ANSAL PROPERTIES AND INDUSTRIES PRIVATE LIMITED vs ENGINEERING PROJECTS (INDIA) LIMITED

Judicial Analysis Court Copy Headnote Facts Arguments Court observation

1997 Supreme(Del) 285

High Court Of Delhi
ANSAL PROPERTIES AND INDUSTRIES PRIVATE LIMITED - Appellant
Versus
ENGINEERING PROJECTS (INDIA) LIMITED - Respondent
ORIGINAL MISCELLANEOUS PETITION 108 of 1986
Decided On : 03/18/1997

Advocates Appeared:
C.M.OBEROI, JAGDIP KISHORE

Headnote:Arbitration Act 1940 - Section 41(b) r/w Order 39 Rule 1 & 2, CPC-Injunction-Encashing of bank guarantee-Agreement for construction of IRAQ GRAIN STORAGE — Work granted — Petitioner furnished performance bank guarantee and bank guarantee for contract value and advance of contract price subject to recovery in running bills — Amount recovered before, the completion of work of, petitioner — Adjusted — Respondent gave part of project to petitioner — Bank guarantee extended — Dispute — Work abandoned by petitioner — Petitioner also raised claims — Dispute referred to arbitrator — Adjudication pending — Petitioner sought injunction against invocation of — Petitioner claimed fulfillled und performed the part of contract — Respondents denied performance of — Failed to complete work — Incomplete work — Performance guarantee — Effect of — Principle of governing of invocation of — While invoking loss of damages not mentioned — Only state contractor failed to perform-Invocation not in terms of guarantee — Not validly invoked — Petition partly allowed — Second invocation — Respondent not entitled to invoke — Restrained from invoking.

Judgement Key Points

Key Points: - The court sought an injunction against the respondent from claiming or encashing two bank guarantees issued by the New Bank of India on behalf of the petitioner (!) . - The respondent was awarded a contract for the construction of Iraq Grain Storage Projects, and the petitioner was associated with a part of this project (!) (!) . - The petitioner furnished a performance bank guarantee and a bank guarantee to secure an advance payment, both of which were extended over time (!) (!) (!) . - Disputes arose between the parties, and the matter was referred to an arbitrator; the respondent invoked both bank guarantees (!) (!) . - The petitioner claimed the work was completed and the advance was adjusted, while the respondent denied performance and claimed outstanding dues (!) (!) . - The court partly allowed the petition, upholding the invocation of the bank guarantee for the advance amount but restraining the respondent from invoking the performance bank guarantee due to invalid invocation (!) . - The court noted that the extension of a bank guarantee can be seen as an admission of liability by the petitioner (!) . - The principles governing bank guarantees emphasize their independence from the underlying contract and the need for honoring irrevocable commitments unless fraud or special equity is established (!) (!) (!) (!) . - The invocation of the performance bank guarantee was found to be invalid because the letter did not specify the amount of loss or damages suffered, as required by the guarantee's terms (!) (!) (!) . - The invocation of the advance bank guarantee was upheld as the letter stated the advance had not been recovered and the guarantee terms gave the respondent sole discretion to determine the extent of loss or damage (!) (!) .

What are the principles governing the invocation of bank guarantees?

What is the validity of a bank guarantee invocation when the invocation letter does not specify the amount of loss or damages suffered?

What is the effect of extending a bank guarantee on the liability of the guarantor?

J. B. Goel, J.

( 1 ) THIS is a petition under Section 41 (b) read with Second Schedule to the Arbitration Act, Order 39 Rules 1 and 2 and Section 151 of the Code of Civil Procedure seeking injunction against the respondent from claiming, demanding or encashing the Bank guarantees No. 27/78 of Rs. 5. 45 Lacs and No. 36/78 for Rs. 22. 59 Lacs issued by the New Bank of India, Haus Khas Branch, New Delhi on behalf of the petitioner in favour of the respondent.

( 2 ) BRIEFLY, the facts are that the respondent is engaged in the business of execution of turnkey projects of different nature in India and abroad and had been awarded the work by the State Organisation of Grain of the Ministry of Internal Trade of the Republic of Iraq for construction of Iraq Grain Storage Projects at Talafar, Sinjar and Shirkat Sites in Iraq.

( 3 ) THE respondent by means of an agreement dated 5th July, 1978 associated the petitioner and gave part of the said project in respect of the work pertaining to Shirkat site to the petitioner on the terms and conditions mentioned in the said agreement.

( 4 ) THE petitioner inter alia had agreed to furnish a performance Bank guarantee equal to 5% of the Contract value for implementation of the contract which was to be valid until completion of maintenance period and issuance of the maintenance certificate.

( 5 ) BESIDES this, the pctilioncr was also to furnish another Bank guarantee to secure the payment of advance of 5% of the contract price to be paid by the respondent to the petitioner for the execution of the work. This advance amount was to be recovered by the respondent by adjustment in instalments from Running Account Bills commencing from 4th Running Account Bill and in such manner that the entire advance is recovered fully three months prior tot he completion of the petitioner s portion of the work.

( 6 ) THE petitioner had duly furnished two bank guarantees No. MRB-27/78 dated 5-7-1978 in the sum of Rs. 25 Lacs to secure advance mobilisation money and another Performance guarantee No. MRB-36/78, dated 21. 8. 1978 in the sum of Rs. 22. 59 lacs both issued by the New Bank of India Ltd. , Hauz Khas, Branch, New Delhi. Both the bank guarantees have been extended from time to time and arc kept alive.

( 7 ) VARIOUS amounts against the advance mobilisation had been adjusted during the progress of the work and this bank guarantee had been extended to the extent of unadjusted amount, i. e. , in the sum of Rs. 5. 45 lacs, while the other bank guarantee of Rs. 22. 59 lacs has been extended in full. The disputes had arisen between the partics. According to the respondent the Petitioner did not complete the work and abandoned the same which was awarded to some other person at the risk and cost of the petitioner and also various dues remained due from the petitioner in respect of adhoc advances made etc. The petitioner also raised various claims.

( 8 ) THE disputes arising between (he partics have already been REFERRED TO to an arbitrator in pursuance of arbitration clause contained in the contract and adjudication proceedings are still pending. The respondents by means of two separate letters dated 30th May, 1986 invoked both the aforesaid bank guarantees.

( 9 ) THE petitioner has filed the present petition seeking injunction against invocation of the two guarantees. The case of the petitioner is that the stipulated time schedule for the work could not be adhered to due to events not attributable to them and the work was completed by them by 31. 12. 1982 except certain minor portion of work which could not be taken up as the same overlapped with the extension project undertaken by the respondent and after discussions held during January, 1983 the partics had mutually decided that the petitioner s work would be foreclosed as on 7. 2. 1983 with no liability of any kind on the petitioner. Accordingly the contract was considered as finalised and the work was taken over by the respondent. It is thus claimed that the petit

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