Invocation of Bank Guarantees: Conflicting Opinions Adding to the Uncertainty

[By Talin Bhardwaj]

The author is a student at Rajiv Gandhi National Univerisity of Law, Patiala.

Introduction:

Bank guarantee is a type of guarantee under section 126 of the Indian Contract Act, 1872 (“ICA”) in which the bank becomes a guarantor to reduce the risk in a commercial transaction between parties. The Supreme Court in various cases while considering the judgments given by the Courts of the United Kingdom (“UK”), has held that the invocation of bank guarantees ideally should not be restrained as it may act as a detriment to trust in internal and international commerce. However, the Supreme Court, at the same time, through various judgments has also held that the invocation of bank guarantees may be restrained in two cases: Firstly, in cases of egregious fraud which vitiates the entire transaction and secondly, in cases where there is a risk of an irreparable harm/injustice to one of the parties. These grounds were in furtherance to the judgments given by the courts of the UK and the USA.  Additionally, the High Court of Calcutta in the case of Texmaco Ltd. v. State Bank of India & Ors. added a condition of “special equities” for restraining the invocation of bank guarantees. The condition of “special equities” was to be considered as a measure for providing relief to the parties due to the harm suffered in exceptional circumstances and was also accepted by the Supreme Court recently in the case of Standard Chartered Bank v. Heavy Engineering Corporation Ltd.

These conditions have become particularly pertinent in light of the catastrophic financial distress brought about by the COVID-19 pandemic. The Delhi and the Bombay High Courts have presented conflicting opinions on whether COVID-19 can act as ground under “special equities” to restrain the invocation of bank guarantee in recent times. The author through this article seeks to analyze the conundrum posed by the recent judgments and provide some clarity on the question of whether COVID-19 constitutes a valid ground for restraining the invocation of bank guarantees.

The saga of conflicting judgments:

As mentioned earlier, both the Delhi and the Bombay High Court have presented diverging opinions on whether COVID-19 could act as a ground for the court to restrain the invocation of bank guarantee. The Bombay High Court in the case of Standard Retail Pvt. Ltd. v. GS Global Corp. & Ors., denied granting an injunction to restrain a party from invoking the bank guarantee. On account of the financial impact of the pandemic, the petitioners contended that the commercial contracts that were entered between the parties were frustrated, and thereby, the encashment of the bank guarantees should be prohibited. The Bombay High Court, however, refused to restrain the respondents from encashing the letters of credit and the bank guarantees even in the circumstances emanating from COVID-19, majorly due to the nature of the contract.

On the contrary, the Delhi High Court in the case of M/S Halliburton Offshore Services Inc. v. Vedanta Limited & Anr. restrained the encashment of eight bank guarantees due to the pandemic. The parties entered into a contract for the construction of walls. On account of certain differences arising between the parties pertaining to the completion of the project, the petitioner moved to the Delhi High Court pursuant to section 9 of the Arbitration & Conciliation Act, 1996. The petitioner claimed that COVID-19 had adversely affected the completion of the project as a nation-wide lockdown was announced by the government to tackle the transmission of the virus, which consequently led to a shortage of labor due to their migration. The Delhi High Court, in consonance with the Standard Charted Bank judgment, upheld that special equities and irretrievable harm are two separate grounds on which the court can interfere with the encashment of a bank guarantee. The court, while reviewing the facts and circumstances of the case, finally came to the conclusion that the unprecedented circumstances brought about by the pandemic would validly constitute “special equities”, which thereby, entitles a party to seek interim relief for restraining the invocation of bank guarantees.

  • Increasing complications to an already persisting conundrum:

The verdict of the Delhi High Court in the case of Indirajt Power Private Ltd. v. Union of India & Ors. has added fuel to the already persisting conundrum. In the present case, the petitioner was assigned the responsibility for the completion of a thermal project. The petitioner thereby, contended that due to the adverse circumstances brought by the pandemic, the court should stay the invocation of the bank guarantees, in furtherance to the judgment given by the court in the M/S Halliburton Offshore Services Inc. v. Vedanta Limited & Anr. case. The Delhi High Court in this case noticed that the project was to be completed in April-May 2018 and was repeatedly delayed by the petitioner. On these grounds, the court held that the petitioner cannot be entitled to an interim relief on the ground of “special equities”. Further, the court while relying on the judgment of Umaxe Projects Private Limited v Air Force Naval Housing Board & Anr., held that the court shall not interfere in the case of encashment of bank guarantees even if a party would suffer damages unless these damages are irreparable. Recently, the opinion of the Delhi High Court again oscillated in the case of Technimont Pvt. Ltd. & Ors. v ONGC Petro Additions Ltd., whereby, it restrained the respondent from encashing the bank guarantees because of the pandemic and due to the fact that these guarantees remain valid for a period till December 2020 which shall balance the interests of both the petitioner as well as the respondent.

  • Understanding the juxtaposing Delhi High Court judgments:

A closer look at the initial two juxtaposing judgments of the Delhi High Court has clearly made the applicability of the “special equities” more complex to understand. Both the cases involved the completion of a project in which the deadline for completing the project was much before the outbreak of the pandemic and thereby, time was of the essence in these contracts. Furthermore, since the deadline for the completion of the project in both the cases was before the pandemic, there is certainly a case of a preventive force majeure delay, whereby, the delay or the incompletion of the project is not directly attributable to the force majeure event i.e. COVID-19, but to the inability of the parties to finish the projects till the stipulated deadline. Considering these factors, these two cases have a considerably similar factual background. Therefore, Delhi High Court’s position of granting interim relief by restraining the encashment of bank guarantee in the Halliburton Offshore Services case, and denying the relief in a similar case of Indirajt Power case is prima facie contradictory and leads to an interpretative conundrum.

Conclusion:

The diverging opinions of the Bombay High Court and the Delhi High Court, and the wavering judgments of the Delhi High Court in the cases of Halliburton Offshore Services and Indirajt Power, within the span of a week, has undoubtedly increased confusions on the question of whether COVID-19 constitutes a ground, which can be considered by the parties to seek relief from the courts to restrain the invocation of bank guarantees. Admittedly, the facts and circumstances of the case decided by the Bombay High Court differ greatly from that of the cases of Delhi High Court, yet, the two conflicting judgments of the Delhi High Court having similar facts and circumstances has been a major source of confusion and increased uncertainty about the application of “special equities”. However, amongst this confusion, one thing that remains lucidly clear is that the formula of “one size fits all” certainly cannot be applied in these cases. Additionally, it also needs to be acknowledged that even though COVID-19 has led to unprecedented consequences for the economy, its impact has not been uniform on all the companies, as some companies have been affected more severely than others. This puts an additional responsibility on the courts to assess and prevent irreparable harm to any company due to the invocation of bank guarantees in these circumstances. Thereby, the imperativeness of carefully reviewing the facts and circumstances of each case for determining whether the financial ramifications of COVID-19 fulfills the condition of either special equities or irretrievable harm to restrain the encashment of bank guarantee shall remain the key for the courts in the future decisions.

 

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