2013 Supreme(Mad) 1476

In the High Court of Madras
R.S. Ramanathan, J.
BEFESA AGUA, SAU CIF A 41290792, Avda Buhaire, 241018, Sevilla, Spain and another - Applicants;
Versus
IVRCL Infrastructure and Projects Ltd., M-22/3RT, Vijayanagar Colony, Hyderabad-500057 and others - Respondents.
O.A. Nos. 610 & 611 of 2011 and Application Nos. 3370, 3371 of 2011 & 3624 & 3625 of 2011
Decided On : April 2, 2013

Bank Guarantees are separate and distinct agreements and the terms of the Bank Guarantee alone should be considered.

Headnote:

ARBITRATION - Section 9 of the Arbitration and Conciliation Act, 1996 - Maintainability of Applications - Bank Guarantees - Unconditional and Irrevocable - Injunction - Fraud - Irretrievable Injury.

Fact of the Case:

The Applicants, a Spanish Company operating in the infrastructure sector, entered into a joint venture with the First Respondent to undertake a project to design, construct, operate and maintain a Desalination Plant. The Second Respondent was the Joint Venture Company of the Applicants and the First Respondent. The Third Respondent issued Bank Guarantees in favour of the Second Respondent at the request of the First Applicant. The Applicants completed the construction of the Plant and the Performance Achievement Test was conducted by the Independent Consultant. The Applicants and the First and Second Respondents entered in an MoU to amend the scope of work under the Project Contracts enumerated above. The Applicants caused the Third Respondent to issue 2 separate Bank Guarantees, i.e., the Defects Liability Bonds dated 14th August 2010, one under the ECC Contract and another under Supply Contract in favour of the Second Respondent to secure against non-fulfillment of the obligations under the Project Contracts as amended by the MoU. According to the Applicants, the Defects Liability Bonds are not unconditional and/or irrevocable Bank Guarantees. Per contra, the payment under the Defects Liability Bonds is conditional upon (i) alleged defects being identified are within the scope of work as amended by the MoU; (ii) such defects must arise during the Defects Liability Period, i.e., on or before 29th June 2011; (iii) the alleged defects must be detailed in writing; (iv) even after such detailed written demand, the payment is liable to be made only if the Applicants fail to fulfill their obligations under the relevant Project Contract within a reasonable period; and (v) the said written demand must be valid and duly executed. Each of these conditions must be fulfilled if any payment is to be made under the said Defects Liability Bonds. The Second Respondent issued Demand Notice to the Third Respondent in respect of the BII Bond alleging defects including the marine works and other matters outside the scope of work. The Second Respondent has further claimed “consequential losses and such other defects as may be noticed during the balance defect liability period.” The Second Respondent has also issued a Demand Notice to the Third Respondent in respect of the UTE Bond alleging various defects that were not at any point in time notified to the Applicants as required under the Project Contracts. The Second Respondent has further claimed “consequential losses and such other defects as may be noticed during the balance Defect Liability Period.” Therefore, the Applicants filed the above Original Applications O.A. Nos. 610 & 611 of 2011 under Section 9 of the Arbitration and Conciliation Act 1996 and Applications for interim relief restraining the Third Respondent from remitting any money pursuant to the Demand Notice, dated 21st July 2011 with reference to Bank Guarantee No. 5550225508, dated 14.8.2010 issued by the Third Respondent on behalf of the Second Respondent for an amount of €10,79,302.41 and for interim injunction restraining the Third Respondent from remitting any monies pursuant to the Demand Notice, dated 21st July 2011 with reference to Bank Guarantee No. 5550225510, dated 14th August 2010 issued by the Third Respondent on behalf of BEFESA Infrastructure India Pvt. Ltd., for an amount of €10,79302.41 and the Applicants also prayed for stay of the Demand Notices, dated 21.07.2011.

Finding of the Court:

1. The Applications filed under Section 9 of the Arbitration and Conciliation Act, 1996 are not maintainable and the Bank Guarantees are distinct and separate Agreements entered into between the Applicants and the Respondents 1 & 2 and the Bank Guarantees issued by the Third Respondent do not contain any Arbitration Clause and therefore, an Application under Section 9 of the Arbitration and Conciliation Act, 1996, for interim reliefs pending Arbitration proceedings cannot be filed for the purpose of determining a dispute arising under such Bank Guarantee. 2. The Bank Guarantees provided by the Third Respondent are unconditional and irrevocable in nature and therefore, the Second Respondent cannot be restrained from invoking the Bank Guarantees. 3. Once a Bank Guarantee is given, the Bank must honour the same and make payment according to the tenor of the guarantee without any proof or condition and exceptions to the above rule and when there was an egregious fraud of which the Bank has notice or irretrievable damage would cause to the parties, if the Bank Guarantees were allowed to be invoked.

Issues: 1. Whether the Applications are maintainable under Section 9 of the Arbitration and Conciliation Act, 1996, when the Bank Guarantees do not have any Arbitration Clause. 2. Whether the Bank Guarantees are unconditional and irrevocable as contended by the Respondents or conditional as contended by the Applicants. 3. Whether the Applicants have made out a case for injunction if the Bank Guarantees were held to be unconditional; and 4. Whether they have proved fraud on the part of the Second Respondent and whether they have proved that irretrievable injury would be caused in the event of invocation of the Bank Guarantee by the Second Respondent.

Ratio Decidendi: 1. A mere reference to ECC Contract or Supply Contract or the execution of the Bank Guarantees, pursuant to the requirement as per the ECC Contract and Supply Contract will not make the Arbitration Clause to be read into Bank Guarantees. 2. The Bank Guarantees, which are subject matter of the interpretation in these cases fall under the Category 3 of Paragraph 13 as stated above. Therefore, unless a special reference to Arbitration Clause is mentioned in the Bank Guarantee, the same cannot be read into the Bank Guarantee and when there is no Arbitration Clause in the Bank Guarantee, the Application under Section 9 of the Arbitration and Conciliation Act, 1996 is not maintainable. 3. Further, it has been held by the Hon'ble Supreme Court, in all the cases, referred to above, that Bank Guarantees are separate and distinct agreement and the terms of the Bank Guarantee alone should be considered and therefore, in the light of the principles laid down by the Hon'ble Supreme Court in the judgment reported in M.R. Engineers and Contractors Pvt. Ltd. v. Som Datt Builders Ltd., 2009 (7) SCC 696, in my opinion, the Arbitration Clause cannot be read into Bank Guarantee, and when the Arbitration Clause cannot be read into Bank Guarantee and when the Bank Guarantees do not contain an Arbitration Clause, the Applications filed under Section 9 of the Arbitration and Conciliation Act, are not maintainable.

Final Decision: The Applications are not maintainable under Section 9 of the Arbitration and Conciliation Act, 1996 and accordingly, the same are dismissed. Consequently, connected applications are closed. No costs.