Delhi High Court : Bank Guarantees are Required to be Honored in spite of Disputes between the Parties

Delhi High Court : Bank Guarantees are Required to be Honored in spite of Disputes between the Parties

The Delhi High Court, headed by a single judge, Hon'ble Justice Vibhu Bakhru, in the matter of Dadheech Infrastructures Private Ltd vs DTE Gen MD ACCN Project & Anr. observed that, "the plain language of the Bank Guarantees that they are unconditional and the issuer bank (Andhra Bank) is obliged to pay the amount on the respondent stating that "the amount claimed is due by way of loss or damage caused or would be suffered by the Government by reason of any breach by the petitioner".

The petitioner had filed the petition under Section 9 of the Arbitration and Conciliation Act, 1996, inter alia, praying that the respondent may be restrained from invoking and encashing the Performance Bank Guarantees for an amount of Rs. 11,00,00,000/- and Bank Guarantee for an amount of Rs. 2,91,00,000/-.

The petitioner further prayed that the respondent may be injuncted from encashing the Retention Guarantees being the Bank Guarantees furnished by the petitioner against disbursal of Retention Money, being Bank Guarantee for a sum of Rs. 20,76,000/, for a sum of Rs. 2,07,50,000/-and Bank Guarantee for a sum of Rs. 1,80,00,000/- (Retention Bank Guarantees).

In terms of the said Contract, the petitioner had furnished the two Performance Bank Guarantees. Certain interim payments were made to the petitioner after retaining a specified proportion in terms of the Contract. The said retention money was also disbursed against Retention Bank Guarantees.

Learned counsel appearing for the petitioner submitted that the said invocation was not in terms of the Bank Guarantee, inasmuch as, no loss has been caused to respondent no.1. He also earnestly contended that there has been no breach of the Contract by the petitioner and, therefore, the action taken by respondent no.1 is unsustainable.

He further submitted that the invocation of the Bank Guarantees in question is predicated on respondent no.1 terminating the Contract and, since the said termination is illegal and unwarranted, the invocation/encashment of the Bank Guarantees in question are liable to be stayed.

However, according to the Respondent No.1 the petitioner had failed to perform the contract and therefore it had terminated the same by its letter on 4th January, 2021. It was apparent that disputes arose between the parties in relation to the execution of the said Contract. The Andhra Bank (now the Union Bank of India), respondent no.1 had invoked the Bank Guarantees in questionviz., the Performance Bank Guarantees as well as the Retention Bank Guarantees.

The court after hearing both the parties stated that it does not find merit in the aforesaid contentions raised by the petitioner.

The plain language of the Bank Guarantees in question indicates that the payment of the Guaranteed amount is not contingent upon cancellation of the Contract. The terms on which the Bank Guarantees can be invoked are similarly worded, stated the Court.

"The contention that the invocation of the Bank Guarantees liable are liable to be injuncted as the petitioner disputes that it is in breach of the contract, is also unsubstantial. The law relating to interdicting invocation of the bank guarantee is now well settled. "To support this statement the court referred to the Supreme Court's observation in the case of Svenska Handels banken v. M/s. Indian Charge Chrome and Others where it was observed, "in case of confirmed bank guarantees/irrevocable letters of credit, it cannot be interfered with unless there is fraud and irretrievable injustice involved in the case and fraud has to be an established fraud."

In addition to this the Court also cited the observations made in the case of U.P. Cooperative Federation Limited v. Singh Consultants and Engineers Pvt. Ltd, "The nature of the fraud that the Courts talk about is fraud of an "egregious nature as to vitiate the entire underlying transaction". It is fraud of the beneficiary, not the fraud of somebody else."

The Court finally observed, "it is settled law that invocation of the Bank Guarantees cannot be withheld on account of any disputes between the parties. Thus, the Bank Guarantees are required to be honoured notwithstanding the disputes that have arisen between the parties. In view of the above, the petitioner's prayer that respondent no.1 be restrained from invoking the Bank Guarantees cannot be acceded to."

The Court quashed the petition stating that indisputably, the contract is determinable. Interdicting the operation of the letter terminating the Contract, would in effect amount to directing specific enforcement of the Contract, which is impermissible in terms of Section 14 (d) of the Specific Relief Act, 1963.