Dismissed

M/s. Abb Ltd., (Asea Brown Boveri Ltd.,) v. a.P.Central Power Distribution Company Ltd.

Telangana HC16 Dec 2011CMA/340/2011

Case brief

AI extract

What is this about?

The court considered an appeal against an order dismissing a petition for injunction against the invocation of bank guarantees. Revoking the lower court's implication of conditional invocation due to suppressed facts regarding defect rectification and the voluntary nature of the second guarantee, the court dismissed the appeal.

What did the court decide?

The petition seeking injunction against invocation of bank guarantees was disposed of; no reliefs granted to the appellant.

M/s. Abb Ltd., (Asea Brown Boveri Ltd.,) Vs a.P.Central Power… — Arbitration | Telangana HC (2011)

¶1

HON’BLE SRI JUSTICE A. GOPAL REDDY AND HON'BLE SRI JUSTICE K.S.APPA RAO

¶2

C.M.A. No.340 of 2011

¶3

Dated: 16-12-2011

¶4

Between:

¶5

M/s.ABB Ltd., (ASEA BROWN BOVERI LTD.) A company incorporated under Indian Companies Act, 1956, Plot Nos.5 & 6, II Phase, P.B.No.5806, Peenya Industrial Estate, Peenya, Bengaluru, rep. by Kishore Shetty, Occ:Manager Legal Compliance.

¶6

…Appellant

¶7

AND

¶8

Andhra Pradesh Central Power Distribution Company Ltd., (APCPDCL), rep. by its Superintending Engineer SCADA Project, GTS Colony, Erragadda, Hyderabad and another.

¶9

Respondents.

¶10

This Court made the following:

¶11

HON’BLE SRI JUSTICE A. GOPAL REDDY AND HON'BLE SRI JUSTICE K.S.APPA RAO

¶12

C.M.A. No.340 of 2011

¶13

JUDGMENT: (Per Hon’ble Sri Justice A.Gopal Reddy)

¶14

This appeal under Section 37 of the Arbitration and Conciliation Act, 1996 is preferred against the decretal order passed by II Additional Chief Judge, City Civil Court, Hyderabad in O.P.No.1310 of 2009 dated 10.3.2011, whereby the O.P. filed by the appellant seeking injunction restraining respondent No.1 from invoking the bank guarantees has been dismissed.

¶15

The appellant-Company primarily manufactures electricity devices that are used in Electricity generation, distribution and transmission. It became successful tenderer in the tenders floated by Andhra Pradesh State Electricity Board (‘APSEB’) for the project named “Andhra Pradesh Energy Efficiency Project-Hyderabad Integrated Supervisory Control and Data Acquisition Project”, for short (‘SCADA’). The tender had two components i.e. (i) Integrated SCADA system and (ii) Communication System. On awarding the contract work to the appellant-Company, an agreement was entered into with respondent No.1 on 24.4.1998 vide CE(C & SSS/E4/390/98 and 391/98. As per the agreement part-II special conditions, the contractor shall obtain a performance security of an amount of 10% of contract price. The performance security defined at clause 1.1.22 Part-I General conditions of the tender is as follows:

¶16

“Performance security means the security to be provided by the contractor in accordance with sub-clause 10.1 for the performance of the contract.”

¶17

In terms of the agreed conditions, the appellant-Company furnished bank guarantee for an amount of Rs.3,45,00,618/- on 28.9.2004 vide B.G.No.0002BG00084904 (B.G.No.1). Further on completion of works by the contractor-Appellant-Company, the employer-respondent No.1 shall “take over the works”. The appellant-Company furnished second bank guarantee bearing No.002BG14803 (B.G.No.2) dated 4.3.2003 for issuing taking over certificate by the Andhra Pradesh Central Power Distribution Company Limited (‘APCPDCL’) for fulfillment of terms and conditions of the agreement for an amount of Rs.1.5 crores representing 5% of the contract value, which is not relatable to any clauses of the tender. While so, the respondent No.1-employer addressed a letter dated 15.6.2009 to the second respondent-Bank lodging claim for both the bank guarantees for an amount of Rs.4,24,84,903/- (Rs.3,45,00,618/- and Rs.75,84,285/-) and requested the Bank to send the claim amounts in the form of demand draft favouring respondent No.1. On receipt of the same, the appellantCompany requested the first respondent not to invoke or encash the bank guarantees, in spite of which, the first respondent addressed another letter to the second respondent-Bank on 29.6.2009 to send the amounts covered under the bank guarantees by way of demand draft to their office. In view of the same, the appellant-Company moved an application under Section 9 of the Arbitration and Conciliation Act before the lower Court to restrain the respondents from invoking and encashing the bank guarantees as referred to above. It is the contention of the appellant-Company that the Clause 30 of the Part-I General Conditions of tender refers to defects after taking over certificate by the employer and that as per Clause 1.1.11, the “Defect

