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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.  

2. 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.

REPORTABLE

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3. 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.”

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4. 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:

                   “ (a) 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.

(b) 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).”

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5. 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.”

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xxx        xxx              xxx xxx”

6. 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.”

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7. 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:

“ (a) 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;

(b) 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.”

8. 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:

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“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

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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.”

9. 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.   

10. 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

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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 others1, 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.

1 (2015) 7 SCC 728

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(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

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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

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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.”

11. 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

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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.

12. 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 Company2, 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.

2 (2007) 8 SCC 110

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(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.”

13.  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

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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.  

14. 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

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working  out  its  grievances  in  appropriate  proceedings  as

permitted under law.

........................................J.     (KURIAN JOSEPH)

.......………………………………J. (ROHINTON FALI NARIMAN)

New Delhi; September 28, 2016.