Unconditional Bank Guarantees Can Be Restrained In Cases Of Egregious Fraud, Irretrievable Injustice Or Special Equities: Delhi HC

The Delhi High Court recently clarified law on injunctions against Bank Guarantee (BG) invocation, emphasising that unconditional BGs can only be restrained in cases of 'egregious fraud,' 'irretrievable injustice,' or ‘special equities.’

While doing so, the Court upheld the law laid down by the Bombay High Court in Reliance Infrastructure Ltd v NLC India Ltd, MANU/MH/0944/2022.

The Court said, “112. As is unexceptionably held by the High Court of Bombay in the afore extracted passages from Reliance Infrastructure, the requirement of the letters of invocation being in terms of the BGs has to be realistically applied. The Court cannot expect word to word, comma to comma, reproduction, in the letters of invocation, of the stipulations contained in the BGs. The allegations, if any, which the BGs envisage as being communicated by the beneficiary to the Bank, must be so communicated. There is, however, no pristine form in which this communication should take place. What has to be seen is whether, in substance, the required assertion/allegation was made in the letters of invocation. Those allegations/assertions may equally be made in a document annexed to the letters of invocation, to which the letters of invocation invite reference, as in the present case.”

The dispute arose from a construction contract between Appellant and Respondent. The Respondent furnished Bank Guarantees (BGs) to secure its performance. Disputes arose, leading to arbitration. The Respondent sought to prevent the Appellant from invoking the BGs. The Arbitral Tribunal restrained the Appellant from invoking the BGs, leading to this appeal by the Appellant.

The Appellant argued that it was justified in terminating the contract due to the Respondent's defaults. It contended that the invocation of BGs was in accordance with the law and the terms of the BGs.

The Appellant challenged the Arbitral Tribunal's finding that the invocation letters were not compliant with the BG terms. It argued that the Tribunal erred in omitting crucial paragraphs from the invocation letters, which referred to the termination notice detailing the Respondent's defaults.

The Appellant also contested the Tribunal's finding of 'special equities,' stating that there was no evidence to support the claim that invoking BGs would cause irretrievable financial prejudice to the Respondent.

It emphasised that the Respondent was involved in multiple large projects and the Appellant was ensured the enforceability of any future arbitral award in the Respondent's favor.

The Respondent argued that the delays in the project were due to unforeseen circumstances like the COVID-19 pandemic and design complexities, which were beyond its control. It highlighted that it had sought an extension of time based on an expert opinion, and the invocation of BGs during ongoing discussions was unjust.

The Respondent supported the Tribunal's findings on 'special equities,' stating that encashing the BGs would cause it irreversible financial harm and hinder its ability to recover even if it succeeded in arbitration.

It also contended that the Appellant's failure to reduce the Performance Bank Guarantee (PBG) amount from 10% to 3%, as per a government memorandum, further supported the existence of 'special equities.'

The Respondent argued that the invocation letters for the various BGs (PBGs, ABG, RBGs) were not strictly compliant with the terms of the respective BGs. It pointed out discrepancies in the language used in the invocation letters compared to the specific conditions mentioned in the BGs.

The Court held that the Arbitral Tribunal's decision to stay the invocation of BGs was unsustainable.

The Court found that the invocation letters, when read with the termination notice, were compliant with the BG requirements. It rejected the Tribunal's finding of 'special equities,' stating that there was no evidence to support the claim of irreversible financial prejudice to the Respondent. The Court also dismissed the Respondent's argument based on the government memorandum regarding PBG reduction, stating that it was inapplicable in cases where arbitration was contemplated.

The Court concluded that the Respondent failed to establish a case for injunction against BG invocation and set aside the Tribunal's order.

Towards the end, the Court also commended role played the Respondent’s Counsel –
“144. In parting, this Court records its appreciation for the manner in which Mr. Saurav Agrawal presented the case, though pitted against the senior and venerated Mr. Venugopal. He argued with unruffled confidence and poise and, if he was not ultimately successful in steering his client’s cart up the hill, it was only because the hill was too steep, and not owing to any want of effort on his part."

Arb. A. (Comm) 15/2024