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Saturday, October 1, 2016

Whether the High Court is justified in exercising its discretionary jurisdiction under Article 226 of the Constitution of India for restraining the appellant from invoking an unconditional bank guarantee executed by the first respondent,= In Himadri Chemicals Industries Limited v. Coal Tar Refining Company[2], at paragraph -14: “14. From the discussions made hereinabove relating to the principles for grant or refusal to grant of injunction to restrain enforcement of a bank guarantee or a letter of credit, we find that the following principles should be noted in the matter of injunction to restrain the encashment of a bank guarantee or a letter of credit: (i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the beneficiary is entitled to realise such a bank guarantee or a letter of credit in terms thereof irrespective of any pending disputes relating to the terms of the contract. (ii) The bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. (iii) The courts should be slow in granting an order of injunction to restrain the realisation of a bank guarantee or a letter of credit. (iv) Since a bank guarantee or a letter of credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of bank guarantees or letters of credit. (v) Fraud of an egregious nature which would vitiate the very foundation of such a bank guarantee or letter of credit and the beneficiary seeks to take advantage of the situation. (vi) Allowing encashment of an unconditional bank guarantee or a letter of credit would result in irretrievable harm or injustice to one of the parties concerned.” Guarantee given by the bank to the appellant contains only the condition that in case of breach by the lead promoter, viz., the first respondent of the conditions of LoI, the appellant is free to invoke the bank guarantee and the bank should honour it … “without any demur, merely on a demand from GMB (appellant) stating that the said lead promoter failed to perform the covenants…”. It has also been undertaken by the bank that such written demand from the appellant on the bank shall be … “conclusive, absolute and unequivocal as regards the amount due and payable by the bank under this guarantee”. Between the appellant and the first respondent, in the event of failure to perform the obligations under the LoI dated 06.02.2008, the appellant was entitled to cancel the LoI and invoke the bank guarantee. On being satisfied that the first respondent has failed to perform its obligations as covenanted, the appellant cancelled the LoI and resultantly invoked the bank guarantee. Whether the cancellation is legal and proper, and whether on such cancellation, the bank guarantee could have been invoked on the extreme situation of the first respondent justifying its inability to perform its obligations under the LoI, etc., are not within the purview of an inquiry under Article 226 of the Constitution of India. Between the bank and the appellant, the moment there is a written demand for invoking the bank guarantee pursuant to breach of the covenants between the appellant and the first respondent, as satisfied by the appellant, the bank is bound to honour the payment under the guarantee. Therefore, the appeal is allowed and the impugned judgment is set aside. However, we make it clear that this judgment will not stand in the way of the first respondent working out its grievances in appropriate proceedings as permitted under law.





                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION





                       CIVIL APPEAL NO.  9821  OF 2016
                 (Arising out of S.L.P.(C) No. 7874 of 2016)




GUJARAT MARITIME BOARD               ...  APPELLANT (S)

                                   VERSUS

L&T INFRASTRUCTURE DEVELOPMENT
PROJECTS LTD. AND ANOTHER                    ... RESPONDENT (S)




                           J  U  D  G  M  E  N  T



KURIAN, J.:



    Leave granted.

Whether  the  High  Court  is  justified  in  exercising  its  discretionary
jurisdiction under Article 226 of the Constitution of India for  restraining
the appellant from invoking an unconditional bank guarantee executed by  the
first respondent, is the main issue arising for consideration in this case.
The appellant invited  bids  for  development  of  Sutrapada  Port.  In  the
process, a Letter of Intent (hereinafter referred to as  ‘LoI’)  was  issued
to the first respondent on 06.02.2008. The relevant conditions  of  LoI  are
extracted below:


1.7   The Lead Promoter shall submit a detailed  project  report  within  12
months of issue of this Letter of Intent (LOI) and  present  it  to  Gujarat
Maritime Board for their approval.

