Invocation of Bank Guarantee

FAO (OS) Nos.397/2014 & 398/2014 Page 1 of 76
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment Reserved on : September 11, 2014
Judgment Pronounced on : September 15, 2014
+ FAO(OS) 397/2014
CONSORTIUM OF DEEPAK CABLE INDIA
LIMITED & ABIR INFRASTRUCTURE PRIVATE
LIMITED (DCIL-AIPL) THR ABIR ….. Appellant
Represented by: Mr.Rajiv Nayyar and Mr.Chetan
Sharma, Sr.Advocates instructed by
Mr.Kartik Nayar, Mr.Shaan Mohan
and Mr.Himanshu Gupta, Advocates
versus
TEESTAVALLEY POWER TRANSMISSION
LIMITED ….. Respondent
Represented by: Dr.Abhishek Manu Singhavi,
Mr.Amarjeet Singh Chandhiok and
Mr.Sandeep Sethi, Sr.Advocates
instructed by Ms.Haripriya
Padmanabhan, Mr.Aman Garg,
Mr.Vaibhav Jain, Mr.Abhimanyu
Garg and Mr.Ritesh Kumar,
Advocates
FAO(OS) 398/2014
ABIR INFRASTRUCUTURE PRIVATE LIMITED….. Appellant
Represented by: Mr.Rajiv Nayyar and Mr.Chetan
Sharma, Sr.Advocate instructed by
Mr.Kartik Nayar, Mr.Shaan Mohan
and Mr.Himanshu Gupta, Advocates
versus
TEESTAVALLEY POWER TRANSMISION
LIMITED ….. Respondent
Represented by: Dr.Abhishek Manu Singhavi,
Mr.Amarjeet Singh Chandhiok and
Mr.Sandeep Sethi, Sr.Advocates
FAO (OS) Nos.397/2014 & 398/2014 Page 2 of 76
instructed by Ms.Haripriya
Padmanabhan, Mr.Aman Garg,
Mr.Vaibhav Jain, Mr.Abhimanyu
Garg and Mr.Ritesh Kumar,
Advocates
CORAM:
HON’BLE MR. JUSTICE PRADEEP NANDRAJOG
HON’BLE MS. JUSTICE MUKTA GUPTA
PRADEEP NANDRAJOG, J.
1. Since factual backdrop is common to the two captioned appeals they
are being decided by a common order. Challenge in FAO(OS) No.397/2014
is to the order dated September 03, 2014 passed by the learned Single Judge
dismissing application filed by the appellant under Section 9 of the
Arbitration and Conciliation Act, 1996 seeking to restrain the respondent
from invoking the letter dated May 30, 2014 terminating two Supply and
Service Agreements : TPTL/Tower-A1/01 and TPTL/Tower-A2/01 dated
February 22, 2010, modified by two Supplementary Agreement(s) dated
May 10, 2010; finding a reflection by way of Amendment-1 dated July 05,
2010 to the agreement(s) dated February 22, 2010. Challenge in FAO (OS)
No.398/2014 is to an order dated September 03, 2014, dismissing a petition
filed by the appellant under Section 9 of the Arbitration and Conciliation
Act, 1996, praying that the notice dated May 30, 2014, terminating the two
contracts be stayed and the respondent be directed to maintain status quo in
respect of the works pending adjudication of the dispute regarding the
termination of the contract before an Arbitral Tribunal, since the contract(s)
between the parties had an arbitration clause.
2. On November 18, 2009 the letter of intent was issued to the appellant
resulting in a binding agreement for the Tower Packages A1 and A2, and as
FAO (OS) Nos.397/2014 & 398/2014 Page 3 of 76
per the terms of the offer, requiring the works to be completed by October
17, 2011 for the reason completion time was 23 months.
3. Undisputedly, time for completing the works was extended thrice – on
November 11, 2011, November 30, 2012 and lastly on July 04, 2013. As per
the last extension dated July 04, 2013, the scheduled date for completion of
the works was October, 2014; and we take it to be October 31, 2014. While
granting extensions no liquidated damages were levied, but the right to levy
the same was reserved.
4. The works to be executed under the two agreements concerned the
laying of a power supply line for transmitting electricity, to be generated
from a hydro power project in the State of Sikkim on the river Teesta, to the
designated end point. The work was sub-divided, keeping in view that part
area where works had to be executed was hilly and part plains. The hilly
section referred to as Tower Package A-1 and formed one contract had a
segment from the hydro power station to Rangpoo, which was within the
State of Sikkim and thereafter from Rangpoo to Panighatta in the Darjeeling
District in the State of West Bengal. The plain section was from Panighatta
to Kishanganj in the State of Bihar. The contract was for supply of material
and erection of a Transmission Line. All necessary material to lay the
foundations and erect the towers and thereafter lay the Transmission lines
(called stringing) had to be supplied by the appellant and necessary works
had to be executed. Since the supply line would pass through government
land and private land; through forest areas and non-forest areas; necessary
permissions required concerning the forest land from the competent
authority and sanctions as per local laws for non-forest land had to be
obtained. Consent of the owners of the land had to be obtained and
FAO (OS) Nos.397/2014 & 398/2014 Page 4 of 76
compensation paid. To access the site where the towers would be erected a
Right of Way had to be obtained, and in case of private lands, as per law,
which could be mutually agreed consent terms or as per the statutory
provisions of the Indian Telegraph Act, 1885.
5. The parties were conscious that the execution of the works would
require extensive preparatory work in the form of documentation for filing
applications before various authorities to seek permissions and consent, and
if a work had to be executed on private land, and if consent was not given
for the compensation offered to the land owners, to initiate proceedings
under the Indian Telegraph Act, 1885. This is apparent from the fact that
before the contracts were entered into, but after notice inviting
proposals/offer was issued by the respondent, on December 04, 2009, the
appellant made an offer to the respondent in which it, inter alia, it wrote :
“As discussed during the meeting held with your good self, we
would like to confirm and assure that APIL is fully competent
to undertake the above works and have all expertise for
preparing the Forest & Civil Aviation Proposals and obtaining
the necessary clearances from respective State and Central
Government authorities. We have in-house teams of surveyors,
experience transmission line engineers along with back-end
teams of technical experts and our Liaison Professionals.
We are prepared to offer our most competitive consultancy
charges for providing above services as under:-
(The rates are thereafter given in a schedule, which we
are not noting being not relevant. The quoted rate is
`19,74,67,799/- (Rupees Nineteen Crores Seventy Four
Lacs Sixty Seven Thousand Seven Hundred Ninety Nine
only).
6. As per Annexure-I to the proposal dated December 04, 2009, the
FAO (OS) Nos.397/2014 & 398/2014 Page 5 of 76
scope of work concerning the proposals was detailed, and suffice it to state
that the scope of work included preparing the necessary documents and
liaisoning with the forest officers and officers of the revenue department in
the State of Sikkim, West Bengal and Bihar; including documentation for
submission to the District Magistrates.
7. The original agreements dated February 22, 2010 excluded from the
scope of work, obtaining the necessary permissions and sanctions as also
consents.
8. The scope of work was expanded under the Supplementary
Agreement(s) dated May 10, 2010.
9. Relevant for the purposes of the present decision would be that the
scope of works increased as per the Supplementary Agreement(s) dated May
10, 2010 were listed in Clause I, which reads :-
“Following additional services are agreed to be added under
the Scope of Facilities:
(i) Survey (Fresh Detailed Survey) and Contouring.
(ii) Preparation of proposals for obtaining clearances from
Civil Aviation and Owners/administrative offices of EHV
Power lines, Railways, Roads, Rivers & Highways,
Communication lines.
(iii) Preparation of proposals for and arranging way leave
clearances from owners of land coming under
towers/compensation of damage to crops etc as well as
cutting of trees in consultation with and consent of the
Revenue and Forest authorities of respective
district/states.”
10. In Clause II the rates were quoted and relevant would it be to note that
FAO (OS) Nos.397/2014 & 398/2014 Page 6 of 76
while quoting the rates it was indicated that the same includes „preparation
of proposals and arranging way leave clearances from owners of land
coming under towers/compensation of damages to crops etc. as well as
cutting of trees in consultation with/consent of the revenue and forest
authorities of respective district/States.‟ A note was appended under clause
II as under:-
“Note.
(i) The rate/amount for the items mentioned at Sl.No.1.0
is inclusive of Service Tax.
(ii) The rates/amounts for the items mentioned at
Sl.No.2.0 & 3.0 are exclusive of Service Tax, which
shall be paid by M/s TPTL, as applicable.
(iii) The above amounts do not include the following
which will be paid by TPTL directly to the lawful
owners and appropriate Central/State Agencies:
 Compensation for (i) Diversion land required for
Towers (ii) Crop (iii) Tree (iv) buildings (v)
afforestation cost etc., as assessed by Forest/Revenue
department or any other agency,
 Central or State Judicial or Non Judicial Stamp
duties, legal fees or cases related to TPTL.
11. Pertaining to the terms of payment, under clause III, it was clearly
indicated vide sub-clause (B)(d) „balance 35% of the respective lump sum
amount, on receipt of approvals.‟
12. Clause IV in the Supplementary Agreement(s), pertaining to time
schedule, was drawn up as under:-
FAO (OS) Nos.397/2014 & 398/2014 Page 7 of 76
“Time Schedule (Appendix-4-Contract Agreement)
The Contractor shall complete the services including the
additional items of works/services within the Time for
Completion given under the Contract unless an extension of
time is authorized by the Employer keeping in view the
additional scope of services, if any.
The Contractor shall be responsible for getting the statutory
clearances including Right of Way (ROW) and way leave
clearances required for completion of the Facilities within
stipulated Time of Completion.”
13. Before continuing with the factual narration, it would be appropriate if
we note the relevant legal provisions which necessitated the issue of
clearances and permissions for execution of the works to be kept in mind by
the parties and commercial terms thereof finding a reflection in the
agreement(s) dated may 10, 2010, between the parties.
14. The Indian Telegraph Act, 1885, as amended by Act No.8 of 2004,
with effect from April 01, 2002, vide Section 3(1AA) defines „Telegraph‟ to
mean ‘any appliances, instrument, material or apparatus used or capable of
use for transmission or reception of signs, signals, writing, images, and
sounds or intelligence of any nature by wire, visual or other electromagnetic
emission Radio waves or Hertzian waves, galvanic, electric or
magnetic means.‟ Sub-Section(4) of Section 3 defines a „Telegraph line‟ to
mean „a wire or wires used for the purpose of a telegraph, with any casing,
coating, tube or pipe enclosing the same, and any appliances and apparatus
connected therewith for the purpose of fixing or insulating the same‟.
Under Section 4 of the Act, within India, the Central Government has the
exclusive privilege of establishing, maintaining and working telegraphs. But
FAO (OS) Nos.397/2014 & 398/2014 Page 8 of 76
as per the proviso thereof, is empowered to grant a license on such
conditions, as it thinks fit, to any person to maintain or work a telegraph
within any part of India. Since laying of telegraph lines would require
erection of poles and towers and laying of lines, it is apparent that a power
had to be vested in the Central Government to acquire any right over, along,
across, in or upon land. Thus, Section 10 of the Indian Telegraph Act, 1885
was enacted to confer said power in the Central Government. If the land
belonged to a local authority, permission as per Section 12 had to be
obtained from the local authority, with the obligation of the local authority to
grant the necessary permission on payment of such expenses as the local
authority desired. For private land, the power was, as per Section 10(d), for
the Central Government to acquire the right by paying compensation to the
person interested. The statute envisaged a situation where the owner of a
private land refused to give consent or refused to agree on the compensation
to be received and thus Section 16 was enacted, as per which the Central
Government was empowered to make a reference to the District Magistrate
to permit the Central Government to exercise its rights under Section 10 and
require a dispute pertaining to compensation to be referred to the District
Judge, whose determination was final.
15. Rather than to enact similar provisions pertaining to laying of
electricity transmission lines, while enacting ‘The Electricity Act, 2003’, a
provision was made for the applicability of the provisions of the Indian
Telegraph Act, 1885 to The Electricity Act, 2003, and thus we find Section
164 in The Electricity Act, 2003, which reads as under:-
“Exercise of powers of Telegraph Authority in certain cases.-
FAO (OS) Nos.397/2014 & 398/2014 Page 9 of 76
The Appropriate Government may, by order in writing, for the
placing of electric lines or electrical plant for the transmission
of electricity or for the purpose of telephonic or telegraphic
communications necessary for the proper co-ordination of
works, confer upon any public officer, licensee or any other
person engaged in the business of supplying electricity under
this Act, subject to such conditions and restrictions, if any, as
the Appropriate Government may think fit to impose and to the
provisions of the Indian Telegraph Act, 1885, any of the powers
which the telegraph authority possess under that Act with
respect to the placing of telegraph lines and posts for the
purposes of a telegraphs established or maintained, by the
government or to be so established for maintained.”
16. Since the respondent – ‘Teesta Valley Power Transmission Limited’
had obtained a license from the appropriate authority under Section 14 of
The Electricity Act, 2003, it was authorized to transmit electricity as a
transmission licensee. To enable it to exercise the powers under the Indian
Telegraph Act, 1885, as per the requirement of Section 164 of The
Electricity Act, 2003, the appropriate government : being the Central
Government, issued the necessary order in writing on April 29, 2010,
notified on May 11, 2010, (a day after the Supplementary Agreement(s)
dated May 10,2010 were executed) conferring the power which a telegraph
authority possesses under the Indian Telegraph Act, 1885. The order dated
April 29, 2010 succinctly notes the route of the transmission line to be led
and list the district in the State of Sikkim, West Bengal and Bihar through
which the transmission lines had to pass.
17. Under the contracts the appellant had furnished six bank guarantees,
two to secure the mobilization advanced which appellant received from the
respondent and four towards performance guarantee. Under the contract a
percentage of the sum payable was to be retained by the respondent, payable
FAO (OS) Nos.397/2014 & 398/2014 Page 10 of 76
after successful completion and testing of the works. But apparently to
enable the appellant to overcome a financial crisis the respondent released
the withheld amounts but under two bank guarantees. Thus, in this manner,
eight bank guarantees came to be furnished by the State Bank of India at the
instance of the appellant, with the respondent being the beneficiary. Put in a
tabular form (with one more additional column setting out the amount
invoked under the bank guarantees), the details of the guarantees would be
as under:-
S.
No.
