Existence of "special equities" can be inferred if irretrievable injustice would occur if invocation of bank guarantee is not granted: Delhi High Court

Existence of "special equities" can be inferred if irretrievable injustice would occur if invocation of bank guarantee is not granted: Delhi High Court

The Delhi High Court by a single judge, Justice C. Hari Shankar while hearing the case of SMS Ltd. vs Oil and Natural Gas Ltd. (ONGC) observed that The existence of "special equities" can be inferred if irretrievable injustice would occur if invocation of bank guarantee is not granted.

The petition was filed under Section 9 of the Arbitration and Conciliation Act, 1996 (A&C, Act) in which the petitioner SMS Ltd. prayed for pre-arbitral injunction, restraining the respondent ONGC Ltd. from acting in furtherance of a letter dated 15th December, 2020, issued by the latter to the former.

The brief facts of the case were that on 27th June 2012, a contract, for construction of an effluent treatment plant, was executed between a consortium led by SMS and ONGC, where under the consortium was to construct the plant for ONGC.

The petitioner submitted that Bank Guarantees are not unconditional, and ONGC could not, therefore, straightway invoke the Bank Guarantees. Further petitioner submitted the law relating to stay of invocation of bank guarantees is that, SMS is not, in a sense, seeking stay of invocation of the Bank Guarantee, furnished by it to ONGC. Petitioner contended that the present case would be governed by the principles of grant of interlocutory injunction i.e., existence of a prima facie case, balance of convenience, and irreparable loss.

Per contra, the respondent submitted that the Bank Guarantees forming subject matter of consideration in the present case are not conditional, but are unconditional Bank Guarantees, invocable on demand.

Therefore, all the proscriptions, which apply to grant of restraint on invocation of unconditional bank guarantees, would apply mutatis mutandis in the present case and, even in law, there are only two circumstances in which invocation of an unconditional bank guarantee can be restrained, i.e., existence of egregious fraud or special equities which result in the perpetration of irretrievable injustice on the applicant seeking stay.

The respondent submitted that this was a question of fact, which cannot be decided in a proceeding under Section 9 of the 1996 Act, but would have to be adjudicated in arbitral proceedings.

The Counsel for ONGC also pointed out that "special equities" in order to constitute a legitimate ground to stay invocation of a bank guarantee, have to be such as result in irretrievable injustice and injury to the party. In other words, the considerations of special equities and irretrievable injury are not independent and distinct considerations, but are inextricably intertwined.

The Court having heard both the parties opined that it is well-settled law regarding the interdiction of invocation of unconditional bank guarantees and that prayer in this petition cannot be granted.

The Court stated, "If the law does not permit the court to grant stay of invocation of the Bank Guarantees furnished by SMS, equally, the law cannot permit the court to stay the operation of the impugned letter dated 15th December, 2020."

The Court observed that court cannot pass an order which results in grant of a relief which the court is not empowered to grant, in law. It is trite, in law, that a court cannot grant, indirectly, that which the law does not permit it to grant directly.

The Court further explained contracts are intended, as a rule, to be self-contained, and the phenomenon of incorporation by reference is normally encountered where multiple contracts are executed, between the same parties, in cognate transactions forming part of an integrated whole, inter alia to ensure clarity and avoid prolixity. Covenants, which are not to be found in contracts, cannot readily be read there into, by applying the principle of incorporation by reference.

The Court asserted that, one of the principal considerations which would militate against any such conclusion of incorporation by reference would be where the incorporation results in conflict, or even disharmony, vis-avis other covenants in the contract.

The Court observed that no incorporation, of the contract between ONGC and SMS could be said to have taken place in the Bank Guarantees furnished by SMS. Any submission of such "bodily incorporation", as advanced by petitioner stood discredited.

According to the Court, "Even if the Bank Guarantees were to be enforced in the present case, SMS would, were it to succeed in arbitral proceedings, be in a position to recover the monies. It is not – and cannot be – the contention of SMS that ONGC is in financial doldrums, or that, were the Bank Guarantees to be enforced and encashed, the arbitral proceedings would stand frustrated. No "irretrievable injustice" would, therefore, ensue to SMS, were the Bank Guarantees furnished by it invoked by ONGC."

The Court reiterated that there could be no stay against ONGC from invoking the Bank Guarantees furnished by SMS.