Full Text
HIGH COURT OF DELHI
Date of Decision: 16.11.2021
ZEE ENTERTAINMENT ENTERPRISES LTD & ANR. ..... Petitioner
Through: Mr Gopal Jain, Senior Advocate with Mr Kunal Tandon, Mr Kumar Shashank
Shekhar, Advocates.
Through Mr Chetan Sharma, learned ASG with Mr J.K. Singh Mr Ashish, Advocates.
VIBHU BAKHRU, J. (ORAL)
JUDGMENT
1. The petitioners have filed the present petition under Section 9 of the Arbitration and Conciliation Act, 1996 (hereafter ‘the A&C Act’), inter alia, praying as under:- “a) Pass an order in the nature of an ex-parte adinterim/interim nature restraining the Respondent No.1 from invoking the Bank Guarantee bearing BG No~240GT02201040006 dated 09.04.2020 for a BG amount of Rs.37.17 Crores issued by Respondent No.2 Bank (pursuant to the letter of 2021:DHC:3689 termination dated 11.11.2021), issued by Petitioner No.1 for and on behalf of Petitioner No.2; (b) Pass an order in the nature of an ex-parte adinterim/interim nature staying the operation and effect of the termination letter dated 11.11.2021;
(c) Pass an order in the nature of an exparte/interim nature restraining the Respondent No.1 from issuing the press release for and in respect of the Termination Letter dated 11.11.2021 and if issued, to direct the Respondent to withdraw the said Press Release.”
2. The respondent (hereafter ‘RailTel’) had issued a Request for Proposal (RFP) for “Selection of Digital Entertainment Service Provider (DESP) for delivering Content on Demand (COD) Services on Build Own Operate (BOO) model for Indian Railways”. It is stated that petitioner no. 2 (Margo Networks Pvt. Ltd. – hereinafter ‘Margo’) had submitted its bid pursuant to the RFP and was declared successful. Thereafter, RailTel issued a Letter of Award (LoA) dated 14.01.2020 awarding the contract to Margo.
3. In terms of the RFP, it was agreed that the contract to provide COD Services would be for a term of ten years. The contract was on revenue sharing basis whereby Margo had agreed to share revenue from the COD Services subject to payment of an Annual Minimum Guarantee amount (hereafter ‘MG’). The MG for the first year was agreed at ₹63 crores. In terms of the RFP, Margo was also required to furnish a Performance Bank Guarantee equivalent of a value of 50% of the quoted MG within a period of thirty days of issue of the LoA. The parties agreed that for the second year, the MG amount would be increased to the revenue shared during the last applicable financial year if the same was higher than 50% of the MG.
4. Petitioner no.1 (hereafter ‘ZEEL’) is the holding company of Margo and had furnished the subject Bank Guarantee bearing BG No- 240GT02201040006 dated 09.04.2020 issued by respondent no.2 (HDFC Bank) for an amount of ₹37.17 Crores (hereafter referred to as ‘the BG in question’).
5. Margo states that after issuance of the BG in question, it had sent several emails to the Northern Railways with regard to implementation of the contract to provide COD Services in various trains.
6. Margo states that it had also exchanged correspondence with RailTel in regard to the Performance Bank Guarantee from March, 2020 onwards. The petitioners (ZEEL and Margo) contend that their resources were severely constrained in view of the nationwide lockdown imposed with effect from 23.03.2020, on account of Covid- 19 pandemic. Margo also claims that there were significant delays on the part of RailTel on account of delay in receiving permission from the Railways for implementing the COD Services on various trains.
7. Margo made various requests for deferment/waiver of the MG payments but the said request was not entertained and RailTel continued to raise invoices for the MG amount and the interest charges thereon.
8. Margo states that it paid the MG for the first year along with the interest in terms of the RFP. The controversy between the parties is in respect of the MG payment for the second year.
9. Margo states that RailTel did not accept any of its proposals, however, agreed to defer the payment of the balance 50% of the first year’s MG till 01.03.2021 and the second year’s MG till 31.03.2021. The petitioners state that in the given compelling circumstances, Margo furnished the undertaking on 10.02.2021 as desired by RailTel and undertook to ensure the MG payments to RailTel in accordance with the terms and conditions of the LoA issued on 14.01.2020. In view of the said undertaking, RailTel also agreed to extend the term of the contract for a further period of one year, till 13.01.2031.
10. However, on 09.07.2021, Margo sent a letter stating that its earlier undertaking was null and void in wake of the second wave of Covid-19 pandemic and it sought further deferment of the MG payments as well as extension of the term of the contract in question.
