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IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH
Rakesh Kumar Jain, J.
ISGEC Heavy Engineering Limited – Petitioner
Versus
Cavite Biofuel Producers Inc. and another – Respondents
ARB-ICA No.1 of 2018
Decided On : 17-04-2018
ARBITRATION - BANK GUARANTEE - INJUNCTION - IRREVOCABLE AND UNCONDITIONAL BANK GUARANTEE - INJUNCTION AGAINST ENCASHMENT - EXCEPTIONS - FRAUD, IRRETRIEVABLE INJUSTICE, SPECIAL EQUITIES, STRICT COMPLIANCE WITH TERMS OF GUARANTEE - LATENT DEFECTS - DELAY LIQUIDATED DAMAGES - ASSESSMENT OF SUM DUE - COURT'S JURISDICTION - TERRITORIAL JURISDICTION.
Fact of the Case:
Petitioner, an engineering company, entered into EPC, Offshore Supply, and Onshore Supply Contracts with Respondent 1, a Philippines-based company, for the development of a sugar mill and other facilities. Petitioner furnished advance payment guarantees and performance bank guarantees through Respondent 2. Disputes arose regarding alleged site latent conditions and cost implications, with the petitioner claiming an extension of time and additional costs. Respondent 1 terminated the contract due to the petitioner's failure to achieve commercial operations on time. The petitioner filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996, seeking an interim stay against the encashment of bank guarantees.
Finding of the Court:
1. The court held that it had jurisdiction to hear the petition under Section 9 of the Arbitration and Conciliation Act, 1996. 2. The court found that the bank guarantees were irrevocable and unconditional and could only be invoked in exceptional circumstances, such as fraud, irretrievable injustice, special equities, or strict non-compliance with the terms of the guarantee. 3. The court found that the petitioner had not established any fraud, irretrievable injustice, or special equities that would justify granting an injunction against the encashment of the bank guarantees. 4. The court held that the petitioner's claim regarding latent defects, extension of time, and additional costs was a matter to be determined by the arbitrator and did not warrant an injunction. 5. The court held that the assessment of the sum due in relation to delay liquidated damages was not a condition precedent to the invocation of the bank guarantees.
Issues: 1. Whether the court had jurisdiction to hear the petition under Section 9 of the Arbitration and Conciliation Act, 1996. 2. Whether the bank guarantees were irrevocable and unconditional and could only be invoked in exceptional circumstances. 3. Whether the petitioner had established any fraud, irretrievable injustice, or special equities that would justify granting an injunction against the encashment of the bank guarantees. 4. Whether the petitioner's claim regarding latent defects, extension of time, and additional costs was a matter to be determined by the arbitrator and did not warrant an injunction. 5. Whether the assessment of the sum due in relation to delay liquidated damages was a condition precedent to the invocation of the bank guarantees.
Ratio Decidendi: 1. The court has jurisdiction to hear a petition under Section 9 of the Arbitration and Conciliation Act, 1996, for interim stay against the encashment of bank guarantees. 2. Irrevocable and unconditional bank guarantees can only be invoked in exceptional circumstances, such as fraud, irretrievable injustice, special equities, or strict non-compliance with the terms of the guarantee. 3. The petitioner must establish fraud, irretrievable injustice, or special equities that would justify granting an injunction against the encashment of the bank guarantees. 4. Claims regarding latent defects, extension of time, and additional costs are matters to be determined by the arbitrator and do not warrant an injunction against the encashment of bank guarantees. 5. The assessment of the sum due in relation to delay liquidated damages is not a condition precedent to the invocation of bank guarantees.
Final Decision: The petition for an interim stay against the encashment of bank guarantees was dismissed.
Rakesh Kumar Jain, J.
1. This petition is filed under Section 9 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “Act”) for interim stay against the encashment and realization of the bank guarantees furnished by respondent no.2 on behalf of the petitioner to respondent no.1.
2. The petitioner is a limited company, having its registered office at Yamunanagar, Haryana, and engaged in heavy engineering, equipment manufacturing and providing engineering solutions. Respondent no.1 is a Philippines based company and respondent no.2 is the bank who has issued various guarantees from time to time in compliance of the contract(s) entered into between the petitioner and respondent no.1.
3. Respondent no.1 entered into an Engineering, Procurement and Construction Contract (hereinafter referred to as the “EPC Contract”) with the petitioner for development, design, engineering, procurement, construction, installation, testing, commissioning, rectification of defects, rectification of certain fleet-wide defects, operation, maintenance, repair, refurbishment and modification of a fully integrated sugar mill, bio-ethanol distillery and cogeneration facility (hereinafter referred to as the “facility”) to be located in Sitio Lobo-Lobo, Baranguay Cauangan, Municipality of Magallanes, Cavite, Philippines. On 16.06.2015, the EPC Contract was further split into two further contracts, namely, Offshore Supply Contract and the Onshore Supply Contract. The petitioner was engaged as the Offshore Contractor under the Offshore Supply Contract to perform offshore works forming part of the facility and a Philippines based company called as “Juntee Philippines Inc.” (hereinafter referred to as the “Juntee”) was engaged as the Onshore Contractor under the Onshore Supply Contract to perform onshore works forming part of the facility. Both the Offshore Supply Contract and the Onshore Supply Contract were collectively called Coordinated Contracts and Offshore Contractor and the Onshore Contractor were called as Coordinated Contractors. On 16.06.2015 itself, a Coordination Agreement was executed between the petitioner, respondent no.1 and Juntee.
4. In terms of the aforesaid agreements/contracts, the petitioner furnished advance payment guarantees and performance bank guarantees through respondent no.2 to respondent no.1. In Appendix-I dealing with the Definitions and Interpretations, the Advance Payment Guarantees has been defined as “an advance payment guarantee issued on behalf of the Contractor to the Owner in respect of the Advance Payment in accordance with Clauses 12.1 to 12.5 in the form specified in Schedule 12 or otherwise in the Approved Form” and the Performance Bank Guarantee has been defined as “a performance bank guarantee or performance bank guarantees issued on behalf of the Contractor to the Owner under this Contract in the form specified in Schedule 12 or otherwise in the Approved Form”.
5. At this stage, it would be pertinent to mention that the word “security” is also defined as “any bank undertaking guarantees and other security procured or provided by the Contractor in favour of the Owner in respect of all or some of the Contractor’s obligations under or in connection with this Contract (and includes the Performance Bank Guarantees)”. Security is further defined in Clause 12 of the Offshore Supply Contract, in which both the Advance Payment Guarantee and Performance Bank Guarantee are defined in Clauses 12.1 to 12.9. The Advance Payment Guarantee and the Performance Bank Guarantee under the Onshore Supply Contract and the Offshore Supply Contract were given by the petitioner to the extent of 10% of the contract value for the two contracts and in terms of Clause 12.3, the advance payment was to be repaid through 10% deductions from each payment milestone until the advance payment is repaid in full. The
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