¶18

liability period” means one year or the period stated in Part-II following taking over. The Contractor as per Clause 30.2 shall make good any defect or damage to any part of the works during the defect liability period and the defect liability period shall not be extended by more than one year as per Clause 30.4 of the Tender notification. If the contractor fails to remedy defect on damage within a reasonable time, the employer may carry out the work himself or by others in a reasonable manner and the costs incurred by the employer shall be deducted from the contract price. Once the extended defect liability period is also ended by March, 2005, the bank guarantee-II is not relatable to any clause in the tender and therefore, it cannot be invoked. For invocation of bank guarantee-I, a certificate from the A.P.Transco stating that the contractor has failed to perform all or part of the contract should be accompanied/enclosed in terms of the guarantee. Unless the said conditions are specified, the bank guarantee cannot be invoked.

¶19

Contesting the application, the first respondent filed a counter inter alia contending that bank guarantee-I worth Rs.3.45 crores is related to performance security as per Clause1.10(b) of the agreement and whereas bank guarantee-II worth Rs.1.5 crores is unconditional bank guarantee which can be invoked at any time if the appellant-Company fails to complete the works upto the satisfaction of the first respondent as per the taking over certificate dated 18.3.2003. Further first respondent paid Rs.1.5 crores in advance for completion of the pending works as per taking over certificate dated 18.3.2003 and on furnishing the bank guarantee by the appellant-contractor for the advance already paid and therefore, the question of any due by the first respondent to the appellant-Company does not arise. As the integrated SCADA Project was not taken over in full shape, the

¶20

amount of Rs.90,71,125/- towards maintenance of equipment since 2003 will not arise at all. The annual maintenance will come into effect only after taking over of the project in full shape by the first respondent. Due to incompletion of the Integrated SCADA Project for six years, the first respondent was unable to serve the customers effectively and there was lot of inconvenience caused to the electricity consumers in twin cities and also to the employees of first respondent in SCADA project. The basic object of the SCADA project was not fulfilled due to inept handling and improper execution of the works by the appellant-Company. Taking over certificate was issued subject to the rectification of the defects pointed out in Annexure I & II annexed to the certificate. Once the appellant-Company failed to comply the defects pointed out, the first respondent is entitled to invoke the bank guarantees in terms thereof irrespective of any pending dispute and therefore, no injunction can be issued restraining the first respondent from invoking the bank guarantee.

¶21

The lower Court by the impugned order held that in the bank guarantee, there is an expression undertaking to pay to the Superintending Engineer, SCADA, amounts not exceeding Rs.3,45,00,618/- but the said payment is qualified by a condition i.e. ‘that the demand must be in writing which shall be accompanied by a certificate from APTransco (the employer) stating that the contractor has failed to perform all or part of the contract’. Further it shows that ‘if this guarantee should be called on the basis of a certificate under the paragraph 1, to the effect that the contract has been frustrated or terminated prior to the fulfillment and in case of frustration, such frustration shall not have been caused by the contractor and in case of termination, such termination shall not have been caused through the contractor’s default, then the above maximum amount of this guarantee

