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Larsen And Toubro Limited vs Shree Ahuja Properties And … on 22 March, 2017

COM.APPL6.17.doc

IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION

COMMERCIAL APPEAL (LODG) NO. 6 OF 2017
IN
COMMERCIAL ARBITRATION PETITION (LODG) NO. 243
OF 2016

Larsen Toubro Limited, a Company registered ]
under the Companies Act, 1956, having its ]
Registered Office at LT House, Ballard Estate, ]
P.O. Box No. 278, Mumbai – 400 001. ]…Appellant

Versus

1 Shree Ahuja Properties Realtors Private ]
Limited, a Company registered under the ]
Companies Act, 1956 having its Registered ]
Office at Rajpipla, Opp. Standard Chartered Bank, ]
Linking Road, Santacruz (West), Mumbai-400054]

2 Punjab National Bank, Maker Tower “E”, ]
Ground Floor, Cuffe Parade, Mumbai-400005 ]…Respondents

Mr. Iqbal Chagla, senior counsel with Mr. Birendra Saraf, Mr.
Nimay Dave, Mr. Jehaan Mehta, Mr. Sachin Chandarana, Mr.
Rashid Boatwala, Ms. Lipsa U. and Mr. Sudarshan M. i/b M/s.
Manilal Kher Ambalal Co. for the Appellant.

Mr. Feredun Devitre, senior counsel with Mr. Cyrus Ardeshir, Mr.
Kedar Desai, Mr. Aditya Raut, Mr.Bhuvneshwar Pathak and Ms.
Sujata More i/b M/s. Desai Desai Carrimjee Mulla for the
Respondent No.1.

CORAM : S.C. DHARMADHIKARI
B.P. COLABAWALLA, JJ.

Reserved on : 17TH MARCH, 2017
Pronounced on : 22ND MARCH, 2017

SRP 1/37

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JUDGMENT : [Per S.C. Dharmadhikari, J.]

1 When this appeal was mentioned before this Bench on

Thursday, i.e. 16th March, 2017, a request was made to continue

the ad-interim order further as it was operative only till 16 th

March, 2017. The request to continue it further was opposed by

the contesting respondent No.1. Bearing in mind the nature of

the order passed on 23rd January, 2017, we indicated to both

sides that the impugned order refuses to restrain the encashment

of the bank guarantee, and this appeal being directed to be

disposed of finally, it would not be proper to go on granting such

ad-hoc extensions. We, therefore, with the consent of both sides,

placed the appeal itself for disposal at the admission stage on 17th

March, 2017. As soon as it was called out, we indicated to both

sides that one of us (B.P. Colabawalla, J.) holds the shares in the

petitioner-appellant-company. If any party has objection, he

would like to recuse himself. Both senior counsel, on instructions,

stated that they have no objection to this Bench hearing and

disposing of this appeal. On this understanding we have

proceeded further. Hence, admit. Respondents waive service. By

consent, heard finally. Paper-book dispensed with.

SRP                                                                                                                        2/37




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      2                    This appeal under section 10 of The Commercial

Courts, Commercial Division and Commercial Appellate Division

of High Courts Act, 2015, (Act No.4 of 2015) is directed against

the order passed by the learned single Judge on the above

Commercial Arbitration Petition. By this order dated 9 th January,

2017, the learned Judge has dismissed a petition filed under

section 9 of The Arbitration Conciliation Act, 1996 by the

petitioner-appellant.

3 Briefly stated, the facts are that this petition under

section 9 of the said Act of 1996 was filed against one Shree

Ahuja Properties Realtors Private Limited (for short

“respondent No.1”) and Punjab National Bank (for short

“respondent No.2”) alleging that the petitioner-appellant, a

company registered under the provisions of the Indian Companies

Act, 1956, is the largest Engineering Company and, inter-alia,

engaged in the business of construction, engineering, power

development, power equipment manufacturing and related

activities. The first respondent is a private limited company

registered under the same Companies Act and, inter-alia,

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carrying on business of real estate development. The second

respondent is a Nationalised Bank, carrying on banking business

in terms of the Banking Regulations Act, 1949.

4 The parties shall hereafter be referred to as per their

nomenclature in the Arbitration Petition.

5 The petitioner and the first respondent had a dispute

arising out of alleged non-payment of the petitioner’s dues in

respect of the works carried out. The works were carried out as

per the revised scope of work and activities mutually agreed

between the petitioner and the first respondent in the year 2013.

The petitioner claims that it is entitled to receive compensation

for costs and additional expenses incurred due to the delay

caused by the first respondent. The petitioner was prevented

from completing the balance work within the agreed and

extended period as set out in the contract agreement dated 2 nd

March, 2010, read with the supplementary agreement dated 1 st

August, 2013. There are various breaches alleged of the

obligations under these agreements in paragraph 3 of the

petition. It is common ground that this agreement contains an

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arbitration clause . This agreement was executed in the light of a

tender floated by the first respondent in or about November,

2009, expressing its desire of constructing a world class

residential complex at Prabhadevi, Mumbai. The petitioner

participated in that tender and the contract was awarded to

them. The contract involved execution of work such as

procurement and construction of building and other facilities.