1.8   The Lead Promoter shall obtain all environment clearances and  coastal
regulation zone (CRZ) clearances and effective  financial  closure  and  all
such other clearances and permissions within 18  months  or  issue  of  this
Letter of Intent

1.9   A Performance Guarantee/Bank Guarantee of Rs  5  Crores  (Rupees  Five
crores only) shall be submitted to Gujarat Maritime Board within 4 weeks  of
issue  of  this  Letter  of  Intent  in  the  Performa   annexed   herewith.
(Annexure1). This performance/bank guarantee is against  the  submission  of
Detailed  Project  Report  within  12  months  and   obtaining   environment
clearance,  coastal  regulation  zone  clearance  and  effecting   financial
closure within 18 months as mentioned in para 1.7  and  1.8  above,  failing
which Gujarat Maritime Board/Government shall cancel this Letter  of  Intent
and bank guarantee shall be forfeited.”

On 07.05.2010, the first respondent requested for change  of  location  from
Sutrapada to Kachchigarh  and  the  bank  guarantee  was  extended.  At  the
instance of the first respondent, the Yes  Bank  Limited  furnished  a  bank
guarantee to the appellant on 26.11.2011 for an amount of Rs.5  crores.  The
relevant conditions read as follows:

                    “
We, YES BANK Ltd. do hereby guarantee and undertake to pay to GMB an  amount
not exceeding Rs 5,00,00,000/- (Rupees Five Crores only) as  against  breach
by the Lead Promoter for the development of Kachchigarh Port.  The  decision
of GMB as to any breach having been committed  and  loss/damages  caused  or
suffered shall be absolute and binding on us.

We, YES BANK Ltd, do hereby undertake to without any reference to  the  Lead
Promoter or any other person  and  irrespective  of  the  fact  whether  any
dispute is pending between GMB  and  the  Lead  Promoter  or  any  court  of
Tribunal or arbitrator relating thereto, pay  the  amount  due  and  payable
under this guarantee without any demur, merely on demand  from  GMB  stating
that the said Lead Promoter’s failure to perform the covenants of the  same.
Any such written demand made  by  GMB  on  the  Bank  shall  be  conclusive,
absolute and unequivocal as regards the amount due and payable by  the  Bank
under this guarantee. However, Bank’s liability under this  guarantee  shall
be restricted to an amount  not  exceeding  Rs  5,00,00,000/-  (Rupees  Five
Crores only).”



It appears, the first respondent could not proceed with  the  work  even  at
Kachchigarh,  and  on  such  intimation,  the  appellant  by  letter   dated
10.03.2015,  cancelled  the  LoI  issued  to  the  first   respondent.   The
communication dated 10.03.2015 cancelling the LoI to  the  extent  relevant,
reads as follows:



“This is with reference to your above mentioned letter informing  GMB  about
your inability to develop a port at Kachchigarh due to  presence  of  corals
not seeking any further extension of the LOI.

In this regard, it is hereby informed that  your  admission  on  failure  in
taking up the Project is in breach of the conditions set out in  the  Letter
of Intent dated 6.2.2008. At your request, the proposal for cancellation  of
Letter of Intent issued to M/s. L&T Ltd.   for  development  of  Kachchigarh
port was laid before the Board and was further  submitted  to  GOG  for  its
decision in the matter. After much deliberations, the Government of  Gujarat
has vide its letter dated February 23, 2015 accorded  its  approval  to  (a)
cancel the Letter of Intent to M/s L&T Ltd. for development  of  Kachchigarh
port and (b) forfeit the Bank Guarantee worth Rs.5 crores submitted  by  the
Company.

In view of the above direction of  the  Government,  the  Letter  of  Intent
dated 06.02.2008 issued to you for development of Kachchigarh port  (earlier
Sutrapada port) is hereby cancelled. Further, the issuing Bank of  the  Bank
Guarantee has been informed about GMB’s claim on the Bank Guarantee.”

xxx                                  xxx                                 xxx
xxx”

On the same day, the appellant also invoked the bank guarantee furnished  by
the  Yes  Bank  Limited  at  the  instance  of  the  first  respondent.  The
communication reads as follows:


“This is with reference to the above mentioned  Performance  Bank  Guarantee
issued by  your  bank  on  behalf  of  M/s  L&T  Infrastructure  Development
Projects Ltd.(“the Company”) towards securing the fulfilment  of  conditions
set out in the Letter of Intent (“LOI”)  dated  15.07.2010  and  having  its
validity till March 31,  2015  worth  Rs.5,00,00,000/-  (Rupees  Five  crore
only) submitted to Gujarat Maritime Board (GMB).

