Delhi High Court: In an appeal filed under Section 37(2)(b) of the Arbitration and Conciliation Act, 1996 (‘1996 Act’) to challenge the award dated 10-01-2024 passed by the Arbitral Tribunal comprising three Arbitrators, a Single Judge Bench of C. Hari Shankar, J. set aside the impugned order and said that the decision of the Arbitral Tribunal to stay the invocation of the Bank Guarantees (‘BGs’) furnished by Navayuga-Van OORD JV (respondent) to the Director General, Project Varsha, Indian Navy (‘DG’) (appellant) was neither sustainable on facts nor in law.
Background
The DG floated a tender in November, 2016 for the construction of the outer Harbour Package at Project Varsha, Visakhapatnam, Andhra Pradesh. The joint venture of Navayuga-Van OORD JV emerged as the successful bidder, and the letter of acceptance was issued to them on 24-10-2017. This culminated in a contract dated 19-12-2017.
As per the contract, Navayuga-Van OORD JV issued two Performance Bank Guarantees (‘PBGs’) dated 18-11-2017 and 29-11-2017 in favour of the DG for Rs. 292.54 Crores and Rs. 74,16,97,410/- respectively. They also issued an Advance Bank Guarantee (‘ABG’) dated 09-12-2017 for Rs. 188,82,87,026/- and four Retention Money Bank Guarantees (‘MBGs’) for 32 crores, 3.7 crores, 22.5 crores, and 20 crores.
Disputes arose between the parties and Navayuga-Van OORD JV approached the Court seeking two reliefs on the premise that it anticipated coercive action by the DG. First, the appointment of an independent agency to find an effective way forward and to enable expeditious completion of contractual works. Second, that the DG be restrained from invoking or encashing the BGs furnished by Navayuga-Van OORD JV, during the pendency of the arbitral proceedings.
The above-mentioned matter was disposed of by a Single Judge Bench of the Court by judgment dated 30-06-2022. Navayuga-Van OORD JV challenged this judgment before a Division Bench of the Court. In the meanwhile, the Arbitral Tribunal which had passed the impugned award was constituted.
By the impugned order dated 10-01-2024, the Arbitral Tribunal had allowed the application of Navayuga-Van OORD JV and had restrained the DG from invoking any of the BGs for a total amount of Rs. 633,73,84,436/- while the disposal of the proceedings was pending.
The Arbitral Tribunal found that the invocation letter dated 06-07-2022 addressed by the DG to the banks concerned, seeking to invoke the BGs was not in conformity with the requirements of the BGs themselves.
The DG submitted that the contract was terminated as Navayuga-Van OORD JV had defaulted in ensuring proper and timely performance of the contract and subsequently, had justifiably invoked the BGs.
Navayuga-Van OORD JV submitted that due to circumstances beyond their control including the Covid-19 pandemic, it had become impossible to complete the project within the originally envisaged contractual period of 42 months. It was also mentioned that upon referring the matter to a professor of IIT Madras, he opined that it would take 88 months to complete the project.
Analysis and Decision
The Court stated that the only issue for consideration, in the present matter, was whether the invocation of the BGs furnished by Navayuga-Van OORD JV could legally have been injuncted. It was mentioned that the Court was unable to satisfy itself that the manner in which the Arbitral Tribunal had exercised its discretion was in sync with law, which made it important for the Court to interfere.
The Court said that any prayer for injunction of invocation of the BG, by the benefactor, is like a prayer by one party seeking a restraint against a second party complying with its statutory obligations towards a third party. Therefore, the court said that such an order is not to be ordinarily granted.
Further, the Court said that the invocation of an unconditional BG can be injuncted if one or more of three conditions is shown to exist. The party seeking an injunction has to establish that the injunction is vitiated by egregious fraud, or that invocation would result in irretrievable injustice, or that there exist special equities that justify the grant of injunction against invocation.
The Court noted that the Arbitral Tribunal had sought to justify the decision to grant injunction against invocation of the BGs on the ground that the letters of invocation dated 06-07-2022 did not conform to the conditions contained in the BGs and that special equities existed.
The Court referred to CRSC Research and Design Institute Group Co. Ltd. v. Dedicated Freight Corridor Corporation of India Ltd. 2020 SCC OnLine Del 1526 and Garg Builders v. Hindustan Prefab Ltd. 2022 SCC OnLine Del 1264 and stated that what was required was the application of the principles discussed in these cases.
To answer whether the letter of invocation was as per the BGs, the Court perused the content of all the BGs and stated that all that was required for the bank to be contractually obligated to pay the amount covered by the RBGs was a statement by the DG saying that the amount claimed was due from Navayuga-Van OORD JV by reason of breach of the contract by them irrespective of the nature or extent of the breach. The Court also mentioned that no defence of Navayuga-Van OORD JV to any assertions made by the DG was permissible while invoking the RBGs.
