APECO INFRASTRUCTURE INDIA PVT LTD v. BHARAT HEAVY ELECTRICALS LIMITED

In BSES Ltd. v. Fenner India Ltd. [(2006) 2 SCC 728] this Court held: (SCC pp. 733-34, para 10)

(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.

26. The Court, in Vinitec Electronics proceeded, thereafter, to examine whether the bank guarantee, forming the subject matter of the controversy before it, was conditional or unconditional, and the discussion, in the judgement, on this aspect, is instructive. Paras 17, 18 and 19 of the report deserve, in this context, to be reproduced in extenso:

18. Thereafter by a letter dated 20-8-2001, the bank guarantee was amended and Para 4 of the bank guarantee dated 10-8-2001 was substituted and the same reads as under: “Therefore, we, the Bank, hereby affirm that we are guarantors and responsible on behalf of the supplier up to a total of Rs 16,81,238.50 (Rupees sixteen lakhs eighty-one thousand two hundred thirty-eight and paise fifty only) and we undertake to pay any sum or sums within the limit of Rs 16,81,238.50 (Rupees sixteen lakhs eighty-one thousand two hundred thirtyeight and paise fifty only) as aforesaid upon receipt of written demand from the Company within the validity of this bank guarantee.”

19. In the unamended bank guarantee the Bank affirmed that they are guarantors and responsible on behalf of the supplier up to a total of Rs 16,81,238.50 (Rupees sixteen lakhs eighty-one thousand two hundred thirty-eight and paise fifty only) and had undertaken to pay any sum or sums within that limit upon receipt of written demand from the purchaser within the validity of bank guarantee provided it is established that the supplier be in default for the performance of their warranty obligations under the contract. This makes it abundantly clear that what was furnished was a conditional bank guarantee and the bankers were liable to pay the amounts only upon establishing the fact that the supplier was in default for the performance of their warranty obligations under the contract. But by the subsequent letter dated 20-8- 2001, the relevant clause in bank guarantee was amended whereunder the Bank stood as guarantor and responsible on behalf of the supplier up to a total of Rs 16,81,238.50 (Rupees sixteen lakhs eighty-one thousand two hundred thirty-eight and paise fifty only) and had undertaken to pay any sum or sums within that limit “upon receipt of written demand from the Company within the validity of this bank guarantee”. This amended clause makes it abundantly clear that the Bank had undertaken to pay amounts up to a total of Rs 16,81,238.50. The condition that the amounts shall be paid only upon establishing the supplier to be in default for the performance of their warranty obligation under the contract has been specifically deleted. In our considered opinion, the bank guarantee as amended replacing Para 4 of the original bank guarantee makes the bank guarantee furnished as unconditional one. The bankers are bound to honour and pay the amounts at once upon receipt of written demand from the respondent.

27. These paras illustrate, lucidly, the distinction between a conditional bank guarantee and an unconditional bank guarantee. The judgement 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. ” (Emphasis supplied)

28. The issue was revisited, by the Supreme Court, in its more recent decision in Standard Chartered Bank v. Heavy Engineering Corporation Ltd, 2019 SCC OnLine SC 1638. 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 (1996) 5 SCC 450, Hindustan Construction Co. Ltd v. State of Bihar (1999) 8 SCC 436, State Bank of India v. Mula Sahakari Sakhar Karkhana Ltd (2006) 6 SCC 293, Himadri Chemicals (2007) 8 SCC 110 and Gujarat Maritime Board v. Larsen & Toubro Infrastructure Development Projects Ltd(2016) 10 SCC 46, 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”.

29. The above legal position stands reiterated in Yograj Infras. Ltd. V. Ssangyong Eng. & Construction Co. Ltd 2012 (2) SCALE 58 and Adani Agri Fresh Ltd v. Mahaboob Sharif (2016) 14 SCC 517.

30. Thus far, the position in law appears to be crystal clear.

31. 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. (2006) 2 SCC 728 regards “irretrievable injustice” as a specie of the “special equities” genus, whereas Standard Chartered Bank v. Heavy Engineering Corporation Ltd, 2019 SCC OnLine SC 1638, 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. ” (Emphasis as in original)