Whereas, in view of breach of the conditions set  out  in  the  LOI  by  the
Company, the Gujarat  Maritime  Board/Government  intends  to  exercise  its
right in accordance with Clause 1.9 and has decided to cancel the Letter  of
Intent and forfeit the above Bank Guarantee.

I, undersigned hereby put my  claim  to  forfeit  the  Bank   Guarantee  no.
005GM07113300001 dated November 26, 2011 worth Rs.  Five  crores  issued  by
your bank and to reimburse  the  amount  of  the  Bank   Guarantee  in   the
account of Gujarat Maritime Board, Gandhinagar.
It is requested to issue Demand Draft in the name of Vice Chairman  &  Chief
Executive Officer, Gujarat Maritime Board  payable  at  Gandhinagar  at  the
earliest.”


The  first  respondent  filed  a  writ  petition  before  the   High   Court
challenging the cancellation of the LoI  and  the  invocation  of  the  bank
guarantee. The following are the two main reliefs:

      “
That this Hon’ble Court be pleased to issue an appropriate  writ,  order  or
direction and  be  pleased  to  quash  and  set  aside  the  decision  dated
23.02.2015 of the respondent no. 2 and the  consequential  decision  of  the
respondent no. 1 communicated vide letter  of  10.03.2015,  to  approve  the
request of the petitioner to cancel the LoI issued to the  petitioner,  with
the condition of forfeiting the  Bank  Guarantee  worth  Rs  5  crores,  and
further command the respondent no. 1 to cancel the LoI dated 06.02.2008  and
return the Bank Guarantee to the petitioner;

That this Hon’ble Court may be pleased to issue appropriate writ,  order  or
direction directing the respondent no. 1 not to encash  the  Bank  Guarantee
No. 005GM07113300001  dated  26.11.2011(extended  from  time  to  time)  and
command the respondent  no.  1  to  withdraw  the  letter  dated  10.03.2015
addressed to Yes Bank invoking the aforesaid Bank Guarantee.”




By the impugned judgment, the writ petition was allowed.  Paragraphs-24,  25
and 26 of the  impugned  judgment  which  deal  with  the  contentions   are
extracted below:


“24. Learned counsel for the GMB however, would place much reliance  on  the
tender conditions in which the tenderer agreed that the bidder  had  made  a
complete and careful examination to determine the  difficulties  in  matters
incidental to the  performance  of  its  obligations  under  the  Concession
Agreement and to specify the nature  and  extent  of  all  difficulties  and
hazards. Counsel would  therefore,  contend  that  any  difficulty  or  even
impossibility in obtaining environmental clearances cannot be a  defence  of
the petitioner to avoid forfeiture of the security deposit.  We  are  unable
to read such  condition  in  such  a  rigid  manner.  If  the  contract  had
frustrated on account of impossibility, we have serious  doubt  whether  GMB
could forfeit security deposit  citing  the  reason  that  whatever  be  the
reason, the petitioner failed to perform  its  obligations  and,  therefore,
must be visited with  the  penalty  of  forfeiture.  However,  there  is  an
additional reason why we must reject such a contention. We may  recall,  the
initial project was for construction of port at  Sutrapada.  On  account  of
the respondents not being able to make the land available for such  project,
the same  had  to  be  shelved.  Only  as  an  alternative,  the  petitioner
suggested Kachchigarh as a site where the port could be  developed.  Surely,
the  petitioner  was  not  expected  to  carry  out  complete  environmental
assessment before coming up with such  an  alternative  suggestion  nor  GMB
understood the offer of the petitioner as to one which will irrespective  of
environment concerns, be accepted. When there was  a  fundamental  shift  in
the initial project envisaged in the letter of intent, the  contention  that
whatever be the difficulties in  executing  the  contract,  forfeiture  must
follow, need to be viewed in the background of such material changes.

