On What Grounds Can Invocation Of A Bank Guarantee Be Restrained? Calcutta High Court Explains

The Calcutta High Court recently had the opportunity to expound on the issue as to on what grounds can the invocation of a bank guarantee be restrained.

Justice Moushumi Bhattacharya was adjudicating upon an application moved under Section 9 of the Arbitration and Conciliation Act, 1996 (Act). In the instant case, vide an order dated May 10, 2021 a Single Judge had restrained the respondent No. 2 from making any payment under a bank guarantee invoked by the respondent No. 1. Subsequently, the order was modified on May 18, 2021 by another Single Judge confirming the interim order of injunction and further restraining the respondent No. 1 from enchasing the bank guarantee.

Thereafter, the letter of invocation was stayed and the petitioner was given the liberty of producing a copy of the order before the respondent No. 2 in their seats at Kolkata and Dhaka. Accordingly, the instant petition was moved under Section 9 of the Act. In the affidavit moved by the respondent No. 1, the orders of injunction were however not contested.

Observations

The Court at the outset observed that in contemporary business, trade and commercial transactions, both domestic and international, significant complexities are involved - for instance spatial distance between counterparties who engage in such commercial transactions. Accordingly, the Court noted that it often becomes difficult and challenging to assess the creditworthiness of the counterparty or the business partner.

"Hence, over a period of time, commercial instruments have emerged for securing contractual payments. A Bank Guarantee is such an instrument that has evolved for securing payments with respect to commercial transactions", the Court remarked further.

Elucidating upon the definition of a bank guarantee, the Court noted that under Section 126 of The Indian Contract Act, 1872, a 'Contract of guarantee' is a contract to perform the promise, or discharge the liability, of a third person in case of his default. In the case of a Bank Guarantee, a bank, who is the guarantor, undertakes or guarantees to pay the beneficiary an amount of money as specified in the guarantee if the original contract's debtor fails to adhere to his contractual obligations, the Court stated further.

Justice Bhattacharya further stated that generally Courts are slow to interfere with the transaction between a bank and the beneficiary which is seen as being independent of the underlying contract between the lender and the supplier unless conditions call for such interference.

Opining further on the three conditions that qualify such an interference, the Court stated,

"The three conditions, as accepted in several decisions, are fraud of an egregious nature; special equities or the invocation not being in terms of the bank guarantee. It is sufficient if a party seeking a restraint on the invocation is able to establish any one of the three requirements."

It was further noted that the test of special equity or irrevocable injustice is a matter of an assessment by a Court on the particular facts presented to it for stay on a notice of invocation. The injury or injustice must be irrevocable, irremediable and irreversible. Thus, it was opined that the party seeking an order for restraint must show that the invocation and consequent payment by the bank to the intended beneficiary would set the party back irreversibly- in monetary terms which may not be recovered in the foreseeable future.

Referring to the facts of the present case, the Court noted that the petitioner has satisfied two of the three ingredients, namely special equity and the invocation not being in terms of the guarantee.

"The clauses in the contract and more particularly the General Conditions of Contract (GCC) clearly demonstrate that the bank guarantee was furnished towards performance security. There can be no issue with regards to performance since the petitioner has already received 90% of the contract price as discussed above", the Court noted further.

The Court further observed that the invocation letter also demonstrates that there cannot be any performance issue with regards to the supplies effected by the petitioner. The invocation letter does not contain any allegation of a breach of performance obligations by the petitioner. The special equity also stands satisfied by reason of the petitioner facing an immediate and irreversible financial loss if the payment is made by Citibank NA, Dhaka to the respondent No. 1 in terms of the Letter of Invocation, it was stated further.

Referring to the interim orders passed by the Single Judges on May 10, 2021 and May 18, 2021, the Court observed that the orders were passed on a particular set of facts before filing of affidavits.

"This court may have considered altering or further modifying the orders of injunction at the instance of the respondent No. 2 having compelling facts disclosed subsequently on affidavits. Apart from territorial jurisdiction, no other grounds have been pleaded or shown which would warrant varying the orders when all relevant facts were taken into consideration by the learned Judges. It is also significant that the respondent no. 1 has not appeared or contested these proceedings and respondent no. 2 has taken to "shadow boxing" on behalf of the absentee wrongdoer", the Court opined further.

Accordingly, the Court refused to interfere with the order dated May 10, 2021 which was subsequently modified on May 18, 2021.

Case Title: KSE Electricals Ltd. V. Project Director, Bangladesh Electrification Board and Anr

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