BHARAT HEAVY ELECTRICALS LIMITED Vs. INDIAN OVERSEAS BANK

JUDGEMENT

(1.) Manmohan Sarin, J.-The petitioner has filed the above petition under Section 9 of the Arbitration and Conciliation Act, 1996 with an application, under Order XXXIX, Rules 1 and 2, CPC, seeking a restraint against the threatened encashment of Performance Bond/Bank Guarantee in the sum of Rs. 35,39,75,000.00, issued by respondent No. 1 Bank in favour of respondent No. 2, under the Contract dated 20.9.1995 between the petitioner and respondent No. 2.

(2.) The petitioner moved the Court on receipt of a notice dated 2.8.1999, issued by respondent No. 2, notifying the petitioner that it would invoke the Bank Guarantee for Rs. 35,39,75,000.00, if the payment of the liquidated damages was not made within 30 days. Respondent No. 2 had addressed the same letter to all the 4 major contractors for encashment of their respective performance bonds given under their respective contracts with the petitioner.

(3.) THe case of the petitioner as set out in the petition and urged before the Court may be stated as follows: (i) The notice/threatened demand dated 2.8.1999, was not in accordance with the terms of the Bank Guarantee/Performance Bond. The form of demand requires respondent No. 2 to state that the contractors failed to rectify the breach under the contract, "as defined in the Performance Bond." It is urged that the Performance Bond/Bank Guarantee was given for the performance of the contct, as defined in the Performance Bond. The submission is that the Performance Bond is for completion of, "the scope of supply as defined in the contract in Clause 1.1.46 at page 15 and as detailed in Schedule 3 at pages 110 to 112 of volume 2. In other words, the contention is that petitioner having supplied all the materials mentioned in Schedule 3 as duly verified by the engineer of respondent No. 2, the Bank Guarantee/Performance Bond could not be invoked. This, it is claimed is supported by 31 certificates, issued by respondent No. 2. Reference is also invited to a certificate dated 20.2.1998, certifying completion of despatch of all equipments under the scope of supply. It is urged that the last supply of equipment for unit of the power plant was made in May, 1998 and supply of equipment for unit 2 was made in November, 1998. The petitioner claims to have adhered to the scope and schedule of supply and it is urged that there is no breach or default in the equipment supply contract. Thus, there was no cause or justification for invoking the Bank Guarantee and the attempt at invocation was clearly fraudulent. All equipments, as per the scope of supply haing been supplied by the petitioner and no notice of any breach or defect in the scope of supply was ever issued. Notice dated 2.8.1999 related to alleged delay in completion of plant, which does not relate to the scope of supply and hence if the respondent is permitted to encash the Bank Guarantee, it would purport to fraud and result in irretrievable justice. (ii) It is urged that the construction and commissioning of the power plant is not part of scope of equipment supply contract. The same is covered by a separate contract awarded to M/s. Badger Energy INC. of U.S-A., who have submitted their own Performance Bond in favour of respondent No. 2 for construction and commissioning of the power plant. The delay in completion of power plant, it is urged, is not attributable to failure of the petitioner in performance of the scope of supply under the equipment supply contract, which stands executed fully. The Performance Bond cannot be legally encashed for the delay under the other contract, which is not covered by the equipment supply contract. The petitioner urges that the respondent's claim for liquidated damages from 20.6.1998 to 5.3.1999, does not relate to the delay for non-supply of equipments. The threatened invocation of the Bank Guarantee shall not be, therefore, in accordance with the terms of the Bank Guarantee/ Performance Bond as per format in second schedule. It is also urged that the demand is not in the prescribed second schedule, which requires a declaration from the respondent to state that no appropriate cure for breach and defect has commenced. Regarding the defect in the turbine for unit I, which was noticed in the course of erection of the turbine in June, 1999, necessary rectification as required under the contract has been commenced. The claim of respondent No. 2 for liquidated damages is said to be unconscionable and in contravention of Clause 7 of the contract. The demand on the Performance Bond or Bank Guarantee towards the delay in construction of plant by other contractors under a separate contract would be nothing but perpetuating fraud and, therefore, the Bank Guarantee cannot be encashed as all the equipments mentioned in third schedule have been supplied to the satisfaction of the Engineer of respondent No. 2. (iii) Reliance is placed by the petitioner in support of its contentions on Larsen & Toubro Limited v. Maharashtra State Electricity Board & Ors., 1995 (7) S.C. 18, where the Apex Court granted stay against the invocation of Bank Guarantee as the performance of the contract was completed. The Bank Guarantee was to enure only till successful completion of the trial operations of the plant till it was taken over. The event having ensued, the invocation of the Bank Guarantee was held to be not encashable on its terms and to prevent irretrievable justice injunction was issued. Further, reliance is placed on J.T. 1992 (2) S.C. 136, which enjoins that the encashment of the Bank Guarantee has to be in accordance with its terms. Learned Counsel further relied on 67 (1997) DLT 231 (232) and State of Maharashtra v. Dr. M.N. Kaul, AIR 1967 S.C. 1634 to urge that the invocation is to be in accordance with the terms of the Bank Guarantee.