Sms Limited vs. Ongc Limited

Held

The Court held that the bank guarantees furnished by SMS Ltd. were unconditional. Relying on the Supreme Court's decision in Vinitec Electronics Pvt. Ltd. v. H.D.F.C. Bank, the Court found that the recitals in the preamble of the bank guarantees, stating they were furnished to cover liquidated damages, did not render them conditional. The operative part of the guarantee made the bank liable to honour the guarantee on demand. The Court found no evidence of egregious fraud, special equities, or irretrievable injustice that would justify restraining ONGC from encashing the bank guarantees. The Court noted that even if the guarantees were enforced, SMS Ltd. could recover the monies if successful in arbitration, and there was no indication of ONGC's financial instability. Therefore, the prayer to restrain ONGC from acting in furtherance of the impugned letter, which involved invoking the bank guarantees, was dismissed.

Facts

SMS Limited (petitioner) filed a petition under Section 9 of the Arbitration & Conciliation Act, 1996, seeking an interim injunction against Oil & Natural Gas Limited (ONGC, respondent). The dispute arose from a letter dated December 15, 2020, issued by ONGC to SMS Ltd. This letter communicated an amendment to a contract dated June 27, 2012, for the construction of an effluent treatment plant. ONGC extended the completion period from July 31, 2014, to July 31, 2018, and levied liquidated damages (LD) amounting to Rs. 12,09,83,122.10, plus GST of Rs. 2,17,76,961.97, totaling Rs. 14,27,60,084.00. ONGC demanded this amount by December 22, 2020, threatening to encash bank guarantees if payment was not made.

Key Issues

1. Whether the Bank Guarantees furnished by SMS Ltd. were unconditional and could be encashed by ONGC upon demand, despite SMS Ltd.'s contention that the LD and GST were not payable under the contract, particularly in light of the contract clauses regarding access to the worksite and the firm price of the contract? (Section 9 of the Arbitration & Conciliation Act, 1996, and relevant contract clauses). Petitioner's arguments: SMS Ltd. argued that the bank guarantees were conditional, tied to the actual liability for LD and GST, and that ONGC's demand was premature and unjustified as delays were attributable to ONGC's failure to provide site access. They relied on contract clauses that suggested extension of time and potentially excused delays. They also argued that the GST on LD was not leviable. Respondent's arguments: ONGC contended that the bank guarantees were unconditional and that the contract did not permit disputes regarding LD to prevent encashment. They relied on established legal principles regarding the sanctity of unconditional bank guarantees and argued that SMS Ltd. had not made out a case of fraud, special equities, or irretrievable injustice to warrant an injunction.