The scope of the work was set out in the agreement. After mutual

discussions, eventually a letter of acceptance was issued and a

regular contract drawn up dated 2nd March, 2010. Then, the

salient features of this contract are set out. In the Arbitration

Petition itself it is stated that by clause 8.1 of the contract, a

performance guarantee bearing a reference number specified

therein in the sum of Rs.10 crores was issued on behalf of the

petitioner by the second respondent-bank. Annexure-E to the

petition is a copy of this performance guarantee. The performance

guarantee dated 16th July, 2014, was valid till 31 st December,

2014, whereafter its validity came to be extended from time to

time. It is alleged that as per the contract, the scope of work of

the petitioner comprised procurement, construction and

completion of the works and the facilities in accordance with the

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drawings and specifications, addendums and clarifications. The

petitioner has stated as to how it commenced this work and

endeavoured to complete it. However, it alleges that there were

several changes and variations which resulted in delays. Delays

were discussed and the issue sorted out at joint meetings and

workshops held in the month of April, 2013. Relying upon these

minutes and a supplementary agreement dated 1st August, 2013,

the Revised Milestone Schedule, it is alleged there were several

hurdles and obstacles resulting in delays. The petitioner alleges

that the delays occurred only because of the manner in which

respondent No.1 continued to directly deal with sub-contractors,

changed material instructions, made direct payments to facade

contractor, called upon the petitioner to shift focus of work to

other spheres etc, including failing to make payment that fell due.

6 It is in these circumstances that several allegations

are made by the petitioner and later on it is alleged that there

were e-mails exchanged by them. The e-mails from the

respondent No.1 sought to point out the alleged faults and defects,

including in the plumbing work. Finally, alleging that there was

no default on the part of the petitioner, but the delays were

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attributable only to the first respondent, the petitioner claims

that a sum of Rs.115,80,88,257/- as on 30 th September, 2016, is

due and payable. In the light of the denials by the respondent,

these disputes and differences have been projected and sought to

be brought within the purview of the arbitration agreement. The

petitioner learnt that the first respondent has approached its

banker and invoked the performance guarantee.

7 The petitioner, therefore, states that it is not

permissible for the first respondent to invoke this bank guarantee

for it has served its purpose and stands lapsed. The works have

been completed, the possession of four units has been handed

over to the end users, the occupation certificate received has also

been handed in. Therefore, there is no occasion for invoking this

performance agreement. In paragraph 12 of this petition, at

running page Nos.77 and 78, the petitioner challenges the said

invocation by alleging that the performance guarantee’s purpose

has been fully satisfied and served. All rights and obligations

thereunder have come to an end and stood extinguished. It is,

therefore, liable to be discharged and returned. The petitioner

alleges that from the conduct of the first respondent, it is

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apparent that they have an ulterior motive of not making

payment causing wrongful loss to the petitioners, yet proceeding

to encash this performance guarantee. It is in these

circumstances that the petitioners have claimed the following

relief :

“a) that pending the commencement and
hearing and final disposal of the proposed Arbitration
proceedings, and the making and implementation of
the Award therein, the Respondent No.1 and persons
claiming through them be directed to furnish security
for an amount of Rs.115,80,88,257/- (Rupees One
Hundred Fifteen Crores Eighty Lakhs Eighty Eight
Thousand Two Hundred Fifty Seven only being the
outstanding amount due and payable by the
Respondent No.1 to the Petitioner as per particulars
of claim annexed as Exhibit ‘T” to the Petition either
by way of unconditional Bank Guarantee in favour of
the Petitioner or depositing the said amount in this
Hon’ble Court.”

8 We are not concerned with the rest of the reliefs. The

petition under section 9 was lodged on 26 th October, 2016. Upon

being duly served, the first respondent filed written submissions.

In the written submissions, the first respondent denied all the

contentions and allegations in the petition. It was specifically

contended that the contention that the performance guarantee

was not a bank guarantee per se, but in the form of a contract of

indemnity and, therefore, the well settled legal principles

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pertaining to encashment of a bank guarantee would not apply, is

entirely erroneous and incorrect. That contention has been

raised by way of an amendment which was tendered before the

Court at the time of final hearing of the Arbitration Petition on 4 th

November, 2016. This stand is clearly an after-thought. All

throughout the parties have understood that the performance

guarantee was a bank guarantee and nothing else. The

amendment does not, therefore, change the picture at all. Apart

therefrom, what is revealed from a perusal of the guarantee and

as a whole is that Annexure-E to the Arbitration Petition is

referred as a bank guarantee, is apparent. There is also a letter

dated 25th October, 2016, addressed by the petitioner to the

second respondent, inter alia, asking them to intimate the

petitioner in the event of any invocation of the performance

guarantee. Similarly, in the advocate’s letter dated 19 th October,

2016, and some other documents, the petitioner referred to the

guarantee as a performance guarantee and not an indemnity

bond. The indemnity bond has been separately provided under

the contract and cannot be confused with the performance

guarantee. This is apparent from the pleadings in the petition

itself. Else, the petitioner could not have argued, may be in the

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alternative, that the performance guarantee is a bank guarantee,

but it is not unconditional and unequivocal. Hence, when this

performance guarantee is clearly referable to clause 8.1(a) of the

contract, then, it is apparent that there is no substance in the

arguments now canvassed by way of an amendment and after-

thought.