Number of Bank
Guarantee
Type of Bank
Guarantee
Value of BG Amount
Encashed
1. 0910310BG0000163
SBI
BG Form for
advance
payment
26,17,42,403/- 8,83,85,339/-
2. 0910310BG0000165
SBI
BG for advance
payment
11,22,79,862/- 76,78,053/-
3. 0910310BG0000160
SBI
Performance
Security Form
5,49,74,199/- 5,49,74,199/-
4. 0910310BG0000161
SBI
Performance
Security Form
11,74,10,649/- 11,74,10,649/-
5. 0910310BG0000162
SBI
Performance
Security Form
10,83,99,960/- 10,83,99,960/-
6. 0910310BG0000164
SBI
Performance
Security Form
3,67,24,953/- 3,67,24,953/-
7. 0910311BG0001115
SBI
BG for release
of Balance
payment
3,65,00,000/- 3,65,00,000/-
8. 0910311BG0000841
SBI
BG for release
of Balance
payment
2,90,00,000/- 2,90,00,000/-
TOTAL `62,75,85,144 `47,90,73,153/-
18. On May 14, 2014, the respondent invoked the four performance
guarantees and the two bank guarantees issued at the instance of the
appellant, when withheld payments were released in full to it, and the two
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bank guarantees for advance payment. The latter two, not in full value of the
guarantees, but as per serial No.1 and 2 of the tabular statement hereinabove.
19. Appellant immediately rushed to this Court and filed OMP
No.557/2014 under Section 9 of the Arbitration and Conciliation Act, 1996
praying that the State Bank of India be restrained from making any payment
to the respondent under the bank guarantees. A reference was made in the
pleadings to a bank guarantee No.2102413BG0001287 in sum of `5.8 crores
issued by the State Bank of Hyderabad, but for what purpose has not been
brought out. The reply filed by the respondent is centered around the eight
bank guarantees issued by the State Bank of India. The impugned decision
dated September 03, 2014 has discussed the issue concerning the eight bank
guarantees issued by State Bank of India. No arguments were advanced
even before us concerning the bank guarantee issued by the State Bank of
Hyderabad. What happened to the guarantee, whether or not it was invoked
and payment was received? The reason being that the appellant had never
furnished said guarantee to the respondent. It appears that the appellant had
got a bank guarantee in sum of `5.8 crores signed by the manager of a
branch of the State Bank of Hyderabad, but was never submitted to the
respondent. In the hurry to draft the petition, because the respondent had
invoked the eight bank guarantees issued by the State Bank of India and time
was running out, a reference got made to a non-existent bank guarantee. It
was pleaded in the petition that the appellant was not in breach of its
contractual obligations. It was further pleaded that apart from the amount
due under the contract for work done, the appellants had a claim of `41.23
crores for price variation and recompense for idle machinery. It was pleaded
that the respondent had not complied with its obligations under the two
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contracts to ensure that the appellant had a Right of Way (ROW) to access
the sites, nor had it obtained the necessary consent from the owners of lands
who would be affected during the execution of the work. It was pleaded that
time had been extended, without imposing liquidated damages, to complete
the work by October, 2014. It was pleaded that on May 09, 2014 the
respondent had issued a cure notice as per Article 36.2.2 of the General
Conditions of the Contract as per which 14 days mandatory time was given
to the appellant to take remedial action. It was thus pleaded that the
invocation of the guarantees on March 14, 2014 was ex-facie fraudulent and
mala-fide. It was also pleaded that invocation of the guarantees would cause
irreparable injury to the appellant. It was pleaded that it was a case of
special equities in favour of the appellants which was not in breach of any
obligation under the contract and the execution of the works was delayed to
reasons solely attributable to the respondent.
20. To put it pithily, the special equity and fraud pleaded was on two
premises : (i) that the appellant was not in breach of its obligations under the
contract; and (ii) that having extended the time for completion of the works
by October, 2014 and having given a cured notice on May 09, 2014, the
duration of the cure period within which appellant could take remedial
action, invocation of the bank guarantees on May 14, 2014 was mala-fide
and hence fraudulent or alternatively said facts creating a special equity in
favour of the appellant.
21. The respondent opposed the petition pleading that the eight guarantees
were unconditional and it was within its right to invoke the same. It was
pleaded that it had received the amount under the eight bank guarantees and
had presented the banker’s cheque for encashment to its banker : Bank of
FAO (OS) Nos.397/2014 & 398/2014 Page 13 of 76
Baroda. It was denied that the respondent was in breach of any obligation.
22. On May 16, 2014 the learned Single Judge stayed encashment under
the guarantees noting that a cure notice was issued in terms of clause 36.2.2
of the general conditions of the contract on May 09, 2014 and the guarantees
were invoked on May 14, 2014. The learned Single Judge also noted that
time for completion of the contract had been extended till October, 2014.
The learned Single Judge noted that a caveat had been lodged by the
respondent by one Mr.Aman Garg, Advocate. The learned Single Judge
noted that he had taken up the matter for hearing at 10:00 AM on a mention
being made and the Court Master had telephonically informed Mr.Aman
Garg that the matter would be taken up immediately. The learned Single
Judge had noted that Mr.Aman Garg did not appear till 10:25 AM.
23. The respondent filed FAO (OS) No.250/2014 attacking the order
dated May 16, 2014, pleading that in spite of a caveat lodged, the learned
Single Judge had passed the order in spite of being aware that a caveat had
been lodged. It was pleaded that Court timing in the Delhi High Court
commences at 10:30 AM and telephonic information by the Court Master to
Sh.Aman Garg, Advocate was no substitute for the counsel being served
with a copy of the OMP.
24. The Division Bench disposed of the appeal directing that `47.90
crores received under eight bank drafts by the respondent shall be remitted to
this Court and kept in a fixed deposit till the OMP was decided by the
learned Single Judge. The Division Bench noted that appellants learnt of the
bank guarantees being invoked on May 15, 2014 and thus had hardly any
time to respond to the caveat filed by the respondent.
25. This appears to be the reason that at the stage of final hearing before
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the learned Single Judge the issue was discussed only with respect to the
bank guarantees issued by the State Bank of India.
26. Concerning the bank guarantees, the arguments advanced before the
learned Single Judge were : (i) that the guarantees were conditional; (ii) the
respondents were in breach by not ensuring a Right of Way (ROW) and
unencumbered land being made available for construction of towers; (iii)
that the contract period was extended till October, 2014 and before said date
respondent could not allege any breach, the notice to cure under clause
36.2.2 of the General Conditions of the Contract given on May 09, 2014
disentitled respondents to invoke the bank guarantees five days thereafter.
The respondent was in touch with TATA Project Ltd. to which it had
awarded the work unfinished, evincing complete mala-fide; and (iii) there
were thus special equities in favour of the appellant.
27. The learned Single Judge has found two out of the eight bank
guarantees as conditional. Six have been found to be unconditional.
`9,60,63,392/- concerning bank guarantees No.0910310BG0000163 and
0910310BG0000165 has been directed to be returned to the State Bank of
India with interest accrued on the deposit of `47,90,73,153/- received in this
Court pursuant to the orders passed by the Division Bench in FAO (OS)
No.250/2014. The remaining amount has been directed to be paid along
with accrued interest to the respondent.
28. Needless to state the learned Single Judge has held that there were no
special equities. The learned Single Judge has, in paragraphs 28 to 30, very
briefly discussed whether prima-facie the respondent was in breach. The
learned Single Judge has held that these issues had to be decided by the
Arbitral Tribunal. The learned Single Judge has noted a few decisions
FAO (OS) Nos.397/2014 & 398/2014 Page 15 of 76
holding that pending adjudication of disputes before an Arbitrator it is
permissible for a beneficiary to encash the bank guarantees. The learned
Single Judge has noted the well-recognized legal position that the bank
guarantees issued by bank are an independent contract between the bank and
the beneficiary and issues concerning invocation of bank guarantee have to
be determined on the language of the bank guarantees.
29. On May 30, 2014, the respondent proceeded to terminate the
agreements with the appellant. This resulted in the appellant filing OMP
No.651/2014, a petition invoking Section 9 of the Arbitration and
Conciliation Act, 1996, praying that pending resolution of the disputes
before the Arbitral Tribunal (yet to be constituted), the notice of termination
dated May 30, 2014 be stayed and status quo be maintained.
30. In the said petition it was pleaded that time was extended thrice and
lastly up to October, 2014 to complete the works and thus on said reason
alone it was contended that the respondent could not terminate the contract.
It was highlighted in the pleadings that the foremost obligation to be
complied with before any works could be executed was to obtain the Right
of Way, which was the obligation of the respondent. It was pleaded that
necessary forest clearances had to be obtained by the respondent. It was
highlighted that only on April 11, 2012, the respondent informed about
Right of Way issues in the State of Sikkim. It was pleaded that at a meeting
held on June 15, 2013, the respondent deputed a team of its officers to settle
issues concerning Right of Way and compensation. Reference was made to
various letters written by the appellant concerning Right of Way and
sanction to utilize forest land for the project. Reference was made to the
notice to cure dated May 09, 2014. It was highlighted that as per contract
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the appellant would have fourteen days to take remedial action pursuant to
the notice to cure. It was pleaded that the respondent is a joint venture of
Power Grid Corporation of India and Teesta Urja Ltd. the major
shareholding whereof is held by the State of Sikkim. It was thus pleaded
that the respondent could not act unreasonably and in an arbitrary manner.
31. At the outset we may note that the pleadings in the OMPs are sketchy
while make a reference to correspondence between the parties, in that, do not
bring out the intention of the appellant to plead a reference to the conduct of
the parties during execution of the works concerning how they understood
the contractual terms. We simply highlight that it is settled law that if a term
of a contract is found to be ambiguous, it is open to either party to plead,
with reference to the contemporaneous acts of the parties during the executor
period of the contract, to show how the parties understood the same. We are
so highlighting that extensive arguments were advanced in appeal before us
making a reference to the conduct of the parties gleaned through the
correspondence exchanged between the parties. We may additionally note
that in the pleadings there is no reference to any facts nor have any pleas
being urged concerning award of some works concerning the project to
TATA Projects Ltd. To put it pithily, OMP No.651/2014 was premised on :
(i) reasonableness in action expected from an instrumentality of the State;
(ii) time for completion of the works being extended without levy of
liquidated damages thrice, and time for completion of the works being
extended to October 31, 2014; (iii) cure notice being given on May 09, 2014
requiring fourteen days’ time to the appellant to remedy the breaches if any
and proximity of the time when contract was terminated with the expiry of
the said fourteen days period i.e. May 23, 2014 and May 30, 2014, being
FAO (OS) Nos.397/2014 & 398/2014 Page 17 of 76
indicative of malice and gross unreasonableness in the action : the argument
being that if by May 23, 2014 the appellant, in compliance with the cure
notice, would take remedial action, it was impossible that by May 30, 2014 it
would be able to complete the works; and (iv) delay was occasioned
principally due to non-availability of ROW and permissions under the
Forests Act concerning forest land and consent from owners of private land
as also from the local authorities, all of which were the obligations of the
respondent. (The underlying emphasis in the pleadings would be that it was
a water tight strong prima facie case in favour of the appellant). It was
pleaded that there was a mechanism under the contract to resolve the issues
and thus the respondent could not without exhausting the resolution
mechanism straightway proceed to terminate the contract.
32. We may note that in the pleadings there is a scattered reference to a
few letters exchanged, but during arguments in appeal learned counsel had
referred to various letters exchanged, to which reference has not been made
in the pleadings, but were otherwise filed along with the OMP or at stages
thereafter.
33. We would like to speak a word on this.
34. Rule 9 of Order 6 of the Code of Civil Procedure guides that wherever
the contents of a document are material, it shall be sufficient in any
pleadings to state the effect thereof as briefly as possible, without setting out
the whole or any part thereof. Rule 2 of Order 6 guides us that pleadings
must contain in a concise form on material facts on which a party pleading
relies for its claim or defence as the case may be. Thus, if it is the case of a
party that if would be relying upon the conduct of the parties during the
contract period, pleadings of fact have to be made of said conduct, and if the
FAO (OS) Nos.397/2014 & 398/2014 Page 18 of 76
conduct is sought to be inferred from correspondence exchanged, a brief
reference to the correspondence must be made in the pleadings to bring out
as to how the party was bringing out a fact asserted from the
correspondence. This would enable a Court to focus on the issues of fact on
which parties are at variance with each other.
35. This helps the Court in focusing its attention when arguments are
advanced and notes are taken by the presiding judge.
36. As we would unfold the narrative of the factual controversies with
reference to the correspondence exchanged by the parties, it would be
apparent that had parties been focused in their pleadings, judicial time would
not have been wasted. We note that at the opening of the arguments in the
two appeals, learned senior counsel for the appellant had contended that
under the contract the obligation to obtain the Right of Way and various
permissions, sanctions and consents from land owners, be it private land
owners, government owning the land or local authorities owning the land,
was that of the respondent; but had to argue completely differently in
rejoinder submissions. The fulcrum of the opening arguments on issues
concerning the Right of Way and clearances commenced from a letter dated
June 20, 2012, written by the respondent with reference to a committee
constituted to resolve the issues concerning settlement of compensation to
land owners, gram panchayats and the Right of Way. The arguments
commenced, and naturally they were attractive to the Court, that the
Supplementary Agreement had put in, as noted hereinabove in paragraph 11
above, in Clause IV pertaining to Time Schedule, the words ‘the contractor
shall be responsible for getting the statutory clearances including Right of
Way (ROW) and way leave clearances required for completion of the
FAO (OS) Nos.397/2014 & 398/2014 Page 19 of 76
Facilities within stipulated Time of Completion‟. The letter dated June 20,
2012, written by the respondent to the appellant refers to Section 164 of the
Electricity Act, 2003 and brings out that all powers for Right of Way for the
transmission line has been vested in it. The letter thereafter refers to pending
issues of compensation to be paid to land owners for tower location in the
State of Sikkim, West Bengal and Bihar. It then refers to a meeting held on
June 07, 2012 wherein it was decided that a committee comprising members
of both contracting parties shall be constituted to facilitate settlement of
ROW issues. It then refers to constitution of a three member committee
comprising A.K.Tyagi General Manager and Mr.D.Ravi Prashad Senior
Manager of the respondent and Mr.Gautam Sen, General Manager of the
appellant or alternatively Mr.T.Subramanyam, Sr.DGM of the appellant.
The letter terminates by listing the mandate of the committee to be to assess
compensation to land owners and gram panchayats where towers had to be
erected as also Right of Way to reach those sites as also for stringing. At
first blush, the letter would be indicative of the fact that as of said date the
respondent had admitted its liability to obtain the clearances, consents and
permissions and the role of the appellant as per the Supplementary
Agreement(s) dated May 10, 2010 being limited to helping the respondent
with the documentation etc. Our entire focus during hearing of arguments
by the appellants was to take copious notes with reference to documents
referred to by the learned senior counsel for the appellants concerning said
aspect. For indeed, the correspondence between the parties evinces delay
largely attributable to Right of Way issues and issues concerning
compensation to land owners and permissions under the Indian Forest Act.
