Whether the High Court is justified in exercising its discretionary jurisdiction under Article 226 of the Constitution of India for restraining the appellant from invoking an unconditional bank guarantee executed by the first respondent,= In Himadri Chemicals Industries Limited v. Coal Tar Refining Company[2], at paragraph -14: “14. From the discussions made hereinabove relating to the principles for grant or refusal to grant of injunction to restrain enforcement of a bank guarantee or a letter of credit, we find that the following principles should be noted in the matter of injunction to restrain the encashment of a bank guarantee or a letter of credit: (i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the beneficiary is entitled to realise such a bank guarantee or a letter of credit in terms thereof irrespective of any pending disputes relating to the terms of the contract. (ii) The bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. (iii) The courts should be slow in granting an order of injunction to restrain the realisation of a bank guarantee or a letter of credit. (iv) Since a bank guarantee or a letter of credit 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. (v) Fraud of an egregious nature which would vitiate the very foundation of such a bank guarantee or letter of credit and the beneficiary seeks to take advantage of the situation. (vi) 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.” Guarantee given by the bank to the appellant contains only the condition that in case of breach by the lead promoter, viz., the first respondent of the conditions of LoI, the appellant is free to invoke the bank guarantee and the bank should honour it … “without any demur, merely on a demand from GMB (appellant) stating that the said lead promoter failed to perform the covenants…”. It has also been undertaken by the bank that such written demand from the appellant on the bank shall be … “conclusive, absolute and unequivocal as regards the amount due and payable by the bank under this guarantee”. Between the appellant and the first respondent, in the event of failure to perform the obligations under the LoI dated 06.02.2008, the appellant was entitled to cancel the LoI and invoke the bank guarantee. On being satisfied that the first respondent has failed to perform its obligations as covenanted, the appellant cancelled the LoI and resultantly invoked the bank guarantee. Whether the cancellation is legal and proper, and whether on such cancellation, the bank guarantee could have been invoked on the extreme situation of the first respondent justifying its inability to perform its obligations under the LoI, etc., are not within the purview of an inquiry under Article 226 of the Constitution of India. Between the bank and the appellant, the moment there is a written demand for invoking the bank guarantee pursuant to breach of the covenants between the appellant and the first respondent, as satisfied by the appellant, the bank is bound to honour the payment under the guarantee. Therefore, the appeal is allowed and the impugned judgment is set aside. However, we make it clear that this judgment will not stand in the way of the first respondent working out its grievances in appropriate proceedings as permitted under law.

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 9821 OF 2016
(Arising out of S.L.P.(C) No. 7874 of 2016)
GUJARAT MARITIME BOARD … APPELLANT (S)

VERSUS

L&T INFRASTRUCTURE DEVELOPMENT
PROJECTS LTD. AND ANOTHER … RESPONDENT (S)
J U D G M E N T

KURIAN, J.:

Leave granted.

Whether the High Court is justified in exercising its discretionary
jurisdiction under Article 226 of the Constitution of India for restraining
the appellant from invoking an unconditional bank guarantee executed by the
first respondent, is the main issue arising for consideration in this case.
The appellant invited bids for development of Sutrapada Port. In the
process, a Letter of Intent (hereinafter referred to as ‘LoI’) was issued
to the first respondent on 06.02.2008. The relevant conditions of LoI are
extracted below:
1.7 The Lead Promoter shall submit a detailed project report within 12
months of issue of this Letter of Intent (LOI) and present it to Gujarat
Maritime Board for their approval.

1.8 The Lead Promoter shall obtain all environment clearances and coastal
regulation zone (CRZ) clearances and effective financial closure and all
such other clearances and permissions within 18 months or issue of this
Letter of Intent

1.9 A Performance Guarantee/Bank Guarantee of Rs 5 Crores (Rupees Five
crores only) shall be submitted to Gujarat Maritime Board within 4 weeks of
issue of this Letter of Intent in the Performa annexed herewith.
(Annexure1). This performance/bank guarantee is against the submission of
Detailed Project Report within 12 months and obtaining environment
clearance, coastal regulation zone clearance and effecting financial
closure within 18 months as mentioned in para 1.7 and 1.8 above, failing
which Gujarat Maritime Board/Government shall cancel this Letter of Intent
and bank guarantee shall be forfeited.”