5. The bank guarantee, numbered 4574OBG19004415, dated 28th February, 2019, of which stay is sought in the present petition, has been executed between the Kotak Mahindra Bank and the respondent- Bharat Heavy Electricals Limited (BHEL). The covenants of the bank guarantee are clear and unequivocal. Clause 2, which deals with the liability of the respondent no.2 (hereinafter referred to as the “Bank”) on bank guarantee on demand, reads as under: “2. The Guarantor hereby undertakes to pay the amounts due and payable under this guarantee without any demur, merely on demand from the Company intimating that the amount claimed is due by way of loss or damage caused to or suffered or would be caused or suffered by the contractor of any terms contained in the said order/contract. Any such demand made on the guarantor shall be conclusive as regards the amount due and payable by the Guarantor irrespective of the fact whether the Contractor/contractor admits or denies. ” (Emphasis supplied)

6. A reading of the extract of clause 2 of the bank guarantee reveals that the bank is required to pay the amounts due and payable under the guarantee without demur merely on the demand from the BHEL intimating that the amount claimed is due by way of loss or damage caused to or suffered or would be caused or suffered by the contractor of any terms contained in the contract. The clause further ordains that any such demand made on the petitioner would be conclusive as regards the amount to be paid, irrespective of whether the petitioner admits or denies its liability.

7. In view of the expressed terms of the bank guarantee, and the law laid down by various decisions on the issue, this Court cannot restrain the invocation of the bank guarantee. The bank guarantee constitutes an independent contract between the bank and the beneficiary of the bank guarantee. The right of BHEL to invoke the bank guarantee has not been made conditional on performance, or non-performance, of the contract between the petitioner and BHEL. All that is required is a demand from BHEL, to the bank, to the effect that there has been loss or damage caused to or suffered by it, owing to an act of the petitioner. If such a demand is made, that demand would be conclusive against the petitioner, and the bank guarantee would be invocable, irrespective of whether the petitioner admits or denies the allegation of non-performance or breach of the contract.

8. In such circumstances, the law does not empower this Court, ceased with the application of stay of the bank guarantee, to peer behind the bank guarantee and enter into the dispute whether there has, or has not, been breach of the contract. In fact, the position in law is that the guarantor cannot even plead that the stage for invocation of the bank guarantee, as contemplated in the contract, has not arisen.

9. If, however, the bank guarantee was to stipulate that the liability of the bank under the guarantee is made conditional to nonperformance of the contract by the contractor, then it may be possible for the contractor to seek a stay of the invocation of the bank guarantee on the ground that there has been no non-performance. That is, however, different from a case such as the present, in which the contractor cannot dispute the allegation of nonperformance/breach of the contract, if a demand, by BHEL, alleging loss to have occurred on that ground to it, is made.

10. In somewhat better circumstances, this Court had in CRSC Research & Design[1], refused to stay the invocation of the bank guarantees in that case.

11. Ms. Amrita Panda, while fairly acknowledging this position, seeks to plead that the present case involved “special equities”.

12. Regarding special equities, she points out, in this regard that the petitioner is an MSME and that, therefore, though the amount of the bank guarantee is not large, given the scale of the petitioner enterprise, it would result in irretrievable injury to the petitioner.

13. As para 31 of the report of CRSC Research & Design[1] reveals, “Special Equities” can be pleaded as a ground to stay invocation of bank guarantee only if they are truly “Special Equities”, to the extent which would essentially require the establishment of “equitable injustice”, which is so irretrievable as to override the considerations of the expressed terms of the guarantee and the adverse effect on public interest, of grant of injunction on commercial dealings in the country.

14. I am unable to convince myself that, in the present case, special equities of such a magnitude, exist, as would justify stay of invocation of the bank guarantee. The amount of bank guarantee is, at a plain glance, not large and is merely ₹ 7,06,526/-. Even if the bank guarantee were to be invoked, and the petitioner were to succeed in arbitration, at a later and more appropriate stage, a direction to BHEL to liquidate the amount covered by the bank guarantee could always be passed at that stage. This factor, coupled with the fact that the bank guarantee is only for₹ 7,06,526/-, compels me to hold that no case of “special equities” exists, as would justify injuncting the invocation of the bank guarantee.

15. As a result, prayer (a) in the petition cannot be granted and is, accordingly rejected.

16. Issue notice, therefore, limited to prayer (b), returnable on 3rd February, 2021. Notice is accepted by Mr. Atul Shanker Mathur, learned counsel for respondent no.1 and Mr. Gurmeet Binda, learned counsel on behalf of respondent no.2. Counter affidavit, if any, be filed within four weeks with advance copy to learned counsel for the petitioner who may file rejoinder thereto, if any, within two weeks thereof.

17. Before the next date of hearing, the petitioner is directed to place on record the general conditions of the contract, containing the arbitration clause.

C.HARI SHANKAR, J NOVEMBER 24, 2020