But as we heard the respondent, a completely new dimension emerged. We
FAO (OS) Nos.397/2014 & 398/2014 Page 20 of 76
shall be bringing out this aspect while noting the contemporaneous exchange
of correspondence, but would terminate our discussion (on the subject of
pleadings) with a lament on the pleadings of the appellant and bring on
record our anguish that valuable judicial time was wasted because we had to
hear arguments in the two appeals spread over four days commencing from
Monday the 8th day of September, 2014 till Thursday, the 11th day of
September, 2014. On each day we had to devote nearly three hours out of
the five hours sitting time.
37. The respondent opposed the relief prayed in OMP No.651/2014,
pleading that as per the Supplementary Agreement(s) executed on May 10,
2010, the obligation to obtain clearances from the Forest Authorities and
authorizations to enter upon private land and resolved issues of
compensation to land owners as also to obtain permissions and sanctions
from the local authorities, was that of the appellant. The respondent denied
its character of that being an instrumentality of the State. Concededly the
respondent is a company. 26% shares being held by Power Grid
Corporation of India Ltd., a wholly owned company by the Central
Government. The remaining 74% share are held by Teesta Urja Ltd. 26%
shares of which company i.e. Teesta Urja Ltd. are held by the Government
of Sikkim and the remainder by private individuals. Thus, it was pleaded
that the respondent would not qualify to be an instrumentality of the State.
Even taking into account that 26% share holding in Teesta Urja Ltd., which
in turn held 74% shares of the respondent, was held by the Government of
Sikkim and 26% shares of the respondent were held by a Government owned
company, it would not qualify as an instrumentality of the State because the
majority controlling shares of the respondent were still in private hands.
FAO (OS) Nos.397/2014 & 398/2014 Page 21 of 76
Thus, its actions could not be tested on principles of reasonableness and
fairness – a requirement of public law, concerning actions by a State and its
instrumentalities. The respondent pleaded breach of obligations by the
appellant. The respondent pleaded that under Section 9 of the Arbitration
and Conciliation Act 1996 the Court would not stay a letter of termination of
a supply and works contract because claim for damages would be adequate
remedy. It was pleaded that the appellant itself had evinced a desire to offload
the unexecuted part of the contract on April 03, 2014 and this would be
an expression of the appellant not being ready and willing to comply with its
obligations under the agreement. It was pleaded that a stay of the letter of
termination would amount to a specific performance of the supply and works
contract. It was pleaded that the contract was terminable.
38. Vide impugned order dated September 03, 2014, the learned Single
Judge has dismissed the application filed by the appellant and has vacated
the ad-interim order dated June 06, 2014 requiring parties to maintain status
quo.
39. In dismissing the petition, the learned Single Judge has held after
noting the facts and the contentions advanced, with the discussion
commencing from paragraph 48 onwards of the decision : on the subject as
to who had to obtain the necessary permissions and approvals as also
consent from land owners, that issue was vexed and each side was blaming
the other. In paragraph 51 the learned Judge has opined that it was for the
Arbitral Tribunal to take a call and that it would not be proper for the learned
Single Judge to decide on the merits of said controversy.
40. Noting various judgments cited on the subject of terminable contracts
and whether for a supply and works contract an injunction requiring status
FAO (OS) Nos.397/2014 & 398/2014 Page 22 of 76
quo to be maintained in the context of damages being an alternative remedy
and specific performance of such contracts not being directed, all four being
rolled into one set of discussion, the learned Single Judge has opined that
highly disputed questions of fact were arising for consideration and that
claim for damages would be the appropriate remedy. The learned Single
Judge has highlighted appellant’s letter dated April 03, 2004 to off-load the
remaining work at no risk and cost to the appellant but with recompense for
loss of profit. The learned Single Judge has, while discussing said four
issues of law, albeit based on facts, discussed whether there was
reasonableness in the action of the respondent to terminate the contract. The
decisions noted by the learned Single Judge on said issue concern the
defending party being an instrumentality of the State. No opinion has been
expressed by the learned Single Judge regarding respondent’s character as a
State or an instrumentality of the State. The learned Single Judge has,
during the discussion, in paragraph 54, held that a very high degree of prima
facie case is required to be shown in order to obtain relief of stay of
termination of a supply-cum-works contract. In the same paragraph the
learned Single Judge has held that the ‘reasoning accorded by the petitioner
by informing the faults of the respondents are not the ones which are exfacie
apparent on the face of it . . . . therefore, prima facie, the reasons for
termination as given by the respondents cannot altogether be brushed aside
by calling it frivolous in nature.‟ A finding which has invited the attack by
the appellant – on the one hand the learned Single Judge has opined that the
vexed questions of facts at which the parties were at variance would
advisedly be got settled before the Arbitral Tribunal and thus the learned
Single Judge was not delving into the same, but on the other hand a finding
FAO (OS) Nos.397/2014 & 398/2014 Page 23 of 76
has been returned against the appellant that prima facie it had not made good
its submissions that the reasons for termination given by the respondent were
not justified.
41. Having already noted in paragraph 2 above that the letter of intent for
the two tenders were issued on November 18, 2009 and having noted in
paragraph 1 above that on February 22, 2010, two contracts were executed
containing the terms, commercial as well as technical, we have already noted
that on May 10, 2010, two Supplementary Agreement(s) were executed
reflecting further obligations of the appellant and the respondent.
42. Under the original contract, vide Clause 6, the respondent was obliged
to acquire and provide legal and physical possession of the site and access
thereto. The respondent was also obliged to acquire all permits, approvals
and licenses from all local, State or National Government authorities
required for the performance of the contract.
43. Thus, as per the original contract dated February 22, 2010, it was the
responsibility of the respondent to pay compensation to the owners of
private land, whether to be utilized for erection of the towers or by way of
Right of Way. The respondent had to obtain the necessary permissions in
respect of the land if it belonged to a gram sabha or a local authority. In
respect of forest land, the necessary permissions had to be obtained by the
respondent.
44. But, the Supplementary Agreement(s) dated May 10, 2010 altered said
responsibility evidenced by Clause 1 of the Supplementary Agreement(s)
dated May 10, 2010, which we have reproduced in paragraph 9 above. Vide
sub-clause (iii) the appellant took upon itself the task of ‘Preparation of
proposals for and arranging way leave clearances from owners of land
FAO (OS) Nos.397/2014 & 398/2014 Page 24 of 76
coming under towers/compensation of damage to crops etc. as well as
cutting of trees in consultation with and consent of the Revenue and Forest
Authorities of respective district/States’. Further, as per Clause II, where
rates were quoted, as noted in paragraph 10 above, a distinct rate was quoted
for ‘preparation of proposals and arranging way leave clearance from
owners of land coming under towers/compensation of damage to crops etc.
as well as cutting of trees in consultation with and consent of the Revenue
and Forest Authorities of respective district/States’.
45. The note under Clause II clarified that compensations had to be paid
by the respondent. Under Clause IV, while listing the time schedule within
which the necessary approvals had to be obtained, a note was recorded that
the appellant shall be responsible for obtaining the statutory clearances
including Right of Way and way leave clearances.
46. Thus, appellant’s argument that ‘the insidiously added paragraph
beneath the time schedule clause‟ could not shift the liability on the
appellant to obtain the necessary clearances, approvals and sanctions holds
no water.
47. As noted in paragraph 5 above, after the letter of intent was issued, but
before the contract was signed on February 22, 2010, the appellant had vide
its letter dated December 04, 2009, relevant part whereof has been noted in
paragraph 5 above, expressed its desire to not only prepare necessary
documents but even obtained necessary clearances from the State and
Central Government Authorities. It is apparent that in harmony with the
tender documents, the contract bonds were signed on February 22, 2010, but
side by side the parties were discussing shifting of the obligation of the
respondent under Clause 6 of the contract to the appellant, and upon further
FAO (OS) Nos.397/2014 & 398/2014 Page 25 of 76
negotiations, it being agreed that the appellant would take over said
responsibility, the Supplementary Agreement(s) dated May 10, 2010 were
executed, followed by formally amending the original contract by
Amendment-1 on July 05, 2010. Of course the money had to be paid by the
respondent.
48. In this regards it assumes importance to note that the requirement of
Section 164 of The Electricity Act, 2003 had required a written order to be
issued by the appropriate government authorizing the respondent to lay
down electric lines for transmission of electricity. As noted in paragraph 16
above, on April 29, 2010 the Central Government had issued the necessary
order which was notified on May 11, 2010, a day after the Supplementary
Agreement(s) dated May 10, 2010 were executed. It is clear that the parties
were aware on March 29, 2010 that the respondent had the necessary
authorization required by Section 164 of The Electricity Act, 2003. The
ensuing notification on May 11, 2010 was thus a mere ministerial act.
49. There is thus no merit in the contention advanced before us that when
the Supplementary Agreement(s) were executed on May 10, 2010, since the
respondent did not have the necessary authorization in its favour under
Section 164 of The Electricity Act, 2003, the agreement in question was
void.
50. We need to deal with another legal submission at this stage. It was
urged by learned senior counsels for the appellant that the obligation of the
respondent in terms of Section 164 of The Electricity Act being a statutory
obligation, it could not be delegated, and hence the Supplementary
Agreement(s) were void.
51. The argument overlooks the fact that an order contemplated by
FAO (OS) Nos.397/2014 & 398/2014 Page 26 of 76
Section 164 of The Electricity Act empowers the licensee to exercise the
powers under the Indian Telegraph Act, 1885, while laying down
transmission lines. The powers under the Indian Telegraph Act, 1885 which
the licensee exercises are as per Section 10. The right to acquire land by
paying compensation as per Section 10(d) is a power available sans a statute
because in an open market a willing seller can be contacted to sell the land to
a willing buyer. The statutory power is actually to be found in Section 16,
which is to make a reference to the District Magistrate to permit entry upon a
land pending adjudication of dispute qua compensation to be referred to the
District Judge. The word power would be misnomer, and the correct word
should be ‘right’. A right is conferred upon the Central Government (a
person to whom a license has been issued also having same right) to make a
request to the District Magistrate to pass an order permitting it to take
possession of land or have a Right of Way through land, requiring issue of
compensation to be paid to be decided by the District Judge. To put it
differently, ministerial acts required to be performed by firstly entering into
negotiations with the owners of lands and upon failure to settle a rate,
require a reference to be made to the District Judge can be performed by any
person authorized by the licensee; of course, the person concerned acts for
and on behalf of the licensee.
52. As we shall note the correspondence between the parties, it would
become clear that the appellant rightly understood the legal position to be as
aforesaid, evidenced by the fact that the appellant was, with the consent of
the respondent, negotiating with owners of private land to discuss the
compensation payable for Right of Way and/or site where towers had to be
erected. The appellant was preparing the necessary documents required to
FAO (OS) Nos.397/2014 & 398/2014 Page 27 of 76
be submitted to the various authorities and after obtaining signatures of the
authorized officer of the respondent, was submitting the same and was
taking follow up action. The money was paid by the respondent. As per the
Supplementary Agreement(s) dated May 10, 2010, the appellant was raising
bills and receiving payments.
53. It is trite that while exercising power to pass interim orders, a Court
should avoid discussing the merits of the factual controversies and return
determinative findings, lest parties are prejudiced at the trial before the Court
or the Arbitral Tribunal, and a reference to the facts in an order which is by
way of an interim nature has to be the bare minimum to capture the backdrop
facts; and only prima facie findings should be returned, we shall hereinafter
be capturing the backdrop facts in which the dispute has surfaced and
thereafter determine whether the appellant made out prima facie case in its
favour for restraining the respondent from invoking the bank guarantees and
terminating the contract.
54. But we note that the injunction order passed by the learned Single
Judge concerning two bank guarantees which were found to be conditional
bank guarantees has not been challenged by the respondent, and thus
regarding the bank guarantees, we shall be noting the facts relevant to the six
guarantees for which the finding returned is in favour of the respondent. The
guarantees have been opined to be unconditional, a finding which was not
challenged during arguments when the two appeals were heard.
55. On September 07, 2011 the Government of India issued the necessary
clearance under the Indian Forest Act, 1927 for execution of the works in the
State of Sikkim. Pertaining to the forest land in the State of West Bengal the
necessary permissions were granted by the Central Government under the
FAO (OS) Nos.397/2014 & 398/2014 Page 28 of 76
Indian Forest Act, 1927 on May 28, 2013. The two notifications would
show that 48.4485 hectares land in the State of Sikkim and 47.4932 hectares
land in West Bengal was affected.
56. Neither party has brought out as to how many towers were to be
erected in these forest lands. But one thing is clear, the first segment of the
transmission line, from the hydro power stations on Teesta River up to
Rangpoo had the necessary clearance under the Indian Forest Act, 1927 by
September 07, 2011. Thus, the appellant was in a position to commence
erection of towers in forest land in the State of Sikkim by September 07,
2011 and prior thereto, in the State of Sikkim was in a position to erect
towers on non-forest land, but subject to the consent of the land owners,
which obviously subsume an agreement to pay the necessary compensation
and in failure of such an agreement after obtaining necessary permissions
from the District Magistrates. The adjudication of compensation payable by
the District Judge would not have impeded the execution of the works.
Likewise, in the State of West Bengal, the works could have been executed
on non forest land. Post May 28, 2013 this hindrance qua forest land ceased
to exist. There appears to be no forest land adversely affected by the power
supply line in the State of Bihar.
57. Undisputedly the transmission line had a length of 36 km between the
hydro power plant on Teesta river in the State of Sikkim till Rangpoo, 70 km
between Rangpoo and Panighatta and 104 km between Panighatta and
Kishanganj. Further, it is undisputed position that the number of towers to
be erected in the Sikkim segment was 278 and in the West Bengal and Bihar
segment 291. The stringing was 106 km in the State of Sikkim and West
Bengal and 104 km in the remainder. The further undisputed position is that
FAO (OS) Nos.397/2014 & 398/2014 Page 29 of 76
when the contracts were terminated on May 30, 2014 only 86 towers were
erected out of 278 in the first segment and tower foundation was complete
only in 107. In other words 278 – 86 = 192 towers had yet to be erected and
278 – 107 = 171 foundations had yet to be laid. As against 106 km stringing
only 11 km stringing had been done. In the second segment 262 towers
were erected leaving a short fall of 29 towers. 265 foundations had been laid
leaving a short fall of 26. Of the 104 km length, stringing had been
completed only in 59 km.
58. Since most of the correspondence filed by the parties pertains to the
year 2011 onwards, it is apparent that the period June, 2010 till December,
2010 was consumed in preparatory works. We presume that owners of
private land were contacted to negotiate the compensation to be paid if
private lands were to be utilized for Right of Way or where the towers had to
be erected. Revenue records were looked into. Gram panchayats were
contacted. If the lands belonged to statutory or local authorities, they were
contacted. Necessary permissions if all required under local laws were
applied for. But things were moving slowly.
59. May 02, 2011 appears to be the date when the parties decided to
tighten their belts and proceed ahead from the seat of their pants, for the
reason a little over one year had gone by. The stipulated dated for contract
to be completed was October 17, 2011. Hardly any progress had been made.
