Bank Guarantee: Can these be encashed during their validity period? Read Del HC’s opinion on furnishing of bank guarantees

Delhi High Court: The Division Bench of Manmohan and Navin Chawla, JJ. while addressing a matter expressed that no judicial finding is there to state that a Bank Guarantee cannot be encashed during its validity.

Instant appeals were filed challenging the Trial Court’s decision wherein the Trial Court had passed an ex parte ad interim status quo order as regards the encashment of respondents 2 Bank Guarantee for Rs 16, 20,000 in an application filed by respondent 1 under Section 9 of the Arbitration and Conciliation Act, 1996.

Appellant’s counsel submitted that the Bank Guarantee was invoked as respondent 1 had not extended the said Bank Guarantee up to 31-03-2022.

Though, respondents counsel stated that the Bank Guarantee in question had been extended till 31-3-2022.

Analysis, Law and Decision

High Court was inclined to dispose of not only the appeal but also the Section 9 petition filed by respondent 1. However, Mr Jain, counsel for respondent 1, 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.

Prima facie, Court opined that Bank Guarantees are not furnished for being photo framed and kept in a drawing-room.

Bench also opined that:

There is no judicial finding that a Bank Guarantee cannot be encashed during its validity.

High Court expressed that Court cannot injunct encashment of a bank guarantee during its validity if cause of action arises in future.

Supreme Court, in U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., (1988) 1 SCC 174 held that bank guarantee must be honoured free from interference by Courts, otherwise, trust in commerce internal and international would be irreparably damaged.

Recently, in Andhra Pradesh Pollution Control Board v. CCL Products (India) Ltd., 2019 SCC OnLine SC 985, the Supreme Court has held as under:

“23. The settled legal position which has emerged from the precedents of this Court is that absent a case of fraud, irretrievable injustice and special equities, the Court should not interfere with the invocation or encashment of a bank guarantee so long as the invocation was in terms of the bank guarantee.”

While permitting respondent 1 and giving an opportunity, to file whatever documents he wished to rely upon, the matter was listed for 13-09-2021. [SPML Infra Ltd. v. Hitachi (P) Ltd., 2021 SCC OnLine Del 4194, decided on 27-08-2021]

Advocates before the Court:

For the appellant: Sayan Ray & Parag Chaturvedi, Advocates

For the Respondents: Prasouk Jain with Rabiya Thakur, Advocates.

Ateev Mathur, Advocate for Respondent 2 ( SCB)

One comment

  • While I agree with the decision that an injunction against encashing the BG would be wrong, the Court has recognised that there could be .. “case of fraud, irretrievable injustice..” in encashing the BG. The remedy would perhaps lie in the encasher being sued later. In order to establish fraud or wrongful encashment, the reason for encashment would need to be stated. However most BG Clauses say these can be encashed without giving any reason. This is patently unfair, and could cause “irretrievable injustice.” Inclusion of this clause in BGs needs to be found violative of natural justice and therefore ignored even when present. The right of the party to know the cause of encashment is vital to intitiating any remedial action in case of fraud or unjustified or malafide action.

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