9 The first respondent has justified the invocation of

this performance guarantee by contending that there is no

pleading and proof of any fraud and special equities. It is in these

circumstances that in the absence of governing principles which

would enable seeking an injunction and restraint against

encashment of such a guarantee, it can be invoked. There is no

substance in the arbitration petition and it ought to be dismissed.

10 It is upon such pleadings that the learned Judge

considered the petitioner’s request and, though initially granted

an ad-interim injunction, has subsequently vacated it by the

impugned order.

SRP                                                                                                                        10/37




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      11                It is this conclusion of the learned single Judge which

      is assailed in this appeal.



      12                At the outset we must clarify that Mr. Chagla, learned

senior counsel appearing in support of this appeal has stated

before us that he will not raise any contentions on the point or

issue of irretrievable injustice and special equities. Mr. Chagla

would submit that he will raise two fold contentions only.

13 The first contention is that properly and completely

read, the performance guarantee is not spelling out a contract of

guarantee, but indemnity. Mr. Chagla submitted that on a perusal

of the agreement and particularly clause 8 at page 173 of the

paper-book, clause 19.5 at page 209 of the paper-book, it is

evident that this guarantee purports to cover 2.5% of the contract

sum. Clause 30 of the agreement sets out the default of the

contractor. That clause appears at page 238 of the paper-book.

Clause 32 which is at page 243 of the paper-book speaks of

dispute resolution. Mr. Chagla would submit that some of the

documents and appearing at pages 460, 461, 467 and 469 of the

paper-book would indicate that it is true that this Court is not

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concerned with the dispute under the parent contract. In other

words, the underlying contract is not the subject matter of the

present proceedings. The disputes thereunder have to be left out

of consideration and are not relevant. The advocate’s notice

would reveal as to how the petitioner-appellant has a claim

against the respondents and which is spelt out in details at 479,

480, 482 and 486 of the paper-book. The letter of invocation

dated 25th October, 2016, copy of which is at pages 79 and 80 of

the paper-book would denote that the parties understood the

subject clause as a provision for indemnity and not a contract of

guarantee. It is true that a contract of guarantee, specially a bank

guarantee, is independent in nature. However, on a true and

proper construction of the subject document, it is clear that it

falls within the purview of section 124 of the Contract Act, 1872.

Our attention is invited to pages 341 and 342 of the paper-book to

submit that the nomenclature is not decisive or relevant. If

clause 3(i) at page 343 of the paper-book is read and perused

carefully, it would be apparent that this is a contract of

indemnity. In matters of interpretation of the contract and for

understanding its true nature, wording of the other sub-clauses,

namely, sub-clauses 3(ii) and (iii) would not be decisive and does

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not alter the above position. In other words, no reliance can be

placed on these sub-clauses to contend that this is a bank

guarantee. Our attention is also invited to the clause appearing at

page 344 of the paper-book to submit that it is then not

permissible for the first respondent to adjudicate upon the

dispute itself. In other words, a third party independent

adjudication is contemplated as to the losses suffered by the

contractor. It is not a decision of the respondent No.1 and in that

regard Mr. Chagla invites our attention to page 80 of the

compilation. That is not a decision contemplated by a contract of

indemnity. In such circumstances, Mr. Chagla would submit that

this case is completely covered by the principles enshrined in the

judgment of the Hon’ble Supreme Court in the case of State Bank

of India vs. Mula Sahakari Sakhar Karkhana Limited , reported in

(2006) 6 SCC 293, and the judgment of the Hon’ble Supreme

Court rendered in the case of Hindustan Construction Company

Limited vs. State of Bihar (1999) 8 SCC 436 . Alternatively, and

without prejudice, so also assuming that this is a bank guarantee

which can be invoked and encashed, still, it is not unconditional in

nature. Clause 3(i) is an indemnity for losses under the contract

and clause 3(ii) is subject to the decision of the first respondent

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as to the losses suffered thereunder. That is not again decisive.

That does not mean that a unilateral demand by this first

respondent would meet and satisfy the requirement in this sub-

clause. Rather, it denotes a decision by a competent authority

and with regard to such losses suffered. Therefore, the bank is

not obliged to accept any demand and unilaterally raised by the

first respondent. It is in these circumstances that this bank

guarantee is not unconditional and unequivocal.

14 Looked at from any angle, therefore, Mr. Chagla would

contend that the injunction should have been granted by the

learned Judge. If it was initially granted, it should have been

continued given all parameters necessary for grant of the same

being satisfied. He would, therefore, submit that the appeal be

allowed.

15 Mr. Devitre, learned senior counsel for the contesting

respondent supports the impugned order. Mr. Devitre would

submit that there is no merit in any of the contentions of Mr.

