Hitachi Energy India Limited v. Sterlite Power Transmission Limited

(c) GST as applicable shall be paid along with the invoices.

(d) All payments shall be paid within 30 days through Cheque /

RTGS from the date of submission of invoices along with all supporting documents as per Appendix 7. 10.[2] Payment Procedure: 10.2.[1] Payment Schedule/Billing Break-up for Payments:

(i) To facilitate the payments after Advance Payments, the billing break-up of the Contract Price attached as Appendix-1 ("Billing Break-Up") shall be used. Any payment under the Contract, subsequent to the Advance Payments, shall be made only upon certification by the SPGVL's Project Manager.

(ii) All commercial invoices shall be accompanied with the supporting documents as mentioned in Appendix 7. 10.2.[2] Currency of Payment

(i) The Contract Price shall be paid In Indian Rupees

(INR). 10.2.[3] Due Dates for Payment a. The payment shall be made upon fulfillment of the conditions specified in Article 10.[1] and receipt of the Contractor‟s invoice along with all necessary supporting documents for such payment. The Contractor shall submit all running bills along with supporting documents to the SPGVL's Project Manager latest by 25th of each month. The SPGVL shall make the progressive payments as specified. 10.2.[4] Mode of payment: a. All payments shall be made within Thirty (30) days by cheque (payable at par)/RTGS from the date of submission of the Contractor's bill/invoice to the SPGVL, provided that the documents submitted are complete and correct in all respects. (Appendix 7) ARTICLE 12 - BANK GUARANTEES: The bank guarantees to be provided by the Contractor in terms of Article 10 shall be subject to the following conditions: 12.[1] Advance Bank Guarantees (ABGs) - The Contractor shall submit ABG-1 and ABG-2 in accordance with Article 10 for release of Advance Payment-1 and Advance Payment-2 respectively. The ABGs shall be irrevocable, unconditional and irreversible and in a format provided by SPGVL in Appendix-5. The value of ABG-1 shall be proportionally reduced on quarterly basis for the amount adjusted against Advance Payment-1 only after 6 months from the Effective Date. The value of ABG-2 shall be proportionately reduced on quarterly basis for the amount adjusted against Advance Payment-2 only after 6 months, from the Notice to Proceed date) 12.1.[1] ABG-1 shall be submitted within Thirty (30) days from the Effective Date of the Contract. 12.1.[2] ABG-2 shall be submitted within Thirty (30) days from the date of Notice to Proceed. 12.1.[3] The validity of the ABGs shall be extended by the Contractor periodically (if required) till the final recovery of the Advance Payments in accordance with the Contract. 12.[2] Contract Performance Bank Guarantees (CPBGs) – The Contractor shall submit a CPBG-1 and CPBG-2 in accordance with Article 10 in order to guarantee the performance of Contractor's obligations by the Contractor.

12.2. I CPB G-1 shall be submitted within Thirty (30) days from the Effective Date of the Contract. 12.2.[2] CPBG-2 shall be submitted within Thirty (30) days from the date of Notice to Proceed. 12.2.[3] The validity of the CPBGs shall be extended by the Contractor periodically (if required) till the actual date of Operational Acceptance/ Deemed Operational Acceptance of Element in accordance with the Contract. 12.2.[4] The CPBGs shall be unconditional, irrevocable and irreversible and in format provided by SPGVL in Appendix-6. 12.[3] Performance Bank Guarantee (PBG) - In addition to ABGs and CPBGs, the Contractor shall submit an irrevocable and unconditional bank guarantee having value equivalent to 10% (Ten Percent) of the total Contract Price plus applicable GST in order to guarantee the performance of Contractor‟s obligations during the Defect Liability Period and valid till 24 months from the date of Operational Acceptance or Deemed Operational Acceptance plus 3 (Three) months additional claim period. Further if the DLP is required to be extended in accordance with Article 21 of this Contract, for any part of the Supplies, the PBG equivalent to 10% of the Contract Price of that part only shall be extended for the period of extended DLP for the said part This PBG shall be submitted at least 15 (fifteen) days prior to the expiry of CPBGs and release of retention payment. In the event, the Contractor fails to submit the PBG by the period as specified above, SPGVL shall have a right to encash/ invoke the CPBGs and appropriate the amount so received. The validity of the PBG shall be extended by the Contractor periodically (if required) at the request of SPGVL as per the requirements of the Contract. The PBGs shall be unconditional, irrevocable and irreversible and in format provided by SPGVL in Appendix-6. 12.[4] The Contractor understands and accepts that the submission of the aforementioned Bank Guarantees are an integral part of the Contract and any delay on this account shall lead to material breach of the Contract and the Contractor would be liable to appropriate actions available to SPGVL under the Contract, or as per the Applicable Law. 12.[5] The aforementioned bank guarantees (i.e. the ABGs, the CPBGs and the PBG (collectively referred to as the "Bank Guarantees")) shall be issued from the following banks: 12.5.[1] By a Public Sector Bank located in India, or 12.5.[2] a Scheduled Indian Bank or any other bank acceptable to SPGVL 12.[6] In case of enforcement of the Bank Guarantees by SPGVL, the Contractor shall forthwith reinstate the same to their respective original value.”

