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High Court Of Calcutta
Shukla Kabir Sinha, Ashim Kumar Banerjee, JJ.
Larsen And Toubro Ltd. : Appellant
Versus
Visa Power Ltd. : Respondent
A.P.O. No. 282 of 2012
Decided On : Aug 14, 2012
VISA POWER LTD. V. LARSEN AND TOUBRO LTD. - BANK GUARANTEE - ARBITRATION AND CONCILIATION ACT, 1996 - SECTION 9 - IRREVOCABLE BANK GUARANTEE - BANK'S LIABILITY TO HONOUR GUARANTEE - EXCEPTIONS - INJUNCTION AGAINST ENCASHMENT - SECURITY FOR DECREE - ORDER XXXVIII RULE 5 OF THE CODE OF CIVIL PROCEDURE - REQUIREMENTS.
Fact of the Case:
VISA POWER LTD. (VISA) entered into a contract with LARSEN AND TOUBRO LTD. (LANDT) for setting up a Thermal Power Plant at Raigarh in Chhattisgarh. LANDT issued three bank guarantees in favour of VISA through their banker, one for performance guarantee and the other two against the advance that VISA would make to LANDT. The parties entered into four formal contracts on December 7, 2011. Initially, there was no dispute. However, disputes arose due to non-payment of running bills by VISA and disagreements over the scope of work. LANDT threatened to terminate the contract, which VISA construed as a letter of termination. VISA invoked the bank guarantees, and LANDT approached the court under Section 9 of the Arbitration and Conciliation Act, 1996, seeking an order of restraint on VISA from encashing the guarantees. The learned Single Judge dismissed the application, and LANDT appealed.
Finding of the Court:
1. The court held that the bank guarantee was an independent contract between the bank and the beneficiary and, if unconditional, it would depend upon the decision of the beneficiary to have it encashed at any time as he likes. His decision is final and binding upon the bank. If his decision is wrong, that would give rise to a right to the aggrieved party to sue him for damage. However, the Court cannot pass an order of injunction restraining the bank to dishonour the said requisition, if any, or any order of injunction which would in effect stop invocation of an unconditional guarantee. 2. The court found that the learned Judge very rightly declined to interfere on the issue of invocation. In the court's view, if the invocation was wrongful, the aggrieved party would definitely have a right to claim for compensation and/or damage in the arbitration. 3. Regarding the prayer for security, the court held that the petitioner must discharge his onus to show at least, the case made out would require an interference of the Court. If the case made out in the petition, even on its face value, would not warrant any interference, calling for affidavits would not improve the situation. The court found that the facts stated in the petition did not warrant any direction for payment of security under Order XXXVIII Rule 5 of the Code of Civil Procedure.
Issues: 1. Whether an injunction can be granted against the encashment of an irrevocable bank guarantee? 2. Whether the court can order security for a decree in a case where the defendant's net assets are insufficient to satisfy the decree?
Ratio Decidendi: 1. The court held that an injunction against the encashment of an irrevocable bank guarantee can be granted only in exceptional circumstances, such as irretrievable injury, fraud, extraordinary special equities, and invocation not in terms of the Bank Guarantee itself. 2. The court held that an order for security for a decree under Order XXXVIII Rule 5 of the Code of Civil Procedure can be granted only if the petitioner discharges the onus to show that the defendant intends to put the property beyond the reach of execution of a decree.
Final Decision: The court dismissed the appeal, holding that the learned Judge very rightly declined to pass any order for security or injunction. The court granted LANDT liberty to approach the learned Judge again with the prayer for security if occasion would arise in future with appropriate materials renewing the self-same prayer for security.
ASHIM KUMAR BANERJEE, J.
1. BACKDROP VISA Power Limited (hereinafter referred to as "VISA") decided to set up a Thermal Power Plant at Raigarh in the State of Chattrishgarh. VISA issued a Letter of Award in favour of Larsen and Toubro Limited (hereinafter referred to as LandT) entrusting them to set up two units of a power project having capacity of six hundred mega watt at a cost of Rs.1610.01 crores. The Letter of Award would require three bank guarantees to be executed by LandT in favour of VISA through their banker, one would relate to performance guarantee to the extent of Rs.1610 crores and the other two against the advance that VISA would make to LandT that would be reduced in phases simultaneously, on payments being adjusted as against the running bills. LandT duly issued guarantees on September 23, 2010 and January 25, 2011 for advance guarantees of Rs.40.25 crores each and on November 20, 2010 as performance guarantee for Rs.161 crores. The work started in January 2011 however, the parties entered into four number of formal contracts on December 7, 2011. Initially, there was no dispute. The guarantees were being reduced in phases. As on the date of the controversy, the performance guarantee was reduced to Rs.134.8 crores resulting as a consequence of reduction of the total cost and the other two advance guarantees to the extent of Rs.38.98 crores and 32.74 crores. Pertinent to note, the scope of the contact was reduced to Rs.1548 crores. Since the work commenced in January 2011 there was, initially, no dispute. Bills got discounted after adjustment of the advance.
2. CONTROVERSY The point of controversy is also in dispute. LandT claimed, dispute arose as VISA could not clear pending running bills that ultimately, amounted to Rs.148.5 crores as on May 31, 2012 whereas VISA contended, there had been collapse of a portion of the furnace. VISA got shaky about the quality of work. LandT admitted such fault and agreed to undo the faulty construction. Although, the parties were not ad idem on the issue we would find another important issue of controversy. VISA wanted to reduce the scope of the work. Some reason or the other, they no more wanted to go on with the existing contract and decided to reduce the scope by asking LandT to go with Unit 1 and be relieved of the responsibility in constructing unit II. LandT initially agreed. However, the proposal did not materialize as parties could not agree as to the ratio of reduction of value of the contract. We do not wish to deliberate further on the issue as such conciliation on reduction of work and the value would be strictly outside the purview of the litigation as the parties ventured such possibility through negotiation at the desire of this Court. The parties were however, unsuccessful. We do not wish to blame one against the other.
3. MR. Mukherjee appearing for LandT however, strenuously contended that their bills got withheld as a pressure tactic to compel them to agree to the ratio of reduction as suggested by VISA.
4. PRESENT LITIGATION From the records, we find that the parties were corresponding and the issue was not so ripe to knock the door of the Court, at least from the nature of the contents of the E-Mails that would be our first hand impression. The issue triggered when LandT threatened termination of contract vide letter dated July 4, 2012. We would come back to this letter very soon. VISA construed it as a letter of termination whereas LandT would not agree with such interpretation as, according to them, it was merely a threat to terminate on an eventuality stipulated in the said letter and could not be termed as a formal letter of termination under the agreement. VISA also wrote to its banker for invocation of the bank guarantee as would appear from the Photostat copy of the letter of invocation submitted after the close of the hearing before us. At the close of the hearing, Mr. Tilak Bose, learned senior counsel appearing for VISA submitted copies o
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