Chattisgarh High Court Sets Aside Order For Not Considering "Irretrievable Injury" Which May Be Caused To Parties After Invoking Bank Guarantee

The Chattisgarh High Court recently set a aside an order for not considering "irretrievable injury" that may be caused to a party due to encashment of a bank guarantee in a contractual dispute, reiterating the settled position of law on the subject matter.

A division bench of Chief Justice Ramesh Sinha and Justice Ravindra Kumar Agrawal in its August 2 judgment underscored, "Though Bank Guarantee is a bilateral contract between the Bank and the beneficiary, the aspect of irretrievable injury that may be caused to a party should also be considered while its invocation/encashment, especially when the obligation to complete the work for which the Bank Guarantee was given, has been fulfilled".

In doing so the division bench said that the single judge bench while dismissing the plea of appellant company– engaged in executing large scale projects in power, oil and gas sectors, had "erred in law by not considering" the aspect of irretrievable injury which would be caused to the company in case the bank guarantee is permitted to be encashed wherein the company's "net worth" would be completely "wiped out".

"The appellant herein has admittedly approached the State Arbitral Tribunal for the adjudication of its claims and till his claims are adjudicated, equity demands that the respondent/CSPGCL be restrained from encashing/invoking the BGs (bank guarantee) which, as per the learned counsel for the parties, have already been extended for a period of one year," the high court said.

Allowing the company's appeal the high court set aside the single judge's order and further directed the State Arbitration Tribunal to consider and decide the appellant's–BGR Energy Systems Limited, reference plea on the issue and decide it "as expeditiously as possible, preferably within a period of four months" from the date of receiving a copy of the August 2 judgment. Till the reference plea is decided, the high court further restrained the respondent–Chhattisgarh State Power Generation Company Limited (CSPGCL) from invoking/encashing the bank guarantees in question.

On irretrievable injury caused to a party due to invocation of Bank Guarantee

The high court in its 46 page judgment found that admittedly CSPGCL had been granting extension to the appellant-Company on number of occasions and till the appellant company sent a notice of closure of the contract and release of outstanding dues in January 2023, the generator had no objection in extending the contract period.

Noting that the respondent did not inform about any losses caused to it, the court said, "The total cost of the project was Rs. 1633.7098 {Rs. 941.8498 crores + Rs. 691.86 crores) and the respondent/CSPGCL has also made payment of about Rs. 1300 Crores to the appellant-Company. Had it been a case that the respondent/CSPGCL was dissatisfied with the work of the appellant-Company, it could have invoked/encashed the BGs at an earlier point of time. The respondent-CSPGCL has not even bothered to inform the appellant-Company as to what was the actual loss caused to them neither any communication has ever been made in this regard".

The high court found that CSPGCL issued the "trial operation certificate" to the appellant company, the defect liability period was over and the contract was deemed to have been completed under clause 13 of the General Conditions of Contract (GCC) and subsequently "commercial operations had also commenced".

"Thus, there was no reason or justification for invocation of BGs on the part of the respondent CSPGCL without calculating the actual loss / damage caused to the respondent/CSPGCL," the bench underscored.

On Respondent CSPGCL's conduct, indulged in "dilatory tactics"

On the conduct of CSPGCL the high court said that after it got its work completed by the appellant company, CSPGCL in order to avoid discharging its liability, "indulged into dilatory tactics" and "tried to invoked the BGs", once the appellant company sought its legitimate dues.

"If the work of the appellant/Company was not to the satisfaction of the respondent/ CSPGCL, there was no occasion for the respondent/CSPGCL to extend the contract period and enter into supplementary agreements with the appellant-Company", the high court observed.

It further said that if this is the conduct of the CSPGCL, "which is an undertaking Company of the State then no private firm/Company would show any interest in working with it" ultimately causing a loss to the State itself.

Position of Law

The High Court referred to the ratio laid down by the Supreme Court in U.P. State Sugar Corporation v. Sumac International (1997) and Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering works (P) Ltd. (1997) wherein it was observed that "Bank is bound to honour the BGs irrespective of any dispute raised by the customer (at whose instance the guarantee was issued) against the beneficiary, subject to two exceptions". These are– a fraud committed in the notice of the bank which would vitiate the very foundation of the guaranteee or encashment of the BG would result in irretrievable harm or injustice of the kind which make it impossible for the guarantor to reimburse himself.