9. As is evident from a reading of Clause 12.1, the ABGs were stipulated to be irrevocable, unconditional and irreversible. The said provision also prescribed that the value of the ABGs shall be proportionately reduced on a quarterly bases for the amount adjusted against Advance Payment-1. Undisputedly, the Supply Contract also carried similar provisions. The Respondent asserts that various advance payments amounting to Rs.5,38,44,016/- have already been paid to the Petitioner and which amount is liable to be refunded in the absence of any work having been performed or supplies having been effected. It is its contention that in the absence of any steps having been taken under the contracts, the stage for raising invoices did not arise and consequently no amount was adjusted against the advance payment made to the Petitioner. The stand in essence is that since advance payments are yet to be refunded, the question of grant of injunctive relief as claimed by the Petitioner would be wholly unwarranted. It is in the aforesaid backdrop that the prayers as made in the present petition preferred under Section 9 of the Arbitration and Conciliation Act, 1996 are liable to be evaluated.

10. As would be manifest from the reliefs which are claimed, the solitary injunction which is sought is with respect to the BGs detailed in paragraph 8 of the petition. A BG as is well settled is an independent and distinct contract between the bank and the beneficiary. Our courts have consistently held that the said contract can be interfered with and a restraint granted only if a party is able to unequivocally establish irretrievable harm or injustice being caused or where special equities may be found to exist.

11. The Court bears in mind the following pertinent observations as were entered by the Supreme Court in Hindustan Steelworks Construction Ltd. vs. Tarapore & Co.[4] while underlining the special features which underlie a BG:-

12. The Supreme Court in Dwarikesh Sugar Industries Ltd. vs. Prem Heavy Engineering Works (P) Ltd.[5] had culled out the basic grounds on which an injunction could be sought or obtained in respect of a BG. The Court deems it apposite to extract the following passages from that decision: -

22. The second exception to the rule of granting injunction, i.e., the resulting of irretrievable injury, has to be such a circumstance which would make it impossible for the guarantor to reimburse himself, if he ultimately succeeds. This will have to be decisively established and it must be proved to the satisfaction of the court that there would be no possibility whatsoever of the recovery of the amount from the beneficiary, by way of restitution.”

13. The precedents which have been rendered on this subject were exhaustively noticed and reviewed in a recent judgment rendered by a learned Judge of the Court in CRSC Research & Design Institute Group Co. Ltd. v. Dedicated Freight Corridor Corporation of India Limited and Others[6]. The Court deems it apposite to extract the following passages from the aforesaid decision:

26. The following principles clearly emerge from the decision in Vinitec Electronics:

(i) Bank guarantees, which are payable on demand by the guarantor, are unconditional bank guarantees.

(ii) Unconditional bank guarantees entitled the guarantor to realisation thereof, irrespective of any pending disputes. In fact, disputes between the guarantor, and the parties, at whose instance the bank has given the guarantee, are immaterial and of no consequence. Enforcement of the guarantee cannot be injuncted on the pretext that the condition for enforcing the bank guarantee, in terms of the agreement between the parties, has not been fulfilled. What is relevant are the terms incorporated in the guarantee (and not those in the agreement between the parties). The mere fact that the bank guarantee refers to the principal agreement, without referring to any specific clause, does not make the bank guarantee conditional.

(iii) Courts should, therefore, be slow in injuncting realisation of unconditional bank guarantees.

(iv) The only exceptions, to this general rule, are where there exist/exists

(a) fraud of an egregious nature, or (b) irretrievable injustice resulting to the parties, at whose instance the bank gave the guarantee, were the injunction not granted, or

(c) special equities, of which the possibility of irretrievable injustice is itself one. (v) “Irretrievable injustice”, for this purpose, has to be of such an exceptional nature as would override the terms of the guarantee and the adverse effect of the grant of such injunction on commercial dealings in the country.

28. These paras illustrate, lucidly, the distinction between a conditional bank guarantee and an unconditional bank guarantee. The judgment in Vinitec Electronics makes it abundantly clear that the first aspect, to be taken into consideration, is the bank guarantee itself, and the terms thereof. If the bank guarantee is conditional, then, if the conditions have not been fulfilled, injunction, against encashment and invocation, may unquestionably follow. If, however, the bank guarantee is unconditional, then injunction can be granted only if egregious fraud, irretrievable injustice, or special equities, exist, and not otherwise.

