Dismissed

Prithvi Information Solutions Ltd. v. Maharashtra State Power Generation Co. and Anr.

Bombay HC15 Jul 2013APP/369/2013

Case brief

AI extract

What is this about?

The High Court of Bombay, in an appeal against the Single Judge's decision, held that bank guarantees are independent contracts. The court dismissed the appeal, ruling that no injunction could be granted against the encashment of unconditional bank guarantees issued for a turnkey project failure.

What did the court decide?

The appeal was dismissed and the Notice of Motion was disposed of. The application for extension of the ad-interim order was rejected.

Prithvi Information Solutions Ltd. Vs Maharashtra State Power… — Arbitration | Bombay HC (2013)

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VBC 1/6 app293.13-15.7

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IN THE HIGH COURT OF JUDICATURE AT BOMBAY O. O. C. J.

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APPEAL (L) NO.293 OF 2013 IN ARBITRATION PETITION (L) NO.793 OF 2013 WITH

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NOTICE OF MOTION (L) NO.1342 OF 2013

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Prithvi Information Solutions Ltd. Vs. Maharashtra State Power Generation Company & Anr.

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...Appellant.

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...Respondents.

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.... Mr.Milind Sathe, Senior Advocate i/b. Mr.N.S.Thacker for the Appellant. Ms.Neeta Jain with Mr.Kiran Gandhi i/b. Little & Co. for Respondent No.1.

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CORAM : DR.D.Y.CHANDRACHUD AND S.C.GUPTE, JJ.

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July 15, 2013 .

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P.C. :

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The appeal arises from an order of a Learned Single Judge on a Petition under Section 9 of the Arbitration and Conciliation Act, 1996 declining to grant an injunction on the invocation and encashment of several bank guarantees. The ad-interim protection which held the field is to come to an end today and hence, the Registry was directed, upon the appeal being mentioned, to place the appeal for hearing today. Since the appeal is not on Board, we have acceded to the request of Counsel appearing on behalf of the Appellant to hear the appeal on an urgent basis. Counsel appearing on behalf of the First Respondent is present before the Court and has consented to the appeal being heard at the stage of admission. The Punjab National Bank which issued the bank guarantees has not appeared in the proceedings and did not appear before the Learned Single Judge as well.

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VBC 2/6 app293.13-15.7

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A letter of award was issued by the First Respondent to the Appellant on 28 February 2012 for a turnkey project involving the setting up of a Solar PV Power Plant in the district of Dhule. Following the letter of award, an agreement was entered into between the parties on 30 June 2012. In pursuance of the umbrella agreement of 30 June 2012, four separate agreements were entered into on the same date relating to supply, service, works and operations and maintenance. A total of sixteen bank guarantees were issued by the Punjab National Bank at the behest of the Appellant. Two bank guarantees were in relation to the advances made and issued, while the remaining fourteen were performance bank guarantees. The terms of the bank guarantees stipulated that the Bank, waiving all objections and defences under the contract, irrevocably and independently guaranteed to pay on the first written demand of the Respondent, a stipulated sum against a written declaration that the contractor has failed to duly perform the contract. Before this Court, it is undisputed that the same clause for invocation appears in each one of the guarantees.

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The Respondent addressed several letters to the Appellant commencing from 7 April 2012 informing the Appellant of the inadequate progress of the work and drew attention to the fact that the work was required to be completed within a short span of time. The contract originally envisaged that the work would be completed by August 2012. The period for the completion of the work was extended in August 2012 until October 2012. On 22 October 2012, the Respondent issued a notice for correction within the meaning of Clause 17.1.2 of the umbrella agreement and on 26 December

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VBC 3/6 app293.13-15.7

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2012, called upon the Appellant to submit revised drawings as suggested by the consultant of KFW Bank, Germany which was financing the project. Eventually, the contract was terminated on 14 June 2013 on the ground that despite the notice for correction and the assurances of the Appellant, corrective action had not been taken after the lapse of four months and the Appellant had failed to adhere to the time schedule even within the extended period and thereafter. On 14 June 2013, a letter of invocation was addressed by the Respondent to the Bank stating that the Appellant had failed to fulfill the contract consequent upon which it has been terminated. The Bank was called upon to remit an amount of Rs. 41.40 crores under the bank guarantees.

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The Learned Single Judge on being moved on a Petition under Section 9 came to the conclusion that no case of fraud or irretrievable injustice or special equities was demonstrated to exist. Having regard to the law laid down by the Supreme Court in Hindustan Construction Co. Ltd. vs. State of Bihar ,¹ the Learned Single Judge held that no case for the grant of injunctive relief was made out.

