UTC Fire & Security India Ltd v. Bhartiya Rail Bijlee Company Limited and Anr

1. The petitioner has invoked the jurisdiction of this Court under Section 9 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act”) with the prayer that respondent Nos.[1] and 2 be restrained from taking any action in respect of letter dated 05.05.2014 of invocation of bank guarantee. The admitted facts of the case are that:-

2. The petitioner and the respondent had entered into two composite Contract No. CS—0270-151-2-FC-NOA-BRCBL/Nabinagar/10-11/22A dated 21.07.2010 relating to design, engineering, manufacturing etc. for the 2015:DHC:765 complete Fire Detection and Protection System for Nabinagar Thermal Power Project and Contract No. CS-0270-151-2-SC-COA- BRCBL/Nabinagar/10-11/22B dated 21.07.2010 for the work of providing all services in the said Thermal Power Project. Both the contracts were collectively called as the “Contracts” and were interlinked and overlapping and were essentially in the nature of one contract governed by the same General Conditions of Contracts. In due compliance of the provisions of the contract, the petitioner has submitted three bank guarantees. Two bank guarantees were in the nature of performance bank guarantees, the details of which are as under:i. Supply contract-Bank Guarantee No.5520225509 dated 13.08.2010 for Rs. 1,81,57,388/-, the validity of the same is up to 10.01.2015. ii. Erection contract—Bank Guarantee No.5520225510 dated 13.08.2010 for Rs. 38,64,761/-. The validity of this bank guarantee was till 10.01.2015.

3. The petitioner also submitted a bank guarantee No.5520225508 dated 13.08.2010 for Rs. 2,62,63,710, valid up to 10.07.2013 as security against advance in respect of supply contract.

4. The case of the petitioner is that time was not the essence of contract and the respondent had been extending the time for supply of the equipments. It is submitted that delay in completing the contracts had occurred on account of breaches on behalf of respondent No.1 as there was delay in giving inputs on design of the equipment to be supplied under the supply contract. It is further contended that the respondent No.1 had also failed to handover any front or site to the petitioner, as per the obligations under the contract. Out of total 54 work sites to be handed over, the respondent No.1 had offered only four other work sites. Under the contract, the respondent was required to handover 54 work sites/front by 04.11.2011. It is submitted that the act of the respondent towards invoking the bank guarantee is tainted by fraud as the same has been done with the sole agenda and intent to avoid performance of its obligation under the contract and to penalize the petitioner in exercise of its contractual rights. The invocation has been done with the sole ulterior motive of profiteering at the cost and prejudice to the petitioner. The petitioner had been prevented from performing its obligation on account of the breach of material conditions of the contract by the respondent No.1. It is submitted that such means of profiteering specially by public sector undertaking are not only fraudulent, but also inequitable and frowned upon and deprecated by Courts of Law and does not behove an esteemed organisation, especially a public sector undertaking and for this reason alone, invocation of the bank guarantee needs to be stayed. It is further submitted that invocation is contrary to the letter and spirit of the contract for the same reason that it is the respondent No.1 who had failed to fulfil the obligations under the contract. It is submitted that the petitioner is not responsible for failure of performance under the contract which had occurred due to the act of respondent No. 1.

5. The respondent, on the other hand, has stated that present petition is not maintainable. It is submitted that all the three bank guarantees were unconditional bank guarantees and payable on demand by respondent Nos.[2] to respondent No.1. It is submitted that bank guarantees is an independent agreement between respondent No.1 and respondent No.2 and the Court can interfere only when it is shown that the bank guarantee has been obtained by respondent No.1 in a fraudulent manner and the fraud is of egregious nature. It is submitted that the petitioner has not pleaded any grounds which can show that a fraud has been committed upon them while obtaining the unconditional bank guarantee. It is further submitted that the petitioners have also failed to show that they shall suffer any irreparable loss and injury if the bank guarantee is not stayed. It is argued that respondent is a public sector undertaking and, therefore, quite capable of compensating the petitioner in case they succeed. It is denied that respondent No.1 is responsible for the delay in fulfilment of the contract or that they have failed to supply the site to the petitioners. It is submitted that it was the petitioners who had not fulfilled their part of the commitment under the agreement and, therefore, the respondent had extended the period of completion of the contract from time to time. It is submitted that the pendency of any arbitral dispute between the parties is not a ground to stay the invocation of bank guarantee. It is submitted that petition is liable to be dismissed. Reliance has been placed by the respondents on the findings in the case of BSES Ltd. vs. Fenner India Ltd. and Anr, AIR 2006 SC 1148 and Vinitec Electronics Private Limited vs. HCL Infosystems Limited (2008) 1 SCC 544.