25. The contention that  having  given  unconditional  bank  guarantee,  the
petitioner cannot avoid encashment thereof, can also not  be  accepted.  The
parameters for avoiding the payment of a bank guarantee by the  bank  giving
such guarantee cannot be applied in the present case. The  question  in  the
present case is not so much as to allowing the  authorities  to  encash  the
bank guarantee as much as the authority of the GMB  to  retain  such  amount
even if it was so allowed to be encashed. If the decision of GMB  to  cancel
the contract and to award the penalty of forfeiture of Rs 5  crores  on  the
petitioner itself is found to be erroneous and  therefore,  set  aside,  the
question of allowing GMB to encash  the  bank  guarantee  would  simply  not
arise.

26.   In the result,  petition  is  allowed.  Impugned  communication  dated
10.3.2015 is set aside. The respondents shall not encash the bank  guarantee
in question.”



Heard Shri Mukul Rohatgi, learned  Attorney  General  for  India,  and  Shri
Tushar Mehta,  learned  Additional  Solicitor  General,  appearing  for  the
appellant and Shri Gopal Jain, learned  Senior  Counsel  appearing  for  the
first respondent.
Unfortunately, the High Court went wrong both in its analysis of  facts  and
approach on law. A cursory reading of LoI would clearly show that it is  not
a case of forfeiture of security deposit “… if the contract  had  frustrated
on account  of  impossibility…”  but  invocation  of  the  performance  bank
guarantee. On law, the High Court  ought  to  have  noticed  that  the  bank
guarantee is an independent contract  between  the  guarantor-bank  and  the
guarantee-appellant.  The  guarantee  is  unconditional.   No   doubt,   the
performance guarantee is against the breach by the lead promoter, viz.,  the
first respondent. But between the  bank  and  the  appellant,  the  specific
condition incorporated in the bank guarantee is that  the  decision  of  the
appellant as to the breach is binding on the  bank.  The  justifiability  of
the decision is a different matter  between  the  appellant  and  the  first
respondent and it is not for the High Court in a  proceeding  under  Article
226 of the Constitution of India to go  into  that  question  since  several
disputed questions of fact are  involved.  Recently,  this  Court  in  Joshi
Technologies International Inc. v. Union of India and others[1],  where  one
of us (R.F. Nariman,  J.)  is  a  member,  has  surveyed  the  entire  legal
position on exercise  of  writ  jurisdiction  in  contractual  matters.  The
paragraphs which deal with the situation relevant to the case under  appeal,
read as follows:

“68. The Court thereafter summarised the legal  position  in  the  following
manner: (ABL International Ltd. Case (2004) 3 SCC 553)
“27. From the above discussion of ours, following  legal  principles  emerge
as to the maintainability of a writ petition:
(a) In an appropriate case, a  writ  petition  as  against  a  State  or  an
instrumentality of a State  arising  out  of  a  contractual  obligation  is
maintainable.
(b)  Merely  because  some   disputed   questions   of   facts   arise   for
consideration, same cannot be  a  ground  to  refuse  to  entertain  a  writ
petition in all cases as a matter of rule.
(c) A writ petition involving a consequential relief of  monetary  claim  is
also maintainable.

28. However, while entertaining an objection as to the maintainability of  a
writ petition under Article 226 of the  Constitution  of  India,  the  court
should bear in mind the fact that  the  power  to  issue  prerogative  writs
under Article 226 of the Constitution  is  plenary  in  nature  and  is  not
limited by any other provisions of the Constitution. The High  Court  having
regard to the facts of the case, has a discretion to  entertain  or  not  to
entertain a writ  petition.  The  Court  has  imposed  upon  itself  certain
restrictions in the  exercise  of  this  power.  (See  Whirlpool  Corpn.  v.
Registrar of Trade Marks. [(1998) 8 SCC 1]) And this plenary  right  of  the
High Court to issue a prerogative writ will not  normally  be  exercised  by
the Court to the exclusion of other available remedies  unless  such  action
of the State or its instrumentality is arbitrary and unreasonable so  as  to
violate the constitutional mandate of Article 14  or  for  other  valid  and
legitimate reasons, for which the Court thinks it necessary to exercise  the
said jurisdiction.”

