Section 9 Application, Against Cashing Unconditional BG; Court To Consider Only Terms Of BG: Allahabad High Court

The Allahabad High Court has ruled that while dealing with an application under Section 9 of the Arbitration and Conciliation Act, 1996 (A&C Act), seeking to restrain the invocation or encashment of the Bank Guarantee, the Court is only required to consider the terms of the Bank Guarantee Agreement and not the conditions contained in the main Contract between the parties, in terms of which the guarantee was furnished. The bench of Justices Attau Rahman Masoodi and Om Prakash Shukla held that when an application for interim measures is filed under Section 9 of the A&C Act, seeking interference in the invocation of an unconditional Bank Guarantee, the Court is not required to interpret the contract and/or form a prima facie opinion as to whether the beneficiary of the Bank Guarantee has wrongfully invoked the Bank Guarantee. The Court ruled that such an exercise can only be done in a substantive proceeding before the Arbitral Tribunal. The appellant- U.P. Expressways Industrial Development Authority (UPEIDA) and the respondent-M/s. Sahakar Global Ltd., entered into a Contract, in terms of which the respondent furnished performance Bank Guarantees. After a dispute arose between the parties under the Contract, the appellant allegedly threatened to invoke and encash the Bank Guarantee. The respondent filed an application under Section 9 of the A&C Act, seeking to bar the appellant from encashing the performance Bank Guarantee. The Commercial Court, Lucknow passed an order directing the parties to maintain status quo with respect to the performance Bank Guarantee. Against this, the appellant filed an appeal under Section 37 of the A&C Act before the Allahabad High Court. Subsequently, the respondent invoked the arbitration clause and issued a notice under Section 21 of the A&C Act to the appellant. The appellant UPEIDA submitted before the High Court that the Commercial Court failed to consider the law relating to the invocation and encashment of unconditional bank guarantees. It added that the respondent, in its application under Section 9, failed to show the existence of any egregious fraud or irretrievable injustice, so as to claim injunction from encashment of Bank Guarantee. The appellant argued that the unconditional Bank Guarantee furnished by the respondent was an independent contract, distinct from the main Contract under which the dispute arose between the parties. It contended that the mere fact that the dispute under the main Contract would be decided by Arbitral Tribunal and that the respondent intended to keep the Bank Guarantee alive during the arbitral proceedings, did not create a prima facie case in favour of the respondent so as to warrant an injunction order under Section 9. The respondent- M/s. Sahakar Global, submitted that since the Bank Guarantee issued by it was in nature of a performance bank guarantee, it could only be invoked if there was any deficiency of performance under the Contract. It argued that since the dispute between the parties under the Contract was yet to be adjudicated, the performance Bank Guarantee could not be invoked. The High Court referred to the decision of the Supreme Court in U.P. Cooperative Federation Ltd. versus Singh Consultants and Engineers (P) Ltd. (1987), where the Apex Court had observed that a bank which gives the guarantee is not concerned with the issue whether the supplier has performed his contractual obligation under the Contract or not, nor with the question whether the supplier is in default or not. The Supreme Court in U.P. Cooperative Federation Ltd. (1987) had ruled that the bank must pay according to the tenor of the Bank Guarantee, on demand and without any proof or condition. However, the Apex Court had laid down two exceptions to the said rule; firstly, in cases of fraud, of which the bank had notice; the fraud being so egregious so as to vitiate the entire transaction. Secondly, where there is an irretrievable injustice or injury involved, i.e., there must be such exceptional circumstances involved that it would make it impossible for the guarantor to reimburse himself if he ultimately succeeded. Referring to the terms of the Bank Guarantee furnished by the respondent, the Court reckoned that the Bank Guarantees were unconditional and irrevocable. The Court observed that the Bank Guarantee specifically provided that any demand made by the appellant on the Bank shall be conclusive and binding, notwithstanding any difference between the parties or any dispute pending before any Court, Tribunal, Arbitrator or any other authority. The bench reiterated that if the bank guarantee is conditional, then, if the conditions have not been fulfilled, the Court may pass on order of injunction, barring the party from encashing and invoking the bank guarantee. However, if the bank guarantee is unconditional, then injunction can be granted only in cases of...

Section 9 Application, Against Cashing Unconditional BG; Court To Consider Only Terms Of BG: Allahabad High Court

Parina Katyal

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