On 07.05.2010, the first respondent requested for change of location from
Sutrapada to Kachchigarh and the bank guarantee was extended. At the
instance of the first respondent, the Yes Bank Limited furnished a bank
guarantee to the appellant on 26.11.2011 for an amount of Rs.5 crores. The
relevant conditions read as follows:


We, YES BANK Ltd. do hereby guarantee and undertake to pay to GMB an amount
not exceeding Rs 5,00,00,000/- (Rupees Five Crores only) as against breach
by the Lead Promoter for the development of Kachchigarh Port. The decision
of GMB as to any breach having been committed and loss/damages caused or
suffered shall be absolute and binding on us.

We, YES BANK Ltd, do hereby undertake to without any reference to the Lead
Promoter or any other person and irrespective of the fact whether any
dispute is pending between GMB and the Lead Promoter or any court of
Tribunal or arbitrator relating thereto, pay the amount due and payable
under this guarantee without any demur, merely on demand from GMB stating
that the said Lead Promoter’s failure to perform the covenants of the same.
Any such written demand made by GMB on the Bank shall be conclusive,
absolute and unequivocal as regards the amount due and payable by the Bank
under this guarantee. However, Bank’s liability under this guarantee shall
be restricted to an amount not exceeding Rs 5,00,00,000/- (Rupees Five
Crores only).”

It appears, the first respondent could not proceed with the work even at
Kachchigarh, and on such intimation, the appellant by letter dated
10.03.2015, cancelled the LoI issued to the first respondent. The
communication dated 10.03.2015 cancelling the LoI to the extent relevant,
reads as follows:

“This is with reference to your above mentioned letter informing GMB about
your inability to develop a port at Kachchigarh due to presence of corals
not seeking any further extension of the LOI.

In this regard, it is hereby informed that your admission on failure in
taking up the Project is in breach of the conditions set out in the Letter
of Intent dated 6.2.2008. At your request, the proposal for cancellation of
Letter of Intent issued to M/s. L&T Ltd. for development of Kachchigarh
port was laid before the Board and was further submitted to GOG for its
decision in the matter. After much deliberations, the Government of Gujarat
has vide its letter dated February 23, 2015 accorded its approval to (a)
cancel the Letter of Intent to M/s L&T Ltd. for development of Kachchigarh
port and (b) forfeit the Bank Guarantee worth Rs.5 crores submitted by the
Company.

In view of the above direction of the Government, the Letter of Intent
dated 06.02.2008 issued to you for development of Kachchigarh port (earlier
Sutrapada port) is hereby cancelled. Further, the issuing Bank of the Bank
Guarantee has been informed about GMB’s claim on the Bank Guarantee.”

xxx xxx xxx
xxx”

On the same day, the appellant also invoked the bank guarantee furnished by
the Yes Bank Limited at the instance of the first respondent. The
communication reads as follows:
“This is with reference to the above mentioned Performance Bank Guarantee
issued by your bank on behalf of M/s L&T Infrastructure Development
Projects Ltd.(“the Company”) towards securing the fulfilment of conditions
set out in the Letter of Intent (“LOI”) dated 15.07.2010 and having its
validity till March 31, 2015 worth Rs.5,00,00,000/- (Rupees Five crore
only) submitted to Gujarat Maritime Board (GMB).

Whereas, in view of breach of the conditions set out in the LOI by the
Company, the Gujarat Maritime Board/Government intends to exercise its
right in accordance with Clause 1.9 and has decided to cancel the Letter of
Intent and forfeit the above Bank Guarantee.