On May 02, 2011 a high level progress review committee meeting was held
in which 12 officers of the respondent and 4 of the appellant were present.
A lengthy minutes spanning 7 pages were drawn up highlighting the
progress achieved in the form of the District Magistrates being contacted and
instructions issued by them in North Sikkim, South Sikkim and Darjeeling
FAO (OS) Nos.397/2014 & 398/2014 Page 30 of 76
portions of the work in the State of West Bengal. The minutes record
progress made with the various gram panchayats. The minutes note that in
the West Bengal portion urgent steps would be taken, treating the portion to
be priority, to obtain necessary orders for 24 locations concerning forest.
Field work status in North, East and South Sikkim was noted. Meetings
were thereafter held at regular intervals on June 29, 2011, which were
minuted, July 30, 2011, August 30, 2011, November 02, 2011, December
02, 2011 and December 27, 2011.
60. The minutes of the meetings would evidence that the respondent kept
on expressing its concern at the slow pace of work, and we need to simply
highlight that by December 27, 2011, evidenced by a letter written by the
respondent to the appellant, of the 278 towers to be erected in Segment A1
only 9 were erected and as regards tower foundation the same was complete
only in 55.
61. The minutes of the meetings would show that the representatives of
the appellant were agreeing that the Right of Way clearances and consents to
be obtained from owners of private land and in the alternative to apply to the
District Magistrates was their obligation.
62. Thus, prima facie, conduct of the appellant from the inception of the
contract evinces it understanding its obligations under the Supplementary
Agreement(s), contrary to what the appellant now contends before us.
63. It was only on April 03, 2012 that the appellant appears to have, for
the first time, tried to half heartedly take the stand that its obligations under
the Supplementary Agreement(s) dated May 10, 2010 was limited to
preparing cases under the Forest Act, obtaining ROW and proposals for
obtaining mandatory clearances. The appellant unilaterally sought to
FAO (OS) Nos.397/2014 & 398/2014 Page 31 of 76
terminate the Supplementary Agreement(s). The respondent immediately
responded on April 16, 2012 refuting the contents of the appellant’s letter
dated April 03, 2012 informing that the appellant could not unilaterally
terminate the contract or suspend performance thereof in view of the
general conditions of the contract No.35 and 36. The appellant was
informed of its obligations under the Supplementary Agreement(s). It is at
this stage that the respondent decided to form a committee to facilitate
settlement of compensation issues and wrote a letter to the appellant which
reads as under:-
“Sub: Formation of Committee to facilitate settlement of
compensation issues for construction of 400 KV Teesta III
HEP-Kishanganj (Karandighi) transmission line.
Teestavalley Power Transmission Ltd.(TPTL) have been
conferred, under Section 164 of the Electricity Act, 2003 all
powers of Right of Way for establishment and maintenance of
400 KV Teesta III HEP-Kishanganj (Karandighi) transmission
line falling in the States of Sikkim, West Bengal and Bihar.
Accordingly construction works i.e. foundation and tower
erection are being carried out for the said line after release of
payment against crop compensation to the land owners.
In the State of Sikkim, compensation amount to the land owners
for tower locations is being assessed by the concerned District
Collectors and payment is being released to the concerned
District Collectors for onward distribution to the land owners.
The amount of compensation in the State of Sikkim is in the
range of `1.00 to 2.00 lacs per tower location. However,
compensation amount for damage of crops for transportation of
tower materials, hardware, insulators, T&P etc. for approach
to the tower locations is not being assessed by the District
Collectors.
In the State Bihar and Naxalbari area of West Bengal Plain,
FAO (OS) Nos.397/2014 & 398/2014 Page 32 of 76
compensation amount to the land owners for tower locations as
well as approach to the locations is being assessed by the
concerned Gram Panchayat. It may be mentioned that amount
of compensation these locations is in the range of `8000 –
`10000 per tower location. However, in few locations of these
area compensation amount is in the range of `10000 – `40000.
In the Tea Estates of West Bengal Plain, there are 17 tower
locations where ROW issues are to be settled with the owners of
the Tea Estates which is pending for last two years. Similarly,
ROW issues for 94 tower locations In non-forest area of West
Bengal Hills (Darjeeling District) are also for last two years.
The issues was deliberated in the meeting taken by Director
(Projects), POWERGRID on 7.6.2012 wherein it has been
decided that a committee comprising of members from TPTL
and DCIL-AIPL JV shall be constituted to facilitate settlement
of ROW issues.
In view of above, it is proposed to constitute a committee
comprising of the following three members from TPTL and
DCIL-AIPL JV to facilitate settlement of ROW issues:
(i) Mr.A.K.Tyagi, General Manager, TPTL
(ii) Mr.Goutam Sen, General Manager, DCIL-AIPL JV
alternative Mr.T.Subramanyam, Sr.DGM, DCIL-AIPL
JV.
(iii) Mr.D.Ravi Prasad, Sr.Manager, TPTL/Mr.Prashant
Singh Manager, TPTL.
The committee shall carry out site visits and perform the
following activities:
(i) Locations in Sikkim : To assess compensation amount for
damage of crops for transportation of tower materials,
hardware, insulators, T&P etc. for approach to the tower
locations in foundation & erection as well as line
corridor for stringing, not assessed by the District
Collectors and vetting of the same by the Gram
Panchayats.
FAO (OS) Nos.397/2014 & 398/2014 Page 33 of 76
(ii) Locations in Bihar and Naxalbari area of West Bengal
Plain : To assess compensation amount of more than
`10000/- for damage of crops in tower locations/line
corridor for foundation, erection & stringing and vetting
of the same by the Gram Panchayats.
(iii) Locations in Tea Estate of West Bengal Plain : To assess
compensation amount for damage of tea plants in tower
locations/ line corridor for foundation, erection and
stringing in association with Tea Estates Officials and
vetting of the same by the District Revenue officials.
(iv) Locations in West Bengal Hills (Darjeeling District) : To
assess compensation amount for damage of crops in
tower locations/line corridor for foundation, erection &
stringing and vetting of the same by the Dist.Revenue
Officials.
The Committee shall submit its report for the assessed locations
along with the compensation amount to the Sr.Vice President
for approval. However, present methodology of compensation
payment for locations in Sikkim assessed by the District
Collectors and for locations in Bihar & West Bengal assessed
by the Gram Panchayats upto `10000/- shall be continue.
The proposal may kind be approved.”
64. Much was sought to be made out by learned Senior counsel for the
appellant on the language of the letter and in particular the constitution of
the committee to facilitate settlement of ROW issues. With reference to the
opening paragraph of the letter wherein it has been recorded that power has
been conferred under Section 164 of the Electricity Act, 2003 for Right of
Way establishment and maintenance of transmission lines, it was urged
during opening of the arguments in the appeal that by writing said paragraph
FAO (OS) Nos.397/2014 & 398/2014 Page 34 of 76
the respondent has admitted its obligations to obtain the Right of Way after
making payment to the affected land owners. With reference to next two
paragraphs wherein it is written that compensation issues are being assessed
by the District Collectors it was sought to be urged as if the respondent was
informing the appellant that it was actively pursuing issues of compensation.
With respect to the constitution of the committee it was sought to be
projected as if the respondent was constituting a committee so that the
appellant, having a member on the committee, would be kept aware of the
status of the Right of Way. But, in view of the documents read by the
respondent, during arguments in rejoinder the learned senior counsel for the
respondent laid great emphasis on a letter dated May 21, 2012 written by the
appellant to the respondent in which it wrote as under:-
“Dear Sir,
Kindly refer to our above cited letters/referred mails inviting
your attention to the grim situation, we are being made to face
due to non-payment of compensation payments by TPTI. While
the erection gangs lost working time, we continue to incur idle
charges of erection gangs and Watch & ward expenses at
several other locations where tower material is shifted in
advance as per program.
As may be seen from the enclosed details, there are 218
cases of compensation payments pending with TPTI for
locations in Bihar (A2 package).
 61 cases submitted on 2nd April,
 97 cases submitted on 24th April,
 43 cases submitted on 2nd May,
 16 cases submitted on 9th May, 12.
This delay in payment of compensation is holding up tower
erection work at 12 locations (278/1, 278A/8, 281, 282/1, 285,
FAO (OS) Nos.397/2014 & 398/2014 Page 35 of 76
294B, 294D/2, 294D/4, 294F, 294E/2 and 295B). We will be
submitting our claim for the idle labour as well as Watch &
Ward of tower material wherever it is shifted but erection has
been stopped by landowners on account of non-payment of
compensation.
Similarly in Bengal (A2 package) there are 60 cases of
compensation payments pending with TPTI.
 28 cases submitted on 24th March 12.
 32 cases submitted on 2nd May, 12.
(Detail of Owners, location Nos & compensation amount are
enclosed)
We are in the process of identifying & cleaning corridor for
stringing work, in Bengal A2 section, however non-payment of
previous compensation is a large issue for the affected
landowners which needs to be addressed immediately.”
To urge that the letter in question evidenced that by May 21, 2012 that
it had processed 218 cases of compensation and that delay in payment of
compensation was holding up tower erection at 12 locations. The argument
was that the letter in question was proof that in spite of the appellant
processing the claims concerning payment of compensation and issues of
compensation being resolved, the non-payment of the compensation by the
respondent was delaying the execution of the works. It is apparent that in
rejoinder a totally new case concerning the obligation of the parties
pertaining to whose obligation it was to obtain the Right of Way and settle
compensation claims.
65. The learned Senior counsel for the appellants had referred to their
letter dated June 10, 2013 wherein it had written to the respondent on the
subject of non-availability of forest clearance and urged that assuming it
FAO (OS) Nos.397/2014 & 398/2014 Page 36 of 76
being appellant’s responsibility to process the applications and take up
follow up actions thereafter for clearances under The Indian Forest Act, the
appellant could not take the matter any further because clearances under the
Forest Act were conditional.
66. We fail to understand the logic of the argument for the reason the two
permissions concerning forest land in the State of Sikkim and the State of
West Bengal granted by the Central Government, the first on September 07,
2011 and the second on January 07, 2013, grant the necessary sanctions.
There are no conditions attached to the sanction(s). The condition
antecedent are being treated by the appellant as a condition precedent.
67. The condition antecedents regarding felling/pollarding/pruning of
trees requiring permission of the State Forest Department, compensatory
forestization etc. are relatable to the Forest Conservation Act,1980, and do
not in any manner hinder the clearances under the Indian Forest Act.
68. Another twist was given to the argument by referring to a Government
of India order dated March 21, 2011 as per which the Government of India
had instructed that unless approvals under the Indian Forest Act are obtained
no work should commence even in non-forest land because if ultimately
approval under the Indian Forest Act is not granted, the entire money spent
on a project would be wasted.
69. The argument overlooks that on January 07, 2013, the Government of
India had modified its aforesaid recommendatory directive for linear projects
involving use of forest land. Linear projects would be such as roads, canals,
pipelines and electricity transmission lines. The relaxation was that work
could commence in non-forest land if it was technically feasible to execute
the project along and alternate alignment if approval under The Indian Forest
FAO (OS) Nos.397/2014 & 398/2014 Page 37 of 76
Act was not granted. It was not the case of the appellant that it was not
possible to complete the supply line along and alternate alignment if
approval under The Indian Forest Act was refused. The position would
therefore be that at least for the stretch in the State of Sikkim there being a
forest clearance as early as September 07, 2011, there could be no excuse for
the work not to proceed at full pace along said stretch.
70. As noted in paragraph 3 above time was extended thrice for
completion of the works. Firstly on November 11, 2011, thereafter on
November 30, 2012 and lastly on July 04, 2013. At each stage, while
extending time for completion of the works, schedules were fixed, but were
not adhered to by the appellant.
71. Learned counsel for the parties had made a reference to
correspondence exchanged after July 04, 2013 in some detail because the
reason was that notwithstanding time being extended to complete the works
by October 31, 2014 as per the last extension granted on July 04, 2013, the
respondent had terminated the contract on May 30, 2014, and the argument
of the appellant was that the respondent could not terminate the contract mid
between the extended period.
72. Since we have to look at the case at the stage from the point of view of
what prima facie stands out, and we have to eschew any determinative
findings, we would only note that on April 03, 2014 the appellant wrote a
letter expressing a desire to be relieved from the contract obligations at no
risk and cost to it and all it being recompensed the loss of profit for the
unfinished work. The letter reads as under:-
“Sub: Construction of 400 KV D/C Teesta III-Panighata
section Package A1 & Panighata- Kishanganj section Package
FAO (OS) Nos.397/2014 & 398/2014 Page 38 of 76
A2 of Teesta III-Kishanganj Transmission Line associated with
1200 MW Teesta III HEP at North Sikkim under Contract No.
TPTL/TOWER-A1/01 & 02 and A2/01 & 02 dated 22nd
February 2010.
Ref: 1) Supplementary Agreements to Service Contract
nos.TPTL/TOWER-A1/02 & A2/02; dated 10th May 2010.
2) Your letter No.TPTL/HQ/Tower Package/298
dated 26th Feb 2014.
3) Our letter no.TR/01/TPTL/480 dated 10th March
2014
4) Minutes of Meeting held on 27th March 2014.
Dear Sir,
With reference to the above referred correspondences
and discussion held on the subject, we note your concern
that the project needs to be completed by January 2015
inorder to wheel the power of Teesta-III HEP but we are
extremely sorry to inform you that you are not able to
appreciate the serious concern raised by us on account of
ROW issues, Forest clearances, compensation payment
and pending payment issues leading to delay in
completion of work These issues have been brought to
your notice from time to time and also reiterated during
recent discussions but you have failed to understand the
gravity of the situations. It is evident that reasons of
delay is beyond our control and not attributable to us
hence offloading of portion of work is unwarranted and
not acceptable to us. Therefore we would prefer and
request you to take over the complete work on ás is
where is basis‟ at no risk and cost to us. However, in
view of your continuous insistence for offloading of
services work of Darjeeling and part of South Sikkim
from our scope and completion of balance portion of
FAO (OS) Nos.397/2014 & 398/2014 Page 39 of 76
work by us, we would request you for acceptance of the
following conditions to enable us to continue with the
work:
 Offloading of part work as proposed by you shall be done
at no risk and cost to us
 All works related to statutory clearances such as Right of
Way, Forest clearances and way leave clearance etc
including preparation of proposals for the same for
entire line (both the packages) under supplementary
agreement shall be excluded from our scope.
 Rates for the items of the balance work in our scope shall
be revised in line with the rates which shall be finalized
by yu for service contract of the offloaded Darjeeling and
part of South Sikkim portion.
 Revised time extension shall be granted with Price.
Variation and without imposition of Liquidated
Damages.
 Proportionate performance bank guarantee shall be
returned for the portion of work to be withdrawn.
