KSHEMA POWER AND INFRASTRUCTURE COMPANY (P) LTD. v UNION OF INDIA & ORS

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT** **THE HONOURABLE MR.JUSTICE V.G.ARUN** **TUESDAY, THE 23[RD] DAY OF MAY 2023 / 2ND JYAISHTA, 1945 WP(C) NO. 15426 OF 2021** ## **PETITIONER/S:** KSHEMA POWER AND INFRASTRUCTURE COMPANY (P) LTD. REGISTERED OFFICE AT XXVII/532.T2, TRINITY CASTLE, EDAPALLY,COCHIN - 682024, KERALA, REPRESENTED BY AUTHORIZED SIGNATORY, C.C. VISWANATHAN NAIR, S/O. CHANDRA SEKHARAN NAIR, CHANDRA VILAS, KODANAD, ERNAKULAM - 683544. BY ADVS. PRAVEEN K. JOY T.A.JOY E.S.SANEEJ M.P.UNNIKRISHNAN M.K.SAMYUKTHA N.ABHILASH DEEPU RAJAGOPAL BEENA JOSEPH GEORGE POONTHOTTAM (SR.) ## **RESPONDENT/S:** 1 UNION OF INDIA REPRESENTED BY SECRETARY, MINISTRY OF BANKING & FINANCE, PARLIAMENT HOUSE, NEW DELHI - 110001. 2 RESERVE BANK OF INDIA BAKERY JUNCTION ROAD, NANDAVANAM, PALAYAM, TRIVANDRUM - 695033, REPRESENTED BY GENERAL MANAGER. 3 GRIEVANCE REDRESSAL COMMITTEE STATE BANK OF INDIA, LOCAL HEAD OFFICE, POOJAPURA, TRIVANDRUM - 695012. 4 THE GENERAL MANAGER STATE BANK OF INDIA, LOCAL HEAD OFFICE, POOJAPURA, TRIVANDRUM - 695012. 5 THE CHIEF MANAGER STATE BANK OF INDIA, SMALL SCALE FINANCE, KALAMASSERY BRANCH, PATHADIPALAM, ERNAKULAM - 682024. 6 THE MANAGER STATE BANK OF INDIA, SMALL SCALE FINANCE, SUKHLIYA BRANCH, INDORE, MADHYAPRADHESH 452003. W.P.(C) No.15426 of 2021 -2- 7 THE PROJECT DIRECTOR MADHYA PRADESH PASCHIM KSHETHRA, VIDHTH VITARAN COMPANY LTD, G.P.H. COMPOUND, POLOGROUND, INDORE, MADHYAPRADHESH 452003. BY ADVS. SHRI.P.VIJAYAKUMAR, ASG OF INDIA S.EASWARAN RAJU JOSEPH (SR.) C.JOSEPH ANTONY S.MANU ## **OTHER PRESENT:** SC FOR SBI M.JITESH MENON **THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON** **10.01.2023, THE COURT ON 23.05.2023 DELIVERED THE FOLLOWING:** W.P.(C) No.15426 of 2021 -3- ## **JUDGMENT** Dated this the 23[rd] day of May, 2023 The petitioner, as the lead partner of a joint venture company, entered into two contracts with the 7[th] respondent for supply of materials, erection, installation, testing and commissioning of 11KV line and other related works and solar panels for the North and South Division of Indore city in Madhya Pradesh. As per Clause 9 of the contract, the petitioner is required to furnish bank guarantee for 10% of the contract amount. Accordingly, the petitioner submitted Exts.P2, P3 and P4 bank guarantees from the State Bank of India, Kalamassery Branch. The bank guarantees provides for payment of the bid security at Indore through the State Bank of India, Small Scale Finance Sukhliya Branch, Indore. The validity period of the bank guarantees was up to W.P.(C) No.15426 of 2021 -4- 31.12.2020 and the last date for lodgement of claim was 31.12.2021. The validity period of Ext.P4 bank guarantee was subsequently extended up to 31.12.2024. 2. Based on the award of contract, the petitioner commenced the work and payments were made by the 7[th] respondent periodically. Even though the works were completed by 31.03.2020, the 7[th] respondent refused to pay the balance bill amount, citing various complaints received about the irregularities committed by the petitioner in the execution of the works. The 7[th] respondent further issued Ext.P6 letter dated 30.07.2021 to the Managers of the Kalamassery and Sukhliya Branches of the State Bank of India, invoking the bank guarantees and directing to remit the proceeds to its accounts. 3. On coming to know about Ext.P6 letter, the petitioner submitted Ext.P7 representation, W.P.(C) No.15426 of 2021 -5- pointing out that the validity period of the bank guarantees had expired and the branch managers should therefore be restrained from invoking the bank guarantees. This writ petition is filed apprehending that the bank guarantees would be invoked, despite the request in Ext.P7. The reliefs sought in this writ petition are as under; _“i. To issue writ, order or direction in the nature of mandamus directing the 3rd and 4th respondent to take up Ext.P7 and initiate appropriate action, following the dictum in Ext.P1 judgment and to keep in abeyance the further proceedings of 5 respondent under Ext.P6, in the interest of justice._ _ii. To call for the entire records leading to issuance of Ext.P6 from the 5th respondent, as it is illegal and arbitrary, following the dictum in Ext.P1 Judgment, in the interest of justice._ _iii. To issue writ, order or direction in the nature of mandamus directing the 5th respondent to stop the further proceedings under Ext.P6, following the dictum in Ext.P1 judgment and to reject the claim for expired_ ## W.P.