¶22

shall be limited to an amount certified by an independent firm of accountants’. Thus bank guarantee-I is a conditional bank guarantee and the first respondent failed to enclose certificate from the APTransco stating that the appellant has failed to perform all or part of the contract. Whereas, bank guarantee-II under Ex.A.2, there is no evidence on record to show that the Superintending Engineer, who sought to invoke the bank guarantee-II in Ex.A.2 is authorized by the APTransco to invoke the bank guarantee, which is no way connected with any of the Clauses of the agreement/tender notification. But the appellant-Company did not state the real facts before the Court namely, the minutes of the meeting-Ex.B.25, which clearly shows that the work is not completed in terms of the contract. In spite of it, taking advantage of the situation that the funds provided by the donor for the project, is going to lapse by the end of March, 2003, the appellantCompany persuaded the first respondent to issue taking over certificate assuring that the pending work would be done and the defects pointed out by the first respondent’s engineers would be rectified, which clearly indicated in Annexure I & II attached to the taking over certificate. The taking over certificate was not unconditional but it was only conditional one. The appellant-Company having furnished the bank guarantee-II voluntarily with an object of taking away the money without completing the work, came with a false plea to the effect that it furnished the bank guarantee under duress and under threat of invocation of earlier bank guarantee. Having suppressed the fact that taking over certificate was issued subject to the condition of complying the defects as mentioned in Annexure I and II enclosed to said certificate and that it did not complete the said defects till date and holding so, the lower Court held that the appellantCompany is not entitled to equitable relief of injunction and dismissed

¶23

the application.

¶24

Sri M.S.Ramachander Rao, learned counsel appearing for the appellant-Company would contend that though the lower Court gave a finding that the bank guarantee-I was wrongly invoked contrary to the terms, yet it failed to exercise the jurisdiction. There is no suppression of facts as pointed out by the lower Court as per Ex.A.10 and subsequent letter. The appellant-Company is not responsible for the delay and it is the employer (first respondent) who is responsible for the delay. The minutes of the meetings dated 7.3.2003 marked as Ex.B.25 discloses that the one year warranty period would commence from the date of issue of taking over certificate after rectification of all defects to the satisfaction of APCPDCL. Therefore, after taking over certificate is issued, the defect period is only one year and thereafter the first respondent is not entitled to invoke the bank guarantee. Further as per the bank guarantee-I-Ex.A.5, the demand in writing shall be accompanied by a certificate from APTransco (the employer) stating that the contractor has failed to perform all or part of the contract. In the absence of any such certificate issued by APTransco, the bank guarantee cannot be invoked as it is a conditional bank guarantee, which has also been accepted by the lower Court. Therefore, the lower Court is not justified in dismissing the application. The learned counsel relied on Hindustan Construction Co. Ltd. v. State of Bihar and Others^[1] and M/s.J.G.Engineers (P) Ltd. v. Union of India^[2] .

¶25

Per contra, Sri O.Manohar Reddy, learned counsel appearing for the first respondent contended that the project is funded by British Overseas Development Administration in pursuance of the Electricity

¶26

Reforms Act. APSEB has been divided into two categories i.e. (i) A.P.Transco, which undertakes the transmission and (ii)A.P.Genco, which undertakes the generation. The APTransco is again divided into four parts i.e. Central Power Distribution Company Limited (APCPDCL), Northern Power Distribution Company Limited, Southern Power Distribution Company Limited etc. The issuance of taking over certificate itself is conditional. The performance guarantee was given for Rs.3.45 crores as per Ex.B.27 letter dated 7.5.2004. Therefore, APCPDCL, which is successor employer can always invoke the bank guarantee. Pursuant to the minutes of the meetings-Ex.B.25, bank guarantee-II has been issued on issuance of taking over certificate. When the bank guarantee is unconditional, the invocation of the bank guarantee by the first respondent is justified. Though the appellantCompany agreed to furnish bank guarantee for issuing taking over certificate agreeing to rectify the defects as per the minutes of the meting, it failed to rectify the said defects. Therefore, the warranty period will commence from the date of issuance of taking over certificate after rectification of all the defects to the satisfaction of APCPDCL. Therefore, issuance of taking over certificate itself is conditional subject to rectification of defects. In the absence of any such rectification of defects, it is not open for the appellant-Company to contend that the defect period has been expired.

¶27

Before we consider the rival contentions, the relevant clauses in the contract are essential to be noted. Clause 29.1 deals with Taking Over, which reads thus:

¶28

“29.1 Taking Over

¶29

The works shall be taken over by the Employer when they have been completed in accordance with the Contract, except in minor respects that do not affect the use of the Works for their intended purpose, have passed the Tests on Completion and a Taking-Over Certificate has been issued or deemed to have been issued in accordance with Sub-Clause 29.2.”