11. RailTel did not accept the same and, by a letter dated 05.08.2021, withdrew its agreement to extend the term of the contract for further period of one year as Margo had not complied with the terms of its undertaking. RailTel referred to various clauses of the RFP and further called upon Margo to pay the second MG by 16.08.2021 and also put Margo to notice that in case of non-compliance, RailTel would be left with no option but take action including forfeiture of the Earnest Money Deposit (EMD) in terms of Clause 2.24.1.[3] of Section II of the RFP and, to terminate the Contract on account of occurrence of an Event of Default as contemplated under Clause 3.29 of the RFP.
12. Margo responded to the said notice by a letter dated 10.08.2021 and claimed that it had not violated any terms of the RFP and there was no amount due and payable by it because there was no contract in force between the parties. Margo claimed that the timeline for payment of the first year’s MG and the timelines for payment of MGs for the further period would trigger only on execution of the Agreement and in absence thereof it was not liable to pay the second year’s MG.
13. By a letter dated 11.11.2021, RailTel terminated the contract between the parties and called upon Margo to comply with the Exit Management Schedule under Section III of the RFP. RailTel also issued a letter dated 11.11.2021 to HDFC Bank invoking the Bank Guarantee in question.
14. In the aforesaid context, the petitioners have filed the present petition. Submissions
15. Mr Jain, learned senior counsel appearing for the petitioners contended that the invocation of the BG in question was liable to be interdicted in view of the Force Majeure event of the outbreak of Covid-19. He referred to Clause 3.25 of the General Conditions of Contract (GCC) and on the strength of the Sub-clause (ii) of Clause 3.25 of the GCC submitted that an outbreak of a pandemic would constitute a Force Majeure event. He submitted that in terms of Clause 3.25 (c) of the GCC, a party who has given notice of a Force Majeure event would be excused from performance or punctual performance of its obligations under the Contract so long as the relevant Force Majeure event continues. He submitted that the pandemic is still raging and therefore, Margo is absolved of performance of its obligations in terms of the LOA.
16. He further submitted that in terms of Clause 3.25 (h) of the GCC, the parties had agreed that in case of Force Majeure, all parties were obliged to endeavour to agree on an alternate mode of performance in order to ensure continuity of the service and implementation of the obligations as well as to minimise any adverse consequences of Force Majeure. He submitted that in terms of the said clause, RailTel was obliged to engage with Margo to arrive at an amicable solution for implementing the contract and it was not open for RailTel to terminate the contract in question. Next, he submitted that there was no default on the part of Margo as the parties had not entered into a definitive agreement and its payment obligations would commence only after the parties had entered into the agreement.
17. He referred to an order dated 20.04.2020 passed by a Coordinate Bench of this Court in M/s Halliburton Offshore Services Inc. v. Vedanta Limited & Anr.: OMP (I) (COMM) 88/2020 (Halliburton -
1) and submitted that this Court had recognized that the restrictions imposed pursuant to the outbreak of Covid-19 was a Force Majeure event and created special equities in favour of the parties. The Court had accordingly issued an ad interim order interdicting invoking or encashment of a bank guarantee issued in that case. He also referred to the subsequent judgement dated 29.05.2020 passed in the said matter [Halliburton - 2] and submitted that in the said case, the Court had vacated the ad interim order but had directed that the amount recovered be kept in a separate joint account. He submitted that a similar order may also be passed in this case.
18. Next, he submitted that this court had expanded the scope of special equities as a ground for interdicting invocation of a bank guarantee. He referred to the decision of the Division Bench of this Court in Hindustan Construction Co. Ltd. v. National Hydro Electric Power Corporation Ltd.: 2020 SCC OnLine Del 1214 and drew the attention of this Court to paragraph number 21 of the said judgment and submitted that earlier the bank guarantees would not be interdicted except in cases of established fraud; however, the Courts had now expanded the said scope to include the consideration as to which party was in breach of the contract.
19. Mr Jain also referred to the order dated 31.12.2020 passed by a Coordinate Bench of this Court in ISGEC Heavy Engineering Ltd. v. Indian Oil Corporation Ltd. & Anr.: OMP (I) (Comm) 442/2020. He submitted that in that case, the question of fraud was not urged, however, the court proceeded to examine the question of special equities and following the decision of the Division Bench of this Court in Hindustan Construction Co. Ltd. v. National Hydro Electric Power Corporation Ltd. (supra) passed an ad interim order directing that status quo be maintained regarding encashment of the bank guarantee.
