Delhi High Court: In a case wherein a petition was filed for restraining respondent from invocation/encashment of the Petitioner’s Bank Guarantee under Section 9 of the Arbitration and Conciliation Act, 1996 (“Act”), a Single Judge Bench of Chandra Dhari Singh, J. disposed of the petition and restrained the respondent from invoking/encashing the bank guarantee as the facts and circumstances of the present case, demonstrated special equities in favour of the petitioner.
The petitioner was a Company incorporated under the Companies Act, 1913 and the respondent was a Public Sector Enterprise incorporated and registered under the Companies Act, 1956. The respondent was desirous of setting up of a 160 MW Hydroelectric Power Project known as Teesta Low Dam H.E. Project. In 2006, the petitioner’s bid was accepted by the respondent for a contract price of Rs. 395.90 crores by issuing the Letter of Acceptance. The contract agreement was signed and formally executed between the parties, and the date of commencement was agreed to be 1-5-2006. The work could not be completed in the original stipulated time of 41 months and was finally completed in 2016. Meanwhile, there were a series of arbitral disputes that arose between the parties which led them to enter into several arbitral proceedings. Later, the petitioner approached this Court, and this Court partly restrained the respondent, under Section 9 of the Act, from invoking the Petitioner’s Bank Guarantee and directed the respondent to provide one week’s notice before invoking the same.
Subsequently, the invocation of the Bank Guarantee was attempted by the respondent through a letter, being the impugned letter herein, on the grounds that an amount of Rs. 145.05 crores towards Car Insurance Premium, Flood Premium Insurance and Liquidated Damages were alleged due from the petitioner. Therefore, the petitioner had preferred this petition under Section 9 of the Act before this Court to direct the respondent to deliver the Bank Guarantee and in the alternative, restrain the respondent from invoking/enchasing the Petitioner’s Performance Bank Guarantee.
Analysis, Law, and Decision
The issue before this Court was “whether the instant Performance Bank Guarantee invoked by the respondent could be held to be valid?”.
The Court relied on Gujarat Maritime Board v. Larsen & Toubro Infrastructure Development Projects Ltd., (2016) 10 SCC 46, wherein the Supreme Court after taking note of the exposition of law on the subject “Bank Guarantee” in Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co., (2007) 8 SCC 110, had laid down the principles for grant or refusal for invocation of bank guarantee or a letter of credit. Thus, the Court opined that “if during commercial dealings an unconditional bank guarantee was given or accepted, the beneficiary was entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee was bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee”.
Further the Court opined that “the existence of any dispute between the parties to the contract was not a ground for issuing an injunction to restrain the enforcement of bank guarantees. The Courts have carved out only two exceptions. Fraud in connection with such a bank guarantee was the first exception whereas the second exception was that allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned”. Moreover, the court opined that there was also a third exception, being that of special equities operating in favour of the party against whom the bank guarantee was being sought to be invoked.
The Court noted that in the present case, the Guarantee was unconditional, and the said Bank Guarantee was extended to Rs. 26,13,51,850 which was extended from time to time and as on date remained valid and subsisting till 31-5-2022. The Court further noted that as per the petitioner, the claims qua the Project were allowed and awarded by the Arbitral Tribunals in favour of the petitioner and were due upon the respondent. The petitioner also submitted that in view of the Taking Over Certificate dated 16-5-2016, and the Defects Liability Certificate dated 14-8-2021 being granted to the petitioner, there was no case of non-performance to make out a case for invocation of Bank Guarantee. Thus, there being no loss which could be covered by the Bank Guarantee, it was the petitioner’s case that the respondent had no right to invoke the guarantee.
The Court opined that the following facts and circumstances of the present case, cumulatively demonstrate special equities in favour of the petitioner:
The petitioner had arbitral awards w.r.t. the Project in its favour wherein the counterclaims of the respondent had been dismissed.
The Bank Guarantees given during the contract could not be said to have been given in perpetuity even for the period after the completion of project and adjudication of claims/counterclaims between the parties.
Even if the respondent succeeded in its challenge to the Award under Section 34, it must resort to fresh arbitration proceedings regarding the counterclaims.
There was no prima facie case made out considering the awards passed in favour of the petitioner, especially considering the uncontested facts that the project was taken over for substantial completion of works, and the Defect Liability Period was completed, and finally the Defect Liability Certificate was issued. Therefore, no valid basis for invocation/encashment of the bank guarantee by the respondent existed.
Thus, the Court disposed of the petition and held that the respondent was restrained from invoking/encashing the bank guarantee till the disposal of and subject to the judgment in Section 34 petitions challenging the arbitral awards qua the contract between the parties in relation the Project.
[Hindustan Construction Co. Ltd. v. National Hydro Electric Power Corporation Ltd., 2023 SCC OnLine Del 819, decided on 13-2-2023]
Advocates who appeared in this case :
For the Petitioner: Senior Advocate B.B. Gupta;
Advocate Rishi Agrawala;
Advocate Achal Gupta;
Advocate Udai Khanna;
Advocate Shruti Arora;
For the Respondent: Advocate Gauhar Mirza;
Advocate Anushka Shah;
Advocate Adya Joshi.
*Judgment authored by: Justice Chandra Dhari Singh.
*Simranjeet Kaur, Editorial Assistant has reported this brief.