Further, to answer whether the letters of invocation were in conformity with the requirements of the BGs, the Court said that there was no scope for applying the principles of incorporation by reference as per the facts of this case and that the invitation in para 1 of the letters of invocation to refer to the notice of termination, required the bank to read both the documents together.
Thus, the Court said it was clear that all requirements of the PBGs, ABG, and RBGs were contained in the communications from the appellant to the banks for invocation of the BGs.
The Court, upon reading the notice of termination dated 06-07-2022, noted that there were more than sufficient assertions regarding failure of Navayuga-Van OORD JV in complying with its obligations under the contract, and the entitlement of the DG to be paid the amounts covered by the BGs.
Further, the Court said that Clause 15.4 of the contract ipso facto entitled the DG to be paid the amounts covered by all the BGs as a consequence of the termination of the contract and this right was absolute and indefeasible.
The Court stated that when the letters of invocation are read along with the notice of termination, the required assertions and allegations as envisaged by the BGs, had been duly communicated by the appellant to the banks.
In this context, the Court said that it was completely in agreement with the view expressed in Reliance Infrastructure Ltd. v. NLC India Ltd.1 wherein it was held that the requirement of letters of invocation being in terms of BGs has to be realistically applied. It was also said that what has to be seen is whether the required assertion/allegation was made in the letters of invocation which may also be made in a document annexed to the same to which reference is invited.
The Court stated that it could not be said that the letters of invocation dated 06-07-2022 that was addressed by the DG to the banks, did not conform to the stipulations contained in the BGs and thus, the findings of the Arbitral Tribunal could not sustain.
To answer whether the invocation of the BGs could be injuncted by applying the principle of special equities, the Court said that while applying the principle of special equities, the Arbitral Tribunal had proceeded on considerations which were not forthcoming from the material on record and were presumptive in nature.
The Court referred to decisions laid down by the Supreme Court and said that the equities in favor of the party that restrict the invocation of the BGs must be so overwhelming that they predominate and override the obligation of the bank to honor its commitment to the beneficiary under the BGs. It was noted that the Supreme Court observed that the considerations of fraud and special equities must be conjointly found to exist for an unconditional BG to be injuncted.
Further, the Court said that if one were to apply the principles laid down in Svenska Handelsbanken v. Indian Charge Chrome, (1994) 1 SCC 502, the impugned award of the Arbitral Tribunal would have to be set aside since Navayuga-Van OORD JV had never even alleged fraud against the appellant.
The Court stated that the Arbitral tribunal was well aware of the legal position which says that special equities must necessarily be in the form of irretrievable injustice, which is why, it did not hold special equities to be existing in favour of Navayuga-Van OORD JV but, has concentrated on the aspect of irretrievable injustice.
The Court said that the observation made by the Arbitral Tribunal that allowing the DG to encash the BGs would render restitution of the respondent at a later stage impossible could not sustain in facts or in law.
The Court stated that disputed factual claims cannot constitute ‘special equities’ as understood in law as a consideration on which the invocation of unconditional BGs could legitimately be injuncted. It was also said that even though Clause 15.6 of the contract entitled the DG to recover the injuncted amounts with interest at a later stage, it could not, however, determine whether a case for grant of injunction did or did not exist.
The Court opined that Navayuga-Van OORD JV had not succeeded in making out a case to justify injunction within the parameters of the applicable law either before the Arbitral Tribunal or before the Court.
Thus, the Court quashed and set aside the impugned award while saying that the findings of the Arbitral Tribunal were unsustainable, and no case for injuncting the invocation of BGs furnished by Navayuga-Van OORD JV could be said to exist. It was also said that neither the Arbitral tribunal nor the Court could delve into the various covenants of the contract to examine whether the invocation of the BGs by the DG was justified.
[Director General, Project Varsha v. Navayuga Van OORD JV, 2024 SCC OnLine Del 6459, Decided on 17-09-2024]
Advocates who appeared in this case :
For Petitioner — Sr. Advocate K.K. Venugopal, ASG Aishwarya Bhati, Advocate Kapil Arora, Advocate P. Veer Misra, Advocate Palak Nagar, Advocate Kajal Arora, Advocate Siddhant Kohli, Advocate Kartik Sharma, Advocate Anuradha, Advocate Aryaman Vachher
For Respondent — Advocate Saurav Agrawal, Advocate Shantanu Agarwal, Advocate Aadya Chawla, Advocate Harshit Malik, Advocate Manas Arora, Advocate Chandreyee Maitra, Advocate Sulekha Agarwal, Advocate Allaka
Buy Arbitration and Conciliation Act, 1996 HERE
