Bank Guarantee; Fernas Construction Company Inc Vs. Gujarat State Petronet Ltd. [Gujarat High Court, 21-10-2016]

Bank Guarantee – Any existence of dispute between the parties to the contract cannot be a ground to restrain from evoking the bank guarantee.

Bank Guarantee

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

CORAM: HONOURABLE MR.JUSTICE R.M.CHHAYA

Date : 21/10/2016

PETN. UNDER ARBITRATION ACT NO. 96 of 2016

FERNAS CONSTRUCTION COMPANY INC….Petitioner(s) Versus GUJARAT STATE PETRONET LTD & 1….Respondent(s) Appearance: MR RASHESH SANJANWALA, SR. ADVOCATE with MR. ARCHIT P JANI, ADVOCATE for the Petitioner(s) No. 1 MR SAURABH N. SOPARKAR, SR. ADVOCATE with MR ASPI M KAPADIA, CAVEATOR for the Respondent(s) No. 1

ORAL ORDER

1. By way of this petition under

Section 9 of the Arbitration and Conciliation Act, 1996

read with provisions of the

Commercial Courts, Commercial Division and Commercial Appellate Division of High Court Act, 2015

the petitioner has prayed for the following reliefs ­

“(a) restrain Respondent No.1 from implementing the termination letter dated 09.08.2016 (Annexure P­9) or any request made pursuant thereunder, including without limitation the demands made in Respondent No. 1’s e­mail dated 20.09.2016 (Annexure P­ 18);

(b) restrain Respondent No.1 from engaging a third party to implement the project;

c) restrain Respondent No.1 from invoking and/or encashing the Bank Guarantees i.e. Advance Bank Guarantee Vide No. 1609FBG130018 dated 29.01.2013 valid upto 31.12.2016 for Rs 7.50 Crores and Performance Bank Guarantee vide No. 1609FBG130009 dated 11.01.2013 valid upto 31.12.2018 for Rs. 27,29,69,140/­; and

(d) restrain Respondent No.1 from taking any other adverse action against the petitioner, including adjustment of securities, etc.

(e) pass ex­parte orders in terms of prayer (a) to (d) above and confirm the same after notice of motion;

(f) award costs; and

(g) pass any other or further relief in favour of petitioner which this Hon’ble Court deems fit and proper in the facts and circumstances of the case.”

2. The following relevant facts which emerge from the record of the petition are as under:

2.1 That the petitioner is a company incorporated under the laws of Turkey having its principal place of business at Ankara­Turkey. Respondent No.1, a public sector undertaking of the State of Gujarat awarded a contract to the petitioner vide Letter of Intent No.GSPL/TS/207/CS/LOI/402 dated 20.09.2012 for Gas Compressor Station in Gujarat. The further relevant facts as averred in the petition indicates that the LOI dated 20.09.2012 provides 17 months as completion time which includes 15 months for engineering, procurement and construction and additional 2 months for commissioning including operating acceptance from the date of the LOI. The record indicates that based upon LOI, the petitioner signed the contract on 26.02.2013 and the LOI was made effective from 25.11.2012. The record indicates that first extension of time was given by the respondent no.1 on 01.04.2014 and lastly it was extended till 31.08.2016. The record indicates that as per the contract the petitioner has given two bank guarantees to respondent no.1 by Axis Bank, respondent no.2 herein. As provided under clause 13.3.1 of the General Conditions of Contract (hereinafter referred to as “the Contract”) the petitioner gave an advance Bank Guarantee vide no. 1609FBG130018 dated 29.01.2013 for Rs.7.50 crores which is valid upto 31.12.2016 and Performance Bank Guarantee vide no. 1609FBG130009 dated 11.01.2013 for Rs.27,29,69,140.00 being valid upto 31.12.2018.

2.2 It is a matter of record that the respondent no.1 herein terminated the contract by a letter dated 09.08.2016. It is a matter of record that the petitioner herein filed a Special Civil Application 13640/16 before this Court and inter alia prayed as under:

“A. YOUR LORDSHIPS be pleased to restrain respondent No.1 from invoking and/or encashing the Bank Guarantees i.e. Advance Bank Guarantee vide No. 1609FBG130018 dated 29.01.2013 valid upto 31.12.2016 for Rs. 7.50 Crores and Performance Bank’ Guarantee vide No. 1609FBG130009 dated 11.01.2013 valid upto 31.12.2018 for Rs.27,29,69,140/­;

B. YOUR LORDSHIPS be further pleased to restrain the respondent No.2, its representatives, officers or agents to release the amount of Bank Guarantees i.e. Advance Bank Guarantee vide No. 1609FBG130018 dated 29.01.2013 valid upto 31.12.2016 for Rs.7.50 Crores and Performance Bank Guarantee vide No.609FBG130009 dated 11.01.2013 valid upto 31.12.2018 for Rs. 27,29,69,140/­ to the respondent No.1;

C. Pending hearing, admission and final hearing of the matter, YOUR LORDSHIPS be pleased to restrain respondent No.1 from invoking and / or encashing the Bank Guarantees i.e. Advance Bank Guarantee vide No. 1609FBG130018 dated 29.01.2013 valid upto 31.12.2016 for Rs. 7.50 Crores and Performance Bank Guarantee vide No. 1609FBG130009 dated 11.01.2013 valid upto 31.12.2018 for Rs. 27.29,69,140/­.

