CMA/679/2014 of Golden Jubilee Hotels Ltd Vs Jaypeem Granites Pvt Ltd on 31 December 2014

1. Pavers 100 X 75 mm

2. Curb Stones 200 X 500 X 175 mm

3. Curb Stones 400 X 500 X 175 mm

6. It is the case of the petitioner that it has executedthe hard-scape works in spite of adverse conditions at thesite and such civil works in most of the places were out ofthe line and the petitioner had to engage masons who hadto do plastering and hacking though it was not within thescope of its work and completed the work and only anamount of Rs.4,15,171/- is remaining towards mobilisationadvance and a huge amount of Rs.35,61,100/- is due to it,from the respondent and in spite of the same, attributingbreach of terms and conditions on the part of thepetitioner, the 1[st] respondent is trying to invoke the bankguarantee. On the said grounds, petitioner filed petitionunder Section 9(ii) & (e) of the Act to restrain the 1[st]respondent from encashing bank guaranteeNo.G84GOOPG131580001 dated 06.06.2013, for Rs.30lakhs, from the 2[nd] respondent-bank.

7. In the O.P., the 1[st] respondent has filed counter-affidavit. As stated in the counter-affidavit, it was the caseof the 1[st] respondent that the subject bank guarantee wasnot issued under the purchase order, but was issuedunder the work order dated 20.03.2012. While admittingthat earlier letter of intent dated 20.03.2012 was amendedon 14.09.2012, it is stated that in pursuance of theamended letter of intent, it has paid Rs.90 lakhs towards

mobilisation advance vide cheque No.00342 dated30.04.2012 and in pursuance of the same, the petitionerhas given bank guarantee for a sum of Rs.90 lakhs in theprescribed pro-forma and as much as there were leftoverworks which were to be attended by the petitioner, theyhave accepted the bank guarantee furnished by thepetitioner for a sum of Rs.30 lakhs in substitution to thebank guarantee which was given for a sum of Rs.90lakhs. Further, it is pleaded that there is mobilisationadvance of Rs.39 lakhs with the petitioner and as thepetitioner was not rectifying the poor quality of works doneby it, the petitioner was cautioned vide letter dated19.07.2013, that if it does not complete the work, it will beconstrained to get the work done by a third party andinvoke the bank guarantee. It is further pleaded that bankguarantee is a independent contract and in the absenceof any established fraud of egregious nature and specialequities, the petitioner is not entitled for the relief assought for.

8. Before the civil court, no oral evidence was let in. On behalf of the petitioner, Exs.P.1 to P.13 were filed andon behalf of the 1[st] respondent, no evidence, either oral ordocumentary, was let in. The civil court, by the impugnedorder, mainly on the ground that the purchase order dated14.09.2012 contains arbitration clause, and, further, byrecording a finding that there are triable issues between the petitioner and the 1[st] respondent and, further, in viewof the fraud alleged by the petitioner, has held that it isnecessary to protect the subject bank guarantee till thedisposal of dispute between the parties before theArbitrator.

9. We have heard Sri Sunil B. Ganu, learned counselrepresenting Sri M. Papa Reddy, learned counsel for theappellant herein (1[st] respondent before the civil court) and Sri M.S.Srinivasa Iyengar, learned counsel for the 1[st] respondentherein (petitioner before the civil court) and perused thematerial on record.

10. Mainly, it is contended by the learned counsel forthe appellant that the civil court has misinterpreted theevidence on record and allowed the petition filed by the1[st] respondent herein. It is submitted that bank guaranteewas given pursuant to letter of intent dated 20.03.2012and modified order, by changing the nature of work, wasissued on 14.09.2012; there is no arbitration clause in themodified work order dated 14.09.2012, as such, in theabsence of any arbitration clause, the civil court ought notto have entertained the petition at all; merely becausedispute is raised by the 1[st] respondent herein, that, byitself, is no ground to restrain the invocation of bank guarantee; unless there is an established fraud whichwould vitiate the very foundation of guarantee or specialequities in favour of the 1[st] respondent herein, 1[st] respondent herein is not entitledfor the relief as granted by the civil court. It is furthersubmitted that the 1[st] respondent herein has notestablished any fraud of egregious nature for seekinginjunction and in spite of the same, the civil court haspassed the impugned order without assigning validreasons. In support thereof, he relied on the followingdecisions of the Hon’ble Supreme Court.