29. The issue was revisited, by the Supreme Court, in its more recent decision in Standard Chartered Bank v. Heavy Engineering Corporation Ltd. The terms of the bank guarantees, in that case, contemplated their invocation “against any loss or damage caused to or suffered by the Corporation by reason or any breach or failure by the said supplier, in due performance of the aforesaid contract”. The specifics of the controversy between the parties need not detain us. Suffice it to state that the Supreme Court held the bank guarantees to be “unconditional” and “specific in nature”. Thereafter, the Supreme Court, relying on its earlier decisions Ansal Engineering Projects Ltd. v. Tehri Hydro Development Corporation Ltd., Hindustan Construction Co. Ltd. v. State of Bihar, State Bank of India v. Mula Sahakari Sakhar Karkhana Ltd., Himadri Chemicals and Gujarat Maritime Board v. Larsen & Toubro Infrastructure Development Projects Ltd., reiterated the principles already set out hereinabove, and emphasised, additionally, that fraud or special equities had, to support the prayer for stay of invocation of bank guarantees, to be “pleaded and prima facie established by strong evidence as a triable issue”.

32. Some scope for debate, however, arises, on the concept of “special equities”. The decisions of the Supreme Court - perhaps, advisedly - do not delineate, in precise contours, the ambit of the expression. Significantly, Fenner India Ltd. regards “irretrievable injustice” as a specie of the “special equities” genus, whereas Standard Chartered Bank treat “special equities” and “irretrievable injustice” as distinct circumstances, either of which would justify injuncting the invocation of a bank guarantee.“Irretrievable injustice”, to reiterate, has to be of such a magnitude as would override the twin considerations of the express terms of the guarantee and the adverse effect, from the grant of injunction, on commercial dealings in the country. “Special equities”, too, must, therefore, be so “special” so as to prevail over these two considerations, otherwise paramount while examining a prayer for injunction against invocation of a bank guarantee. While, therefore, examining whether “special equities” exist, so as to justify the grant of a prayer for injuncting invocation of a bank guarantee, the Court has to tread warily, and cannot confer, on the expression “special equities”, so elastic a construction, as would snap the rule.

49. Which leaves us with the third circumstance, in which stay of invocation of an unconditional bank guarantee can be legitimately directed by the court, i.e. the existence of special equities. Again, the petitioner has, undoubtedly, averred, in the petition, that such “special equities” do exist; the justifiability of the averment, however, requires to be examined.

50. Without extracting the specific references, to the existence of “special equities”, as made in the petition, suffice it to state that the only ground, on which the petitioner has urged the existence of such “special equities”, is its averment that its claim, against Respondent No. 1, is far in excess of the amounts of the bank guarantees. There is no other ground, on which the existence of “special equities” has been pleaded.

51. Can a mere claim, of the petitioner, against the respondent - the sustainability of which is yet to be adjudicated - constitute “special equities”, so as to justify injuncting the invocation of unconditional bank guarantees, issued by the bank, at the petitioner's instance, in favour of Respondent No. 1, even if such a claim is in excess of the amount covered by the bank guarantees? In my considered opinion, it cannot.

52. Extrapolating from the principle enunciated in Fenner India Ltd. in the context of irretrievable injury, I have already opined, hereinbefore, that “special equities” must be so special as to override the twin considerations of the sanctity of the terms of the bank guarantee, and the deleterious effect which the grant of injunction, against honouring of unconditional bank guarantees, would have on the commercially transacting public. The Supreme Court has held, in Meet Singh v. State of Punjab, that the word “special” means “distinguished by some unusual quality, peculiar or out of the ordinary” and that it “has to be understood in contradistinction to the word „general‟ or „ordinary‟.” Viewed in this background, Respondent NO. 1 is entitled, on the express terms of the bank guarantees, to their invocation in its favour, subject to Respondent No. 1 submitting the required signed statements. The Performance Guarantee goes so far as to specifically stipulate that Respondent No. 1 was not required to prove or establish the breach of contract, on the part of the petitioner, before being entitled to the invocation of the bank guarantee. These are strong equities in favour of Respondent No. 1, and the sanctity attached to bank guarantees, and to the credibility of the banking system which provides such guarantees, serves to augment the equities. Can these equities be offset by the mere fact that the petitioner may have a yet to be established claim, against Respondent No. 1, so as to justify restraining the Bank from honouring the covenants of the bank guarantees? The answer, in my opinion, has necessarily to be in the negative.”

14. It must, at the outset, be noted that the Petitioner here neither alleges nor has it asserted or proven a case of fraud. The Court also bears in mind the test in relation to injunctions in respect of Bank Guarantees having been formulated to be fraud of an “egregious” nature. As is evident from the aforesaid recital of facts, all that comes to the fore is the existence of a contractual dispute between the parties. The Court also bears in mind the objection taken by the Respondent who contended that the advance payments held by the Petitioner are liable to be refunded. It becomes pertinent to note that the aforesaid assertion as set forth in the reply which was submitted has not been controverted by the Petitioner. In view of the aforesaid, the Court is of the firm opinion that no case of irretrievable harm or special equities exists.

15. The petition along with pending applications fails and shall consequently stand dismissed.

YASHWANT VARMA, J. FEBRUARY 28, 2023