D. Be pleased to pass any other order interest of Justice.”

2.3 This Court (Coram : Mr. Rajesh.H. Shukla, J.), by judgment and order dated 04.10.2016, was pleased to dismiss the same against which the petitioner filed Letters Patent Appeal being LPA No.995/16 and the said LPA was dismissed vide order dated 05.10.2016. Thereafter, the present application is filed by the present petitioner under section 9 of the Arbitration and Conciliation Act, 1996.

3. The petitioner has raised various contentions and allegations as regards performance of the contract and the conduct of the respondent no.1 and has prayed for as indicated above. The respondent no.1 has appeared through caveat and has filed a preliminary affidavit in reply.

4. Heard Mr. Rashesh Sanjanwala, learned Sr. Advocate with Mr. Archit P. Jani, learned advocate for the petitioner, Mr. Saurabh Soparkar, learned Sr. Advocate with Mr. Aspi Kapadia, learned advocate for the caveator.

5. Mr. Sanjanwala, learned counsel appearing for the petitioner has taken this Court through the basic facts of the Letter of Intent and the contract entered into by the petitioner with the respondent No.1 and other relevant clauses of the General Conditions of Contract including clause no.9 and has contended that the petitioner has undertaken 63% of the work and as such, the time was extended by the respondent no.1 till 31.08.2016. However the contract has been wrongly terminated on 09.08.2016.

5.1 Mr. Sanjanwala has contended that as on date, no amount is due and payable by the petitioner contractor to the respondent and though the bank guarantee is unconditional, right of encashment would arise only when any amount is due and payable and the same is adjudicated. Mr.Sanjanwala further contended that the no such event has occurred for encashment of bank guarantee and further asserted that an amount of about 48 crores is with the respondent no.1. It was also further contended that the respondent no.1 would be entitled to the same only when there is proof of the same and in such circumstances, the claim has to be adjudicated claim and only adjudicated claim would justify evocation of Bank Guarantee. It was further asserted that any unadjudicated claim would not qualify as an amount due to justify evocation of a performance guarantee.

5.2 It was further contended by Mr. Sanjanwala, learned counsel appearing for the petitioner that even if the Bank Guarantee is unconditional, right to evoke the same is qualified by the General Conditions of Contract, and therefore, there is no payment due from the contractor to the owner. It was further submitted that there is no adjudicated claim for any loss or damage and therefore, as per the terms of the contract, respondent no.1 is not entitled to utilise the performance security. It was further contended that under the contract, bank guarantee is by way of performance security capable of being utilised only for payment.

5.3 Relying upon the conditions of the contract, it was further contended that the respondent no.1 would be entitled to maximum amount of 10% of the contract value and therefore, assuming that anything is payable to the respondent, it would be subject to maximum cap of 10% of the contract value and the same amount is secured, which is already retained by the respondent no.1. It was further contended that without showing as to what amount was due and payable as per clause 9, which establishes the claim, evocation of Bank Guarantee should not be permitted.

5.4 Relying upon the judgment of the Apex Court in the case of M/s. Gangotri Enterprises Ltd. v. Union of India and Ors. in Civil Appeal No. 4814/16, it was contended by Mr. Sanjanwala that even in the case on hand, the facts are similar and the injunction as prayed for deserves to be granted.

5.5 Mr.Sanjanwala however candidly submitted that as far as the Bank Guarantee Vide No. 1609FBG130018 dated 29.01.2013, which stood for Rs.7.50 crores has already been encashed and therefore, this petition is limited to consideration of Performance Guarantee No. 1609FBG130009 dated 11.01.2013 for Rs.27,29,69,140/­. It was therefore submitted by Mr. Sanjanwala that the petition requires consideration and the petitioner is entitled to the reliefs claimed for.

6. Per contra Mr. S.N. Soparkar has raised a preliminary issue to the effect that the prayers prayed for in this petition are similar to the prayers prayed for in the earlier petition being SCA No. 13640/16 wherein the learned Single Judge of this Court has already decided the said issue and even the LPA filed against the said judgment is dismissed by the Hon’ble Division Bench of this Court.

6.1 It was further contented that therefore this Court, as a Single Judge, cannot sit in appeal. Mr. Soparkar further contended that the issues which are decided by the learned Single Judge in the earlier petition binds the parties and the said issues stand concluded between the parties and therefore, now it is not open to say to this Court that the said issue is open. It was further contended that the same argument against the Bank Guarantees came to be raised and is decided between the parties. Mr. Soparkar submitted that though other prayers are made the petitioner has only argued as regards the evocation of bank guarantee.

6.2 Mr. Soparkar further submitted that respondent no.1 is a State authority. It was further contended that encashment of Bank Guarantee is a separate and independent contract between the respondent no.1 and the Bank which is unconditional guarantee and therefore, respondent no.1 has a right to revoke the Bank Guarantee. Mr. Soparkar asserted that the facts clearly spells out that a contract was given and it is not in dispute that the work was not completed in time. It was further contended that several replies were given and huge losses had to be suffered by the respondent no.1.

6.3 Mr. Soparkar further submitted that the reading of clause 9 and the assertion that there is 10% cap is without any pleadings and as such there is no cap. Relying upon the clause 30 of the Contract, it was therefore submitted that the factual assertions made in the petition are incorrect.

6.4 Mr. Soparkar has further relied upon the following judgments ­

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