Author: Nikitha Panchagnula, Student at University College of Law, Osmania University.
Citation: 2007 (1) ARBLR 311 Delhi
Date of Decision: December 18, 2006
Bench: Gita Mittal
Original Copy: View
Statute involved: The Arbitration and Conciliation Act, 1996
Issues in Question:
- Whether the petitioner is entitled for the grant of an injunction against the encashment of the bank guarantee on the ground that it would cause irretrievable financial loss and injustice to him?
Background of the Case:
- The petitioner and the respondent entered into an agreement to conduct the construction work of the Baabehalli Hydro Electric Project located at Punjab at the rate of Rs. 6,09,82,995/-. The petitioner had sent a letter to the respondent conveying its acceptance to do the work which formed part of the agreement. It was required to finish the entire work within a period of one year. The respondent had asked the petitioner to furnish a performance security for which the petitioner agreed which shall be in the form of a bank guarantee for an amount of Rs. 30,50,000/- as mentioned in the agreement.
- It was agreed by the parties that such bank guarantee shall be furnished within 21 days from the date of receipt of the letter of acceptance. This would stand valid for a period of 28 days from the date on which the defects liability period would end and the defect liability period was agreed to be 365 days.
- According to one of the terms of the contract, disputes relating to payment etc., were to be referred to an engineer after which it was required to be referred to an adjudicator- Col. G.L. Bajpai within 14 days from the date of engineer’s decision. The adjudicator had to give his decision within 28 days in writing from the date of receipt of the dispute.
- The petitioner had stated that he had sent reminders to receive the payment of outstanding bills which amounted to Rs. 58,73,662/- according to the petitioner and had also submitted the running bills for the work done which were not paid by the respondent. The respondent disputes that the petitioner had failed to perform the contract from the time it commenced and hasn’t de-watered the land by excavation. Rather than improving the performance and overcoming the problem, the petitioner started to decrease the labour force as assigned to the project.
- The respondent claimed that the petitioner had concealed the fact of receiving an advance of Rs.55 lakhs, from respondent 1. The respondent had stated that few bills were found to be forged which were submitted by the petitioner and the project engineer had rejected these bills since the work was not done by the petitioner as a result of which, there was a tremendous failure of the work to be completed. The respondent claims that in the meanwhile, the petitioner was approaching the respondent in need of financial assistance which was rejected. So, the petitioner had extended the bank guarantee thrice.
- The petitioner and the respondent have relied on the minutes of the meeting held between the parties in conveying their claims. In the meeting, according to the petitioner, the respondent had agreed to pay a certain amount to be incurred on the bank guarantee and that in lieu of this, all the communications made and the legal notices sent to the arbitrator would stand withdrawn. Respondent 1 had agreed to pay 12% on certain extra billing items which were specified.
- Respondent 1 pointed out that the petitioner was required to substantially enhance the performance liability to an amount of Rs. 3 crores to carry on with further work as the petitioner failed to discharge its contractual liabilities. The petitioner had claimed that it cannot bear the huge amount and hence they could bear the enhancement in the bank guarantee only to an amount of Rs. 2 crores and not beyond that. As per the Memorandum of Understanding, the respondent had agreed to pay and had paid Rs. 30,000/- towards the rent of motors to the petitioner. But the receipt nowhere showed it was towards the enhanced bank guarantee.
- Thereafter, the petitioner had filed an application under Section 11(6) of The Arbitration and Conciliation Act, 1996 to get an arbitrator appointed. The petitioner had claimed that as a counter blast to this application, the respondent had invoked the bank guarantee dishonestly, furnished by the petitioner which was done to put pressure and thereby cause irretrievable financial loss to the petitioner. The petitioner also claims that there are already pending bills to an amount of Rs. 58 lakhs to be payable by respondent 1 for which the petitioner has approached before the Hon’ble High Court of Delhi for the appointment of an arbitrator. The petitioner points out that the action of respondent 1 is unauthorized and malafide patently which projects its fraudulent intentions and that the respondent had sought the bank guarantee only after receiving the notice with regard to the petition filed for the appointment of an arbitrator.
- Therefore, basing on the above avertments, the petitioner had filed a petition under Section 9 of The Arbitration and Conciliation Act , 1996 praying the Hon’ble High Court to grant a stay against the encashment of the bank guarantee in order to prevent irretrievable financial loss and injustice to the petitioner.
- The Court made the following observations while delivering the judgement:
- On the perusal of the Memorandum of Understanding, it was understood that there was an agreement by the respondent only to re-check certain billing items furnished and nothing beyond.
- The petitioner had failed to provide an enhanced bank guarantee upto Rs. 2 crores which it had agreed to pay earlier.
- It was agreed in the petition by the petitioner that no work was done after 2004.
- The petitioner in the petition had admitted that the bank guarantee was in the nature of performance security and it was nowhere related to any amounts regarding the payment of bills or running bills of the petitioner regarding which it had raised a dispute.
- The petitioner also admitted that there was no fraud either in the contract executed between the parties or in the provision providing for bank guarantee by the respondent 2.
- The petitioner could not prove its contention that the bank guarantee was invoked after filing of the petition for the appointment of an arbitrator or after receiving the notice thereof by respondent 1.
- The Court relied on one of the judgements of the Apex Court in the case of U.P. Coop. Federation Ltd. vs. Singh Consultants and Engineers (P) Ltd. [(1988) 1 SCC 174] where in the Court held that “In order to restrain the operation of a bank guarantee, there should be serious dispute and there should be a good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Otherwise the very purpose of bank guarantees would be negatived and the fabric of trading operation will be jeopardised.”
- The Court pointed out that the petitioner would be entitled to an injunction only if it can prove decisively and authoritatively that it would be impossible for it to reimburse itself if the bank guarantee is encashed which was certainly not in the instant case. The financial loss plea raised by the petitioner would not amount to irretrievable injustice entitling the petitioner to grant an injunction.
- Basing on these principles and the facts of the case, the Court had declined injunction against the encashment the bank guarantee and accordingly dismissed the petition.
- It is a settled principle that courts would stand reluctant to interdict contractual compliances by an injunction unless and otherwise a strong prima facie case would be made out by the person who is seeking an injunction.
- The nature of the fraud that a court would look into is fraud which is of a gregarious nature so as to vitiate the entire transaction in question. The fraud cannot be based on a mere suspicion but the same has to be proved clearly from the material on the record.
- It is therefore clear that it is only in the case of irretrievable damage and established fraud that an injunction can be granted to a party in a special case.