Chagla. The document was always understood as a performance

guarantee. There was never any doubt or confusion about its

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nature. The first respondent has not relied upon only its

nomenclature, but understood it as a bank guarantee which can

be invoked by referring to clause 8.1 and other clauses of the

contract. Mr. Devitre would reiterate the settled principle that

the bank guarantee is an independent contract. It has nothing to

do with the parent contract nor any of its terms can be linked to

the parent contract unless and until there is any specific

insertion in that regard. Further, he would submit that if this

document is read as a whole, it clearly indicates that it is a

guarantee and there is no question of terming it as an indemnity.

More so, when both sides have never disputed or doubted its true

nature. The petitioner, therefore, is estopped from contending

otherwise. Similarly, the alternate contention has no merit given

the clear wording of clause 3(ii) and (iii). In these circumstances,

he would submit that both the judgments relied upon have no

application on facts. The appeal, therefore, deserves to be

dismissed.

16 With the assistance of Mr. Chagla and Mr. Devitre we

have perused the Memo of Appeal. We have perused the

impugned judgment and the decisions of the Hon’ble Supreme

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Court relied upon.

17 It is common ground and as pointed out by Mr. Chagla

that grant of an injunction to restrain the encashment of an

unconditional bank guarantee is an exception. Its encashment is

the rule. The exception is only in established and proven cases of

fraud and irretrievable injustice. Both of which are not

highlighted before us are in the terms that the law demands. The

fraud, if any, is in invoking this performance guarantee by

allegedly terming it as a bank guarantee. In other words, if the

document relied upon by the first respondent is not spelling out a

contract of guarantee, then, its invocation is per se illegal. That is

how the fraud is alleged. We do not think that such a pleading

would suffice. The understanding of one of the parties about the

nature of the contract in this case would not be conclusive and

decisive. If there was a confusion that this is not a contract of

guarantee, but an indemnity and still the first respondent has

gone ahead and tried to derive any benefit or advantage under the

same, then, dependent upon other circumstances, one can

possibly agree with the appellant-original petitioner. However, it

is only the appellants allegation that this is not a contract of

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guarantee, but a contract of indemnity.

18 For making good that argument or plea also, there are

no materials. The appellant-petitioner in the petition itself states

that the contract envisaged furnishing of a performance

guarantee. The petition itself relies upon clause 8.1 of the

contract in that behalf. That clause reads thus :

                   "8              BONDS

                                   Provision of Bonds

                   8.1     The Contractor undertakes to obtain and

deliver to the Employer simultaneous with the
Commencement Date:

(a) An unconditional and irrevocable on
demand: (A) Performance Bond in the form attached
to these Conditions of Contract as Annexure B: (the
“Performance Guarantee”), which shall be issued
by a reputed national or international bank in
Mumbai approved by the Employer at its sole and
absolute discretion for the purpose, for an amount of
2.5% (two point five per cent) of the Contract Sum;
and (B) Performance Indemnity Bond, in the form
attached to these conditions as Annexure AA (the
“Performance Indemnity Bond “) for an amount of
2.5% (two point five per cent) of the Contract Sum.
The Performance Guarantee and the Performance
Indemnity Bond are collectively referred to as the
“Performance Bond”.

(b) An unconditional an irrevocable on demand:
(A) Advance Payment Guarantee in the form
attached to these Conditions of Contract as Annexure
B (the “Advance Payment Guarantee”) which shall be
issued by a reputed national or international bank in

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Mumbai approved by the Employer at its sole and
absolute discretion for the purpose, for an amount
equal to 5% (five percent) of the Advance Payment;
and (B) Advance Payment Indemnity Bond, in the
form attached to these conditions as Annexure BB
(the “Advance Payment Indemnity Bond”) for an
amount of 5% (five percent) of the Advance Payment.
The Advance Payment Guarantee and the Advance
Payment Indemnity Bond are collectively referred to
as the “Advance Payment Bond”.

If at any time the Contract Sum increases (whether
because of one increase or multiple increases arising
from Variation) by more than 5.0% (five point zero
percent) the Contractor must provide an additional
unconditional and irrevocable on demand bond which
shall be issued by a reputed national or international
in Mumbai approved by the Employer at its sole
discretion for an amount equal to 5% (five percent) of
the increase in the Contract Sum.”

19 A perusal of this clause would reveal that the

contractor undertakes to obtain and deliver to the employer

simultaneously with the commencement date an unconditional

and irrevocable on demand performance bond in the form

attached to the conditions of the contract as Annexure B (the

Performance Guarantee), which shall be issued by a reputed

national or international bank in Mumbai approved by the

Employer at its sole and absolute discretion, for an amount of

2.5% of the contract sum and Performance Indemnity Bond, in

the form attached to these conditions as Annexure AA. Thus,

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these are the two distinct requirements and understood by the

parties themselves. Clause 19.5 styled as Indemnity reads as

under :

“Indemnity

19.5 In consideration of the Employer awarding
the Works to the Contractor, (which the Parties
hereby confirm is good, sufficient and valuable
consideration), the Contractor agrees that, as a
separate and independent contract and obligation
from any other obligation under the Contract, and
notwithstanding any (A) illegality; and/or (B)
unenforceability of, or affecting, or relating to, any
provision of the Contract in relation to payment of
any damages by the Contract under the Contract, the
Contractor shall at all times indemnify the Employer
and keep the Employer indemnified for, hold the
Employer harmless against any pay to the Employer,
upon demand; (A) an amount equal to all costs,
expenses, damages, liabilities and losses (whether
direct or indirect) that are incurred or may be
incurred by the Employer, suffered or may be
suffered by the Employer and/or asserted or may be
asserted against the Employer, in each case, arising
in connection with and/or as a consequence of any
delay in meeting the Time for Completion of any
Section or Portion of the Works or the whole of the
Works or for any delay or failure in meeting the
Specifications or the environment, health and safety
requirements under the Contract.”