 All the pending bills, price variation bills and claims etc
for the executed work of offloaded portion shall be
released
 Mobilization and demobilization charges including
expense incurred for stores and other infrastructural
facilities shall be reimbursed.
 Loss of profit due to offloading of work shall be released
 Loss incurred due to offloading of work to BCEPL in the
offloaded portion shall be released.
We are awaiting your response by return on the aforesaid
issued.”
73. Now, in the letter the appellant has unequivocally evinced its intention
to off-load the complete work on as is there is basis. The learned Single
Judge has thus correctly opined that in view of said letter the appellant
would not be entitled to adopt a dog in a manger approach by not being in a
position and having no intention to complete the work in not allowing
FAO (OS) Nos.397/2014 & 398/2014 Page 40 of 76
anybody else to do so.
74. In this reference, as is brought by the letter dated April 03, 2014, we
simply note that correspondence between the parties between the months of
January, 2014 till March 2014 would show the anxiety of the respondent to
ensure that somehow or the other the works in Sikkim and Darjeeling district
in West Bengal be completed and the appellant expressing its inability to do
so. This is the reason why in the letter in question the appellant has
consented that as an alternative measure service works of Darjeeling and
part of South Sikkim be off-loaded. The correspondence would show that as
a matter of fact the appellant had expressed its inability to complete the work
in South Sikkim and Darjeeling and this is the reason why the respondent
had invited limited offers from experience parties in February, 2014 for
unfinished works in the Darjeeling and South Sikkim segment, which works
alone have been awarded to TATA Projects Limited on May 30, 2014.
75. In this connection we would terminate our discussion by noting that
the contract, vide clause 36 empowered the respondent to withdraw certain
works as per the contract without any financial liability and even terminate
the contract.
76. We have already noted in paragraph 57 above that a major portion of
the work remained unexecuted by May 30, 2014.
77. The argument that having extended the time till October 31, 2014, the
respondent could not have terminated the contract on May 30, 2014, appears
to be attractive at first blush, but as the flushing is over, one realizes that
the argument is no more than a puffing. The correspondence between the
parties would evince that the envisaged progress when extension was
granted on July 04, 2013 for the works to be completed by October 31, 2014
FAO (OS) Nos.397/2014 & 398/2014 Page 41 of 76
was not achieved even up to 40% of the stage by which the works were to be
completed. The appellant was lagging far behind evidenced by the fact that
as per the extension, by January 2014, in Tower Package A1 as against 67
more foundations to be laid only 13 were laid and as against 79 more towers
to be erected only 46 were erected. Similarly, for Tower Package A2 as
against 32 foundations more to be laid till January 04, 2014 only 2 were laid
and as against 29 more towers to be erected during this period, none were
erected. On the laying of cables (stringing), as against 23 kilometers to be
laid only 4 kilometers were laid in Tower Package A1 and for Tower
Package A2 as against 46 kilometers only 12 kilometers were laid. If a
contractor lags behind by more than 60% of the envisaged works between a
period, rendering it impossible for the works to be completed in the
remainder, it would not be expected that the owner should wait for the d-day
and meet his water loop.
78. The respondent had served upon the appellant a notice to cure, being
the requirement of Clause 30.22 of the General Conditions of the contract on
May 09, 2014. The relevant part of the clause reads : ´then the employer
may then without prejudice to any other rights it may possess under the
contract give a notice to the contractor stating the nature of the default and
requiring the contractor to remedy the same. If the contractor fails to
remedy or take to steps to remedy the same without 14 days of its receipt of
such notice, then the employer may terminate the contract forthwith by
giving a notice of termination to the contractor.‟
79. The appellant has not shown any document to us that within 14 days it
responded to the cure notice by remedying the defects pointed out. The
correspondence post May 09, 2014 would show that the appellant insisted on
FAO (OS) Nos.397/2014 & 398/2014 Page 42 of 76
its stand that its inability to continue with the work was the defaults by the
respondent.
80. Seeing not even an iota of forward movement post May 09, 2014, the
respondent would be prima facie justified in terminating the contract.
81. The argument that the letter dated May 30, 2014 terminating the
contract makes the termination effective after seven days is a mis-reading of
the letter of termination. It was preceded by the appellant’s letter dated May
23, 2014 reiterating its offer to hive off a portion of the work in Darjeeling
and South Sikkim and the same being given to some other contractor which
was followed the respondent’s letter on May 24, 2014. The appellant
responded on May 28, 2014. The letter of termination has referred to the
termination being forthwith and we only highlight that clause 36.2.1
empowers the respondent to terminate the contract forthwith. The seven
days time referred to in the letter of termination is the requirement of clause
36.2.3 of the contract which requires the contractor to hand over the site with
all documents to the respondent by a notified date. The respondent was thus
complying with the requirement of clause 36.2.3 when it gave seven days
time to the appellant to vacate the unfinished sites.
82. It is trite that determinable/terminable contracts would not be
interdicted by interim orders especially when the same relate to supply and
execution of works because damages for breach would be an adequate
remedy. On the facts of the instant case, the offers made by the appellant to
off-load the remaining works in full and alternatively the unfinished works
in South Sikkim and Darjeeling district would further justify no interim
relief being granted with respect to the termination of the contracts.
83. Thus, on facts the conclusion arrived at by the learned Single Judge in
FAO (OS) Nos.397/2014 & 398/2014 Page 43 of 76
declining to confirm the ex-parte ad-interim order of status quo and dismiss
the petition filed by the appellant under Section 9 of the Arbitration and
Conciliation Act, 1996 concerning the letter dated May 30, 2014 cannot be
faulted with.
84. As we have prima facie found that the respondent is not an
instrumentality of the State, there would be no question of the respondent
being subjected to the rigorous of Article 14 of the Constitution of India.
The respondent would be as free as any other individual and would have the
same freedom as anyone else would have in matters of contract. But for the
reason we find a few decisions by learned Single Judges of this Court, five
of which were cited by learned counsel for the appellant in support of the
plea that even in matters which are post contractual in nature the State and
its instrumentalities would have to justify the action taken under the contract
on principles of reasonableness and fairness, we would think it appropriate,
as a Division Bench should do, to iron out the creases and throw light in the
penumbral region. The five decisions cited were 2006 (126) DLT 504 Atlas
Interactive India Pvt. Ltd. Vs. BSNL & Anr., 2003 (103) DLT 44 Pioneer
Publicity Corporation Vs. DTC, an unreported decision dated August 14,
2012 in OMP No.581/2010 KSL & Industries Ltd. Vs. National Textile
Corporation Ltd., 2002 (Supp.) Arb.LR. 632 Softline Media Ltd. & Shalimar
Advertisers Vs. DTC and an unreported decision dated February 28, 2014 in
OMP No.260/2014 Mayar Health Resorts Ltd. Vs. Indian Tourism
Development Corporation.
85. Article 14 of the Constitution of India protects individuals against
arbitrary State action. It mandates that the State shall not deny to any person
the equality before the law or the equal protection of law. The article
FAO (OS) Nos.397/2014 & 398/2014 Page 44 of 76
establishes equality of legal status for all and insulates an individual from
discrimination. Any administrative and executive action of the State which is
arbitrary, unguided, actuated by malice or based on irrelevant criteria has
been treated as subjecting individual to a discriminatory treatment and thus
violative of Article 14. Over the years, most of the principles of judicial
review as expanded by the Courts in England and America have, with
suitable modifications, been brought within the extending horizon of judicial
review over State action in this country. A corresponding horizon as to
which authorities would constitute a State has taken place. The distinction
between judicial, quasi-judicial, administrative or executive State action has
been obliterated.
86. In the field of contract as well, there has been an extension of law on
this subject. Since a State enters into a contract in exercise of its executive
power, it has been held that State action in matters pertaining to contract
cannot be taken out from the purview of judicial review.
87. However, this evolution of law has to be understood and applied with
a rule of caution.
88. Business requires total freedom to decide and take action in the best
interest of business. Profit, is the aim of every business and, therefore, when
a State conducts business it must have all the freedom to do so. If shackled
by the strict principles of judicial control over administrative action, it may
become impossible for a State to conduct business, as business needs to be
conducted.
89. We may ignore the judgments dealing with the limitations on the
power of the State at the time of entering into contract, for they would
constitute a different category of cases.
FAO (OS) Nos.397/2014 & 398/2014 Page 45 of 76
90. Disputes involving breach of alleged obligations by the State or its
agent can be classified into three groups:-
(i) Where grievance relates to alleged breach of promise on part of the
State where claimant has acted to his prejudice on basis of assurance or
promise on the part of the State, but the agreement is short of a contract
within the meaning of Article 299 of the Constitution;
(ii) Where the State after entering into a contract, acts in exercise of
statutory power and the claimant alleges a breach on the part of the State;
and
(iii) Where the rights are purely contractual and claimant alleges breach
by the State of a term of the contract.
91. The present case before us has to be placed in the third category.
Questions of pure alleged breaches of contract are raised.
92. Undoubtedly, a body which is an instrumentality of the State, while
exercising its powers or discretion is subject to the Constitutional
limitations. The rule inhibiting arbitrary action will apply to such body in
their dealing with the public. This rule flows directly from the doctrine of
equality embodied in Article 14. As noted in the decision reported as AIR
(1979) SC 1628 Ramana Dayaram Sethi Vs. IAAI the principles of
reasonableness and rationality and non-arbitrariness as projected under
Article 14 of the Constitution of India characterise every State action
whether it be under authority of law or in exercise of execution power
without making of law.
93. Has this principle been extended to State action under a contract pure
and simple after a contract was executed between the parties and the
FAO (OS) Nos.397/2014 & 398/2014 Page 46 of 76
instrumentality of the State claimed acting in exercise of a right (not a
power) under the contract?
94. The decision of the Supreme Court reported as AIR 1989 SC 1642
Dwarka Das Marfatia & Sons Vs. Board of Trustees of the Port of Bombay
needs to be noted. Action of the Board of Trustees Bombay Port pertaining
to eviction of a tenant from its property came up for consideration. The
argument of the appellant was that the action of the respondent in
terminating its tenancy had a public law character attached to it and was,
therefore, subject to judicial review. It was asserted that every action of the
respondent which was a State within Article 12 of the Constitution, whether
it be in the field of contract, or any other field was subject to Article 14 of
the Constitution (refer para 10). It was noted (refer para 11) that the eviction
of the appellant was only in pursuance of a policy of the Port Trust. Relying
upon the judgment in International Airport Authority‟s case (supra) it was
held that ‘Government policy would be invalid as lacking in public interest,
unreasonable or contrary to the protest standards‟, if it violates the mandate
of Article 14 pertaining to arbitrariness and unreasonableness and any action
taken pursuant thereto would be invalid.
95. Thus, it is to be noted that what was considered was a policy decision,
which was applied thereafter to a contract and not a decision arising out of
the contract.
96. Judgment of the Supreme Court reported as AIR 1990 SC 1031
Mahavir Auto Vs. Indian Oil Corporation & Ors. also needs a clarification
because it is often cited by counsel for the parties as if at a post agreement
stage, a dispute pertaining to a contract and especially when the same is
determined is actionable under a public law remedy. Issue related to a post
FAO (OS) Nos.397/2014 & 398/2014 Page 47 of 76
contract dispute (as was the situation in Dwarka Dass Marfatia’s case). The
following observations of the Supreme Court are relevant:-
“16) Mr. Salve submitted that in private law field there was no
scope for applying the doctrine of arbitrariness or mala fides. The
validity of the action of the parties have to be tested, it was urged
on behalf of the respondent on the basis of “right” and not
“power”. A plea of arbitrariness/mala fides as being so gross
cannot shift a matter falling in private law field to public law
field. According to Mr. Salve to permit the same would result in
anomalous situation that whenever State is involved it would
always be public law field, this would mean all redress against
the State would fall in the Writ Jurisdiction and not in suits before
Civil Courts.
“17) We are of the opinion that in all such cases whether public
law or private law rights are involved, depends upon the facts and
circumstances of the case. The dichotomy between rights and
remedies cannot be obliterated by any straight jacket formula. It
has to be examined in each particular case. Mr. Salve sought to
urge that there are certain cases under Article 14 of the arbitrary
exercise of a “right” arising either under a contract or under a
Statute. We are of the opinion that that should depend upon the
factual matrix.
“18) Having considered the facts and circumstances of the case
and the nature of the contentions and the dealings between the
parties and in view of the present state of law, we are of the
opinion that decision of the State/public authority under Article
298 of the Constitution, is an administrative decision and can be
impeached on the ground that the decision is arbitrary or
vocative of Article 14 of the Constitution of India on any of the
grounds available in public law field.”
97. On facts, it was noted that the Ministry of Energy, Department of
Petroleum had issued certain guidelines/directions, based on which Indian
Oil Corporation had taken an administrative decision to discontinue
FAO (OS) Nos.397/2014 & 398/2014 Page 48 of 76
business, inter alia, with the appellant before the Supreme Court. Since,
action was based pursuant to an administrative decision, it was held that
principles of judicial review were attracted. We may note the observations
of the Supreme Court in para 20 of the judgment as under:-
“20) Having regard to the nature of the transaction, we are of the
opinion that it would be appropriate to state that in cases where
the instrumentality of the state enters the contractual field, it
should be governed by the incidence of the contract.”
98. Certain observations of the Supreme Court in the decision reported as
AIR 1991 SC 537 Srilekha Vidyarthi Vs. State of UP, in our opinion are
relevant and need to be noted. Case related to the termination of the
appointment of District Government Advocates, which was in the nature of a
contractual appointment terminable at will on either side; not being
appointment to a post under the Government. Pursuant to a policy decision
taken by the State of Uttar Pradesh, circular was issued, pursuant thereto the
services of the existing Government Counsel were dispensed with. Direct
writ petition under Article 32 of the Constitution of India was filed as also
the appeals arising out of judgment of the Allahabad High court dismissing
the writ petition were heard together and decided. What is relevant to be
noted is the question framed by the Supreme Court for being answered. In
para 4 the questions was posed as under :-
“Broadly, two questions arise for decision by us in this bunch of
matters. These are: Is the impugned circular amenable to judicial
review?; and if so, is it liable to be quashed as vocative of Article
14 of the Constitution of India, being arbitrary?
99. Answering the question it was observed :-
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” It can no longer be doubted at this point of time that Article 14 of
the Constitution of India applies also to matters of governmental
policy and if the policy or any action of the Government, even in
contractual matters, fails to satisfy the test of reasonableness, it
would be unconstitutional.(See Ramana Dayaram Shetty vs . The
International Airport Authority of India (1979) 3 SCR 1014 and
Kasturi Lal Lakshmi Reddy Vs . State of Jammu and Kashmir
[1980] 3 SCR 1338 . In Col. A.S. Sangwan Vs . Union of India,
AIR 1981 SC 1545 , while the discretion to change the policy in
exercise of the executive power, when not trammelled by the
statute or rule, was held to be wide, it was emphasised as
imperative and implicit in Article 14 of the Constitution that a
change in policy must be made fairly and should not give the
impression that it was so done arbitrarily or by any ulterior
criteria. The wide sweep of Article 14 and the requirement of every
State action qualifying for its validity on this touch-stone,
irrespective of the field of activity of the State, has long been
settled. Later decisions of this Court have reinforced the
foundation of this tenet and it would be sufficient to refer only to
two recent decisions of this Court for this purpose.”
