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."

Background

The 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 Court

The 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 guarantee must be honoured strictly in accordance with the terms of the guarantee, subject to two exceptions. The first is in a clear case of fraud, which the bank has notice of, and the beneficiary seeks to take advantage of."

Upholding the decision of the Commercial Court, the High Court observed that,

"Commercial Court has noticed the parameters for invocation of bank guarantee and thereafter in paragraph 33 of the order has rightly held that invocation of bank guarantee can be interdicted on three grounds, i.e., "fraud", "irretrievable injury" and "special equity", and also held that the appellants herein have not set up any such ground out of the said three grounds to seek restraint order against the invocation of bank guarantee and proceeded to reject the application."

Reading the terms of bank guarantee, it held that the bank guarantee would show that the performance guarantee is an autonomous and independent contract and that is independent. The obligation arising under the bank guarantee is independent of the obligation arising out of the main contract between the parties, it added. It further noted,

"The performance guarantee imposes an absolute obligation on the banks to pay irrespective of any dispute which may have arisen between the parties and pending before any such court or tribunal, the liability being absolute and unequivocal. It is independent of the primary contract between the appellants and the respondents. The bank is not concerned with the rights regardless of the underlying disputes but only with the performance of the obligation. The letter of guarantee was addressed to the SECR in unqualified terms. The liability of the bank is absolute and unequivocal."

With the contract's rescinding clause, the Court held that the security deposit should be forfeited whenever the contract is rescinded, and the performance guarantee shall be encashed. The Court noted that Courts' interference under Order 39 Rules 1 & 2 of the CPC while granting an interim injunction in enforcing bank guarantees must be minimal. It observed,

"In case of fraud or special equities to prevent irretrievable injustice to the parties seeking injunction, Courts interfere to prevent enforcement of bank guarantees. If the terms of the bank guarantee are unconditional and absolute, the bank has to pay the amount of bank guarantee without demur. The payment of bank guarantee cannot be made subject to the claims and counterclaims arising out of the main contract between the parties."

Case Title: ARSS – SIPS (JV) and Ors v. Union of India & Ors.

Citation: 2022 LiveLaw (Chh) 4

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