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2015 Supreme(Bom) 822
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
MOHIT S. SHAH, G.S. KULKARNI, JJ.
M/s. S. Satyanarayana & Co. - Petitioner
Versus
M/s West Quay Multiport (Private Limited) & Another - Respondents
Appeal (Lodging) No. 395 of 2015 in Arbitration Petition (Lodging) No. 647 of 2015
Decided On : 09-06-2015
For the Appellant:V.R. Dhond Sr. Advocate a/w Rashmi Khandekar, Arindam Pal, Adwitiyaa Das i/b M/s Augustus Law Chambers, Advocates.
For the Respondents:S.U. Kamdar Sr.Advocate a/w Chirag Kamdar, Suraj Iyer i/b M/s Ganesh & Co., Advocates.
Bank guarantees are independent contracts and must be honored according to their terms. Invocation of the guarantees is permissible upon discovering defects, and the completion certificate does not absolve the contractor of liability for defects noticed during the defect liability period.
Headnote:
Bank Guarantee - Arbitration and Conciliation - 37 of the Arbitration and Conciliation Act, 1996 - 9
Fact of the Case:
The appellant sought an injunction against enforcement of two bank guarantees after completing a construction project. The respondent invoked the bank guarantees due to defects noticed in the completed work.
Finding of the Court:
The court found that the bank guarantees were irrevocable and unconditional, and the respondent had the right to invoke them upon discovering defects, as per the terms of the guarantees. The court rejected the appellant's claim for an injunction.
Issues: The issues revolved around the validity of invoking the bank guarantees, the presence of defects in the completed work, and the satisfaction of the completion certificate.
Ratio Decidendi: The bank guarantees were to be honored in accordance with their terms, and the invocation by the respondent was found to be in line with the terms of the guarantees. The completion certificate did not absolve the appellant of liability for defects noticed during the defect liability period.
Final Decision: The appeal was dismissed, and no costs were awarded.
G.S. Kulkarni, J.
1. This Appeal under section 37 of the Arbitration and Conciliation Act, 1996 (for short the Act) is directed against an order dated 21 April 2015 passed by the learned Single Judge whereby the appellant's application filed under section 9 of the Act seeking an injunction against enforcement of two bank guarantees stand dismissed.
2. Facts: Respondent no.1 had invited bids for the works namely 'Supply of materials for Construction of Compound Wall of Stack Yard for WQ-6 berth at West of M/s Essar Pellet Plant, at Vishakhapatnam Port Trust as also separate bids were invited for “labour charges” for the said work. The appellant was a successful bidder and accordingly respondent no.1 issued two letters of acceptance (LOA) both dated 27 November 2012 in favour of the appellant. One of the conditions of the letter of acceptance (LOA) was that the appellant would furnish a performance guarantee of a nationalized bank for an amount of 10 % of the contract value. An agreement-cum-work order dated 5 December 2012 came to be executed between the parties. Schedule C of the Agreement was the agreed proforma of the performance guarantee to be executed by the appellant in favour of the respondent no.1. The appellant accordingly furnished two performance guarantees for an amount of Rs.34,00,000/- and another performance guarantee for Rs.18,50,000/- both dated 27 February 2013. These are the bank guarantees which are in question in these proceedings. These performance guarantees were required to be kept valid during the defect liability period which was eighteen months from the date of the completion of the work under the contract and for a period of six months thereafter. Some clauses under the 'General Conditions of Contract' relating to the performance guarantee need to be noted.
Clause 49 is the provision relating to the performance guarantee and relevant clauses therein are clauses 49.1 and 49.3 which reads thus:
49.1: “The client shall be entitled to enforce the Performance Guarantees if the Contractor fails to pay to the client any amounts due and payable by it under this Contract. The Performance Guarantee may also be enforced by the client if the contractor fails to perform any of its obligations in accordance with this contract, including to provide the contractor's documents or to perform the works or any part thereof in accordance with this contract, for the failure of the Contractor's Documents or the Works to meet the Specifications, the client's requirements or other requirements under this Contract or the concession Agreement, upon any Defects being discovered in the Works or upon the occurrence of the events specified in this Contract that enable the client may enforce the Performance Guarantees”
(Emphasis supplied)
49.2..............................
49.3 “ The client shall upon giving notice to the Contractor, be entitled to enforce the Performance Guarantee at the first instance without any requirement to place a demand on the Contractor for the amount as a condition precedent to the drawing of any amount covered by the Performance Guarantees. Further the client shall be entitled to enforce the Performance Guarantees or any part thereof notwithstanding any dispute pending to be determined between the Parties in respect of the default claimed by the client to have been committed by the Contractor.”
3. It is not disputed that the work under contract was completed by the appellant on 22 July 2014 and the defect liability period of 18 months commenced from the said date. Clause 40 of the general conditions of contract provided for the defect liability period which reads thus:
3. “Defects Liability Period
40.1: The Contractor shall be responsible to make good and remedying at his own expenses within such period as may be stipulated by the client any Defects, which may develop or be noticed by the client or the client during the Defects Liability period.
40.2: The Contractor may be required to repair,
