According to the Allahabad High Court, the Court is only required to take into account the terms of the Bank Guarantee Agreement and not the provisions in the main Contract between the parties, in terms of which the guarantee was provided, when dealing with an application under Section 9 of the Arbitration and Conciliation Act, 1996 (A&C Act), seeking to prevent the invocation or encashment of the Bank Guarantee.
The court is not required to interpret the contract and/or form a prima facie opinion as to whether the beneficiary of the bank guarantee has improperly invoked the bank guarantee when an application for interim measures is filed under Section 9 of the A&C Act, seeking interference in the invocation of an unconditional bank guarantee, according to the ruling by the bench of Justices Attau Rahman Masoodi and Om Prakash Shukla. The Arbitral Tribunal must be involved in a substantive matter before the Court, the Court ruled.
Claims of respondent and appellant
The respondent, M/s. Sahakar Global Ltd., and the appellant, U.P. Expressways Industrial Development Authority (UPEIDA), entered into a contract under which the respondent provided performance bank guarantees. The appellant reportedly threatened to use and encash the Bank Guarantee following a disagreement between the parties to the Contract. When attempting to prevent the appellant from cashing in on the performance bank guarantee, the respondent invoked Section 9 of the A&C Act. The parties are required to maintain the status quo about the performance bank guarantee, according to an order issued by the Commercial Court of Lucknow. The appellant took this issue up in an appeal to the Allahabad High Court under Section 37 of the A&C Act. The respondent thereafter made use of the arbitration provision and gave the appellant notice following Section 21 of the A&C Act.
Before the High Court, the appellant UPEIDA claimed that the Commercial Court had disregarded the legal requirements governing the use and redemption of unconditional bank guarantees. To obtain an injunction against the encashment of the bank guarantee, it was also stated that the respondent had failed to demonstrate any egregious fraud or irreparable injustice in its application under Section 9.
According to the appellant, the unconditional bank guarantee provided by the respondent constituted a separate agreement from the main Contract, which was the subject of the dispute between the parties. It argued that the mere fact that the arbitration tribunal would decide the main contract dispute and that the respondent intended to maintain the Bank Guarantee throughout the arbitration proceedings did not establish a prima facie case in the respondent's favour sufficient to support an injunction order under Section 9.
Respondent M/s. Sahakar Global argued that because the bank guarantee it had issued had the characteristics of a performance bank guarantee, it could only be used in the event of a breach of the contract's performance requirements. It maintained that the performance bank guarantee could not be used because the issue between the parties under the contract had not yet been resolved.
The High Court cited the Supreme Court's ruling in Singh Consultants and Engineers (P) Ltd. v. U.P. Cooperative Federation Ltd. (1987), in which the Apex Court noted that a bank providing the guarantee is not concerned with whether the supplier has met his contractual obligations under the Contract or not, nor is it concerned with whether the supplier is in default or not.
In U.P. Cooperative Federation Ltd. (1987), the Supreme Court had declared that the bank had to provide payments on demand, by the terms of the bank guarantee, and without requiring any justification or conditions. However, the Apex Court established two exceptions to the aforementioned rule. The first one is when fraud is so egregious that it invalidates the entire transaction and is detected by the bank. Second, there must be an irreparable injustice or injury involved; in other words, there must be exceptional circumstances that would prevent the guarantor from being able to pay himself back even if he finally prevails.
The Court determined that the bank guarantees were unconditional and irreversible based on the details of the bank guarantee provided by the respondent. The Court noted that the Bank Guarantee expressly stated that any claim made by the appellant on the Bank shall be final and binding, regardless of any disagreements between the parties or any disputes currently under consideration by any Court, Tribunal, Arbitrator, or other authority.
The bench reaffirmed that if a bank guarantee is conditional, the court may issue an order of injunction prohibiting the party from cashing out and using the bank guarantee if the terms have not been met. However, if the bank guarantee is unconditional, an injunction may only be issued in instances of flagrant fraud, irreparable wrongdoing, or exceptional circumstances.
M/s. Sahakar Global, the respondent, claimed before the court that the appellant had neglected to allege that there was any omission or fault in the respondent's execution of the Contract throughout the whole term of the Contract.
The respondent additionally argued that the appellant was not permitted to use the performance bank guarantee as collateral for the respondent's shortfall in remittance because of the relevant condition in the parties' contract. It claimed that the appellant could not rely on the performance bank guarantee.
In response, the Court noted that under the Bank Guarantee's provisions, the appellant is not obligated to inform the Bank of any performance shortfall or defect on the part of the respondent while requesting the Bank Guarantee's invocation.
It also made note of the appellant's claims that the respondent had allegedly failed to pay the full amount owed under the Contract. The Court further stated that it is a matter of interpretation that must be decided by the Arbitral Tribunal whether the appellant's contention regarding the respondent's shortfall in remittance can be expanded to mean a flaw or fault in the performance of the Contract. The bench expressed the opinion that the Court is only interested in the wording of the Bank Guarantee and not how the Contract should be interpreted.
The High Court further ruled that the Court is not required to interpret the contract and/or form a prima facie opinion as to whether the beneficiary of the Bank Guarantee has wrongfully invoked the Bank Guarantee when an application for an interim measure is filed under Section 9 of the A&C Act, seeking interference in the invocation of an unconditional bank guarantee. It also stated that such an exercise may only be carried out in a substantive arbitration tribunal process.
In Mahatma Gandhi Sahakara Sakkare Karkhane v. National Heavy Engineering Coop. Ltd. (2007), the Apex Court ruled that no provision in the parties' main agreement or contract could be used as a justification to prevent the invocation and encashment of the bank guarantee. It was emphasized once more that only the conditions included in the guarantee signed by the bank are significant.
Court observation
As a result, the High Court concluded that the Court is only required to take into account the conditions of the Bank Guarantee Agreement when deciding on an application under Section 9 of the A&C Act that seeks to prevent the invocation or encashment of the Bank Guarantee. It further stated that a bank guarantee's enforcement cannot be halted because the principal contract between the parties, under which the guarantee was provided, does not have the necessary provisions for enforcement.
"Given the well-established law on the matter, any mention of the first disagreement between the parties on the fulfillment of the contract is wholly unrelated to the question of a stay of the invocation of the bank guarantees. That dispute must necessarily serve as the foundation for a completely distinct action that will be decided either through arbitration or by judicial adjudication. Therefore, the inquiry in the current interim proceedings is limited to whether a case of flagrant deception in the issue of obtaining or providing BGs is made out based on the documents "The Court said.
The court concluded that none of the situations in which the use of an unconditional bank guarantee can be stayed existed, even if it found that the respondent had failed to prove any flagrant fraud was involved in the creation or acquisition of the bank guarantee.
The Court further noted that although the law on interdicting an unconditional bank guarantee is settled as a result of the Supreme Court's string of consistent rulings over more than four decades, the courts are still overrun with Bank Guarantee cases, which take a long time to resolve.
As a result, the High Court upheld the appeal and overturned the Commercial Court's decision.
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