20 A perusal of the same would indicate as to how the

contract envisages two distinct arrangements. One is a bond and

when that is made, it is styled as a performance bond in the form

of a performance guarantee and a performance indemnity bond.

SRP                                                                                                                     19/37




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Two separate formats are devised by the parties for the purpose

of the same. It is not as if the understanding is that it means one

and the same. Annexure AA sets out the approved draft of the

advance payment indemnity bond and Annexure A is the

approved draft of the advance payment guarantee. That is also a

bank guarantee. That bears a bank guarantee number. What is

then material for our purpose is the document itself. The

document appears at page 342 of the paper-book. It is a

performance guarantee addressed to the first respondent. That is

in the form of a bank guarantee. The first respondent is styled as

the employer whereas the appellant is the contractor. The

performance of civil construction works is the contract. Under

the contract, the contractor has agreed to provide a performance

guarantee in terms of clause 8.1 of the contract for an amount of

Rs.10 crore in the form of a bank guarantee. Then clause 3,

which is heavily relied upon and appearing at pages 343 and 344

reads as under :

“3. In consideration of the above, We Punjab
National Bank, a banking company incorporated
under the Banking Companies Act, 1970 and Head
office at 7, Bhikaji Cama Place, Africa Avenue, New
Delhi – 110066 and having a branch office at Large
Corporate Branch, Make Tower “E”, Ground Floor,
Cuffe Parade, Mumbai – 400005 (the “Bank” which

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expression shall unless repugnant to the context or
meaning thereof include its successors,
administrators, executors and assigns) do hereby
covenant and undertake as follows:

(i) We hereby undertake to indemnify and keep
you indemnified to the extent of the sum of
Rs.10,00,00,000/- (Rupees Ten Crores only) from and
against all losses and damages that may be caused to
or suffered by you by reason of any default or defaults
on the part of the Contractor in performance of the
Contract or carrying out any works under the
Contract or otherwise in the observance and
performance of any of the terms and conditions
relating there to in accordance with the true intent
and meaning thereof and in the event of any default
or defaults on the part of the Contractor as aforesaid,
we shall forthwith on demand pay to you any sum or
sums not exceeding in the total of the said sum of
Rs.10,00,00,000/- (Rupees Ten Crores only) as may
be claimed by you from the Contractor as your losses
and/or damages by reason of such default or defaults
on the part of the Contractor as aforesaid without
demur or without reference to the Contractor.

(ii) Notwithstanding anything to the contrary,
we agree that your decision as to whether the
Contractor has made any such default or defaults and
the amount or amounts to which you are entitled by
reasons thereof, will be binding on us and we shall not
be entitled to ask you to establish your claim or
claims under this Performance Guarantee but shall
pay the same forthwith without any objection or
excuse.

(iii) We undertake to pay to you any money so
demanded from time to time notwithstanding any
dispute or disputes raised by the Contractor in any
suit or proceeding pending before any court or
tribunal or arbitration relating thereto, our liability
under these presents being absolute and unequivocal.

(iv) An assignment of the Contract to any third
party by you shall not affect the terms of this

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Performance Guarantee and the benefit of this
Performance Guarantee shall accrue to such assignee.

(v) Any amendment in the Contract between the
Contractor and you shall not in any manner affect our
obligations under this Performance Guarantee.

(vi) The Payment(s) so made by us under this
Performance Guarantee shall be a valid discharge of
our liability for payment hereunder. This
Performance Guarantee will also be discharged upon
return of the original to us.

(vii) This Performance Guarantee shall come into
force from the date of this Performance Guarantee
and shall not be revoked by us any time during its
currency without your previous consent in writing.

(viii) Unless extended, this Performance
Guarantee shall remain in force till 31/12/2014
provided however that, should it be necessary
extend, we shall extend forthwith the period of this
Performance Guarantee on your request till such time
as may be required by you.

(ix) You will have fullest liberty without affecting
this Performance Guarantee to postpone for anytime
or from time to time any of your rights or power
against the Contractor and either to enforce or
forebear to enforce any of the terms of conditions of
the Contract and we shall not be released from our
liability under this Performance by the exercise of
your liberty with reference to the Contractor any
variation or modification of the Contract or any other
act, matter, or think whatsoever which under the law
relating to sureties would, but for the provisions
hereof have the effect of so releasing us from our
liability hereunder. Provided always that nothing
herein contained will enlarge our liability hereunder
beyond the limit of Rs.10,00,00,000/- (Rupees Ten
Crores only).

                  (x)             In order to give full effect to the Performance


SRP                                                                                                                    22/37




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Bind you shall be entitled to act as if we were your
principal debtors in respect of your claims against the
Contractor under the Contract and we expressly
waive all our suretyship and other rights if any,
which are in any way inconsistent with the above or
any other provisions of the Performance Guarantee.