§Himadri Chemicals Industries Ltd. v.Coal Tar.[[1]]Refining Co §Reliance Salt Ltd., v. Cosmos Enterprises andanother.[[2]]

11. On the other hand, it is submitted by the learnedcounsel for the 1[st] respondent herein that only an amountof Rs.4,15,171/- is lying with the 1[st] respondent herein outof the mobilisation advance; in spite of the same, as theappellant herein was playing fraud by invoking the bankguarantee, the civil court has rightly granted injunction andthere are no grounds to interfere with the same. It isfurther submitted that huge amount of Rs.35,61,100/- isdue to the 1[st] respondent herein; in spite of the same, asthe appellant herein was trying to invoke the bank guarantee, the 1[st] respondent herein has approached thecivil court; in view of the serious dispute, the same is amatter for adjudication by the Arbitrator and there are nogrounds to interfere with the same.

12. In this case, at first instance, it is to be noticed thatletter of intent for doing hard-scape work was issued on20.03.2012, the scope of which is modified by furtherorder dated 14.09.2012. In addition to the same, there isseparate order, which is purchase order dated 14.09.2012for supply of pavers and curb stones for a sum ofRS.1,93,97,310/-. A perusal of various documents makesit clear that the civil court has not looked into the variousclauses of the agreements in a proper perspective. It istrue, in the letter of intent dated 20.03.2012, there is aclause for arbitration. It is the case of the appellant hereinthat in the modified work order dated 14.09.2012 there isno such clause. However, it is to be seen that there isanother order, i.e. purchase order, which is also dated14.09.2012.

Clause-12 of the said purchase order provides forarbitration for resolution of dispute. As the bankguarantee is furnished only with regard to execution ofworks, but not with reference to purchase order dated14.09.2012, the civil court has misconstrued the clausesin the aforesaid documents on the objection raised by theappellant herein that there is no arbitration clause, for invoking the jurisdiction of the civil court by way of petitionunder Section 9 of the Act. Added to the same, itappears, only on the ground that there are triable issuesbetween the parties in respect of the work contract and onthe allegation of fraud alleged by the 1[st] respondentherein, before the civil court, the impugned order ispassed. The law relating to grant or refusal to grantinjunction in the matter of invocation of bank guarantee ora letter of credit is now fairly settled by a plethora ofdecisions of the Hon’ble Supreme Court and various HighCourts. As per the law declared by the Hon’ble SupremeCourt, unless fraud or irretrievable harm or injury isestablished, orders of injunction invoking the bankguarantee cannot be ordered in a routine and mechanicalmanner. In the judgment in Himadri ChemicalsIndustries Ltd. (1 supra), it is held that invocation of bankguarantee could not be restrained merely on the groundthat dispute exists between the parties. In the saidjudgment, it is held as under:

“The law relating to grant or refusal to grant injunction inthe matter of invocation of a Bank Guarantee or a Letterof Credit is now well settled by a plethora of decisionsnot only of this court but also of the different High Courtsi n India. In U.P. State Sugar Corporation v. SumacInternational Ltd.AIR 1997SC 1644, this courtconsidered its various earlier decisions. In this decision,the principle that has been laid down clearly on theenforcement of a Bank guarantee or a Letter of Credit isthat in respect of a Bank Guarantee or a Letter of Creditwhich is sought to be encashed by a beneficiary, thebank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by itscustomer. Accordingly this Court held that the courtsshould be slow in granting an order of injunction torestrain the realization of such a Bank Guarantee. It hasalso been held by this court in that decision that theexistence of any dispute between the parties to thecontract is not a ground to restrain the enforcement ofBank guarantees or Letters of Credit. However this courtmade two exceptions for grant of an order of injunctionto restrain the enforcement of a Bank Guarantee or aLetter of Credit. (i) Fraud committed in the notice of thebank which would vitiate the very foundation ofguarantee; (ii) injustice of the kind which would make itimpossible for the guarantor to reimburse himself.

