd. v. HCL Infosystems Ltd., 2 CRSC Research & Design Institute Group Co. Ltd. v. Dedicated Freight Corridor Corpn. of India Ltd.,3 and Skyline Air Conditioning Engineers Private Limited V. Public Works Department, 4
6. I have heard learned counsel for the parties and gone through the records.
7. The law surrounding the invocation of unconditional BG is well settled in a catena of decisions of the Supreme Court and this Court. The BG which provides that they are payable by the guarantor on demand is considered to be unconditional. If such BGs are given in the course of a business dealing, the same can be invoked by the beneficiary irrespective of any pending disputes between the parties. The bank has no choice but to honor the BGs despite any opposition being made by the customer because in essence, BGs represent an independent and distinct contract between the Bank and the beneficiary which is not affected by the underlying contract. Any petition seeking to restrain the realization of such BGs has to make out exceptional circumstances. It can either be fraud which vitiates the very underlying premise of the BG, or special equity wherein the realization would cause irretrievable harm or injustice to one of the parties concerned. It is but obvious that the invocation of any BG would cause harm to the bank and to the customer. That by itself would not qualify as irretrievable harm or injustice. The harm or injustice, to make out a case for injunction, has to be such as to override the very terms of the guarantee.
8. The Supreme Court in Standard Chartered Bank v. Heavy Engg. Corpn. Ltd., (Supra) collated the law on the subject by referring to its various other decisions and explained it in the following manner:-
“19. The law relating to invocation of bank guarantees with the consistent line of precedents of this Court is well settled and a three-Judge Bench of this Court in Ansal Engg. Projects Ltd. v. Tehri Hydro Development Corpn. Ltd. [Ansal Engg. Projects Ltd. v. Tehri Hydro Development Corpn. Ltd., (1996) 5 SCC 450] held thus: (SCC p. 454, paras 4-5)
“4. It is settled law that bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the validity of the primary contract between the person at whose instance the bank guarantee was given and the beneficiary. Unless fraud or special equity exists, is pleaded and prima facie established by strong evidence as a triable issue, the beneficiary cannot be restrained from encashing the bank guarantee even if dispute between the beneficiary and the person at whose instance the bank guarantee was given by the bank, had arisen in performance of the contract or execution of the works undertaken in furtherance thereof. The bank unconditionally and irrevocably promised to pay, on demand, the amount of liability undertaken in the guarantee without any demur or dispute in terms of the bank guarantee. The object behind is to inculcate respect for free flow of commerce and trade and faith in the commercial banking transactions unhedged by pending disputes between the beneficiary and the contractor.
5. … The court exercising its power cannot interfere with enforcement of bank guarantee/letters of credit except only in cases where fraud or special equity is prima facie made out in the case as triable issue by strong evidence so as to prevent irretrievable injustice to the parties.”
(emphasis supplied)
20.  A bank guarantee constitutes an independent contract. In Hindustan Construction Co. Ltd. v. State of Bihar [Hindustan Construction Co. Ltd. v. State of Bihar, (1999) 8 SCC 436] , a two-Judge Bench of this Court formulated the condition upon which the invocation of the bank guarantee depends in the following terms: (SCC p. 442, para 9)
“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.”
21. The same principle was followed in SBI v. Mula Sahakari Sakhar Karkhana Ltd. [SBI v. Mula Sahakari Sakhar Karkhana Ltd., (2006) 6 SCC 293] wherein a two-Judge Bench held thus: (SCC p. 301, paras 33-34)
“33. It is beyond any cavil that a bank guarantee must be construed on its own terms. It is considered to be a separate transaction.
34. If a construction, as was suggested by Mr Naphade, is to be accepted, it would also be open to a banker to put forward a case that absolute and unequivocal bank guarantee should be read as a conditional one having regard to circumstances attending thereto. It is, to our mind, impermissible in law.”
xxx
23. The settled position in law that emerges from the precedents of this Court is that the bank guarantee is an independent contract between bank and the beneficiary and the bank is always obliged to honour its guarantee as long as it is an unconditional and irrevocable one. The dispute between the beneficiary and the party at whose instance the bank has given the guarantee is immaterial and is of no consequence. There are, however, exceptions to this rule when there is a clear case of fraud, irretrievable injustice or special equities. The Court ordinarily should not interfere with the invocation or encashment of the bank guarantee so long as the invocation is in terms of the bank guarantee.”

9. The principles for grant of refusal or refusal to grant of injunction to restrain enforcement of a bank guarantee were enumerated by the Supreme Court in Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co.,5 wherein it was held as under:-
14. From the discussions made hereinabove relating to the principles for grant or refusal to grant of injunction to restrain enforcement of a bank guarantee or a letter of credit, we find that the following principles should be noted in the matter of injunction to restrain the encashment of a bank guarantee or a letter of credit:
(i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the beneficiary is entitled to realise such a bank guarantee or a letter of credit in terms thereof irrespective of any pending disputes relating to the terms of the contract.
(ii) The bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer.
(iii) The courts should be slow in granting an order of injunction to restrain the realisation of a bank guarantee or a letter of credit.
(iv) Since a bank guarantee or a letter of credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of bank guarantees or letters of credit.
(v) Fraud of an egregious nature which would vitiate the very foundation of such a bank guarantee or letter of credit and the beneficiary seeks to take advantage of the situation.
(vi) Allowing encashment of an unconditional bank guarantee or a letter of credit would result in irretrievable harm or injustice to one of the parties concerned.