6. The petitioner in the rejoinder has submitted that this is one of the rare cases wherein the respondent No.1’s conduct is so egregiously fraudulent and lacking in bona fide that it vitiates the entire underlying transaction and, therefore, their case falls within the exception to the rule of non-intervention as laid down by Supreme Court in the cases of BSES Ltd. (supra)and Vinitec Electronics Private Limited (supra). It is submitted that the respondent No.1 had wrongly induced the petitioner to submit three bank guarantees, despite being fully aware that it was not in a position to release front/sites, thereby preventing the petitioner from discharging its obligation.

7. I have heard the arguments and have perused the relevant record.

8. The present dispute relates to the release of the bank guarantees. The nature and purpose of the bank guarantees had been discussed by the Supreme Court in the case of Hindustan Construction vs. State of Bihar (1999) 8 SCC 436. The relevant paragraphs 8 and 9 of the said judgment are reproduced as under:-

9. From the language of these bank guarantees, it is apparent that these bank guarantees are unconditional bank guarantees. Since in the case of Hindustan Construction (supra), the Supreme Court has held that bank guarantees are independent contracts between the beneficiary and the bank and since these bank guarantees are unconditional bank guarantees, the contract between the beneficiary and the bank has to be honoured and the Courts cannot restrain the two contracting parties to honour their agreement unless except on two grounds, i.e., an egregious nature of fraud has been played upon the petitioner or that he shall suffer an irretrievable loss.

10. Injunction has been sought on the ground of fraud. The expression ‘fraud’ has been defined in the case of Meghmala and Others vs. G. Narasimha Reddy and Ors. (2010) 8 SCC 383, wherein the expression ‘fraud’ has been defined and the Courts are advised to take the element of fraud seriously and the Court has held that any act which is tainted by fraud should not be condoned and sustained. The Court has also relied while defining the fraud on the findings in Lazarus Estate Ltd. Vs. Besalay (1956) 1 QB 702: (1956) 2 WLR 502, Andhra Pradesh State Financial Corporation Vs. M/s. GAR Re-Rolling Mills & Anr. AIR 1994 SC 2151 and State of Maharashtra & Ors. Vs. Prabhu (1994) 2 SCC 481. In para 33, the Court has observed as under:- “Fraud is an intrinsic, collateral act, and fraud of an egregious nature would vitiate the most solemn proceedings of courts of justice. Fraud is an act of deliberate deception with a design to secure something, which is otherwise not due. The expression "fraud" involves two elements, deceit and injury to the person deceived. It is a cheating intended to get an advantage. (Vide Dr. Vimla Vs. Delhi Administration AIR 1963 SC 1572; Indian Bank Vs. Satyam Fibres (India) Pvt. Ltd. (1996) 5 SCC 550; State of Andhra Pradesh Vs. T. Suryachandra Rao AIR 2005 SC 3110; K.D. Sharma Vs. Steel Authority of India Ltd. & Ors.

Central Bank of India Vs. Madhulika Guruprasad Dahir & Ors. (2008) 13 SCC 170).”

11. The petitioner has contended that the bank guarantees have been obtained by fraud because the respondent No.1 was aware from the very beginning that it would not be able to handover the vacant possession of the site and since it has failed to handover the vacant possession of the site, the petitioner could not complete his part of obligation under the contract. The respondent, on the contrary, has alleged that it was the petitioner who had defaulted in performance and had not fulfilled his part of the contract. Hence, the dispute has arisen between the parties regarding the fulfilment of the obligations under the contract by both the parties and this has arisen during performance of the contract. The bank guarantees, on the other hand, were submitted at the initial stage at the time of entering the contract. It is not shown by the petitioner that it was at that time that any fraud of egregious nature had been played upon him. The petitioner had entered into the contract on its own free will and has not alleged that it was forced into this contract. It has been admitted on behalf of the petitioner that before bidding, the petitioner was required to do the site inspection and the same was done. It, therefore, cannot be said that any fraud, what to say of egregious nature, had been played upon it, at the time of execution of the present bank guarantees.