Disputes Between Parties To Contract Not A Ground For Restraining Enforcement Of Bank Guarantee: Chhattisgarh High Court

The Chhattisgarh High Court has recently held that the bank can be restrained from enforcement of unconditional and absolute performance bank guarantee by interim injunction only in case of fraud or special equities, to prevent irretrievable injustice. Justice Arvind Singh Chandel further held that existence of disputes between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of a bank guarantee, or letter of credit.It thus dismissed an appeal filed under Section 37 of the Arbitration and Conciliation Act, 1996, against an order of the Commercial Court rejecting the application filed by the appellants herein for restraining the respondents from invoking bank guarantee."The Commercial Court has rightly held that the appellants have failed to plead and establish the grounds of "fraud," "special equity," and "irretrievable injustice" to the appellants for seeking an interim injunction against the enforcement of bank guarantee."BackgroundThe South East Central Railway issued a notice inviting tender to construct a connecting line between two districts. The appellants were declared successful bidders, and a letter of acceptance was issued.When the agreement was to be executed between the properties, there was a stipulation that the work would be completed within 24 months from the acceptance letter. The appellants submitted a bank guarantee worth Rs. 6,77,26,553/- in the shape of a performance bank guarantee. After that, a dispute arose between the parties due to laxity in performance and dissatisfaction with the work progress.The respondents terminated the contract. In lieu of the same, the appellants filed a writ, which was dismissed by giving liberty to invoke arbitration clause, if any. An arbitrator was not appointed despite making an application concerning the arbitration clause. They applied under Section 9(1) of the Arbitration & Conciliation Act, 2020, before the District Judge.The Commercial Court rejected the application holding that invocation of bank guarantee and payment thereunder can be restrained only on three grounds: fraud, irretrievable injury, and special equity. Still, the appellants have not set up any such ground out of the three grounds above for obtaining an injunction against the invocation of bank guarantee and, accordingly, rejected the application, which has been sought to be questioned by way of this arbitration appeal.The said order came to be challenged in present proceedings through Advocates Vijay Dubey and Amrito Das.Findings of the CourtThe Court took two issues arising out of the matter, 1. Whether upon the constitution of Arbitral Tribunal by South East Central Railway, the instant arbitration appeal arising out of rejection of the application under Section 9(1) of the AC Act would not be maintainable by virtue of Section 9(3) of the AC Act? 2. Whether the learned Commercial Court (District Level) is justified in rejecting the application filed by the appellants under Section 9(1) of the AC Act seeking an interim injunction against the revocation of bank guarantee to the extent of ₹ 6,77,26,553/-?For the first question, the Court referred to the apex court decision in Arcelor Mittal Nippon Steel India Ltd v. Essar Bulk Terminal Ltd. to note that it is no more res Integra. In the said case, it was held that the bar of Section 9(3) would not operate once an application has been entertained and taken up for consideration. In the instant case, the application under Section 9(1) was filed and entertained by the Commercial Court and finally dismissed on merits by order dated 4-7-2020 against which arbitration appeal was preferred and entertained by granting interim order in favour of the appellants. Therefore, the Court was of the opinion that constitution of Arbitral Tribunal by respondent No. 2 on 23-11-2021 would not prevent it from deciding the arbitration appeal. It held,"The preliminary objection raised on behalf of the respondents that this arbitration appeal is not maintainable in view of the constitution of Arbitral Tribunal in terms of Section 9(3) of the AC Act, is hereby overruled."On the second question, the Court referred to Section 126 of the Indian Contract Act and held that a bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the terms of the underlying transaction, or the primary contract between the person at whose instance the bank guarantee is given and the beneficiary. Referring to Hindustan Steel Works Construction Ltd. v. Tarapore & Co., the Court observed that the nature of the bank's obligation is absolute and not dependent upon the inter se disputes or proceedings.It also referred to a catena of judgments and principles issued by the apex court in injunction for restraining encashment of a bank guarantee or a letter of credit. It also read the exceptions to the grant of the injunction of a bank guarantee. It noted, "A bank...

Disputes Between Parties To Contract Not A Ground For Restraining Enforcement Of Bank Guarantee: Chhattisgarh High Court

Shrutika Pandey

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