Except under these circumstances, the courts shouldnot readily issue injunction to restrain the realization of aBank Guarantee or a Letter of Credit. So far as the firstexception is concerned, i.e. of fraud, one has to satisfythe court that the fraud in connection with the BankGuarantee or Letter of Credit would vitiate the veryfoundation of such a Bank Guarantee or Letter of Credit.So far as the second exception is concerned, this courthas held in that decision that it relates to cases whereallowing encashment of an unconditional bank guaranteewould result in irretrievable harm or injustice to one ofthe parties concerned. While dealing with the case offraud, this court in the case of U.P. Coop. FederationLtd. v. Singh Consultants and Engineers (P) Ltd. [1988]1 SCR 1124 held as follows:

The fraud must be of an egregious nature such as tovitiate the entire underlying transaction. While coming toa conclusion as to what constitutes fraud, this court inthe above case quoted with approval the observations ofSir John Donaldson, M.R. in Bolivinter Oil SA v. ChaseManhattan Bank(1984) 1 All ER 351which is as follows,'The wholly exceptional case where an injunction may begranted is where it is proved that the bank knows thatany demand for payment already made or which maythereafter be made will clearly be fraudulent. But theevidence must be clear both as to the fact of fraud and as to the bank's knowledge. It would certainly notnormally be sufficient that this rests on theuncorroborated statement of the customer, forirreparable damage can be done to a bank's Credit in therelatively brief time which must elapse between thegranting of such an injunction and an application by thebank to have it charged.

(Emphasis supplied)

13. Similarly, in the judgment in Reliance Salt Ltd. (2supra), the Hon’ble Supreme Court has held that merebreach of contract would not lead to conclusion that fraudhas been committed. It is further held that the fraud whichis alleged and which vitiates the contract must have anexus with the acts of the parties prior to entering into thecontract. Para-17 of the said judgment reads as under:

“A claim which is denied or disputed, in the event ofnecessity for determination of the lis, may not be foundto be correct. If Appellant was to allege a breach ofcontract in a properly framed suit, Respondent No. 1could also allege the breach of contract on the part ofAppellant herein. Breach of contract by reason of supplyof inferior quality of tea or salt or delay in supply or ashort supply may render a party responsible fordamages for commission of breach of contract, but,breach of contract alone does not lead to the conclusionthat a fraud had been committed thereby. It is contendedthat commission of fraud would include any act todeceive but then such act must be confined to actscommitted by a party to a contract with intention todeceive another party or his agent or to induce him toenter into a contract. Fraud, which vitiates the contract,must have a nexus with the acts of the parties prior toentering into the contract. Subsequent breach of contracton the part of a party would not vitiate the contractitself.”

14. In the case on hand, from a perusal of the petitionfiled by the 1[st] respondent herein before the civil court andalso the impugned order, it is clear that there are noallegations of fraud in support of the case of the 1[st]respondent herein for grant of injunction its favour, in thelight of the aforesaid judgments of the Hon’ble SupremeCourt. Both the said judgments support the case of theappellant herein and we are of the view that no validreasons have been recorded by the civil court for grant ofinjunction as prayed for. Moreover, arbitration clausewhich is relied on, is only from the purchase order, whichhas nothing to do with the work order which is the subjectmatter of letter of intent dated 20.03.2012, as modified bywork order dated 14.09.2012. Further, it is also brought toour notice that though the 1[st] respondent herein has invoked the bank guarantee byfiling the O.P., as early as on 16.08.2013, so far, it has notinitiated any proceedings seeking reference of the disputeto the Arbitrator.

15. For the foregoing reasons, we are of the view thatthe impugned order is fit to be set aside.

16. Accordingly, the Civil Miscellaneous Appeal isallowed and the order dated 29.03.2014, passed inArbitration O.P.No.1692 of 2013, by the learned IIIAdditional Chief Judge, City Civil Court, Hyderabad, ishereby set aside. The C.M.A., is allowed to the extent indicated above. Consequently, Arbitration O.P.No.1692of 2013 filed by the 1[st] respondent herein standsdismissed, vacating the injunction granted by the civilcourt. No order as to costs.

As a sequel, miscellaneous petitions if any pendingin this C.M.A., stand disposed of.

______________________

R. SUBHASH REDDY, J

31[st] December, 2014MRR

__________________________

A.SHANKAR NARAYANA, J

[1](2007) 8 SCC 110

[2](2006) 13 SCC 599