69. The position thus summarised in  the  aforesaid  principles  has  to  be
understood in the context of discussion that preceded which we have  pointed
out above. As  per  this,  no  doubt,  there  is  no  absolute  bar  to  the
maintainability of the writ petition even in contractual  matters  or  where
there are disputed questions of fact or even when monetary claim is  raised.
At the same time, discretion lies with the High Court  which  under  certain
circumstances, it can refuse to exercise. It also  follows  that  under  the
following circumstances, “normally”, the Court would  not  exercise  such  a
discretion:
69.1. The Court may not examine the issue unless the action has some  public
law character attached to it.
69.2. Whenever a particular mode of settlement of  dispute  is  provided  in
the contract, the High Court would refuse to exercise its  discretion  under
Article 226 of the Constitution and relegate the party to the said  mode  of
settlement, particularly when settlement of disputes is to  be  resorted  to
through the means of arbitration.
69.3. If there are very serious disputed questions  of  fact  which  are  of
complex nature and require oral evidence for their determination.
69.4.  Money  claims  per  se  particularly  arising  out   of   contractual
obligations are  normally  not  to  be  entertained  except  in  exceptional
circumstances.
70. Further, the legal position which  emerges  from  various  judgments  of
this Court dealing with different situations/aspects relating  to  contracts
entered into by the State/public authority  with  private  parties,  can  be
summarised as under:
70.1. At the stage of entering into a contract, the  State  acts  purely  in
its executive capacity and is bound by the obligations of fairness.
70.2. State in its executive capacity, even in  the  contractual  field,  is
under obligation to act fairly and cannot practise some discrimination.
70.3. Even in  cases  where  question  is  of  choice  or  consideration  of
competing claims before entering into the field of contract, facts  have  to
be investigated and found before the question of a violation of  Article  14
of the Constitution could arise. If those facts  are  disputed  and  require
assessment  of  evidence  the  correctness  of  which  can  only  be  tested
satisfactorily by taking detailed evidence, involving examination and cross-
examination  of  witnesses,  the  case  could   not   be   conveniently   or
satisfactorily  decided  in   proceedings   under   Article   226   of   the
Constitution. In such cases the Court can  direct  the  aggrieved  party  to
resort to alternate remedy of civil suit, etc.
70.4. Writ  jurisdiction  of  the  High  Court  under  Article  226  of  the
Constitution  was  not  intended  to  facilitate  avoidance  of   obligation
voluntarily incurred.
70.5. Writ petition was not maintainable to  avoid  contractual  obligation.
Occurrence  of  commercial  difficulty,   inconvenience   or   hardship   in
performance of the conditions agreed to  in  the  contract  can  provide  no
justification in not complying with the terms of contract which the  parties
had accepted with open eyes. It cannot ever be that a licensee can work  out
the licence if he finds it profitable to do so: and  he  can  challenge  the
conditions under which he agreed  to  take  the  licence,  if  he  finds  it
commercially inexpedient to conduct his business.
70.6. Ordinarily, where a breach of contract is  complained  of,  the  party
complaining  of  such  breach  may  sue  for  specific  performance  of  the
contract,  if  contract  is  capable  of   being   specifically   performed.
Otherwise, the party may sue for damages.”


