21 November 2022


Appellate Tribunal for Electricity

Kochi Salem Pipeline Pvt. Ltd. and Ors. v. Petroleum & Natural Gas Regulatory Board




Unless there is fraud of beneficiary or irretrievable harm or injury, Courts are not to interfere with encashment of Bank Guarantees

Appellant No. 1 a Joint Venture Company formed for specific purpose of constituting, commissioning and operating Kochi-Coimbatore-Erode-Salem LPG Pipeline. A consortium of Appellant No. 2 ("Bharat Petroleum Corporation Ltd. - BPCL") and Appellant No. 3 ("Indian Oil Corporation Ltd.-IOCL") with Appellant No. 2 as lead partner has been selected by Respondent Board for grant of authorization for said Pipeline. Letter of Intent issued by Respondent-Board in term of which Appellant No. 2 was directed to submit Performance Bond/Bank. Pursuant thereto Respondent Board issued a Letter of Authorisation ("LOA"). One of conditions in said LOA was that, entity was required to submit a Financial Closure Report to Respondent Board within a period of 120 days from date of authorization under Regulation 10 of said Regulations. Appellant is aggrieved by impugned order of Respondent Board whereby it has encashed 25% of Performance Bank Guarantee by relying upon Regulation 16(1)(c)(i) of said Regulations on ground that, there has been a breach of authorization with respect to achievement of financial closure.

Unless there is fraud of the beneficiary or irretrievable harm or injury, the Courts are not to interfere with the encashment of Bank Guarantees. The contract between the Bank and the beneficiary is held to be an independent contract irrespective of the dispute between the bank's customer and the beneficiary. Until agreements specified therein are executed, there is no obligation or commitment on part of bank to advance money. It clearly states that, said communication should not be construed as giving rise to any binding obligation on part of Bank. Respondent Board has rightly observed that, terms and conditions of said letter have been accepted by Appellants except for Letter of Credit norms which are left for negotiation. In fact, Term Sheet clearly states that, it cannot be construed as an obligation on part of the Bank to enter into financing documents. Since, SBI Sanction Letter dated 25th May, 2015 is conditional, financial closure cannot be said to have been achieved by 25th May, 2015 as contended. Appellants were well aware of requirement of financial closure as Bid Document provides for it. Appellants took almost a year to establish the Joint Venture Company.

Exercise of discretion cannot be interfered with unless it is capricious, arbitrary or injudicious. It is true that the Appellants had to get Environmental Clearance which was not in their hands. It is also true that Regulation 16 states that an authorized entity has to abide by all terms and conditions specified in the said Regulations. But, it has carved out an exception for 'force majeure'. Clause 32.0 of Bid document which relates to 'force majeure' states that, restrictions imposed by Central Government or other statutory bodies which prevent or delay the execution of obligations under said Regulations fall in scope of 'force majeure'. But it is case of Respondent Board that in various explanations provided by Appellants for failure to achieve financial closure, no mention was made that delay in financial closure was due to pending environmental clearance. Respondent Board had given sufficient extensions to Appellants. Even personal hearing was given to the Appellants. In such circumstances, impugned exercise of discretion cannot be questioned particularly when the bank guarantee has already been encashed and same has also been replenished by Appellants.

Respondent Board has observed that, it has given the Appellants ample opportunities for being heard and reasonable time to fulfill their obligations through various communications issued from time to time. As per monthly progress report of August, 2015, considerable progress has been achieved with regard to ROU acquisition in Kerala but there is no sufficient progress of ROU acquisition in Tamil Nadu. Supreme Court dismissing the appeal held that, Appellants will have to ensure that they commit no further default, which could attract cancellation of the authorization.

Tags : Bank guarantee Encashment Delay Financial Closure

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