(C) No.15426 of 2021 -6- _bank guarantee, in the interest of justice.”_ 4. Heard Adv. Praveen K.Joy for the petitioner, Senior Advocate Raju Joseph for the 7[th] respondent, Adv.S.Easwaran, learned Counsel appearing for the State Bank of India and Adv. S.Manu, learned DSGI for the Union of India. 5. Learned Counsel for the petitioner submitted that the challenge is confined to the invocation of Exts.P2 and P3 bank guarantees, as the validity period of Ext.P4 stands extended up to 31.12.2024. Referring to Exts.P2 and P3, it is pointed out that the guarantee cover is only for the period 20.09.2019 to 31.12.2020 and it is specifically stipulated in the bank guarantee that the liability of the bank is to pay to the employer the amount guaranteed in respect of any demand duly made prior to expiry of the letter of guarantee. As such, the bank guarantee can be invoked only if the demand was made prior to its W.P.(C) No.15426 of 2021 -7- expiry. Insofar as Ext.P6 demand was made after the expiry period, the bank guarantee cannot be invoked. In support of this contention, reliance is placed on Ext.P1 judgment wherein, under similar circumstances, it was held that, for a right under the bank guarantee to arise, demand has to be made within the period of validity of the agreement. Attention is also drawn to the order dated 27.08.2021 passed in this writ petition, based on the submission of the Bank's Counsel that, in the light of Ext.P1 judgment, the bank may not be acting upon Ext.P6 claim insofar it relates to Exts.P2 and P3 bank guarantees. It is submitted that the order was subsequently made absolute on 29.10.2021. Although 7[th] respondent's challenge against that order in W.A.No.1725 of 2021, was repelled by the Division Bench. 6. Learned Senior Counsel, appearing for W.P.(C) No.15426 of 2021 -8- the 7[th] respondent, raised a preliminary objection as to the maintainability of the writ petition on the ground that this Court lacks territorial jurisdiction, since the agreement was entered into and the work executed in Indore. It is contended that, execution of the bank guarantee being in terms of the agreement executed at Indore, the demand for invocation of bank guarantee by the 7[th] respondent does not give rise to any cause of action within the territorial limits of this Court. 7. It is further contended that, bank guarantee being a contract between the bank and the beneficiary, the beneficiary's demand for invocation of bank guarantee will not give rise to any cause of action for the person at whose instance the bank guarantee was provided. In support of this contention, reliance is placed on the decision in _**Hindustan Steel Works**_ W.P.(C) No.15426 of 2021 -9- ## _**Construction Ltd v. Tarapore and Co. and another**_ _**[(1996) 5 SCC 34]**_ **.** According to the Senior Counsel, Ext.P1 judgment cannot be taken as a precedent since the finding therein was rendered without considering the relevant provision, namely, Section 28 of the Contract Act. 8. For deciding the issue involved, a scrutiny of the following terms of the bank guarantees is essential; _“Our liability under this Letter of Guarantee shall be to pay to the Employer whichever is the lesser of the sum so requested or the amount then guaranteed hereunder in respect of any demand duly made hereunder prior to expiry of the Letter of Guarantee, without being entitled to inquire whether or not this payment is lawfully demanded._ _This letter of Guarantee shall remain in full force and shall be valid from the date of issue until ninety (90) days beyond the Defect Liability Period of the Facilities i.e. upto and inclusive of 31/12/2020 and shall be extended from time to time for such period_ W.P.