Observing that no doubt BGs are irrevocable in nature and that they are payable by the guarantor to the appellant "on demand without demur", the high court said that Supreme Court had reiterated in Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co (2007) that "Courts should be slow in granting an injunction to restrain the realisation of such BGs".

In its 2007 decision the apex court had laid down certain principles which are to be noted by courts adjudicating the issue. This includes, while dealing with an injunction plea in the course of commercial dealings when an unconditional Bank Guarantee or Letter of Credit is given or accepted, the Beneficiary is entitled to realize such a Bank Guarantee or a Letter of Credit as per the terms irrespective of any pending disputes relating to the terms of the contract.

The apex court further held, "the Bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer...Since a Bank Guarantee...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...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"

The high court said that while it respectfully agrees with the ratio laid down by the Supreme Court, another important issue which needs consideration in the matter is with regard to irretrievable injury that may be caused to a party by invocation/encashment of the BGs.

The high court referred to Supreme Court's decision in Gangotri Enterprises Ltd. v. Union of India & Ors (2016) wherein it was observed, "In other words, the sum claimed by the respondents is neither an admitted sum and nor a sum which stood adjudicated by any Court of law in any judicial proceedings but it is a disputed sum and lastly, the Bank Guarantee in question being in the nature of a performance guarantee furnished for execution work of contract...and the work having been completed to the satisfaction of the respondents, they had no right to encash the Bank Guarantee".

It further referred to a decision of the Chennai high court which it said had been affirmed by the Supreme Court in Chennai Metro Rail Limited v. M/s. Transtonnelstroy Afcons (JV) (2022) and had "attained finality" by the order passed by the Supreme Court. The bench said that the same was cited before the Single Judge bench but was not considered.

Background

The appellant BGR Energy–represented by advocate Kartik Seth, was awarded a contract for "design, engineering, manufacturing, shop fabrication, assembly, inspection and testing at supplier's/sub-contractor's works, packing, forwarding to site of all equipment/materials for Balance of Plant (BOP) Package" for the '2x500 MW Marwa Thermal Power Project' by CSPGCL. The company had furnished Bank Guarantees in favour of CSPGCL. The Period for completion of work of contract, as per Letter Of Awards, was 30 months from the date of LOA.

As the company could not complete the works awarded within stipulated period and therefore, on the request of appellant, time for completion of work mentioned in LOAs was extended from time to time with conditions. Trial operation certificate was issued by CSPGCL in favour of appellant company in 2018. Thereafter, appellant entered into supplementary agreement for BOP to supply, erect and trial operate the balance equipment / systems and to provide services. On January 24, 2023 appellant wrote letter to respondent-CSPGCL and requested for release of Rs.129.37 Crores payable to it and also for release of performance bank guarantees.

On March 6, 2023 CSPGCL wrote letter for invocation of BGs amounting to Rs.163.37 crores. After coming to know the action on the part of respondent CSPGCL with regard to invocation of BGs, appellant filed writ petition before the High Court of Madras and obtained an interim order on April 27, 2023, but later on that writ petition was dismissed for want of jurisdiction. Thereafter, the appellant-Company moved writ petition before the single judge bench of the Chhattisgarh High Court, which went to dismiss it on November 28, 2023 against which the company moved the division bench.

Case Title: M/s BGR Energy Systems Ltd. v Chhattisgarh State Power Generation Co. Ltd. and Another

Counsel appearing for Appellants: Advocates Kartik Seth, Ayushi Agrawal, Abhishek Gupta, Medha Shrivastava and Maithali Moondra

Counsel appearing for the Respondent CSGPCL : Senior Advocate Jayant Bhushan, advocates Abhinav Kardekar, Ayush Singh Solanki, Amartya Bhushan and Pranav Khandelwal

Counsel appearing For Respondent Bank : Advocate P.R. Patankar

BGR Energy Systems Ltd. v. CSGPCL and Anr.