20. Mr Sharma, learned ASG appearing for RaiTel countered the aforesaid submissions. He referred to Clause 3.26 of the GCC and submitted that the parties had agreed that the Force Majeure event would not excuse performance of the payment obligations. Reasons and Conclusion
21. At the outset, it is necessary to note that there is no dispute that the BG in question is an unconditional bank guarantee. The law relating to interdicting an unconditional bank guarantee is now far too well settled. It has been authoritatively held by the Supreme Court in several cases that the bank guarantees can be interdicted only in exceptional cases of egregious fraud and special equities.
22. In U.P. Cooperative Federation Limited v. Singh Consultants and Engineers Pvt. Ltd.: 1988 (1) SCC 174, Sabyasachi Mukharji J had observed as under:-
17. This question was again considered by the Queen's Bench Division by Mr Justice Kerr in R.D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd. [(1977) 2 All ER 862] In this case injunction was sought on a question in respect of performance bond. The learned Single Judge Kerr, J. gave the following views: “(i) Only in exceptional cases would the courts interfere with the machinery of irrevocable obligations assumed by banks. In the case of a confirmed performance guarantee, just as in the case of a confirmed letter of credit, the bank was only concerned to ensure that the terms of its mandate and confirmation had been complied with and was in no way concerned with any contractual disputes which might have arisen between the buyers and sellers. Accordingly, since demands for payment had been made by the buyers under the guarantees and the plaintiffs had not established that the demands were fraudulent or other special circumstances, there were no grounds for continuing the injunctions....
(ii) If it was right to discharge the injunctions against the bank, the fact that the Egyptian defendants had taken no part in the proceedings could not be a good ground for maintaining those injunctions. Further, equally strong considerations applied in favour of the discharge of the injunctions against the Egyptian defendants, and their failure to participate in the proceedings did not preclude the court from discharging the injunctions against them.”
18. In my opinion the aforesaid represents the correct state of the law. The court dealt with three different types of cases which need not be dilated here. ** ** **
34. On the basis of these principles I reiterate that commitments of banks must be honoured free from interference by the courts. Otherwise, trust in commerce internal and international would be irreparably damaged. It is only in exceptional cases that is to say in case of fraud or in case of irretrievable injustice be done, the court should interfere.
23. K. Jagannatha Shetty J. in his concurring opinion had further explained as under:
24. In Svenska Handelsbanken v. M/s Indian Charge Chrome and Ors.: (1994) 1 SCC 502, the Supreme Court held as under: “… in case of confirmed bank guarantees/irrevocable letters of credit, it cannot be interfered with unless there is fraud and irretrievable injustice involved in the case and fraud has to be an established fraud…. … irretrievable injustice which was made the basis for grant of injunction really was on the ground that the guarantee was not encashable on its terms…. … there should be prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Mere irretrievable injustice without prima facie case of established fraud is of no consequence in restraining the encashment of bank guarantee.”
25. Undeniably a bank guarantee cannot be interdicted unless the court is persuaded to accept that not granting of an injunction would cause irretrievable injustice. However, as explained by the Supreme Court in Svenska Handelsbanken v. M/s Indian Charge Chrome and Ors. (supra), mere irretrievable injustice without a prima facie case of established fraud would be of no consequence in restraining the encashment of the bank guarantees.
26. In Larsen & Tourbo Limited v. Maharashtra State Electricity Board and Others: (1995) 6 SCC 68, the Supreme Court reiterated the aforesaid view. The relevant extract of the said decision is set out below:-
27. In Himadari Chemicals Industries Ltd. v. Coal Tar Refining Company: 2007 (8) SCC 110, the Supreme Court referred to the earlier decisions and summarized the principles regarding interdiction of a bank guarantee as under:
29. Mr Jain’s contention that special equities creates a separate exception for grant of an injunction of a bank guarantee is also unpersuasive. In Consortium of Deepak Cable India Limited & Abir Infrastructure Private Limited (Dcil-Aipl) Thr Abir v. Teestavalley Power Transmission Limited: 2014 SCC Online Del 4741, the Division Bench of this Court held as under: -
30. As is apparent from the above extract from the decision in Consortium of Deepak Cable India Limited & Abir Infrastructure Private Limited (Dcil-Aipl) Thr Abir v. Teestavalley Power Transmission Limited (supra), special equities cannot be considered as a totally separate exception but is more akin to the requirement of irretrievable injustice. ‘Special equities’ are in a sense special circumstances, which would justify granting the exceptional relief for interdicting a bank guarantee as not granting the said relief would cause irretrievable harm or injury to the party who has otherwise established a compelling case. It is necessary to bear in mind that unconditional Bank Guarantees are furnished in the course of commercial transactions to enable the beneficiary to invoke the same without recourse to any adjudicatory process. Thus clearly, commercial disputes arising in relation to the transactions do not present any special equities.