I, undersigned hereby put my claim to forfeit the Bank Guarantee no.
005GM07113300001 dated November 26, 2011 worth Rs. Five crores issued by
your bank and to reimburse the amount of the Bank Guarantee in the
account of Gujarat Maritime Board, Gandhinagar.
It is requested to issue Demand Draft in the name of Vice Chairman & Chief
Executive Officer, Gujarat Maritime Board payable at Gandhinagar at the
earliest.”
The first respondent filed a writ petition before the High Court
challenging the cancellation of the LoI and the invocation of the bank
guarantee. The following are the two main reliefs:


That this Hon’ble Court be pleased to issue an appropriate writ, order or
direction and be pleased to quash and set aside the decision dated
23.02.2015 of the respondent no. 2 and the consequential decision of the
respondent no. 1 communicated vide letter of 10.03.2015, to approve the
request of the petitioner to cancel the LoI issued to the petitioner, with
the condition of forfeiting the Bank Guarantee worth Rs 5 crores, and
further command the respondent no. 1 to cancel the LoI dated 06.02.2008 and
return the Bank Guarantee to the petitioner;

That this Hon’ble Court may be pleased to issue appropriate writ, order or
direction directing the respondent no. 1 not to encash the Bank Guarantee
No. 005GM07113300001 dated 26.11.2011(extended from time to time) and
command the respondent no. 1 to withdraw the letter dated 10.03.2015
addressed to Yes Bank invoking the aforesaid Bank Guarantee.”
By the impugned judgment, the writ petition was allowed. Paragraphs-24, 25
and 26 of the impugned judgment which deal with the contentions are
extracted below:
“24. Learned counsel for the GMB however, would place much reliance on the
tender conditions in which the tenderer agreed that the bidder had made a
complete and careful examination to determine the difficulties in matters
incidental to the performance of its obligations under the Concession
Agreement and to specify the nature and extent of all difficulties and
hazards. Counsel would therefore, contend that any difficulty or even
impossibility in obtaining environmental clearances cannot be a defence of
the petitioner to avoid forfeiture of the security deposit. We are unable
to read such condition in such a rigid manner. If the contract had
frustrated on account of impossibility, we have serious doubt whether GMB
could forfeit security deposit citing the reason that whatever be the
reason, the petitioner failed to perform its obligations and, therefore,
must be visited with the penalty of forfeiture. However, there is an
additional reason why we must reject such a contention. We may recall, the
initial project was for construction of port at Sutrapada. On account of
the respondents not being able to make the land available for such project,
the same had to be shelved. Only as an alternative, the petitioner
suggested Kachchigarh as a site where the port could be developed. Surely,
the petitioner was not expected to carry out complete environmental
assessment before coming up with such an alternative suggestion nor GMB
understood the offer of the petitioner as to one which will irrespective of
environment concerns, be accepted. When there was a fundamental shift in
the initial project envisaged in the letter of intent, the contention that
whatever be the difficulties in executing the contract, forfeiture must
follow, need to be viewed in the background of such material changes.

25. The contention that having given unconditional bank guarantee, the
petitioner cannot avoid encashment thereof, can also not be accepted. The
parameters for avoiding the payment of a bank guarantee by the bank giving
such guarantee cannot be applied in the present case. The question in the
present case is not so much as to allowing the authorities to encash the
bank guarantee as much as the authority of the GMB to retain such amount
even if it was so allowed to be encashed. If the decision of GMB to cancel
the contract and to award the penalty of forfeiture of Rs 5 crores on the
petitioner itself is found to be erroneous and therefore, set aside, the
question of allowing GMB to encash the bank guarantee would simply not
arise.

26. In the result, petition is allowed. Impugned communication dated
10.3.2015 is set aside. The respondents shall not encash the bank guarantee
in question.”

Heard Shri Mukul Rohatgi, learned Attorney General for India, and Shri
Tushar Mehta, learned Additional Solicitor General, appearing for the
appellant and Shri Gopal Jain, learned Senior Counsel appearing for the
first respondent.
Unfortunately, the High Court went wrong both in its analysis of facts and
approach on law. A cursory reading of LoI would clearly show that it is not
a case of forfeiture of security deposit “… if the contract had frustrated
on account of impossibility…” but invocation of the performance bank
guarantee. On law, the High Court ought to have noticed that the bank
guarantee is an independent contract between the guarantor-bank and the
guarantee-appellant. The guarantee is unconditional. No doubt, the
performance guarantee is against the breach by the lead promoter, viz., the
first respondent. But between the bank and the appellant, the specific
condition incorporated in the bank guarantee is that the decision of the
appellant as to the breach is binding on the bank. The justifiability of
the decision is a different matter between the appellant and the first
respondent and it is not for the High Court in a proceeding under Article
226 of the Constitution of India to go into that question since several
disputed questions of fact are involved. Recently, this Court in Joshi
Technologies International Inc. v. Union of India and others[1], where one
of us (R.F. Nariman, J.) is a member, has surveyed the entire legal
position on exercise of writ jurisdiction in contractual matters. The
paragraphs which deal with the situation relevant to the case under appeal,
read as follows:

“68. The Court thereafter summarised the legal position in the following
manner: (ABL International Ltd. Case (2004) 3 SCC 553)
“27. From the above discussion of ours, following legal principles emerge
as to the maintainability of a writ petition:
(a) In an appropriate case, a writ petition as against a State or an
instrumentality of a State arising out of a contractual obligation is
maintainable.
(b) Merely because some disputed questions of facts arise for
consideration, same cannot be a ground to refuse to entertain a writ
petition in all cases as a matter of rule.
(c) A writ petition involving a consequential relief of monetary claim is
also maintainable.

28. However, while entertaining an objection as to the maintainability of a
writ petition under Article 226 of the Constitution of India, the court
should bear in mind the fact that the power to issue prerogative writs
under Article 226 of the Constitution is plenary in nature and is not
limited by any other provisions of the Constitution. The High Court having
regard to the facts of the case, has a discretion to entertain or not to
entertain a writ petition. The Court has imposed upon itself certain
restrictions in the exercise of this power. (See Whirlpool Corpn. v.
Registrar of Trade Marks. [(1998) 8 SCC 1]) And this plenary right of the
High Court to issue a prerogative writ will not normally be exercised by
the Court to the exclusion of other available remedies unless such action
of the State or its instrumentality is arbitrary and unreasonable so as to
violate the constitutional mandate of Article 14 or for other valid and
legitimate reasons, for which the Court thinks it necessary to exercise the
said jurisdiction.”

69. The position thus summarised in the aforesaid principles has to be
understood in the context of discussion that preceded which we have pointed
out above. As per this, no doubt, there is no absolute bar to the
maintainability of the writ petition even in contractual matters or where
there are disputed questions of fact or even when monetary claim is raised.
At the same time, discretion lies with the High Court which under certain
circumstances, it can refuse to exercise. It also follows that under the
following circumstances, “normally”, the Court would not exercise such a
discretion:
69.1. The Court may not examine the issue unless the action has some public
law character attached to it.
69.2. Whenever a particular mode of settlement of dispute is provided in
the contract, the High Court would refuse to exercise its discretion under
Article 226 of the Constitution and relegate the party to the said mode of
settlement, particularly when settlement of disputes is to be resorted to
through the means of arbitration.
69.3. If there are very serious disputed questions of fact which are of
complex nature and require oral evidence for their determination.
69.4. Money claims per se particularly arising out of contractual
obligations are normally not to be entertained except in exceptional
circumstances.
70. Further, the legal position which emerges from various judgments of
this Court dealing with different situations/aspects relating to contracts
entered into by the State/public authority with private parties, can be
summarised as under:
70.1. At the stage of entering into a contract, the State acts purely in
its executive capacity and is bound by the obligations of fairness.
70.2. State in its executive capacity, even in the contractual field, is
under obligation to act fairly and cannot practise some discrimination.
70.3. Even in cases where question is of choice or consideration of
competing claims before entering into the field of contract, facts have to
be investigated and found before the question of a violation of Article 14
of the Constitution could arise. If those facts are disputed and require
assessment of evidence the correctness of which can only be tested
satisfactorily by taking detailed evidence, involving examination and cross-
examination of witnesses, the case could not be conveniently or
satisfactorily decided in proceedings under Article 226 of the
Constitution. In such cases the Court can direct the aggrieved party to
resort to alternate remedy of civil suit, etc.
70.4. Writ jurisdiction of the High Court under Article 226 of the
Constitution was not intended to facilitate avoidance of obligation
voluntarily incurred.
70.5. Writ petition was not maintainable to avoid contractual obligation.
Occurrence of commercial difficulty, inconvenience or hardship in
performance of the conditions agreed to in the contract can provide no
justification in not complying with the terms of contract which the parties
had accepted with open eyes. It cannot ever be that a licensee can work out
the licence if he finds it profitable to do so: and he can challenge the
conditions under which he agreed to take the licence, if he finds it
commercially inexpedient to conduct his business.
70.6. Ordinarily, where a breach of contract is complained of, the party
complaining of such breach may sue for specific performance of the
contract, if contract is capable of being specifically performed.
Otherwise, the party may sue for damages.”
It is contended on behalf of the first respondent that the invocation of
Bank Guarantee depends on the cancellation of the contract and once the
cancellation of the contract is not justified, the invocation of Bank
Guarantee also is not justified. We are afraid that the contention cannot
be appreciated. The bank guarantee is a separate contact and is not
qualified by the contract on performance of the obligations. No doubt, in
terms of the bank guarantee also, the invocation is only against a breach
of the conditions in the LoI. But between the appellant and the bank, it
has been stipulated that the decision of the appellant as to the breach
shall be absolute and binding on the bank.
An injunction against the invocation of an absolute and an unconditional
bank guarantee cannot be granted except in situations of egregious fraud or
irretrievable injury to one of the parties concerned. This position also is
no more res integra. In Himadri Chemicals Industries Limited v. Coal Tar
Refining Company[2], at paragraph -14:

“14. From the discussions made hereinabove relating to the principles for
grant or refusal to grant of injunction to restrain enforcement of a bank
guarantee or a letter of credit, we find that the following principles
should be noted in the matter of injunction to restrain the encashment of a
bank guarantee or a letter of credit:
(i) While dealing with an application for injunction in the course of
commercial dealings, and when an unconditional bank guarantee or letter of
credit is given or accepted, the beneficiary is entitled to realise such a
bank guarantee or a letter of credit in terms thereof irrespective of any
pending disputes relating to the terms of the contract.
(ii) The bank giving such guarantee is bound to honour it as per its terms
irrespective of any dispute raised by its customer.
(iii) The courts should be slow in granting an order of injunction to
restrain the realisation of a bank guarantee or a letter of credit.
(iv) Since a bank guarantee or a letter of credit 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.
(v) Fraud of an egregious nature which would vitiate the very foundation of
such a bank guarantee or letter of credit and the beneficiary seeks to take
advantage of the situation.
(vi) 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.”

Guarantee given by the bank to the appellant contains only the condition
that in case of breach by the lead promoter, viz., the first respondent of
the conditions of LoI, the appellant is free to invoke the bank guarantee
and the bank should honour it … “without any demur, merely on a demand from
GMB (appellant) stating that the said lead promoter failed to perform the
covenants…”. It has also been undertaken by the bank that such written
demand from the appellant on the bank shall be … “conclusive, absolute and
unequivocal as regards the amount due and payable by the bank under this
guarantee”. Between the appellant and the first respondent, in the event of
failure to perform the obligations under the LoI dated 06.02.2008, the
appellant was entitled to cancel the LoI and invoke the bank guarantee. On
being satisfied that the first respondent has failed to perform its
obligations as covenanted, the appellant cancelled the LoI and resultantly
invoked the bank guarantee. Whether the cancellation is legal and proper,
and whether on such cancellation, the bank guarantee could have been
invoked on the extreme situation of the first respondent justifying its
inability to perform its obligations under the LoI, etc., are not within
the purview of an inquiry under Article 226 of the Constitution of India.
Between the bank and the appellant, the moment there is a written demand
for invoking the bank guarantee pursuant to breach of the covenants between
the appellant and the first respondent, as satisfied by the appellant, the
bank is bound to honour the payment under the guarantee.
Therefore, the appeal is allowed and the impugned judgment is set aside.
However, we make it clear that this judgment will not stand in the way of
the first respondent working out its grievances in appropriate proceedings
as permitted under law.

………………………………….J.
(KURIAN JOSEPH)
…….………………………………J.
(ROHINTON FALI NARIMAN)
New Delhi;
September 28, 2016.
———————–
[1] (2015) 7 SCC 728
[2] (2007) 8 SCC 110
———————–
REPORTABLE

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