(xi) Subject to the maximum limit of our liability
as aforesaid this Performance Bind will cover all your
claim or claims against the Contractor under this
Contract from time to time arising out of or in relation
thereto and in respect of which your demand or
notice in writing be issued to us before the date of
this guarantee mentioned above.

(xii) This Performance Guarantee is in addition to
and not by way of limitation of or substitution for any
other guarantee or guarantees hereto given to you by
us (whether jointly with or alone) and that this
Performance Guarantee is not intended to and shall
not revoke or limit such guarantee or guarantees.

(xiii) This Performance Guarantee shall be a
continuing guarantee and shall not be discharged by
any chance in the constitution of the Contractor or
ourselves, nor shall it be affected by any change in
your constitution or by any amalgamation or
absorption thereof or therewith but will ensure for
and be available to and enforceable by the absorbing
or amalgamated company or concerns. We shall not
revoke this Performance Guarantee during its
currency, except with your prior consent in writing
or upon such return of this Performance Guarantee in
original.”

21 Mr. Devitre is right in contending that this clause

would have to be read in its entirety and it is not permissible to

single out and read out of context sub-clause (i). It is clear that,

that clause employs the words “indemnify” and “indemnified”.

SRP                                                                                                                     23/37




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However, if the opening part of clause 3 is read and perused

carefully, it is apparent that it is in consideration of the contract

or agreement to provide a performance guarantee in terms of

clause 8.1 of the contract for an amount of Rs.10 crore in the

form of a bank guarantee, that the second respondent – Punjab

National Bank covenants and undertakes firstly to indemnify and

keep the first respondent indemnified to the extent of the sum of

Rs.10 crores from and against all losses and damages that may be

caused or suffered by the first respondent for any default or

defaults on the part of the contractor in performance of the

contract or carrying out any works under the contract or

otherwise in the observance and performance of any of the terms

and conditions relating thereto. The Punjab National Bank on

demand shall pay to the employer the sum of Rs.10 crore as the

losses and/or damages by reason of such default or defaults on

the part of the contractor. The amount would be paid without

demur or without reference to the contractor. Notwithstanding

anything to the contrary Punjab National Bank agrees that the

employer’s decision as to whether the contractor has made any

such default or defaults and the amount or amounts to which the

employer is entitled by reason thereof will be binding on the

SRP 24/37

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Punjab National Bank. The bank shall not be entitled to ask the

employer to establish the claim or claims under the Performance

Guarantee but shall pay the same without any objection or

excuses. By clause (iii) it has undertaken to pay the money as

demanded from time to time notwithstanding any dispute or

disputes raised by the contractor in any suit or proceeding

pending before any court or tribunal or arbitration relating

thereto, the liability of Punjab National Bank under these

presents being absolute and unequivocal.

22 We do not see how clause 3 read with the preceding

clause 2 and with all the sub-clauses and further parts of the

contract, the parties desired a provision for indemnity, as alleged

by Mr. Chagla, to be incorporated. The contract of indemnity and

guarantee are understood by Chapter VIII of The Indian Contract

Act, 1872. Section 124 defines a contract of indemnity by which

one party promises to save the other from loss caused to him by

the conduct of the promisor himself or by the conduct of any

other person. The illustration below the section makes the matter

more clear by which it is, for example, stated that A contracts to

indemnify B against the consequences of any proceedings which

SRP 25/37

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may take against B in respect of a certain sum of rupees. This is a

contract of indemnity. The rights of the indemnity holder when

sued are, therefore, spelt out in section 125.

23 Section 126 defines a contract of guarantee and that is

a contract to perform the promise or discharge the liability of a

third person in case of his default. The person who gives the

guarantee is called the surety; the person in respect of whose

default the guarantee is given is called the principal debtor and

the person to whom the guarantee is given is called the creditor.

24 The consideration for guarantee and the surety’s

liability as clarified by sections 127 and 128 make the position

clear further. It is well settled that bank guarantee is an

autonomous contract. It is an independent contract by which, as

in the present case, the banker agrees and undertakes to pay, as

in the instant case, on demand and without any demur or protest,

the sum guaranteed. The unconditional and unequivocal nature

of the obligation, as in this case, is also spelt out when

irrespective of any dispute between the employer and the

contractor, its pendency in any court or tribunal, the moment the

SRP 26/37

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demand is raised, the bank would make the payment. It would

not question the parties like an employer in this case in any

manner with regard to the nature of the dispute. The demand

would not be questioned or disputed. The satisfaction, based on

which the demand is raised by the employer, will be decisive and

conclusive. It is the employer who will determine whether there

is a breach committed of the terms and conditions of the contract

(the underlying or parent contract) and so long as this

independent or autonomous contract is not linked or made

dependent upon the parent or underlying contract, the obligation

to honour the demand, and by the bank in this case, is absolute.

We do not see how this position in law is altered by the present

arrangement.

