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1998 Supreme(Mad) 288
MADRAS HIGH COURT
S Thangaraj
LARSEN AND TOUBRO LIMITED AND OTHERS - APPLICANTS
v.
TAMIL NADU MINERALS LIMITED AND OTHERS - RESPONDENTS.
Original Application No. 70 of 1998 and Application No. 552 of 1998
Decided on : February 25, 1998.
Important Points
Subject
Contract Law - BANK GUARANTEE
Act Referred
ARBITRATION AND CONCILIATION ACT : S.9(ii), S.9(2), S.36
Headnote
BANK GUARANTEE - INVOCATION - CONDITIONS - FRAUD OR IRRETRIEVABLE HARM - ARBITRATION ACT, 1940 - SECTION 41(B) - ARBITRATION AND CONCILIATION ACT, 1996 - SECTION 9(II).
Fact of the Case:
Larsen & Toubro Limited (Applicant) entered into a contract with Tamil Nadu Minerals Limited (Respondent) to set up a Graphite Beneficiation Plant. The contract included a performance guarantee of Rs. 1,86,67,800/- by Bank guarantee. Due to various reasons, the plant failed to achieve the desired output and grade. The Respondent invoked the Bank Guarantee, leading the Applicant to file two applications: one for ad interim injunction restraining the Respondent from enforcing the Bank Guarantee and the other for preservation of the Bank Guarantee pending arbitration.
Finding of the Court:
The court held that the Respondent had the right to invoke the Bank Guarantee as there was no evidence of fraud or irretrievable harm. The court also held that Section 9(II) of the Arbitration and Conciliation Act, 1996 allows the court to grant interim measures, including injunctions, during arbitration proceedings.
Issues: 1. Whether the Respondent had the right to invoke the Bank Guarantee? 2. Whether the court could grant an interim injunction to restrain the Respondent from enforcing the Bank Guarantee?
Ratio Decidendi: 1. The court relied on the Supreme Court's decisions in Hindustan Steel Works Construction Ltd. v. Tarapore & Co., U.P. State Sugar Corporation v. Sumac International Ltd., and Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd. to hold that the Respondent had the right to invoke the Bank Guarantee in the absence of fraud or irretrievable harm. 2. The court held that Section 9(II) of the Arbitration and Conciliation Act, 1996 allows the court to grant interim measures, including injunctions, during arbitration proceedings.
Final Decision: The court dismissed both applications filed by the Applicant.
Sh. R. Krishnamurthy, Sr. Advocate with Sh. Malini Ganesh, Advocate, for the Applicants.
Sh. A. L. Somayaji, Sr. Advocate with Sh. R. Viduthalai, Advocate, for the Respondent No. 1.
S. Thangaraj, J. - The Original Application No. 70 of 1998 is filed by the petitioner against the respondents to pass ad interim injunction restraining the 1st respondent from enforcing of encashing the Bank guarantee No. 99 of 1992 dated 28-7-1992 for a sum of Rs. 1,83,67,800/-.
2. The Application No. 552 of 1998 is filed by the petitioner to pass appropriate order of protection for the preservation of the Bank guarantee furnished by the 2nd respondent or and on behalf of the 1st respondent pending final adjudication of the disputes by the Arbitral Tribunal.
3. The applicant Larsen and Toubro Limited is a Company incorporated under the Companies Act, 1956 and having its registered office at Mumbai and various group offices all over India. The Engineering Projects and Equipments Group of the applicant has its Head Office at Calcutta. The 1st respondent, Tamil Nadu Minerals Limited is a Government of Tamil Nadu Undertaking a Government Company having its office at Chennai. The 2nd respondent is the United Commercial Bank which is a Nationalised Bank having its Head Officer at Mumbai.
4. The 1st respondent decided to set up a Graphite Beneficiation Plant in Sivaganga District to process graphite ore to produce graphite concentrate (96% Fixed Carbon) of 28 tonnes and to process 200 tonnes of graphite ore every day to produce graphite concentration. Ton set up the proposed plant, the contract was awarded to the applicant at a cost of Rs. 18,36,78,000/- as per Government Letter (Ms) No. 271 dated 16-7-1992. The guaranteed output is 28 tonnes of graphite concentrate per day with Fixed Carbon 96% from the input of (ROM) 200 tonnes of ore per day with fixed carbon content of 14.2% and the plaint would stand guaranteed for 20% intermittent overload The applicant had given a performance guarantee for Rs. 1,86,67,800/- by Bank guarantee with validity period upto 31-3-1998. The advance payment of 10% of the contract price was made on 31-7-1992 and the said date was fixed as the date of commencement of the contract. When the applicant was contemplating to conduct performance test, there was a fire accident on 5-6-1994 and it resulted in the replacement of some of the mechanical, electrical and instrumentation parts and the trial production commenced from 19-10-1994. However, it was found that the drier was not capable of drying the graphite concentrate at a rate of 1.4 tonnes per hour as envisaged in the agreement but performed only 0.60 tonnes per hour with the result the output of the graphite concentrate was hardly 15 tonnes per day against 28 tonnes envisaged in the agreement. Further the output grade was 91% Fixed Carbon against 96% Fixed Carbon envisaged in the agreement. Though various improvements in the plant have been done, the original objective could not be attained. When the performance guarantee test was conducted, it was found that the objective shown in the agreement had not been achieved. Finally, the Board of Directors took over the plant from 21-8-1997 by that time the applicant was paid towards the contract of total sum of Rs. 2118.07 lakhs. Even after consulting the experts from I.I.T. Madras, there was no improvement. The final performance guarantee test was conducted from 17-12-1997 to 20-12-1997 and that test also disclosed that shortfall in the performance both in grade and quantity, besides poor recovery and enormous loss of graphite in tailing. So 5% payment amounting to Rs. 89.41 lakhs was not released by the 1st respondent as per the contract. As the final performance guarantee test was not satisfactory, the 1st respondent decided to invoke the Bank Guarantee and accordingly they have sent a letter dated 6-2-1998 to the 2nd respondent to pay a sum of Rs. 1,25,32,268/- by invoking the Bank Guarantee.
5. At that stage the applicant Larsen & Toubro Limited have filed these two applications :
(1) for ad interim injunction restraining the 1st respondent from enforcing/encashing the Bank guarantee; and
(2) f
