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

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 egregious fraud, irretrievable injustice, or special equities, and not otherwise.

The respondent- M/s. Sahakar Global, argued before the Court that the appellant had failed to plead that there was any shortcoming or defect in the performance of the Contract by the respondent during the entire tenure of the Contract.

The respondent further contended that as per the relevant clause contained in the Contract between the parties, the appellant was barred from encashing the performance Bank Guarantee against the shortfall in remittance made by the respondent. Thus, it argued that the performance Bank Guarantee could not be invoked by the appellant.

To this, the Court observed that as per the terms of the Bank Guarantee, the appellant is not required to make any statement to the Bank relating to the shortcoming or defect in performance by the respondent, while seeking invocation of the Bank Guarantee.

Further, it noted that as per the claims raised by the appellant, the respondent had allegedly failed to remit the entire amount due under the Contract. The Court added that whether the appellant's contention, with respect to the shortfall in remittance made by the respondent, can be extended to mean a shortcoming or defect in performance of the Contract, is the subject matter of interpretation, which must be adjudicated by the Arbitral Tribunal. The bench opined that the Court is only concerned with the wording of the Bank Guarantee and not with the interpretation of the Contract.

The High Court further ruled that when an application for interim measure 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. It added that such an exercise can only be done in a substantive proceeding before the Arbitral Tribunal.

Referring to the decision of the Apex Court in Mahatma Gandhi Sahakara Sakkare Karkhane versus National Heavy Engineering Coop. Ltd. (2007), the Court ruled that any condition contained in the main agreement or Contract between the parties, cannot be cited as a ground to stay the invocation and encashment of the Bank Guarantee. It reiterated that what is relevant is only the terms incorporated in the guarantee executed by the bank.

Thus, the High Court concluded that while dealing with an application under Section 9 of the 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. It added that enforcement of a bank guarantee cannot be restrained on the ground that the condition for enforcement, as contained in the main Contract between the parties in terms of which the guarantee was furnished, has not been fulfilled.

"In view of the well crystallized law on the subject, any reference to the original dispute between the parties, relating to the performance of the contract, is completely irrelevant, insofar as the issue of stay of invocation of the bank guarantees is concerned. That dispute has necessarily to form substratum of an entirely different proceeding, to be resolved either by arbitration or by adjudication by a Court. Thus, in the present interim proceedings, the enquiry is confined to, whether on the basis of the documents, a case of fraud of egregious nature in the matter of obtaining/furnishing BGs, is made out", the Court said.

While holding that the respondent had failed to show that any fraud of egregious nature was involved in the making or obtaining of the Bank Guarantee, the Court opined that none of the circumstances in which the invocation of unconditional bank guarantee can be stayed, existed.

The Court further took note that though the law on interdicting an unconditional Bank Guarantee stands settled in view of the series of consistent judgments delivered by the Supreme Court over a span of more than four decades, the courts are, however, still flooded with Bank Guarantee matters, which take substantial time in adjudication.

The High Court thus allowed the appeal and set aside the order of the Commercial Court.

Case Title: U.P. Expressways Industrial Development Authority versus M/s. Sahakar Global Ltd.

Case Citation: 2022 LiveLaw (AB) 535

Counsel for the Appellant: Brijesh Kumar, Amal Rastogi, Utkarsh Srivastava

Counsel for the Respondent: Pritish Kumar

Click Here To Read/Download Order