25 We are not in agreement with Mr. Chagla that clause

3(i) and its wording would indicate that this is not a performance

guarantee in the form of a bank guarantee and, therefore, a

contract of guarantee itself. It is a contract of indemnity. By

relying on the words employed and namely “indemnify” and

“indemnified”, we cannot spell out a distinct contract as is

attempted by Mr. Chagla. Mr. Chagla also sought to draw support

SRP 27/37

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from the contents of the advocate’s notice and the letter of

invocation dated 25th October, 2016, and the withdrawal thereof

by the first respondent.

26 In that regard, if we peruse page 469 of the paper-

book, that is a letter dated 20th October, 2016. That advocate’s

letter addressed to the first respondent would spell out the

version of the appellant and the petitioner. It would spell out how

there are disputes and differences and though the petitioner-

appellant would claim that it has made compliance with all the

terms and conditions of the contract and, therefore, there is no

question of the bank guarantee being invoked, that is the version

of the petitioner-appellant. Mr. Chagla has invited our attention

to the other documents following this communication. He has

also relied upon the e-mail, copy of which is at page 460. He

would submit that the disputes between the parties being set out

and the nature of the demand being raised denotes that it was an

indemnity which was insisted upon. We are unable to agree with

him. Even if one does not go by the nomenclature, still, on a

complete reading of this document and as a whole, we do not

think that the ingredients of section 124 of the Contract Act,

SRP 28/37

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1872, can be held to be satisfied. This is a document and contract

clearly referable to and falling under section 126 of the Contract

Act, 1872. Mr. Chagla would submit that it is a contract of

indemnity and merely because the further clauses, clauses 3(ii)

and 3(iii) refer to certain obligations based on a demand of

respondent No.1 by relying upon the interpretation thereof, we

cannot spell out a contract of guarantee. We are unable to agree

with this either. Mr. Chagla would like the document not to be

read as a whole, but by reading one of its clause and rather a sub-

clause thereof in isolation. He relies upon the wording of clause

3(ix). However, the wording of that clause instead of assisting

the petitioner-appellant, would belie their contentions as raised

before us. It states that in order to give full effect to the

performance bond, the bank understands the employer

proceeding against it as if it is a principal debtor in respect of the

claims of the employer against the contractor under the contract

and bank expressly waives the suretyship and other rights, if

any, which are, in any event, inconsistent with the above or any

other provisions of the performance guarantee. This will clearly

indicate as to how the bank understood this to be a performance

guarantee in the form a bank guarantee and to be furnished by it.

SRP                                                                                                                     29/37




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Once this is an independent and autonomous contract which must

be construed on its own and its interpretation is not controlled by

the parent or the underlying contract, then, Mr. Chagla’s reliance

on clause 3(ix) is misplaced and, in fact, further fortifies our view

that the document in question is nothing but a bank guarantee

given by respondent No.2.

27 Mr. Chagla then submits that the communication at

page 80 of the compilation is not a decision contemplated by a

contract of indemnity. We do not think that this contention

should detain us. This is a letter dated 27 th October, 2016,

addressed by the first respondent to the Punjab National Bank. It

only informs the bank that the performance guarantee has

already been invoked by it on 25 th October, 2016. However, the

first respondent stated before this Court that it would be

withdrawing its invocation letter of 25th October, 2016, and

issuing a fresh one. Therefore, the bank need not act upon the

earlier demand or invocation contained in the letter dated 25 th

October, 2016. There is a substantive demand raised on 27 th

October, 2016. It was entirely upon the first respondent to alter

the contents of its invocation letter or letter of demand. That is

SRP 30/37

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why on 27th October, 2016, it addresses a comprehensive

invocation letter. It refers to the contract. It refers to clause 8.1

and states that the unconditional, irrevocable and unequivocal

bank guarantee is being invoked and a demand is raised on the

bank in terms thereof. We do not think that the contents of this

letter denote that there is any linking of the obligations under the

parent contract with this performance guarantee in the form of a

bank guarantee. There may be a reference to it in this letter of

invocation, but its terms and conditions have not been

incorporated in any manner in the performance guarantee.

Therefore, based on the contents of this letter, the bank was

obliged to pay the sums. It was not open for the bank to question

the contents of this letter. There is a clear demand because the

contractor has been accused of not completing the work required

under the contract. There are numerous deficiencies which are

committed in performance of the contract. There is delay on the

part of the contractor in performing it. The work already done is

defective. Therefore, the contractor has failed to observe and

perform the terms and conditions of the contract which has

resulted in the first respondent suffering huge losses and

damages in excess of Rs.140 crores. That is why the bank is

SRP 31/37

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called upon to make payment of the full guarantee amount of

Rs.10 crore.

28 We do not think, therefore, that there is any scope to

read a distinct contract and as attempted by the petitioner in this

letter.