(C) No.15426 of 2021 -10- _(not exceeding one year), as may be desired by M/s. KSHEMA POWER AND INFRASTRUCTURE COMPANY PRIVATE LIMITED on whose behalf this Letter of Guarantee has been given._ _We are liable to pay the guaranteed amount or any part thereof under this Bank Guarantee only and only if you serve upon us a written claim or demand on or before 31.12.2021.”_ The above terms make it clear that, while the bank is obliged to pay the amount demanded by the employer prior to the expiry of the guarantee (31.12.2020), without demur, the bank will be liable to pay the guaranteed amount or any part thereof, if a written claim or demand is made by the employer on or before the last date for lodgement of claim (31.12.2021). Indisputably, the 7[th] respondent had raised the demand for invocation of bank guarantees prior to 31.12.2021. In such circumstances, it is for the bank to decide as to whether the demand is to be honoured or not. If, for any reason, the bank W.P.(C) No.15426 of 2021 -11- fails to honour the demand, that would give rise to a cause of action for the 7[th] respondent and not for the petitioner. In this context, the following observations of the Apex Court in ## _**Hindustan Steel Works Construction Ltd** (supra)_ assumes relevance; _“14. The High Court also committed a grave error in restraining the appellant from invoking bank guarantees on the ground that in India only a reasonable amount can be awarded by way of damages even when the parties to the contract have provided for liquidated damages and that a term in a bank guarantee making the beneficiary the sole judge on the question of breach of contract and the extent of loss or damages would be invalid and that no amount can be said to be due till an adjudication in that behalf is made either by a court or an arbitrator, as the case may be. In taking that view the High Court has overlooked the correct position that a bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the primary contract between the person at whose instance the bank guarantee is given and the_ W.P.(C) No.15426 of 2021 -12- _beneficiary. What the High Court has observed would be applicable only to the parties to the underlying transaction or the primary contract but can have no relevance to the bank guarantee given by the bank, as the transaction between the bank and the beneficiary is independent and of a different nature. In case of an unconditional bank guarantee the nature of obligation of the bank is absolute and not dependent upon any dispute or proceeding between the party at whose instance the bank guarantee is given and the beneficiary. The High Court thus failed to appreciate the real object and nature of a bank guarantee. The distinction which the High Court has drawn between a guarantee for due performance of a works contract and a guarantee given towards security deposit for that contract is also unwarranted. The said distinction appears to be the result of the same fallacy committed by the High Court of not appreciating the distinction between the primary contract between the parties and a bank guarantee and also the real object of a bank guarantee and the nature of the bank's obligation thereunder. Whether the bank guarantee is towards security deposit or mobilisation advance or working funds or for due performance of the contract if the same is_ W.P.