¶30

Clause 29.2 deals with issuance of Taking-Over Certificate, which

¶31

reads thus:

¶32

“29.2 Taking-Over Certificate

¶33

The Contractor may apply by notice to the Engineer for a Taking-Over Certificate not earlier than 14 days before the Works will in the Contractor’s opinion be completed and ready for taking over under Sub-Clause 29.1

¶34

The Engineer shall within 28 days after the receipt of the Contractor’s application either:

¶35

(a) issue the Taking-Over Certificate to the Contractor with a copy to the Employer stating the date on which the Works were complete and ready for taking over, or

¶36

(b) (b) reject the application giving his reasons and specifying the work required to be done by the Contractor to enable the Taking-Over Certificate to be issued.

¶37

If the Engineer fails either to issue the Taking-Over Certificate or to reject the Contractor’s application within the period of 28 days he shall be deemed to have issued the Taking Over Certificate on the last day of that period.

¶38

If the works are divided by the contract into sections the contractor shall be entitled to apply for separate Taking-Over Certificates for each such Section and it is at the discretion of the Engineer either to accept such separate taking over or not.”

¶39

Clause 30 deals with defect after Taking-Over. Clause 30.1 deals with

¶40

defects liability period, which reads thus:

¶41

“30.1 Defects Liability Period

¶42

Where any part of the Works is taken over separately from the Works the Defects Liability Period for that part shall commence on the date it was taken over.”

¶43

Clause 30.5 reads thus:

¶44

“30.5 Failure to Remedy Defects

¶45

If the contractor fails to remedy a defect or damage within a reasonable time, the Employer may fix a final time for remedying the defect or damage. If the Contractor fails to do so, the Employer may:

¶46

(a) carry out the works himself or by others at the Contractors risk and cost, provided that he does so in a reasonable manner. The costs properly incurred by the Employer in remedying the defect or damage shall be deducted from the Contract Price, but the Contract shall have no responsibility for such work, or

¶47

(b) require the Contractor to grant the Employer a reasonable reduction in the Contract price to be agreed or fixed by arbitration under Clause 50, or

¶48

(c) xxxxxx (not necessary)”

¶49

Now, coming to the facts of the case, first bank guarantee under Ex.A.5 was given on 28.9.2004 and whereas, second bank guarantee under Ex.A.2 was given on 4.3.2003, which is valid upto 30.3.2006, wherein the bank gave an irrevocable bank guarantee undertaking to pay Rs.3,45,00,618/- subject to conditions mentioned in para 2 on receipt of demand in writing accompanied by a certificate from APTransco (Employer) stating that the contractor has failed to perform all or part of the contract. Paragraph 2 thereof specifies that if this guarantee should be called on the basis of a certificate under the paragraph 1 stating that the contract has been frustrated or terminated prior to the fulfillment and in case of frustration that such frustration shall not have been caused by the contractor and in case of termination that such termination shall not have been caused through the contractor’s default then the maximum amount of the guarantee shall be limited to an amount certified by an independent firm of accounts as not having expended or irrevocably committed to be expended on the contract prior to such frustration or termination, taking account of the value of work in progress. It was specifically mentioned that the guarantee shall remain valid upto 30.3.2006.

¶50

Whereas admittedly, second bank guarantee was not given under the Clauses of the agreement. Taking Over certificate-Ex.A.3 dated 18.3.2003 shows that the Taking Over Certificate has been given subject to rectification of the defects mentioned in Annexure-I & II and also on furnishing of bank guarantee for Rs.1.5 crores to cover risks in releasing the final payment pending rectification of the defects pointed out in Annexure I & II to the satisfaction of APCPDCL and also to comply with all other pre-conditions as per the contracts for release of the final payment duly reserving the right to encash the bank guarantee by APCPDCL if the contractor (appellant) fails to rectify the