100. As in the earlier judgments, it was the policy decision which was
found to be violative of Article 14 of the Constitution of India and the
striking down of the action purportedly taken under the contract were thus
struck down.
101. In the decision reported as 1989 (2) SCC 116 Bareilly Development
Authority Vs Ajay Pal Singh it was held that after entering into the field of
contracts, the ‘relations are no longer governed by the constitutional
provisions but by the legally valid contract which determines the rights and
obligations of the parties inter se. In this sphere, they can only claim rights
conferred upon them by contract.’
102. In the decision reported as AIR 2001 SC 3609 Verigamto Naveen Vs.
Government of A.P. & Ors, after a brief resume of its earlier judgments
FAO (OS) Nos.397/2014 & 398/2014 Page 50 of 76
given on the issue where disputes arose purely in the contractual field, the
Supreme Court referred to its decision in Mahabir Auto Store, Srilekha
Vidyarthi and Dwarka Dass Marfatia (referred above) and a few other
decisions. It was held :-
” Where the breach of contract involves breach of statutory
obligation when the order complained of was made in exercise of
statutory power by a statutory authority, though cause of action
arises out of or pertains to contract, brings within the sphere of
public law because the power exercised is apart from contract.
The freedom of the Government to enter into business with
anybody it likes is subject to the condition of reasonableness and
fair play as well as public interest. After entering into a contract,
in cancelling the contract which is subject to terms of the statutory
provisions, as in the present case, it cannot be said that the
matters falls purely in a contractual field.”
103. The aforesaid decisions of the Supreme Court when analysed, clearly
bring out the distinction that where action is taken pure and simple under a
contract, the principles of justness, fairness, arbitrariness, reasonableness etc.
flowing out of Article 14 of the Constitution of India cannot be attracted.
Where, however, the foundation of the action lies in an administrative or an
executive policy decision taken and then applied to the contract, the merits
of the administrative or executive decision taken are subject to judicial
review. In each of the cases, aforesaid, before the Supreme Court it was
noted that either the police decision taken suffers from the vice of
arbitrariness or the administrative decision taken was found to be so
suffering. In each and every decision the Supreme Court was at pains to
clarify that their observations would not apply purely to a field of contract
pure and simple.
FAO (OS) Nos.397/2014 & 398/2014 Page 51 of 76
104. The decision of the Supreme Court reported as 1994 (4) SCC 104
Assistant Excise Commissioner Vs. Issac Peter & Ors is another decision to
which we may refer to. All the aspects of arbitrariness, reasonableness,
promissory estopple, estopple by conduct and legitimate expectation in the
field of contract, where Government was a party were considered. Earlier
decisions referred by us above (except the decision in Verigamto’s case)
were considered. We may extract the relevant observations:-
“24) Learned counsel for the respondents sought to invoke the rule
of promissory estoppel and estoppel by conduct. The attempt is a
weak one for the said rules cannot be invoked to alter or amend
specific terms of contract nor can they avail against statutory
provisions. Here, all the terms and conditions of contract, being
contained in the statutory rules, prevail.
25) Learned counsel for the respondents also sought to rely upon
the rule of legitimate expectation which the licensees entertained
in view of the practice during previous years. Firstly, the rule
cannot be invoked to modify or vary the express terms of contract,
more so when they are statutory in nature. No decision has been
brought to our notice supporting the said proposition. …………….
26) Learned counsel for respondents then submitted that doctrine
of fairness and reasonableness must be read into contracts to
which State is a party. It is submitted that the State cannot act
unreasonably or unfairly even while acting under a contract
involving State power. Now, let us see, what is the purpose for
which this argument is addressed and what is the
implication?………………….. Doctrine of fairness or they duty to act
fairly and reasonably is a doctrine developed in the administrative
law field to ensure the rule of law and to prevent failure of justice
where the action is administrative in nature. Just as principles of
natural justice ensure fair decision where the function is quasijudicial,
the doctrine of fairness is evolved to ensure fair action
where the function is administrative. But it can certainly not be
FAO (OS) Nos.397/2014 & 398/2014 Page 52 of 76
invoked to amend, alter or vary the express terms of the contract
between the parties……………We are, Therefore, of the opinion that
in case of contracts freely entered into with the State, like the
present ones, there is no room for invoking the doctrine of fairness
and reasonableness against one party to the contract (State), for
the purpose of altering or adding to the terms and conditions of
the contract, merely because it happens to be the State. In such
cases, the mutual rights and liabilities of the parties are governed
by the terms of the contract (which may be statutory in some
cases) and the laws relating to contracts. It must be remembered
that these contracts are entered into pursuant to public auction,
floating of tenders or by negotiation. There is no compulsion on
anyone to enter into these contracts. It is voluntary on both sides.
There can be no question of the State power being involved in such
contracts. It bears repetition to say that the State does not
guarantee profit to the licenses in such contract. There is no
warranty against incurring losses. It is a business for the
licensees. Whether they make profit or incur loss is no concern of
the State. In law, it is entitled to its money under the contract. It is
not as if the licensees are going to pay more to the State in case
they make substantial profits. We reiterate that what we have said
hereinabove is in the context of contracts entered into between the
State and its citizens pursuant to public auction, floating of tenders
or by negotiation. It is not necessary to say more than this for the
purpose of these cases.”
105. Even the decision reported as (2004) 3 SCC 553 ABL International
Ltd. & Anr. Vs. Export Credit Guarantee Corporation of India Ltd. & Ors.
granted public law remedy relief to a claim under a contract because of the
obligation under the statute cast upon the respondent to perform public
functions because of a direction issued by the Reserve Bank of India to
cover the risk arising out of the export of tea by AVL International as per an
assigned contract requiring ECGC India Ltd. to ensure the risk. There was
thus a statutory flavour to the contract of insurance.
FAO (OS) Nos.397/2014 & 398/2014 Page 53 of 76
106. There may be, after all a said and written in law, regarding public law
and private law remedies, a miniscule category of cases which irrespective
of public law or private law remedies may invite the application of law laid
down by Maugham, J. in the decision reported as (1929) – 1 Ch. 602
Maclean Vs. Workers‟ Union which was cited with approval by the Supreme
Court in the decision reported as AIR 1963 SC 1144 T.P.Davar Vs. Lodge
Victoria No.363 SC Belgaum & Ors. Maugham, J. observed that in private
actions, and the case before him related to an allegation of being expelled
from the membership of a private association, in an unfair and unjust
manner. It was observed that an action even of a private person would be
treated as unfair and unjust if it violates the principles of ‘fair play so deeply
rooted in the minds of modern English men’. In such cases, it would be
irrelevant whether the defendant/respondent is a private individual or an
instrumentality of the State.
107. Thus, there may be an extreme case where malice is writ large and the
corresponding injury to the other party is manifest. Hardly a fact is in
dispute. From the given facts no conclusion other than the one projected by
the agreed party is possible. The view taken by the offender is
demonstratably unreasonable, and unreasonableness being of the
Wednesbury’s kind, in such cases, irrespective of the character of the
respondent and irrespective of whether the dispute arises out of a contract, it
may be possible to grant by way of an interim measure the stay of the
determination/termination of a contract. But the genre of such cases would
be rare.
108. The forensic battle fought at the bar on the subject of the encashment
of the bank guarantees centered on: what is the sweep of the expression
FAO (OS) Nos.397/2014 & 398/2014 Page 54 of 76
special equity the span whereof entitles the guarantor to avoid payment
under the guarantee.
109. ‘Fraud’, ‘irretrievable injury’ and ‘special equity’ are expressions found
in a catena of judicial opinions penned by Learned and Hon’ble Judges and
notwithstanding a plethora of case law on the subject, the debate goes on.
110. Where the guarantee is limited (on it’s terms) we have no problem, for
the enforcement of the guarantee has to be within the conditions (limitations)
contained in the guarantee. But where a guarantee is couched in a language
which makes it unconditional and the guarantor binds himself to give money
to the beneficiary on demand, without demur or protest; and the guarantor is
not even permitted to probe into the dispute between the parties, an area of
fertile litigation has grown because most common law jurisdictions
recognize primacy to justice as an integral part of law enforcement.
111. Though opinions on bank guarantees span half a century, we plunge
mid-stream and commence our discussion with the celebrated decision of the
Supreme Court reported as 1987 (2) SCALE 1149 U.P.Coop.Federation Ltd.
Vs. Singh Consultants & Engrs. (P) Ltd. The decision has noted the prior
landmark decisions on the subject and throws considerable light on what
would be ‘special circumstances‟ or ‘special equity‟ justifying issuance of
an injunction to restrain the bank from paying under the guarantee issued by
it, which decision has been constantly followed in latter decisions of the
Supreme Court.
112. Two guarantees, one a performance guarantee and the other by way of
security for monies advanced were the subject matter before the Supreme
Court in an action for injunction.
113. Holding that the language of the two guarantees made it crystal clear
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that the guarantees were unconditional, the Supreme Court proceeded to note
prior decisions and culled out the exceptions whereunder a Court would be
justified in issuing an injunction restraining invocation or payment under an
unconditional guarantee.
114. The Supreme Court noted that the letter of credit has been developed
over hundreds of years of international trade. It was most commonly used in
conjunction with the sale of goods between geographically distant parties.
That it was intended to facilitate the transfer of goods between distant and
unfamiliar buyer and unknown customer. It was noted that it was difficult
for a buyer to pay for goods prior to their delivery. The bank’s letter of
credit came into existence to bridge the gap. In such transactions, the seller
(beneficiary) receives payment from issuing bank when he presents a
demand as per terms of the documents. The bank must pay if the documents
are in order and the terms of credit are satisfied. The bank was not allowed
to determine whether the seller had actually shipped the goods or whether
the goods conformed to the requirements of the contract. Any dispute
between the buyer and the seller must be settled between themselves.
115. The reason of the aforenoted opinion is obvious. The letter of credit is
a contract. The bank promises to pay the ‘beneficiary’ – traditionally a seller
of goods – on demand if the beneficiary presents whatever documents may
be required by the letter. They are normally the only two parties involved in
the contract. The bank which issues a letter of credit acts as a principal, not
as agent for its customer, and engages its own credit. The letter of credit
thus evidences an irrevocable obligation to honour the draft presented by the
beneficiary upon compliance with the terms of the credit. The Supreme
Court noted that whether it is a traditional letter of credit or a new device
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like performance bond or performance guarantee, the obligation of the
guarantor (usually a bank) is the same.
116. One exception to the rule of absolute independence of a bank
guarantee was thereafter noted. It was traced to the opinion of Shientag J. in
a case in U.S.A. reported as Sztejn Vs. J.Henry Schroder Banking Corpn. 31
NYS 2d 631.
117. The year was 1941. Injunctions against payments under letters of
credit were not issued by courts. Mr.Sztejn had wanted to buy quality
bristles from Indian and struck a deal for a quantity with an Indian seller.
Payment was secured to the seller by means of a letter of credit which
provided that upon receipt of appropriate documents the bank would pay for
the shipment. Somehow Mr.Sztejn discovered that the shipment made was
crates of worthless rubbish. He went to the bank with a request not to pay
and received a response that being a letter of credit it was an independent
undertaking of the bank and hence it must pay. Mr.Sztejn went to Court. He
sought an injunction against the issuing bank to restrain it from paying under
the letter of credit. He made, prima facie, good his allegations that as
against the contracted goods i.e. bristles, worthless material and was
shipped. Noting a fraud in the transaction the Court issued an injunction
against payment.
118. The Supreme Court noted that the exception of fraud created by
Shientag J. had been subsequently accepted by Courts in England in the
decisions reported as (i) (1958) 2 QBD 127 Hamzen Milas & Sons. v. British
Imex Industries Ltd., (ii) (1977) 2 All E. 862 R.D. Harbottle Mercantile) Ltd.
& Anr. v. National West Minister Bank Ltd., (iii) (1978) 1 All E.R. 976
Edward Owen Engineering Ltd. v. Barclays Bank International Ltd.; and (iv)
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(1982) 2 All E.R.720 UCM (Investment) v. Royal Bank of India. The last
case is of the House of Lords where Lord Diplock in his speech said (at
p.725):
“The whole commercial purpose for which the system of
confirmed irrevocable documentary credits has been developed in
international trade is to give to the seller an assured right to be
paid before he parts with control of the goods and that does not
permit of the any dispute with the buyer as to the performance of
the contract of sale being used as a ground of non-payment or
reduction or deferment of payment.
To this general statement of principles as to the contractual
obligations of the confirming bank to the seller, there is one
established exception: that is, where the seller, for the purpose of
drawing on the credit, fraudulently presents to the confirming
bank documents that contain, expressly or by implication, material
representations of fact that to his knowledge are untrue. Although
there does not appear among the English authorities any case in
which this exception has been applied, it is well established in the
American cases, of which the leading or ‘landmark’ case is Sztejn
Vs. Henry Schroder Banking Corpn. This judgment of the New
York Court of Appeals was referred to with approval by the
English Court of Appeal Edward Owen Engineering Ltd. V.
Barolays Bank International Ltd. though this was actually a case
about a performance bond under which a bank assumes
obligations to a buyer analogous to those assumed by a confirming
bank to the seller under a documentary credit. The exception for
fraud on the part of the beneficiary seeking to avail himself to the
credit is a clear application to the maxim ex trupi cause non
oriture or if plain English is to be preferred, ‘fraud unravels all’,
the courts will not allow their process to be used by a dishonest
person to carry out a fraud.”
119. We may note that the exception of fraud has been codified in Sections
5-114 of the Uniform Commercial Code.
120. With respect to the question : Can an injunction be issued upon a plea
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that the beneficiary is in breach of the contract? Law on the subject was
thereafter noted by the Supreme Court with reference to a decision of the
Court of Appeal in England reported as (1985) 2 Q.B.D. 127 Hamzon Melas
& Sons Vs. British Imex Industries Ltd., wherein it was held the principle
was that commercial trading must go on the solemn guarantee either by the
letter of credit or by bank guarantee or irrespective of any dispute between
the contracting parties whether or not the goods were upon contract.