10. Though the bulk of the submissions have been made regarding who is liable under the contract to pay for the rectification works, the prayers in the present petition seek restraint on the invocation of the BG, both on the respondent No.2, the beneficiary and respondent No.3, the bank. Thus, this Court is not seized with the adjudication of the substantive dispute between the parties, which would be the domain of the Arbitral Tribunal. The form of BG for performance security clearly records that the respondent No.2 need not prove or show grounds or reasons for demand of sum and moreover, it need not even demand the debt from the contractor i.e., the petitioner before presenting the bank with the demand. It is evident that the said BG is unconditional in nature. Hence, to succeed in restraining the invocation of the BG, the petitioner has to either make out a case of fraud vitiating the guarantee or one of special equities, wherein irretrievable harm or injustice would be caused.
11. At this point, it is deemed apposite to refer to the decision by a Division Bench of this Court in CRSC Research & Design Institute Group Co. Ltd. (Supra) wherein the Court, while discussing the scope of enquiry in a petition under Section 9 of the A&C Act and the meaning of the terms ‘Fraud’ and ‘Irretrievable injustice’ held as follows:-
15. We are unable to agree with the contention of the senior counsel for the appellant that this Court, when approached for the interim measure of interference with unequivocal, absolute and unconditional BGs, is required to interpret the contract and/or form a prima facie opinion whether the beneficiary of the BGs has wrongfully invoked the BGs. Such exercise, in our view, is to be done in a substantive proceeding to be initiated by the appellant for recovery of the monies of the BGs, if averred to have been wrongly taken by the respondent No. 1 by encashment of BGs. If any interim relief is also claimed in the said substantive proceedings, the need for taking a prima facie view, will arise therein; however not while dealing with an application for the interim measure of restraining invocation/encashment of BGs. In the said proceedings, no question of taking a prima facie view arises and the enquiry is confined to, whether on the basis of the documents, a case of fraud of egregious nature in the matter of obtaining/furnishing BGs, is made out. As far as the argument of the senior counsel for the appellant, of special equities is concerned, the same is but a facet of the second exception aforesaid of irretrievable harm or injustice. Needless to state that from the entire arguments of the senior counsel for the appellant, no case of fraud of egregious nature in the matter of making/obtaining of the BGs is made out. All that emerges is that there are disputes between the appellant and the respondent No. 1 and it is not even whispered that the respondent No. 1 built the entire charade of entering into the contract, only to obtain BGs and to profiteer from the appellant…
16. Fraud, as an exception to the rule of non-interference with encashment of BGs, is not any fraud but a fraud of an egregious nature, going to the root i.e. to the foundation of the bank guarantee and an established fraud. The entire case of the appellant, we are afraid, fails to qualify so. The Single Judge has written at length on the subject and save for as aforesaid, we need not say more.
17. Irretrievable injustice, as an exception to the rule of non-interference with encashment of BGs, is again not a mere loss, which any person at whose instance bank guarantee is furnished, suffers on encashment thereof. It is always open to such person to sue for recovery of the amount wrongfully recovered. What has to be proved and made out to obtain an injunction against encashment, is that it will be impossible to recover the monies so wrongfully received by encashment. There is not even a whisper to this effect, neither in the pleadings nor in the arguments.

12. Neither in the pleadings or in the submissions, not even a whisper of fraud in obtaining the BGs has been alleged. Thus, that ground is not available to the petitioner. In so far as special equities are concerned, there are none. Though the petitioner contends that it had carried out the correctional works as pointed out by the respondent No.2, the same is denied by the respondent No.2. Another ground canvassed by the petitioner is that the defects were on account of the base layer whereas the petitioner was only concerned with the DBM and BC layer. However, the respondent has relied upon the report by IIT Gandhinagar which pointed out that there were two major problems identified, one was that the previous overlay was not properly bonded to the present course, and another was that the subgrade, subbase, base layers had a very high moisture content due to poor drainage. The report had also suggested certain corrective measures. As per the respondent, no such rectifying measures were undertaken by the petitioner and thus it was forced to engage other contractors at the risk and cost of petitioner, in terms of clause 34.2 of the conditions of contract. The clause reads as follows:-
34.1 If the Contractor has not corrected the Defect, to the satisfaction of the Engineer, within the time specified in the Engineer’s notice/indent, the Engineer will assess the cost of having the Defect corrected and get the defects rectified through some other agency and the Contractor will pay 1.2 times of this amount.

The existence or validity of this clause has not been denied by the petitioner. Only objections pertaining to its applicability have been raised.
13. On an overall view of the facts and circumstances, it is clear that the petitioner has failed to make out any case of irretrievable harm or injustice being caused to it. Merely because he would be at a loss on account of the realization of the BG, would not be sufficient to restrain the invocation of an unconditional BG. It will always be open to the petitioner to sue for recovery of the amount if wrongfully released. Nothing has been shown to prove that it would be impossible to recover such monies, if once released.
14. In view of the above, this Court finds no merit in the present petition and the same is dismissed alongwith pending applications.

MANOJ KUMAR OHRI
(JUDGE)
MARCH 4, 2025/ry
Corrected & released on 11.03.2025
1 (2020) 13 SCC 574
2 (2008) 1 SCC 544
3 2020 SCC OnLine Del 1526
4 MANU/DE/1034/2023
5 (2007) 8 SCC 110
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