Delhi High Court Restrains Invocation of Bank Guarantee Since Party Had Arbitral Awards In Its Favour Under Contract

The Court was dealing with a petition under Section 9 of the Arbitration and Conciliation Act, 1996 (A&C Act) seeking to restrain the opposite party from invoking/ encashing the Performance Bank Guarantee.

The bench of Justice Chandra Dhari Singh held that since the petitioner had arbitral awards with respect to the Construction Project in its favour, where the counter-claims of the opposite party-who sought to invoke the bank guarantee-had been dismissed, there were special equities in petitioner’s favour, which is an exception to the rule that a bank must always honour the terms of an unconditional and irrevocable bank guarantee.

The Court further remarked that though the intent behind enacting the A&C Act is to take the burden of a big chunk of commercial disputes off the conventional Courts, however, appealing the award granted by the Arbitral Tribunal has become a routine practice which is further adding to the burden of the Courts as well as posing a threat to the finality of the arbitral award.

The petitioner, Hindustan Construction Co. Ltd, was awarded a contract with respect to a construction project by the respondent, National Hydro Electric Power Corporation Ltd (NHPC), a Public Sector Enterprise. A contract agreement was executed between the parties.

There were a series of arbitral disputes that arose between the parties, leading to several arbitral proceedings. The arbitral awards passed in the proceedings were subsequently challenged by both the parties under Section 34 of the A&C Act, and the same were pending.

The petitioner, Hindustan Construction, alleged that the respondent, NHPC, by issuing a Letter (Invocation Letter), attempted to invoke the Performance Bank Guarantee furnished by it, on the ground that a certain amount, including Liquidated Damages, was allegedly due from it.

Hindustan Construction thus filed a petition under Section 9 of the A&C Act before the Delhi High Court, seeking a direction to the respondent, NHPC, to deliver the Bank Guarantee and, in the alternative, restrain NHPC from invoking/encashing the same.

The petitioner, Hindustan Construction, submitted before the High Court that the proposed invocation of the Bank Guarantee was clearly in teeth of the 3 Arbitral Awards passed against NHPC in respect of the Project. In the said 3 arbitral awards, all the issues/ claims raised by NHPC in the Invocation Letter, for seeking invocation of the Bank Guarantee, had already been dealt with and adjudicated against NHPC’s favour, Hindustan Construction argued.

Hindustan Construction further alleged that under the 5 different arbitral awards passed by different arbitral tribunals, it is entitled to recover a sum in excess of Rs.700 crores from NHPC. Also, no stay had been granted by the Courts in the different Section 34 petitions filed by both the parties in any of the five arbitral awards, it averred.

It contended that there was no basis for encashment of the Bank Guarantee since NHPC had issued the ‘Taking Over Certificate’ to the petitioner, mentioning achievement of substantial completion of the Contract. Further, a ‘Defect Liability Certificate’ was also issued to the petitioner, admitting completion of work. Thus, there was no case of non-performance to make out a case for invocation of Bank Guarantee, Hindustan Construction pleaded.

The High Court observed that if in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee, in accordance with the terms, irrespective of any pending disputes between the parties to the contract, or else, the very purpose of giving such a bank guarantee would otherwise be defeated.

Thus, the courts should be slow in granting an injunction to restrain the realization of such a bank guarantee, the Court added.

The bench, however, held that there are three exceptions to the said rule. The same are: Firstly, existence of fraud in connection with such a bank guarantee which would vitiate the very foundation of such a bank guarantee; Secondly, where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties, the same being exceptional and irretrievable in nature. Thirdly, existence of special equities in favour of the party against whom the bank guarantee is sought to be invoked.

Referring to the facts of the case, the Court reckoned that the said Bank Guarantee is unconditional. However, the Court concluded that the facts and circumstances of the case cumulatively demonstrate special equities in favour of the petitioner, Hindustan Construction, including in view of the fact that the petitioner has arbitral awards with respect to the Project in its favour where the counter-claims of the respondent, NHPC, have been dismissed.

The bench further ruled that there was no prima facie case made out in light of the awards passed in favour of the petitioner, especially considering that a ‘Taking Over Certificate’ and a ‘Defect Liability Certificate’ had been issued in its favour. Therefore, there was no valid basis for invocation/encashment of the bank guarantee by NHPC, the Court remarked.

The Court added that even if NHPC succeeds in its challenge to the Award under Section 34 of the A&C Act, the same would not result in the counter-claims raised by it being decreed in its favour. It held that the annulment procedure contemplated under Section 34 is potentially different from the procedure in an appeal. Though in an appeal, the decision under review can be confirmed as well as modified, however, in an annulment, the decision under review can either be invalidated in whole or in part, or it can be upheld, the Court observed.

“It is thus clear that the even if the respondent succeeds in its Section 34 petition, the setting aside of the arbitral Award in rejecting the counter-claims of the respondent does not result in the same being decreed in its favour,” the bench said, adding that even if NHPC succeeds under Section 34, it would have to resort to fresh arbitration proceedings with regard to its counterclaims.

The Court thus allowed the petition, restraining NHPC from invoking/ encashing the bank guarantee.

“In view of the aforesaid, the respondent is restrained from invoking/encashing the bank guarantee till the disposal of and subject to the judgment in the Section 34 petitions challenging the arbitral awards qua the contract between the parties in relation the Project,” the Court held.

Case Title: Hindustan Construction Co. Ltd. vs. National Hydro Electric Power Corporation Ltd

Citation: 2023 LiveLaw (Del) 214

Dated: 13.02.2023

Counsel for the Petitioner: Mr. B. B. Gupta, Sr. Advocate with Mr. Rishi Agrawala, Mr. Achal Gupta, Mr. Udai Khanna and Ms. Shruti Arora, Advocates

Counsel for the Respondent: Mr. Gauhar Mirza, Ms. Anushka Shah and Ms. Adya Joshi, Advocates

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