31. In BSES Ltd. v. Fenner India Ltd.: (2006) 2 SCC 728, the Supreme Court had observed as under:
32. The decision of the Division Bench of this Court in Hindustan Construction Co. Ltd. v. National Hydro Electric Power Corporation Ltd. (supra) cannot be read in the manner as contended by Mr Jain. The said judgment is not an authority for the proposition that the principles as authoritatively settled by the Supreme Court in various decisions mentioned above have been diluted or no longer held good. The observations made by the Division Bench that the scope of what constitutes special equities has been expanded and must be read in its context. The Division Bench had specifically noted that the courts have granted injunction on the grounds of special equities where there were extraordinary circumstances and the same “include cases of irretrievable injury, extraordinary special equities including the impossibility of the guarantor being reimbursed at a later stage if found entitled to the money and the invocation of the BG being not in terms of the BG itself. ”
33. It is well settled that in cases where invocation of the bank guarantee is not in terms of the bank guarantee, the courts would intervene and would interdict payment against such an invocation. This is not a case of special equities but constitutes a sperate ground. The concept of irretrievable injury or extraordinary special equities cannot be expanded to take into its fold disputes regarding the interpretation or performance of the underlying contract. A dispute between the parties relating to performance of obligations under the contract does not give rise to any special equities warranting interdiction of a bank guarantee. As noticed above, there must be special circumstances that places the party seeking such an injunction in a position where it would suffer irretrievable injury if the injunction as sought for is not granted.
34. In UP State Sugar Corporation v. Sumac International Ltd.: 1997 (1) SCC 568, the Supreme Court authoritatively held that: -
35. In the facts of the present case, it is undeniable that the outbreak of Covid-19 has resulted in severe commercial difficulties and has put businesses under immense strain. Undisputedly, there was a reduction in the number of commuters using the trains operated by the Railways. This would undoubtedly result in fall of revenues that may have been contemplated by Margo. However, a loss of revenue is not a ground for excusing performance of a contract. It is settled law that the commercial difficulties do not frustrate a Contract or absolve a party from performing its obligations. In Alopi Parshad and Sons Ltd. v. Union of India: (1960) 2 SCR 793, the Supreme Court had held as under:
36. In the present case, Clause 3.26 of the GCC expressly provided for the performance of obligations that could be excused. Clause 3.26 is set out below:- “3.26. Excused Performance If either Party is wholly or partially unable to perform its obligations hereunder because of a Force Majeure event, that Party will be excused from whatever performance is affected by the Force Majeure event, to the extent so affected, provided that the affected Party gives the other Party written notice of the occurrence of the Force Majeure Event as soon as practicable and in any event within seven (7) days after the occurrence of the Force Majeure event, giving full particulars of such occurrence, including an estimation of its expected duration, impact on the performance of such Party’s obligations hereunder. Provided that: a. suspension of performance shall be of no greater scope and of no longer duration than is reasonably required by reason of the Force Majeure event; and b. the affected Party shall exercise all reasonable efforts to mitigate or limit damages to the other Party. c. Notwithstanding anything to the contrary, the obligation of the Bidder/ DESP to pay the Minimum Guarantee shall continue despite the Force Majeure event and any non-payment shall not be excused. d. the financial inability to make payments under the Contract Agreement shall not be a Force Majeure event.”
37. In terms of Sub Clause (c) of the proviso, the parties had clearly agreed that the Force Majeure event would not excuse performance of a bidder to pay the minimum guarantee.
38. In Satyabrata Ghose v. Mugneeram Bangur & Co. And Anr.: AIR 1954 SC 44, the Supreme Court had observed:
39. In view of the express stipulation that a Force Majeure event would not excuse performance of the payment obligations, the contention that Margo is absolved of its liability under the LOA to pay the MG is prima facie difficult to accept.
40. The order in ISGEC Heavy Engineering Ltd. v. Indian Oil Corporation Ltd. & Anr. (supra) is an ad interim order and is of little assistance to the petitioner as the said petition was eventually dismissed by the Court, albeit, on the ground of jurisdiction. The reliance placed by Mr Jain on Haliburton-I (supra) is also misplaced. The said order is an ad interim order, which was subsequently vacated in Haliburton-II (supra).
41. The contention that Margo does not have any obligation to pay any amount is prima facie unsubstantial considering that the petitioner had furnished an undertaking on 11.02.2020 to pay the MG. The said undertaking was furnished after the outbreak of Covid-19.
42. In view of the above, the prayer for interdicting the BG in question is rejected.
43. Notice is issued limited to the question of the termination letter dated 11.11.2021. Reply, if any, be filed within a period of one week from today. Rejoinder, if any, be filed on or before the next date of hearing.
44. List on 30.11.2021.