Section 126 of the Indian Contract Act, 1872 talks about the invocation of guarantee in India. In commercial contracts, parties usually prefer to have a contract of bank guarantee to further assure payment of money. It is an independent contract, free from any dispute between the beneficiary and the applicant of the bank guarantee. While the grounds of fraud and irretrievable injustice against invocation of bank guarantee have been recognised through catena of judgements, the “special equities” as a separate, independent ground was not yet recognised. The 2019 case of Standard Chartered Bank v. Heavy Engineering Corporation Ltd. (Standard Chartered case) marked a departure from the above proposition. However, special equities, as such, has not been defined statutorily. This has been clearly visible in the Delhi High Court decision in Director General Project Varsha v. Navayugavanoordjv which dealt with 'special equities' as an exception to the invocation of unconditional bank guarantees. This judgement stirs up the confusion that the Standard Chartered case has brought, particularly on the fact whether it is truly a third independent exception or simply another way of articulating the irretrievable harm standard.

Institutionalising Bank Guarantee since the introduction of “Special Equities” case

Bank guarantee is primarily governed by Section 126 of the Indian Contract Act, 1872. A bank or a financial institution provides an assurance on behalf of the company or individual to assure payment of money (financial guarantee) or performance of an obligation (performance guarantee) to a third party in a case there is a default. The person to whom the guarantee is provided is the beneficiary and the issuing bank takes on the obligation to pay the beneficiary if the applicant fails to meet their contractual obligations. It is considered as an 'independent contract' between the bank and the beneficiary, and a direct claim can be made to the bank without any reference to the underlying contract between the bank and the applicant, or between the beneficiary and the applicant. The claim has to be received within the validity period mentioned in the contract of guarantee. If the bank fails to honor its obligations, then a direct suit can be filed against the bank before the court.

Usually, courts prefer not to interfere against the invocation of Bank Guarantee. However, courts have recognised that a bank guarantee can be interfered with in cases where fraud or irretrievable injustice would be done. There should exist certain “special circumstances” and/or “special equities” when the Courts should interfere. Earlier the Courts have recognised two kinds of exceptions for an injunction, the first is in the case of egregious fraud and the second one being of irretrievable injustice. As far as fraud is concerned, the party would have to prove that this would vitiate the foundation/crux of the bank guarantee. The Courts follow the prima facie breach rule to prove allegations of fraud. As far as second ground is concerned, it should cause grave injustice to one of the parties concerned. This practice by Indian Courts has been adopted from English common law like in cases of Elian and Rabbath v. Matsas and Matsas,^[1] R.D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd.,^[2] etc. Therefore, while these two grounds have been recognised since decades, the third exception of special equities was not yet articulated properly.

The term “special equities” was first used by the Calcutta High Court in the case of Texmaco Ltd. v. State Bank of India in 1978. The Court did not elaborate much on its definition; it merely relied on the existence of certain “special circumstances” which would justify injunction of bank guarantee. What changed the legal landscape of special equities in bank guarantee and evolved a new kind of jurisprudence was the American case of Itek Corporation v. The First National Bank of Boston^[3] in 1983. The Court held that there should exist certain “exceptional circumstances which would make it impossible for the guarantor to reimburse himself if he ultimately succeeds, will have to be decisively established” and also that a “mere apprehension that the other party will not be able to pay, is not enough”. The Court also considered a fundamental question of whether there exists any adequate remedy for the plaintiff or not? The Court in Itek case relied on the existence of an adequate remedy and ruled in favour of the plaintiff because of the non-existence of the same. This line of argument has been adopted in U.P. State Sugar Corporation v. Sumac International Ltd. (U.P. State Sugar case). In these cases, the Court has generally construed special equities to be equal to irretrievable injustice. However, in Vinitec Electronics Pvt. Limited v. HCL Infosystems Limited, it was clearly stated that irretrievable injury is a part of special equities. The court did not seem to suggest that it is equal to special equities. The invocation of special equities case as ground for injunction has been reiterated in cases like BSES Ltd. v. Fenner India Ltd. (Fenner case), Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co., etc. which has followed the ruling given in U.P. State Sugar case. However, the Fenner case primarily relied on the existence of one more ground to seek injunction – “lack of good faith” or “enforcing with an oblique purpose”. It mainly followed the U.K. case of TTI Team Telecom Ltd. v. Hutchison 3G UK Ltd.,^[4] where even a mere breach of faith, if satisfied with evidence, would be sufficient to grant an injunction. These cases depict the uncertainty in the decisions given by the Courts.