121. With reference to the decision of the House of Lords in UCM
(Investment)’s case (supra) viz-a-viz a plea of fraud in invoking the
guarantee and the opposite party being in breach of its obligations under the
contract, the Supreme Court summarised the legal position as under:-
“The whole commercial purpose for which the system of
confirmed irrevocable documentary credits had been developed in
international trade was to give the seller of goods an assured right
to be paid before he parted with control of the goods without risk
of the payment being refused, reduced or deferred because of a
dispute with the buyer. It followed that the contractual duty owed
by an issuing or confirming bank to the buyer to honour the credit
notified by him on presentation of apparently confirming
documents by the seller was matched by a corresponding
contractual liability on the part of the bank to the bank to the
seller to pay him the amount of the credit on presentation of the
documents. The bank’s duty to the seller was only vitiated if there
was fraud on the part of the seller.”
122. Thereafter, the decision noted that the irretrievable injustice was also a
ground on which an injunction could be issued. The decision of Lord
Denning M.R. reported as 1966(2) Lloyd’s List Law Reports 495 Elian &
Rabbath (Trading as Elian & J. Rabbath Vs. Massas & Ors. was noted,
where an injunction was issued to prevent irretrievable injustice.
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123. Being relevant for a clarification of the issue raised in the instant case,
the facts and the reason for the opinion in Elian’s case needs to be noted.
124. The first defendants’ Greek motor vessel ‘Flora M’ was chartered by
Lebanese charterers for carriage of plaintiffs’ cargo (consigned to Hungary)
from Bairut to Rijeka. Discharge was delayed at Rijeka and Ship owners
exercised lien on cargo in respect of demurrage. Third defendant bank put
up guarantee in London in favour of second defendant (first defendants’
London agents) to secure release of cargo. There was a claim by
Yugoslavians to distrain on goods, involving ship in further delay and master
of Flora M, on lifting original lien, immediately exercised another lien in
respect of extra delay (which was raised when Hungarian buyers put up
2000). Two years later, shipowners claimed arbitration with charterers to
assess demurrage for which first lien was exercised and claimed to enforce
guarantee. Plaintiff claimed declaration that guarantee was not valid and
injunction to restrain shipowners or their agents from enforcing guarantee.
First and the second defendants appealed against the injunction granted by
Blain, J. It was held by the Court of Appeal that it was a special case in
which the Court should grant an injunction to prevent what might by
irretrievable injustice. Lord Denning, M.R., observed that although the
shippers were not parties to the bank guarantee, nevertheless they had a most
important interest in it. If the Midland Bank Ltd., paid under this guarantee,
they would claim against the Lebanese bank who in turn would claim against
the shippers. The shippers would certainly be debited with the account. On
being so debited, they would have to sue the shipowners for breach of their
promise express or implied, to release the goods. Lord Denning, M.R.,
further posed the question were the shippers to be forced to take that course?
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Or can they shortcircuit the dispute by suing the shipowners at once for an
injunction? He further observed at page 497 of the Report that this was a
special case in which injunction should be granted. Lord Denning, M.R.
went on to observe that there was a prima facie ground for saying that on
telex messages which passed (and indeed, on the first three lines of the
guarantee) the shipowners promised that, if the bank guarantee was given,
they would release the goods. He further observed that the only lien they
had in mind at that time was the lien for demurrage. But would anyone
suppose that the goods would be held for another lien? It can well be argued
that the guarantee was given on the understanding that the lien was raised
and no further lien imposed and that when the shipowners, in breach of that
understanding imposed a further lien, they were disabled from acting on the
guarantee.
125. The expression that it was a special case in which the Courts should
grant an injunction to prevent what might be an irretrievable injustice caught
the eye of the Supreme Court. In para 16 of the decision the Supreme Court
noted that Lord Denning M.R. treated this as a very special case and in a
later decision, being the opinion reported as 1978 (1) All. E.R. 976 Edward
Owen Engineering Ltd. Vs. Barclays Bank International Ltd. Lord Denning
M.R. expressed his views on the matter.
126. The facts of Edward Owen’s case were that English suppliers entered
into a contract with Libyan buyers to supply goods to them in Libya. The
contract was subject to a condition precedent that the plaintiffs would
arrange for a performance bond or guarantee to be given, for 10% of the
contract price, guaranteeing performance of their obligations under the
contract. Accordingly, the plaintiffs instructed the defendants, their bankers
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to give on their behalf a performance guarantee for the sum of £50,203.
Acting on those instructions the defendants requested a bank in Libya to
issue a performance bond to the buyers for that sum, and promised the
Libyan bank that they would pay the amount of the guarantee on first
demand, without any conditions or proof. The Libyan bank issued a letter of
guarantee for £50,203 to the buyers. The contract between the plaintiffs and
the buyers provided for payment of the price of the goods supplied by a
confirmed letter of credit. The letter of credit opened by the buyers was not
a confirmed letter of credit and did not, therefore, comply with contract.
Because of that non-compliance the plaintiffs repudiated the contract.
Although it was the buyers who appeared to be in default and not the
plaintiffs, the buyers nevertheless claimed on the guarantee given by the
Libyan bank who in turn claimed against the defendants on the guarantee
they had given. The plaintiffs issued a writ against the defendants claiming
an injunction to restrain them from paying any sum under the performance
guarantee. A judge granted the plaintiffs an interim injunction in the terms
of the injunction claimed by the writ but subsequently another judge
discharged the injunction. The plaintiff appealed to the court of appeal.
Lord Denning M.R. held that the justice was right in discharging the
injunction and reiterated that the bank must honour its commitment.
127. Therefore, in para 24 of its decision the Supreme Court clarified that it
appears that special equities (circumstances) mentioned therein i.e. in
Elian’s case (supra) may be a situation where the injunction was sought for
to prevent injustice which was irretrievable in the words of Lord Denning
M.R. In para 28 of the decision it was categorically opined :
“It is not the decision that there should be a prima facie case. In
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order to restrain the operation either of irrevocable letter of credit
or of confirmed letter of credit or of bank guarantee, there should
be serious dispute and there should be 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 get jeopardised.”
128. The ratio of law in U.P. Cooperative Federation Ltd.‟s case (supra),
would thus be that the bank must pay under an unconditional guarantee; with
the exception, if prima face case is made out that element of fraud exists on
the part of the beneficiary or if there exists a special equity in the form of
preventing irretrievable injustice then alone an injunction may be issued.
Further, fraud has to be of an egregious nature and not a dispute that goods
supplied are not as per contract.
129. Thus, prima facie, only two exceptions are recognized. Firstly, fraud
and secondly to prevent irretrievable injustice. The expression ‘a special
case’ or ‘a special equity’ qualifies the prevention of irretrievable injustice
and is not a third or a distinct head. If it is, then the special case or equity
has to be akin to, or a variant of irretrievable injustice.
130. In the decision reported as 1994 (6) SCC 597 STC Vs. Jainsons
Clothing Corporation & Anr. the Supreme Court noted that the bank
guarantee was unconditional and its enforcement was not hedged with or
conditional upon the performance of the principal contract and that there was
no fraud in the execution of the contract between Jainson and STC, the
Supreme Court held that the exception carved out in the decision in
U.P.Coop. Federation Ltd.’s case (supra) i.e. fraud of an egregious nature
and irretrievable injustice were the only two recognized exceptions and thus
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on the occurrence of the events mentioned in the bank guarantee it becomes
enforceable and that disputes in the performance of the contract does not
give rise to a cause to seek an injunction from enforcing the guarantee.
131. In the decision reported as 1995 (4) SCC 515 N.T.P.C. Vs. Flowmore
Pvt. Ltd. & Anr. the Supreme Court revisited the law on the subject. Two
performance guarantees and three guarantees to secure the mobilization
advance, all five being unconditional and payable on demand, were the
centre of the dispute. The main contract having an arbitration clause, the
dispute was pending adjudication before an Arbitral Tribunal. S.T.C.
invoked the bank guarantees pending arbitration. Flowmore sought
injunction urging two pleas. That main dispute was pending adjudication
before the Arbitral Tribunal and hence status quo should be maintained.
Secondly, invocation was fraudulent. Repelling both contentions it was held
that pendency of arbitration proceedings was an irrelevant factor and that
fraud had to be of an egregious nature so as to vitiate the entire underlying
transaction while irretrievable injustice had to be of a kind arising in a
situation found in 566 Fed Supp 1210 Itek Corpn Vs. First National Bank of
Boston. Finding none, the injunction granted by the High Court was
vacated.
132. We thus need to note the decision in Itek Corporation’s case (supra).
The facts were that in April of 1977, Itek entered into a contract with the
Imperial Government of Iran to manufacture certain high-technology optical
equipment. The contract price was $22,500,000. By the terms of this
contract, the Imperial Government was required to make an advance
payment to Itek of $4,500,000. Itek, in turn, was obliged to provide security
for this advance in the form of four bank guarantees, each in the amount of
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$1,125,000, issued by Bank Melli and naming the Imperial Ministry of War
as beneficiary. Itek was further required to furnish a bank guarantee in the
amount of $2,250,000, issued by Bank Melli in favour of the Imperial
Ministry of War as security for the good performance of its contractual
obligations. As a condition to issuing the guarantees, Bank Melli required
Itek to supply standby letters of credit in its favour, issued by an American
bank, with amounts and terms paralleling those of its own guarantees. Itek
complied with this condition by providing five letters of credit issued by
FNBB and naming Bank Melli as beneficiary. Each of these standby letters
of credit stated that payment would be conditioned on receipt of an
authenticated cable stating that Bank Melli had been required to make
payment under its corresponding guarantee to the Imperial Ministry of War
and that it was airmailing to FNBB a signed statement to that effect. Of the
five original letters of credit issued by FNBB, three remained outstanding as
of January 1980, when the suit was brought. These were S-14555, issued
and outstanding in the amount of $2,250,000; S-14588, issued in the amount
of $1,125,000 and outstanding in the amount of $70,753; and S-14559,
issued and outstanding in the amount of $1,125,000. The contract between
Itek and the Imperial Government of Iran provided that in the event of force
majeure, including the cancellation of Itek’s export license covering the
equipment, either party would be entitled to inform the other of the event
constituting force majeure and, after three months, to cancel the contract by
written notice. Upon cancellation, the parties would clear their account and
release all guarantees and letters of credit. From April of 1977 through the
end of 1978, work on the contract apparently proceeded without incident.
An independent American company monitored the progress of the work
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performed by Itek and gave Itek consistently high praise for its efforts. By
February 10, 1979, the value of Itek’s performance amounted to
$20,300,000; and payments to Itek totalled $11,100,000. In early 1979, Iran
underwent a revolution. Ultimately, the head of the Imperial Government,
Shah Riza Pahlevi, was driven into exile, and was succeeded in power by the
religious leader Ayatollah Ruhollah Khomeini. The Islamic Republic of Iran
was established, and the Imperial Ministry of War was replaced by the
Ministry of National Defense. On April 30, 1979, the State Department
cancelled the export license for the equipment to be manufactured by Itek
under the contract. Two weeks later, on May 15, 1979, Itek notified the
Iranian authorities of the occurrence of force majeure, and requested
consultations in accordance with the terms of the contract. On August 20,
1979, representatives of Itek met in Iran with officials of the Ministry of
National Defense to discuss the occurrence of force majeure and the status
of the contract obligations. At this meeting, Itek’s representatives also
presented the Iranian participants with copes of unpaid invoices that had
accumulated since February 1979, and a summary of the account under the
contract. On November 03, 1979, the United States Embassy in Teheran,
Iran was forcibly taken over and 52 American citizen were taken hostage. In
response to the crisis, President Carter on November 14, 1979 declared a
national emergency and, by Executive Order No.12170, ‘blocked’ all Iranian
assets subject to the jurisdiction of the United States. Shortly thereafter, the
Treasury Department promulgated regulations to implement the Presidential
directive that all assets be blocked. These regulations prohibited the transfer
of any property subject to the jurisdiction of the United States in which Iran
had any interest whatever, except as authorized by license or regulation. The
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regulations specifically authorized payment by United States banks on letters
of credit issued in favour of an Iranian entity, provided the payments were
made into blocked accounts in domestic banks. At the same time, nothing in
the regulations precluded any person for whose account a standby letter of
credit was opened or any other person from contesting the legality of the
demand from the Iranian entity or from raising any other legal defense to
payment. On December 06, 1979, Itek sent to the Ministry of National
Defense further written notice advising of the occurrence of force majeure,
and again requesting consultations. No response was received to this
communication. The suit was filed on January 09, 1980. Itek pleaded that
prevailing circumstances in Iran created a serious risk that unwarranted and
fraudulent demands would be made upon the letters of credit then
outstanding with FNBB. Itek sought temporary and permanent relief in the
form of an order enjoining FNBB from honoring any demand on the letters
of credit, without first giving Itek five days notice. On January 09, 1980 the
Court entered a temporary restraining order requiring three days notice prior
to payment, and after hearing on January 18, 1980, a preliminary injunction
was entered to the same effect. In February and March of 1980, Bank Melli
requested extension of two of the outstanding letters of credit. In the
alternative, Bank Melli requested immediate payment in full. Itek directed
FNBB to refuse both the requests for extension and payment, on grounds
that the contract had been cancelled and the letters of credit securing the
advance payment had been cleared.
133. Itek sought an injunction restraining FNBB from making any payment
on the letters of credit. Holding in favour of Itek it was held:
“In commercial litigation, the question whether the plaintiff is
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likely to suffer irreparable injury may be cast in terms of whether
the plaintiff has available a legal remedy adequate to compensate
it for its injuries. Weinberger v. Romero-Barcelo, 456 U.S. 305,
312, 102 S.Ct. 1798, 1803, 72 L.Ed.2d 91 (1982). Though I accept
that Itek’s ultimate damages, absent an injunction, are susceptible
to reasonable estimation, I do not find that this alone establishes
an adequate remedy at law. As I stated in an earlier opinion in
this matter, “the fact that its damages may be reasonably
calculable will provide Itek with little consolation in the event
those damages ultimately prove uncollectable.” Itek Corporation
v. First National Bank of Boston, 511 F.Supp.1341, 1348
(D.Mass.1981). Nothing has occurred to change my view that “if
[FNBB] were to make payment on the letters as demanded, Itek’s
only recourse would be a lawsuit against the Iranian
Government,” 511 F.Supp. at 1349, or that on the present record,
this cannot be viewed as an “adequate” remedy.”
134. Thus, the irretrievable injustice or special equity noted in Itek’s case
was the impossibility of the party at whose instance the bank guarantee was
issued being in a position to retrieve the money upon obtaining a decree in
its favour.