¶51

defects to its satisfaction by 30.4.2003 or to the extended date, if any, by it. The one year warranty period will commence from the date of rectification of all defects noticed to the satisfaction of APCPDCL. Ex.R.25-minutes of meeting held on 7.3.2003 shows that during the meeting of Department For International Development (DFID) officials with Chairman and Managing Director and other officials of CPDCL on 14.2.2003, a Committee was constituted to examine the performance and acceptance of SCADA system supplied by the appellant. Whereas the appellant agreed to rectify all the defects pointed out by APCPDCL before 30.4.2003 and should give bank guarantee for Rs.1.5 crores against risk for the release of the balance payment from DFID before the project closing date. The one year warranty period will commence from the date of issuance of Taking Over Certificate after rectification of all the defects to the satisfaction of APCPDCL. The APTransco through its letter dated 7.5.2004 informed the appellant that the performance bank guarantee should be issued in the name of APCPDCL for the Hyderabad SCADA Project as the project is being monitored by APCPDCL. The performance bank guarantee would be reckoned from the date of rectification of all defects notified by APCPDCL. In the said letter it was expressed that there is inaction in attending to the problems on DMS Module Software and other problems pointed out by Superintendent Engineer of SCADA, which is highly regretted since it is causing lot of inconvenience and that APCPDCL will be constrained to encash the special bank guarantee of Rs.1.5 crores issued by the appellant besides requesting M/s.Crown Agents, Financial Services, U.K. to encash the performance bank guarantee of 10% of the contract value for non-rectification of the defects. After the said letter, performance bank guarantee for Rs.3,45,00,618/- was given by the appellant. Therefore, the contention

¶52

advanced by the learned counsel for the appellant that APTransco has to issue certificate before invocation of bank guarantee does not merit consideration. Therefore, the said bank guarantee issued on 20.9.2004 should be only in the name of the employer i.e. APCPDCL. The first respondent in its counter at para 11 asserted that bank guarantee-I was accompanied by a certificate issued by it stating that the contractor (appellant) has failed to perform all or part of the contract and the SCADA Project contract has been frustrated by the contractor and hence the first respondent is invoking the bank guarantee-I as the appellant failed to complete the project in time though it was extended from time to time. Though it is denied that the bank guarantee-I was accompanied with a certificate from the first respondent-Company stating that the contractor failed to perform all or part of the contract, still the appellant failed to establish its case by summoning the relevant documents for claiming bank guarantee-I and all other documents, which were in possession of the second respondent-Bank to establish that the bank guarantee-I was not invoked in terms of the guarantee. If at all, it is only for the bank to say that the invocation of the bank guarantee-I was not in accordance with the terms of the bank guarantee and in Ex.A.13 it is specifically referred to the letter dated 24.6.2009 about lodging of the claims for both the bank guarantees. The second respondent-Bank, which was impleaded as a party-respondent has not chosen to file any counter in support of the claim of the appellant that the invocation of the bank guarantee was contrary to the terms of the contract and it is not under obligation to honour the bank guarantee. In the absence of the same, it is rather difficult to accept the contention or uphold the finding of the trial Court that the invocation of the bank guarantee-I was not in terms of the bank guarantee and the conditions have not been fulfilled.

¶53

I n Hindustan Construction Co. Ltd. (1 supra) the Supreme Court held that if the bank guarantee is a conditional one, the beneficiary cannot have unfettered right to invoke the guarantee and court can issue injunction against invocation of the guarantee. The terms of the bank guarantee, are, therefore, extremely material. Since the bank guarantee represents an independent contract between the bank and the beneficiary, both the parties would be bound by the terms thereof. The invocation, therefore, will have to be in accordance with the terms of the bank guarantee, or else, the invocation itself would be bad.

¶54

In M/s.J.G.Engineers (P) Ltd. v. Union of India (2 supra) the Supreme Court dealt with an award passed by the arbitrator as confirmed by the District Court by dismissing the petition filed under Section 34 of the Arbitration and Conciliation Act, which was set aside by the Gowhati High Court. On question No.1 namely, whether the High Court was justified in setting aside the award in respect of claim 1,3 and 11 on the ground that they related to excepted matters, the Apex Court held in para 19 that in fact the question whether the other party committed breach cannot be decided by the party alleging breach. A contract cannot provide that one party will be the arbitrator to decide whether he committed breach or the other party committed breach. That question can only be decided by only an adjudicatory forum, that is, a court or an Arbitral Tribunal. The above decision (2 supra) is totally misplaced to the facts of the case on hand.

