Courts Cannot Injunct Encashment Of Bank Guarantee During Its Validity : Delhi High Court

The Delhi High Court recently remarked that a judicial order cannot be passed that a  Bank Guarantee could not be encashed during its validity.

A Bench of Justice Manmohan and Justice Navin Chawla added that,

"In our view, the Court cannot injunct encashment of a bank guarantee during its validity if a cause of action arises in future. Bank guarantee has a meaning and legal sanctity attached to it."

Reliance was place on the Supreme Court's observation in U.P. Cooperative Federation Ltd. vs. Singh Consultants and Engineers (P) Ltd., wherein it was held that bank guarantees must be honored free form interference by Courts, otherwise, trust in commerce internal and international would be irreparably damaged.

Justice Manmohan further referred to a recent judgment of Andhra Pradesh Pollution Control Board vs. CCL Products (India) Limited, where the Supreme Court also held as under:

The High Court was hearing an appeal that challenged the order passed by District Judge, Commercial Court-02, South East District, Saket District Courts whereby an ex parte ad-interim status quo order was passed in regard to the encashment of Respondent's No. 2 Bank Guarantees for Rs.16,20,000/-in an application filed by Respondent No. 1 under Section 9 of the Arbitration and Conciliation Act, 1996.

There also existed a confusion among the parties with regard to the extension of the Bank Guarantee up to 31st March, 2022.  The Court thus went on to direct the respondent to furnish the original extended Bank Guarantee to the appellant within a week.

In this backdrop, the Court was inclined to dispose of not only the appeal but also the Section 9 petition filed by the respondent no.1, however, the counsel for the respondent stated that he would like to press for an injunction order before the trial court restraining the appellant from encashing the Bank Guarantee in question during its validity period. He drew the Court's attention to a Single Judge's order dated 22nd July, 2021, passed in a similar matter between the same parties. 

To this, the Court said,

"Prima facie this Court is of the opinion that Bank Guarantees are not furnished for being photo framed and kept in a drawing room. The learned Single Judge in the order dated 22nd July, 2021, has advisedly used the expression that 'the order has been passed in view of the consensus arrived at between the parties'."

However, the Court agreed to give the respondent an opportunity to file whatever documents he wished to rely upon within a week.

The matter will now be heard on September 13, 2021.

Case Title: SPML INFRA LTD v HITACHI INDIA PVT LTD and Anr

Click here to Download the Judgement.