In 2019 came the Supreme Court ruling in Standard Chartered Bank v. Heavy Engg. Corpn. Ltd. which sought to give a sense of certainty to the existence of third ground, that is, special equities. They sought to treat special equities as a distinct circumstance from irretrievable injustice. However, after this judgement also, there was no standard criteria given by the Courts. This can be understood by looking at the cases subsequent to the 2019 ruling. The Delhi High Court ruling of Halliburton Offshore Services Inc Limited v. Vedanta Limited and Others (Halliburton case) came at a period when there was nationwide lockdown due to Covid-19 pandemic. Here, the Court decided to injunct the invocation of bank guarantee as the pandemic constituted a 'special circumstance'. In fact, the interim decision in the said case was criticised at several points. The point mentioned was that “the recent decision Standard Chartered Bank Ltd. seems to visualize irretrievable injustice, and special equities, as distinct circumstances, the existence of either of which would justify an order of injunction.” It was criticised that the Court just relying on a sole ground of pandemic, could not justify an injunction. The final decision, however, settled some of the controversies and criticisms that arose from the interim decision, but did not solve the ambiguity of the Standard Chartered case.

This vagueness continues to grapple the Courts with issues and questions pertaining to exact implementation of special equities. This ambiguity came up again in the case of CRSC Research and Design Institute Group Co. Ltd. v. Dedicated Freight Corridor Corpn. of India Ltd. But, a positive point of this case is that it at least acknowledged the fact that there exist certain lacunae in the Standard Chartered case and that the same hasn't been solved by the Halliburton case as well. Justice Hari Shankar addressed this by stating certain points in the judgement -

“'Irretrievable injustice', to reiterate, has to be of such a magnitude as would override the twin considerations of the express terms of the guarantee and the adverse effect, from the grant of injunction, on commercial dealings in the country, “Special equities”, too, must, therefore, be so “special” so as to prevail over these two considerations, otherwise paramount while examining a prayer for injunction against invocation of a bank guarantee. While, therefore, examining whether “special equities” exist, so as to justify the grant of a prayer for injuncting invocation of a bank guarantee, the Court has to tread warily, and cannot confer, on the expression “special equities”, so elastic a construction, as would snap the rule.”

This acknowledgement of the existence of loopholes, however, did not resolve the controversy. The reference can be made to the below made point -

“31. Some scope for debate, however, arises, on the concept of “special equities”. The decision of the Supreme Court – perhaps, advisedly- do not delineate, in precise contours, the ambit of the expression…”

Therefore, it can be seen that there are various tests that the Court is devising from time to time. In Hindustan Construction Co. Ltd. v. National Hydro Electric Power Corporation Ltd., the Court introduced a new test – the test of proportionality – as included within the ambit of special equities. The Court stated -

“While proportionality could be included in the exception of special equities, in our view, it can be applied only where the crystallized liability is significantly lower than the value of the BG furnished and the contract is a concluded one.”

The disadvantage of the above made proposition by the Court is that it introduced further ambiguity. The test of 'crystallized liability being lower than BG' confers wide discretion to the courts to decide how much it should be lower. The Courts also failed to consider that the basic tenet of bank guarantee is to promote trade and commerce, and the Courts should tread cautiously in interfering with such guarantees.

The way forward

The existence of an adequate alternative remedy, as said in Itek case, as a ground to classify a particular circumstance as constituting special equities has often been ignored by Indian Courts. For example, the Delhi High Court ruling of Leighton India Contractor Private Limited v. DLF Limited and Others demonstrates that there still exists a long way to go before overcoming the problem of ambiguity of criteria and tests for special equities. Here, the Court seemed to have ignored the ruling of Itek as well of U.P. State Sugar case, despite mentioning it. The question to ask is who and what determines what those “exceptional circumstances” are. In this particular case, the Court seemed to have relied on the “distrustful manner” in which the bank guarantee was invoked to justify the existence of special equities. There were no “exceptional circumstances” that were relied or argued upon.

There is a need to introduce a definite criterion within the ambit of special equities, instead of applying different tests from time to time. But amidst all of this, the basic purpose of a bank guarantee should not be forgotten by the Courts. In Hindustan Steel Work Corp. v. Tarapore & Co., the Court ruled that if the contract stipulates that the guarantee is unconditional and would be invoked whenever the beneficiary invokes it, the same has to be invoked. It is a sole contract; thereby courts should minimally or not interfere in it.

The 2019 ruling of Standard Chartered could not solve much of the ambiguity behind the invocation of special equites as an exception. The author contend that Standard Chartered Bank did not and could not have meant to recognise “special equities” as separate from the irretrievable harm requirement. The decision should be read in line with earlier precedent where “special equities” is simply another way of expressing the irretrievable injustice threshold, and not as a broader, standalone equitable standard. Therefore, the Courts should step in to resolve the intricacies, and they shouldn't confer upon themselves wide discretionary powers to adjudicate and decide what constitutes exceptional circumstances.

1. Elian and Rabbath v. Matsas and Matsas (1966) EWCA Civ J1109-2. ↑

2. R.D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd. (1978) QB 146. ↑

3. Itek Corporation v. The First National Bank of Boston (1983) 566 Fed Supp 1210, 1217. ↑

4. TTI Team Telecom International Ltd v. Hutchison 3G UK Ltd (2003) EWHC 762 (TCC). ↑

   Author is a fourth year Law student at O.P. Jindal Global University. Views are personal.