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Three submissions have been urged before the Court in appeal: (i) The invocation, it is urged, is not in terms of the contract between the parties. Clause 17 of the Contract requires a computation to be made upon a verification of goods supplied and services rendered by the contractor and the balance can be demanded of what is actually due and payable and it is only

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1 (1999) 8 SCC 436

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VBC 4/6 app293.13-15.7

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thereafter that the guarantees can be invoked; (ii) The contract provides for an internal mechanism in Clause 21 which stipulates that parties must endeavour to negotiate and it is only upon a failure of negotiations that a declaration of failure can be issued by the Respondent; (iii) On 21 December 2012, the Respondent had issued a letter to the Appellant not to proceed with procurement unless its design was approved. In the circumstances, the special equities would weigh in favour of the grant of an injunction.

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The invocation in the present case is in terms of the bank guarantees. It is trite law that a bank guarantee constitutes an independent contract between the Bank and the beneficiary and is independent of the underlying transaction between the beneficiary and the party at whose behest the guarantee is issued. The bank guarantees in the present case provide that invocation would be on a written declaration to the effect that the contractor has failed to duly perform the contract. The letter of invocation dated 14 June 2013 stipulates that the contractor has failed to fulfill the contract as a result of which the contract has been terminated. The invocation was, therefore, clearly in terms of the bank guarantees that were issued by the Bank. As a matter of fact, it is impermissible to read into the bank guarantees, a condition which is not a part of the guarantees or to circumscribe the condition for invocation by stipulating that the bank guarantee could be invoked only after a stipulated procedure was followed. But even if the contract is to be looked at, it is evident that Clause 13.1.13 contained the following stipulation:

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“13.1.12 The contractor shall furnish the required bank

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VBC 5/6 app293.13-15.7

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guarantees towards Performance Security according to the provisions of the Project Agreements.

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13.1.13 The proceeds of the Bank Guarantee shall be payable to the Owner as compensation for any loss resulting from the Contractor's failure to complete his obligations during the successful completion of the Project and ten (10) years O&M Contract period. The present project being a turnkey project, in the event of failure of any one component of the entire contract or any agreement of all Project agreements, the Owner reserves the right to invoke all the Bank Guarantees on the total Contract Price simultaneously.” (emphasis supplied)

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Hence, the contract contemplates that since the project was a turnkey project, in the event of a failure of any one component of the entire contract or any agreement of all the project agreements, the Respondent reserved the right to invoke all the bank guarantees on the total contract price simultaneously.

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The invocation has to be in terms of the bank guarantees. That requirement has been duly fulfilled. The fact that the contract has provided for a mechanism for the parties to negotiate and thereupon arbitrate upon a dispute, is no ground to injunct the exercise of the contractual right to invoke an unconditional bank guarantee. The bank guarantee is in fact, issued for the very purpose of shielding the Respondent from any underlying contractual dispute. If the Appellant succeeds in the arbitration, it is always open to it to recover the dues adjudicated to be payable to it. At this stage, no case for an order of restraint is made out.

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Finally, as regards the third aspect though on 21 December 2012 the Respondent had called upon the Appellant not to proceed with

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VBC 6/6 app293.13-15.7

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procurement unless its designs were approved, this was followed by a letter dated 26 December 2012 calling upon the Appellant to submit revised drawings. Be that as it may, these are purely matters of evidence and would have to be resolved in the course of arbitration proceedings.

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No fraud, irretrievable injustice or special equities are shown to exist, in view of the reasons noted above.

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For these reasons, we hold that there is no error in the impugned judgment and order of the Learned Single Judge declining to entertain the Petition under Section 9. The appeal shall accordingly stand dismissed. There shall be no order as to costs.

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Counsel appearing on behalf of the Appellant states that the adinterim order may be extended by seven days since the Appellant has invoked negotiation under Clause 21 of the contract. The negotiations between the parties under Clause 21 can have no bearing on the invocation or encashment of the bank guarantees. Hence, the ad-interim order shall stand vacated.

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In view of the dismissal of the appeal, the Notice of Motion in the appeal does not survive and is accordingly disposed of.

Prithvi Information Solutions Ltd. v. Maharashtra State Power Generation Co. and Anr.

Case brief

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Prithvi Information Solutions Ltd. v. Maharashtra State Power Generation Co. and Anr.

Case brief

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