29 The alternate contention also need not detain us.

Given the wording which is clear and unambiguous this is an

unconditional, unequivocal and irrevocable bank guarantee. It is

not an indemnity for losses. It cannot be said to be conditional

merely because one sentence of clause 3.1 employ the words

“indemnify the losses”. Merely because it seeks to indemnify the

losses under the contract and the first respondent has to raise a

demand by alleging such losses, will not empower the second

respondent-bank to question the demand or the contents of the

letter of invocation. It cannot, in any manner, call upon the

employer, namely, the first respondent to satisfy it about the

quantum of the loss or the manner in which the same was

suffered or whether that was indeed suffered at all. The demand

by the first respondent and in terms of the above clauses is

SRP 32/37

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decisive. It has been so raised and by the letter of invocation

dated 27th October, 2016. Once the demand is raised, the bank

cannot question it. It is an unconditional performance guarantee

in the form of a bank guarantee. The bank cannot call upon the

employer to satisfy it as to how the appellant has failed to

perform its terms and obligations under the parent contract. In

the absence of any linking and of the above nature, even the

alternate contention must fail.

30 Both the judgments relied upon by Mr. Chagla have no

application to the facts and circumstances of the present case. In

the case of Mula Sahakari (supra) the Hon’ble Supreme Court had

before it an appeal of the bank. It is the bank which was

questioning the nature of the independent contract it had to

perform. It was the bank’s case that what it executed was not a

bank guarantee which could have been encashed, but it was a

performance guarantee. The bank was alleging a fraud on the

part of the beneficiary in seeking to encash such an instrument or

derive any benefit from it. That is how the co-operative society

which had set up a sugar factory had executed a contract for

installation of a paper plant on turnkey basis. That was with one

SRP 33/37

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M/s. Pentagon Engineering Pvt. Ltd.. Pentagon furnished a

performance guarantee in regard to the machinery supplied by it.

That contract contained a clause for retention of ten per cent of

the contract price by M/s. Pentagon. Pentagon suggested for a

modification as regards the payment clause enabling the co-

operative society to waive its rights to retain the ten per cent of

the contract price and in its turn to have a letter of credit so that

they can furnish appropriate bank guarantee. The co-operative

society accepted it. Pentagon responded to it and opened a letter

of credit for the ten per cent retention and as soon as that letter of

credit is opened, Pentagon will give a bank guarantee for the

retention money within ten or fifteen days thereafter. The bank

guarantee/indemnity was thereafter furnished by the State Bank

of India and its clauses were peculiar. That is why when that

bank guarantee was invoked, the bank took the stand that it

cannot honour the demand raised on it by Mula Sahakari. That is

how the co-operative society-respondent filed a suit. An

application was made therein for a direction to the bank to

deposit a sum of Rs.34 lakhs. The High Court directed the bank to

retain the sum subject to the condition that in the event the suit is

decreed, it would be paid with interest at 12%. The suit was

SRP 34/37

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dismissed. The appeal was preferred against that by Mula

Sahakari. The High Court construed that agreement to be a bank

guarantee and decreed the suit.

31 After referring to these facts, the pleadings, the

contract itself, the Hon’ble Supreme Court reproduced the

relevant clauses in paragraphs 13, 14, 15 and 16 of the judgment.

The High Court further read into the contract the words such as

“unequivocal” and “unconditional” “without any demur or

protest”. That is how the High Court committed a gross error in

terming the operative portion of the document as a preamble.

The High Court was wrong in inserting terms and expressions

which did not find place in the document in question. That is how

the further observations are made in paragraph 23 to 26 relied

upon by Mr. Chagla and eventually paragraph 34.

32 To our mind, the facts and circumstances of this case

are completely distinguishable and do not apply to the matter

before us.



      33                Even in the case M/s. Hindustan Construction

SRP                                                                                                                     35/37




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Company Limited (supra) it was apparent that the bank

guarantee itself contained a stipulation linking its invocation to

the terms and conditions in the parent contract which are

required to be fulfilled. That is why the obligations expressed in

the said clause having not been fulfilled by the contractor that the

employer derives the right for recovery of whole or part of the

advance mobilisation loan from the contractor under the

contract. That is why the bank guarantee and to secure the same

could have been invoked only on the satisfaction as above. That is

how Hindustan’s case is distinguishable from the present matter.

34 We, therefore, do not think that any advantage can be

derived from the judgment of the Hon’ble Supreme Court in the

case of Hindustan (supra) either.

35 We are of the firm opinion that the bank guarantee

before us is unequivocal and unconditional. It is not a conditional

bank guarantee and, therefore, the beneficiary has an unfettered

right to invoke it.

SRP                                                                                                                     36/37




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      36                As a result of the above discussion, we find that the

only two contentions raised before us by Mr. Chagla have no

merit. Consequently, the appeal fails. It is, therefore, dismissed.

In the circumstances, there shall be no order as to costs.

37 We clarify that the disputes and differences proposed

to be referred to arbitration shall be decided, uninfluenced by any

tentative and prima facie findings in the impugned order and our

order on this appeal. All contentions of both sides are expressly

kept open.

38 At this stage, Mr. Saraf prays for continuation of the

ad-interim order dated 26th October, 2016, and which is continued

till date. The request is opposed by the respondent No.1.

39 Having noted Mr. Saraf’s request, we find that the

bank guarantee is unequivocal and unconditional. Further, it is a

bank guarantee as ruled by us. In such circumstances, as a

independent obligation of the banker is flowing from the same,

that cannot be interfered with. The request is, therefore, refused.

B.P. COLABAWALLA, J. S.C. DHARMADHIKARI, J.

SRP                                                                                                                     37/37




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