It is contended on behalf of the first respondent  that  the  invocation  of
Bank Guarantee depends on the cancellation of  the  contract  and  once  the
cancellation of the contract  is  not  justified,  the  invocation  of  Bank
Guarantee also is not justified. We are afraid that  the  contention  cannot
be appreciated. The  bank  guarantee  is  a  separate  contact  and  is  not
qualified by the contract on performance of the obligations.  No  doubt,  in
terms of the bank guarantee also, the invocation is only  against  a  breach
of the conditions in the LoI. But between the appellant  and  the  bank,  it
has been stipulated that the decision of the  appellant  as  to  the  breach
shall be absolute and binding on the bank.
An injunction against the invocation of an  absolute  and  an  unconditional
bank guarantee cannot be granted except in situations of egregious fraud  or
irretrievable injury to one of the parties concerned. This position also  is
no more res integra. In Himadri Chemicals Industries  Limited  v.  Coal  Tar
Refining Company[2], at paragraph -14:

“14. From the discussions made hereinabove relating to  the  principles  for
grant or refusal to grant of injunction to restrain enforcement  of  a  bank
guarantee or a letter of credit,  we  find  that  the  following  principles
should be noted in the matter of injunction to restrain the encashment of  a
bank guarantee or a letter of credit:
(i) While dealing with an  application  for  injunction  in  the  course  of
commercial dealings, and when an unconditional bank guarantee or  letter  of
credit is given or accepted, the beneficiary is entitled to realise  such  a
bank guarantee or a letter of credit in terms thereof  irrespective  of  any
pending disputes relating to the terms of the contract.
(ii) The bank giving such guarantee is bound to honour it as per  its  terms
irrespective of any dispute raised by its customer.
(iii) The courts should be slow  in  granting  an  order  of  injunction  to
restrain the realisation of a bank guarantee or a letter of credit.
(iv) Since a bank guarantee or a letter of credit is an  independent  and  a
separate contract and is absolute in nature, the existence  of  any  dispute
between the parties to the contract is not a ground for issuing an order  of
injunction to restrain enforcement of bank guarantees or letters of credit.
(v) Fraud of an egregious nature which would vitiate the very foundation  of
such a bank guarantee or letter of credit and the beneficiary seeks to  take
advantage of the situation.
(vi) Allowing encashment of an unconditional bank guarantee or a  letter  of
credit would result in  irretrievable  harm  or  injustice  to  one  of  the
parties concerned.”



 Guarantee given by the bank to the appellant contains  only  the  condition
that in case of breach by the lead promoter, viz., the first  respondent  of
the conditions of LoI, the appellant is free to invoke  the  bank  guarantee
and the bank should honour it … “without any demur, merely on a demand  from
GMB (appellant) stating that the said lead promoter failed  to  perform  the
covenants…”. It has also been undertaken  by  the  bank  that  such  written
demand from the appellant on the bank shall be … “conclusive,  absolute  and
unequivocal as regards the amount due and payable by  the  bank  under  this
guarantee”. Between the appellant and the first respondent, in the event  of
failure to perform the obligations  under  the  LoI  dated  06.02.2008,  the
appellant was entitled to cancel the LoI and invoke the bank  guarantee.  On
being satisfied  that  the  first  respondent  has  failed  to  perform  its
obligations as covenanted, the appellant cancelled the LoI  and  resultantly
invoked the bank guarantee. Whether the cancellation is  legal  and  proper,
and whether on  such  cancellation,  the  bank  guarantee  could  have  been
invoked on the extreme situation of  the  first  respondent  justifying  its
inability to perform its obligations under the LoI,  etc.,  are  not  within
the purview of an inquiry under Article 226 of the  Constitution  of  India.
Between the bank and the appellant, the moment there  is  a  written  demand
for invoking the bank guarantee pursuant to breach of the covenants  between
the appellant and the first respondent, as satisfied by the  appellant,  the
bank is bound to honour the payment under the guarantee.
Therefore, the appeal is allowed and the impugned  judgment  is  set  aside.
However, we make it clear that this judgment will not stand in  the  way  of
the first respondent working out its grievances in  appropriate  proceedings
as permitted under law.

                                  ........................................J.
    (KURIAN JOSEPH)




                                                       .......………………………………J.
(ROHINTON FALI NARIMAN)
New Delhi;
September 28, 2016.
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[1]    (2015) 7 SCC 728
[2]    (2007) 8 SCC 110


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                                                                  REPORTABLE





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