¶55

It is now fairly well settled that for grant of injunction under Section 9 of the Arbitration and Conciliation Act, 1982, the principles laid down under Order 39 Rules 1 and 2 C.P.C. for grant of injunction are equally applicable. As already observed, the minutes of meeting

¶56

under Ex.R.25 clearly shows that the work is not completed in terms of the contract and in spite of that, taking advantage of the situation that the funds provided by the donor for the project is going to lapse by the end of March, 2003, the appellant persuaded the first respondent to issue taking over certificate assuring that the pending work would be done and the defects pointed out by the first respondent’s engineers would be rectified. Thus the taking over certificate was issued to enable the appellant-Company to draw the amount payable under the contract even without completing the work to the satisfaction of the employer, which is contrary to Ex.A.1. Having failed to execute the contract within the stipulated time, the appellant-Company voluntarily came forward to furnish the bank guarantee for an amount of Rs.1.5 crores to cover the risk, if any, for the release of payment pending issuance of taking over certificate. But the appellant-Company now came forward with a false plea to the effect that it furnished the bank guarantee under duress and under threat of invocation of earlier bank guarantee. All the letters under Exs.R.1 to R.24 and minutes of meeting under Ex.R.25 clearly shows that the appellant-Company could not complete the work even three years after expiry of the original contract period. The appellant made to believe the first respondent (employer) that it will rectify the defects pointed out as per the memorandum of understanding dated 7.3.2003 and as demanded by the first respondent in its letter dated 7.5.2004-Ex.R.1 that performance bank guarantee would be reckoned from the date of rectification of all the defects noted by APCPDCL and inaction in attending the problems on DMS Module Software and other problems as pointed out are highly regretted since it is causing a lot of inconvenience and after the said letter, the appellant furnished the performance bank guarantee-I in favour of APCPDCL. Therefore, it is

¶57

not open for the appellant to contend that the first respondent cannot encash the bank guarantee unless it is accompanied with a certificate from the APTransco. Under these circumstances, the lower Court was right in holding that the appellant-Company suppressed the fact that taking over certificate was issued subject to the condition of complying with the defects as mentioned in Annexure-I & II enclosed to taking over certificate and did not complete the said defects till date. Thus the suppression of the fact that the appellant-Company voluntarily furnished the bank guarantee in order to take away money without completing the work as per agreed terms would disentitle it from claiming the equitable relief of injunction restraining the first respondent from invoking the impugned bank guarantee. Further the appellant-Company failed to establish prima facie case in its favour as the invocation of bank guarantee-I was not in terms of the contract namely, enclosing the certificate which was specifically denied by the first respondent about furnishing of the certificate along with the claim has not been rebutted by the second respondent-Bank or by the appellant-Company. The balance of convenience also does not lie in favour of the appellant. Further the grant of injunction is equitable relief which lies in favour of the first respondent but not in favour of the appellant-Company. No illegality or infirmity is discernable with the impugned order warranting interference by this Court.

¶58

In the result, the appeal is dismissed. No costs.

¶59

_________________ (A. GOPAL REDDY, J.) _______________ (K.S.APPA RAO, J.)

¶60

16^th DECEMBER, 2011 TSR

¶61

[1] 1999(8) SCC 436

¶62

[2] 2011 (5) SCC 758

M/s. Abb Ltd., (Asea Brown Boveri Ltd.,) v. a.P.Central Power Distribution Company Ltd.

Case brief

What is this about?

What did the court decide?

M/s. Abb Ltd., (Asea Brown Boveri Ltd.,) v. a.P.Central Power Distribution Company Ltd.

Case brief

What is this about?

What did the court decide?

What the court decided

A compact analysis

Issues for consideration

Cases cited

Statutes considered

Parties & counsel

Coram

Case details

Similar cases

Indian Overseas Bank, Vs M/s.Sri Ramachandra Tools Public Ltd.

Kompella Venkata Subba Rao Vs Madduri Venkata Hanuman Kumar

P.Seshamma Vs Spl.Dy.Col L.a.Oandanr

Triveni Bhavan Trust Vs Pradeep Kumar