(C) No.15426 of 2021 -13- _unconditional and if there is a stipulation in the bank guarantee that the bank should pay on demand without a demur and that the beneficiary shall be the sole judge not only on the question of breach of contract but also with respect to the amount of loss or damages, the obligation of the bank would remain the same and that obligation has to be discharged in the manner provided in the bank guarantee. In General Electric Technical Services Co. Inc. v. Punj Sons (P) Ltd. [(1991) 4 SCC 230] while dealing with a case of bank guarantee given for securing mobilisation advance it has been held that the right of a contractor to recover certain amounts under running bills would have no relevance to the liability of the bank under the guarantee given by it. In that case also the stipulations in the bank guarantee were that the bank had to pay on demand without a demur and that the beneficiary was to be the sole judge as regards the loss or damage caused to it. This Court held that notwithstanding the dispute between the contractor and the party giving the contract, the bank was under an obligation to discharge its liability as per the terms of the bank guarantee. Larsen and Toubro Ltd. v. Maharashtra SEB [(1995) 6 SCC 68] and Hindustan Steel Workers Construction_ ## W.P.(C) No.15426 of 2021 -14- _Ltd. v. G.S. Atwal & Co. (Engineers) (P) Ltd. [(1995) 6 SCC 76] were also cases of work contracts wherein bank guarantees were given either towards advances or release of security deposits or for the performance of the contract. In both these cases this Court held that the bank guarantees being irrevocable and unconditional and as the beneficiary was made the sole judge on the question of breach of performance of the contract and the extent of loss or damages an injunction restraining the beneficiary from invoking the bank guarantees could not have been granted. The abovereferred three subsequent decisions of this Court also go to show that the view taken by the High Court is clearly wrong._ 9. To counter the objection as to maintainability, Counsel for the petitioner relied on various decisions of the Apex Court, including the decision in _**M/S. Kusum Ingots &**_ _**Alloys Ltd v Union Of India And Anr [(2004) 6 SCC 254].**_ Therein, it was held that even if a small fraction of cause of action accrues within the jurisdiction of a Court, that Court will have ## W.P.(C) No.15426 of 2021 -15- jurisdiction in the matter. It is argued that, insofar as the bank guarantee was executed through Kalamassery Branch of the SBI and Ext.P6 letter demanding invocation of bank guarantee is addressed to the Kalamassery Branch Manager also, a portion of the cause of action, has arisen within the jurisdiction of this Court also. 10. Even if it is taken that a small fraction of the cause of action has arisen within the jurisdictional limits of this Court, the writ petition is still not maintainable, in view of the settled position that, in the absence of exceptional circumstances, writ courts should refrain from entertaining disputes arising out of contracts. There being no such exceptional circumstance here, the writ petition is liable to be rejected. The wording of the bank guarantee that was the subject matter of consideration in Ext.P1 W.P.(C) No.15426 of 2021 -16- judgment, being different from Exts.P2 and P3 bank guarantees, the findings in Ext.P1 have no binding effect. In the result, the writ petition is dismissed. Sd/- **V.G.ARUN JUDGE** Scl/ W.P.(C) No.15426 of 2021 -17- ## **APPENDIX OF WP(C) 15426/2021** PETITIONER EXHIBITS Exhibit P1 TRUE PHOTOCOPY OF THE JUDGMENT OF THIS HON'BLE COURT DATED 26.04.2021. Exhibit P2 TRUE PHOTOCOPY OF THE BANK GUARANTEE NO.7029119BG0000058 DATED 20.09.2019.OF STATE BANK OF INDIA, SME KALAMASSERY. Exhibit P3 TRUE PHOTOCOPY OF THE BANK GUARANTEE NO.7029119BG0000055 DATED 20.09.2019 OF STATE BANK OF INDIA, SME KALAMASSERY. Exhibit P4 TRUE PHOTOCOPY OF THE BANK GUARANTEE NO.7029119BG0000053 DATED 20.09.2019 OF STATE BANK OF INDIA, SME KALAMASSERY. Exhibit P5 TRUE PHOTOCOPY OF THE BANK GUARANTEE FOR AMOUNT RS. 33,72,174/- WITH NO.7029119BG0000053 IN STAMP PAPER DATED 07.01.2021 OF STATE BANK OF INDIA, SME KALAMASSERY BRANCH. Exhibit P6 TRUE PHOTOCOPY OF THE LETTER ISSUED TO THE 5TH RESPONDENT BANK DATED 30.07.2021 IN RESPECT OF THE BANK GUARANTEE OF THE PETITIONER. Exhibit P7 TRUE COPY OF THE PETITIONER DATED 31.07.2021 BEFORE THE 3RD AND 4TH RESPONDENT. Exhibit P8 THE TRUE COPY OF THE RELEVANT PAGE OF THE JUDGMENT 5/11/2020 OF THE APEX COURT IN CIVIL APPEAL NO.3630/2020(ARISING OUT OF SLP (C) 18375/2018).