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BANK GURANTEES ARE NOT FOR THE FRUITLESS PURPOSE
The Delhi High Court last week observed that except in cases of fraud, irretrievable injustice, and special equities, the Court shall not interfere with the invocation or encashment of a 'bank guarantee', provided the invocation was as per terms of the bank guarantee (SPML Infra Ltd. vs. Hitachi India Ltd. & Anr.).
A Division Bench of Justices Manmohan and Navin Chawla said that bank guarantees must be free from interference by courts, otherwise, trust in internal and international commerce would be irreparably damaged.
The court said during the hearing that Prima facie this Court is of the opinion that Bank Guarantees are not furnished for being photo framed and kept in a drawing-room.
The Court also enunciated the legal sanctity and meaning of the word 'bank guarantee' by placing reliance on a series of precedents like the Supreme Court's decision in U.P Cooperative Federation Ltd. vs. Singh Consultants and Engineers Private Ltd. and more recently in Andhra Pradesh Pollution Control Board vs. CCL Products India Limited.
The court observed that in their view, the Court cannot injunct encashment of a bank guarantee during its validity if a cause of action arises in the future. A Bank guarantee has a meaning and legal sanctity attached to it.
After analyzing a slew of precedents, the Court also clarified the well-settled position in this regard.
The order said that in 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.
The observations came in an appeal by SPML Infra Ltd that challenged an order dated July 23, 2021, passed by Saket District Judge by which an ex-parte ad-interim status quo was granted with regard to the encashment of respondent no. 2's bank guarantees, in an application filed by Hitachi (respondent no.1) under Section 9 of the Arbitration and Conciliation Act,1996.
Advocate Prasouk Jain appearing for Hitachi India submitted that he had pressed for an injunction order before the trial court to restrain the appellant from encashing the bank guarantee in question during its validity period.
In support of his contention, he had drawn the Court’s attention to a single judge's order dated July 22, 2021, passed in a similar matter between the same parties.
The High Court, however, opined that the single-judge in the July 22 order had used the expression ‘the order has been passed in view of the consensus arrived at between the parties.
The High Court said that there is no judicial finding that a Bank Guarantee cannot be encashed during its validity
Jain then sought permission to further argue the matter and file some documents which were granted.
The Court proceeded to adjourn the matter for September 13, 2021.
Besides Jain, advocate Rabiya Thakur represented Hitachi India. Advocates Sayan Ray and Parag Chaturvedi represented petitioner SPML Infra.
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