135. In an action for injunction relating to fourteen bank guarantees of four
kinds; (i) to secure Mobilization Advance; (ii) to secure the Security
Amount; (iii) to secure the Funds Advanced by Hindustan Steelworks
Construction Ltd.; and (iv) to secure Due Performance, the High Court
granted an injunction qua the guarantees except the guarantees under head
No.(iii) in favour of the contractor Tarapore & Co., holding that on facts
special equity or special circumstances were shown justifying grant of an
injunction. Reason given by the High Court was that till the arbitrator
decided the dispute the claim under the bank guarantees (qua which
injunction was issued) had not yet been crystallized. Reversing the decision
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of the High Court, in the decision reported as 1996 (5) SCC 34 Hindustan
Steelworks Constructions Ltd. Vs. Tarapore & Co., the Supreme Court held:
“14. The High Court also committed a grave error in restraining
the appellant from invoking bank guarantees on the ground that in
India only a reasonable amount can be awarded by way of
damages even when the parties to the contract have provided for
liquidated damages and that a term in a bank guarantee making
the beneficiary the sole judge on the question of breach of contract
and the extent of loss or damages would be invalid and that no
amount can be said to be due till an adjudication in that behalf is
made either by a court or an arbitrator, as the case may be. In
taking that view the High Court has overlooked the correct
position that a bank guarantee is an independent and distinct
contract between the bank and the beneficiary and is not qualified
by the underlying transaction and the primary contract between
the person at whose instance the bank guarantee is given and the
beneficiary. What the High Court has observed would be
applicable only to the parties to the underlying transaction or the
primary contract but can have no relevance to the bank guarantee
given by the bank, as the transaction between the bank and the
beneficiary is independent and of a different nature. In case of an
unconditional bank guarantee the nature of obligation of the bank
is absolute and not dependent upon any dispute or proceeding
between the party at whose instance the bank guarantee is given
and the beneficiary. The High Court thus failed to appreciate the
real object and nature of a bank guarantee. The distinction which
the High Court has drawn between a guarantee for due
performance of a works contract and a guarantee given towards
security deposit for that contract is also unwarranted. The said
distinction appears to be the result of the same fallacy committed
by the High Court of not appreciating the distinction between the
primary contract between the parties and a bank guarantee and
also the real object of a bank guarantee and the nature of bank’s
obligation thereunder. Whether the bank guarantee is towards
security deposit or mobilisation advance or working funds or for
due performance of the contract if the same is unconditional and if
there is a stipulation in the bank guarantee that the bank should
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pay on demand without a demur and that the beneficiary shall be
the sole judge not only on the question of breach of contract but
also with respect to the amount of loss or damages, the obligation
of the bank would remain the same and that obligation has to be
discharged in the manner provided in the bank guarantee. In
General Electric Technical Services Co. Inc. v. Punj Sons (P) Ltd.
while dealing with a case of bank guarantee given for securing
mobilisation advance it has been held that the right of a contractor
to recover certain amounts under running bills would have not
relevance to the liability of the bank under the guarantee given by
it. In that case also the stipulations in the bank guarantee were
that the bank had to pay on demand without a demur and that the
beneficiary was to be the sole judge as regards the loss or damage
caused to it. This Court held that notwithstanding the dispute
between the contractor and the party giving the contract, the bank
was under an obligation to discharge its liability as per the terms
of the bank guarantee. Larsen and Toubro Limited v. Maharashtra
State Electricity Board and Hindustan Steel Workers Construction
Ltd. v. G.S. Atwal & Co. (Engineers) Pvt. Ltd. were also cases of
work contracts wherein bank guarantees were given either
towards advances or release of security deposits or for due
performance of the contract. In both those cases this Court held
that the bank guarantees being irrevocable and unconditional and
as the beneficiary was made the sole judge on the question of
breach of performance of the contract and the extent of loss or
damages an injunction restraining the beneficiary from invoking
the bank guarantees could not have been granted. The above
referred three subsequent decisions of this Court also go to show
that the view taken by the High Court is clearly wrong.”
136. Referring to the decision in U.P.Coop.Federation’s case, it was
reiterated by the Supreme Court that the fraud and special equity in the form
of irretrievable injustice were the only recognized exceptions justifying
granting an injunction (Refer para 18 and 23).
137. We may hasten to add that the decision in Hindustan Steelworks
Construction Ltd.’s case, has, vide para 18 clarified the ambit of what
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constitutes a fraud justifying granting an injunction. It was clarified as
under:-
“It may be pointed out that fraud which is recognised as an
exception is the fraud by one of the parties to the underlying
contract and which has the effect of vitiating the entire underlying
transaction. A demand by the beneficiary under the bank
guarantee may become fraudulent not because of any fraud
committed by the beneficiary while executing the underlying
contract but it may become so because of subsequent events or
circumstances. We see no good reason why the courts should not
restrain a person making such a fraudulent demand from
enforcing a bank guarantee.”
138. In the decision reported as 1996 (5) SCC 450 Ansal Engineering
Projects Ltd. Vs. Tehri Hydro Development Corpn. the Supreme Court held
that a serious dispute on the question as to who committed the breach of the
contract and whether the amount is due and payable by the contractor till the
arbitrator declares the award are not circumstances, much less exceptional,
justifying granting an injunction to restrain the bank from paying under the
guarantee.
139. A slightly discordant note was struck by the Supreme Court in the
decision reported as 2002 (10) SCC 508 State of Haryana Vs. Continental
Construction wherein the Supreme Court did not interfere with an injunction
order passed by the High Court noting that the dispute was pending
adjudication before the arbitrator. However in the decision reported as 2006
(2) SCC 728 BSES Ltd. Vs. Fenner India it was observed:
“We are afraid that the short order in Continental Construction
Ltd. appears to have been made on the narrow facts of that case
and does not constitute a precedent binding us. Moreover, as
mentioned earlier, a line of judgments of this Court have long
settled the law relating to the invocation of bank guarantees.”
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140. In the decision reported as 1997 (6) SCC 450 Dwarikesh Sugar
Industries Ltd. Vs. Prem Heavy Engineering Work P. Ltd. it was held that
special circumstance of irretrievable injury means a circumstance which
makes it impossible for the guarantor to reimburse itself by way of
restitution.
141. In the decision reported as 1997 (1) SCC 568 U.P.State Sugar
Corporation Vs. Sumac International Ltd. the fact that the beneficiary was a
sick company and that a scheme for its revival was pending consideration
before BIFR under Sick Industrial Companies (Special Provisions) Act 1985
was held not to be a circumstance showing that money would be
irretrievably lost if the claim ultimately went in favour of the contractor.
Referring to the decision in Itek Corporation’s case and the law pertaining to
injunction claims qua bank guarantee, it was observed:
“The courts have carved out only two exceptions. A fraud in
connection with such a bank guarantee would vitiate the very
foundation of such a bank guarantee. Hence if there is such a
fraud of which the beneficiary seeks to take advantage, he can be
restrained from doing so. The second exception relates to cases
where allowing the encashment of an unconditional bank
guarantee would result in irretrievable harm or injustice to one of
the parties concerned.
x x x x x x x x x x x x x x x x
On the question of irretrievable injury which is the second
exception to the rule against granting of injunctions when
unconditional bank guarantees are sought to be realised the court
said in the above case that the irretrievable injury must be of the
kind which was the subject matter of the decision in the Itek
Corpn. Case.
x x x x x x x x x x x x x x x x
FAO (OS) Nos.397/2014 & 398/2014 Page 72 of 76
Before us, however, in the course of argument, the learned
advocate for the respondent urged for the first time in this case
there would be irretrievable injustice to the respondent if the bank
guarantees are allowed to be realised because the appellant is a
sick industrial company in respect of which a reference is pending
before the board for industrial and financial reconstruction under
the Sick Industrial Companies (Special Provisions) Act, 1985. The
respondent contends that even if it succeeds before the arbitrator it
will not be able to realise his claim from the appellant. The mere
fact that a reference under the Sick Industrial Companies (Special
Provisions) Act, 1985 is pending before the Board, is, in our view,
not sufficient to bring the case in the ambit of the “irretrievable
injustice” exception. Under the scheme of the said Act the board
is required to make such inquiry as it may deem fit for determining
whether any industrial company has become a sick industrial
company. Under Section 16 (4) where the board deems it fit to
make an inquiry or to cause an inquiry to be made in this
connection, it may appoint one or more persons to be special
directors for safeguarding the financial and other interests of the
company or in the public interest. Under Section 17 after making
an inquiry, if the Board is satisfied that a company has become a
sick industrial company, the Board may then decide, by an order
in writing, whether it is practicable for company to make its net
worth exceed the accumulated loses within a reasonable time. If
this is practicable, then the Board shall give such company the
opportunity to make its net worth exceed the accumulated loses.
Under Sub-Section (3) of Section 17 if the Board decides that this
is not practicable within a reasonable time, it may adopt measures
specified in Section 18 and provide for a scheme for appropriate
measures in relation to that company. There can, therefore, be no
presumption that the company will, in no circumstance, be able to
discharge its obligations.
x x x x x x x x x x x x x x x x
Under Section 22 on which the respondent relies, where in respect
of an industrial company, an inquiry under Section 16 is pending,
or any scheme under Section 17 is under preparation or a
FAO (OS) Nos.397/2014 & 398/2014 Page 73 of 76
sanctioned scheme is under implementation or when an appeal
under Section 25 is pending, then no proceedings for the winding
up of the industrial company or for execution, distress or the like
against any of the properties of the industrial company or the
appointment of a receiver in respect thereof can be proceeded
with; and no suit for the recovery of money or for the enforcement
of any security against the industrial company shall lie or be
proceeded with except with the consent of the Board or, as the
case may be, the Appellate Authority. The respondent contends
that its right to realise its claim, of established, would be affected
by reason of Section 22 of the said Act. There is no material
before us to show that the appellant company cannot make its net
worth positive. NO scheme has been framed under the said Act so
far. Even under Section 22 there is no absolute bar against any
suit for the recovery of money. The suit cannot be proceeded with
except with the consent of the Board of the Appellate Authority.
Therefore, in an appropriate case, the Board or the Appellate
Authority is entitled to give its consent to such a claim being
proceeded with. This is not a situation of the kind envisaged in the
case of Itek Corpn. where there was no possibility whatsoever of
recovery of any amount from the purchaser.”
142. In the decision reported as 2006 (2) SCC 728 BSES Ltd. Vs. Fenner
India Ltd. ‘lack of good faith’ and/or ‘enforcing with an oblique purpose’
were arguments brought into aid to urge that if a bank guarantee was
invoked for an oblique purpose or invocation lacked in good faith,
exceptional circumstance existed justifying granting an injunction. Decision
of the Court of Appeal in Singapore reported as (2002) 1 SLR 1 Samwoh
Asphalt Premix Ptc. Ltd. Vs. Sum Cheong Piling Pte Ltd. was considered.
143. The Court of Appeal in Singapore held that where a bank guarantee
was invoked as a ‘bargaining chip’ or as a ‘deterrent’ or in an ‘abusive
manner’ it would amount to calling a guarantee for an oblique purpose,
justifying the issuance of an injunction.
FAO (OS) Nos.397/2014 & 398/2014 Page 74 of 76
144. Refusing to go for the bite, in Femur India’s case, the Supreme Court
held:
“We are afraid that in the face of the law succinctly laid down in
U.P.Coop. Federation and reiterated in numerous judgments of
this Court referred to earlier, we are unable to accept the wide
proposition of law laid down in the foreign judgments cited by Mr.
Sorabjee. Whatever may be the law, as to the encashment of bank
guarantees in other jurisdictions, when the law in India is clear,
settled and without any deviation whatsoever, there is no occasion
to rely upon foreign case-law.”
145. The legal position which can be summarized would be that a bank
guarantee is an independent contract between the bank and the beneficiary
and disputes pertaining to bank guarantees have to be resolved de-hors the
terms of the main contract between the parties or disputes relatable to the
main contract between the parties. Where a bank guarantee is a conditional
guarantee invocation thereof would have to be in strict conformity with the
conditions on which the guarantee is issued. In such a case an injunction can
be granted against payment under the bank guarantee if it is found that the
condition upon which the guarantee was issued has not been complied with
or met. But where the guarantee is unconditional and/or the bank has agreed
to make payment without demur or protest, on the beneficiary invoking the
bank guarantee the bank is obliged to honour the same for the reason like
letters of credit, a bank guarantee if not honoured would cause irreparable
damage to the trust in commerce and would deprive vital oxygen to the
money supply and money flow in commerce and transaction which is
necessary for economic growth. Disputes pertaining to the main contract
cannot be considered by a court when a claim under a bank guarantee is
made and the court would be precluded from embarking on an enquiry
FAO (OS) Nos.397/2014 & 398/2014 Page 75 of 76
pertaining to the prima facie nature of the respective claim of the litigating
parties relatable to the main dispute. The dispute between the parties to the
underlying contract has to be decided at the civil forum i.e. a civil suit if
there exists no arbitration clause in the contract or before the arbitral tribunal
if there exists an arbitration clause in the contract. Pendency of arbitration
proceedings is no consideration while deciding on the issue of grant of an
interim injunction. That certain amounts have been recovered under running
bills and have to be adjusted for is of no concern in matters relating to
invocation of bank guarantee. That there are serious disputes on questions
as to who committed the breach of the contract are no circumstances
justifying granting an injunction pertaining to a bank guarantee. Plea of lack
of good faith and/or enforcing the guarantee with an oblique purpose or that
the bank guarantee is being invoked as a bargaining chip, a deterrent or in an
abusive manner are all irrelevant and hence have to be ignored. There are
only two well recognized exceptions to the rule against permitting payment
under a bank guarantee. The same are :-
A. A fraud of egregious nature;
B. Encashment of the bank guarantee would result in irretrievable harm
or injustice of an irreversible kind to one of the parties.
146. The irretrievable harm or injustice of an irreversible kind must relate
to a situation akin to the one found in Itek Corporation’s case (supra) or of
the kind or in Elian’s case (supra).
147. There is no separate third exception of a special equity justifying grant
of an injunction to restrain the beneficiary from receiving under an
unconditional bank guarantee and if there exists any third exception of a
special equity the same has to be of a kind akin to irretrievable injustice or
FAO (OS) Nos.397/2014 & 398/2014 Page 76 of 76
putting a party in an irretrievable situation.
148. Contractual disputes cannot be projected by attempting to urge that the
beneficiary under the bank guarantee is in default. Issues of fraud require
pleadings to bring out a case of a fraud of an egregious nature and we do not
find any brought out in the pleadings. The irretrievable injury or
irretrievable injustice or special equity would mean a situation where the
party at whose behest the bank guarantee is issued is rendered remediless.
The pleadings do not bring out so.
149. The two appeals are accordingly dismissed with costs (one set only)
assessed at `5,00,000/- (Rupees Five Lakhs only) against the appellant and
in favour of the respondent.
150. Amount lying in this Court pursuant to the order passed by the
Division Bench in FAO (OS) No.250/2014 together with interest accrued
thereon shall be paid to the respondent forthwith in terms of the order passed
by the learned Single Judge in OMP No.557/2014.
(PRADEEP NANDRAJOG)
JUDGE
(MUKTA GUPTA)
JUDGE
SEPTEMBER 15, 2014
mamta/skb