BEFORE THE HONBLE HIGH COURT OF JUDICATURE AT ALLAHABAD LUCKNOW BENCH, LUCKNOW In re; Company Petition No.

9 of 2003

M/S Sumag International Ltd. Versus Union Of India and Ors

Petitioner Respondent

Brief facts leading to the Arbitration: 2nd August, 1989 Page No 521 to 561Agreement was executed between UP State Sugar Corporation and Sumag International Pvt Ltd to

prepare engineering layout, design, and manufacture, procure, supply machinery and equipment of

complete sugar plant for the UP Sugar Corp. (Purchaser) for

modernization and expansion of their existing Sugar Plant at Rohankalan (Dist. Muzzafarnagar), Uttar Pradesh from 1300 TCD to 2500 TCD thebey

envisaging the setting up of new Plant of 2500 TCD at a site adjoining to the premesis of the aforesaid existing plant at Rohanakalan. The total contract price was fixed uder Clause 2.1 of the said contract at Rs 1780 lacs(Page No. 524 to 525). As per Clause 4.1a of the said Agreement, Sumag International was required to set up a plant and make it ready for commercial production by 15th Nov, 1990(page No. 529 to 530). As per Clause 15 (Pages 550- 553) of the said Agreement, Sumag

International was required to furnish five bank guarantees out of which one will be in respect of timely delivery of the plant and machinery representing 5% of the Contract price as contained in Clause 2.1 . The 2nd Bank Guarantee was

required to be furnished by Sumag International in respect of guaranteed performance machinery of the by plant them and as

supplied

contained in Clause 14.2.2 of the said Agreement.

The other three Bank Guarantee were to be furnished in respect of the advanced payment referred to in Clause 13.2.(a) to 13.2.(c) amounting to Rs 89 lacs, Rs 178 lacs and Rs 89 lacs respectively (Page 551). Under Clause15.5 Bank all above are

mentioned

guarantees

payable on demand. It was expressly provided that it shall not be open for the guarantor to know the reasons or to investigate or to go into the merits of the demand invoking the bank guarantee or to question or challenge the demand or to require the proof of liability of the Sumag International before paying the amount demanded. It was further provided in the said clause that the invocation of the bank guarantee shall be binding on the respondent and that the invocation of the bank guarantee shall not be affected in any manner (Clause 15.5). Page 552-553. The contract was not carried out within time envisaged under the contract.

6th September, 1995

The UP government through Special Secretary September vide 1995 letter dated 6th the

informed

Managing Director, UP Sugar Corp. that the government has decided to transfer the Rohanakalan Plant to a joint sector and therefore the

expansion project of the said unit stood cancelled and appropriate

action in accordance with the law should be taken, Thus UP State Sugar Corp vide letter dated 7th September 1995 cancelled the said agreement . The UP State Sugar Corp claimed the refund of advance payment of Rs. 3,14,78,093 unadjusted payment. 28th October, 1995 UP Sugar Corp invoked the three bank guarantee in respect of the advance payment after giving the credit to Sumag International for material worth 42 lacs. The UP Sugar Corp also invoked the delivery guarantee for Rs. 89 lacs. as unutilized of and

amount

advance

The 2nd Bank Guarantee for 178 lacs was invoked. The 3rd Bank Guarantee was also invoked for Rs 89 lacs. 5th October, 1995 Sumag International filed a petition under Section 20 of the Arbitration Act for appointment of an Arbitrator. Sumag International also filed an application for interim relief under Section 41(b) of the Arbitration Act against encashment of bank

guarantees which the Civil Judge, Senior Division dismissed, however it was allowed by High Court in revision and restrained the UP Government to enforce these Bank Guarantees. Honble Supreme Court in its order dated 4th December, 1996 appointed the sole arbitrator of Honble Justice R N Sahay(Retd) after consultation with both the parties. Accordingly the Apex Court disposed the Arbitration petition.