In Case Of Fraud, Irretrievable Injustice Or Special Equities Unconditional Bank Guarantee Cannot Be Invoked- Delhi HC

The Delhi High Court has restrained the respondent- National Hydro Electric Power Corporation Ltd. from invoking or encashing the Bank Guarantee and observed that even though the guarantee was an unconditional one, exception of special equities operated in favour of the petitioner.

The Bench of Justice Chandra Dhari Singh observed that “The settled position in law that emerges from the precedents is that the bank guarantee is an independent contract between bank and the beneficiary, and the bank is always obliged to honour its guarantee as long as it is an unconditional and irrevocable one. There are, however, exceptions to this rule when there is a clear case of fraud, irretrievable injustice or special equities.”

Senior Advocate B.B. Gupta appeared for the petitioner and Advocate Gauhar Mirza appeared for the respondent.

In this case, the petition had been preferred wherein urgent intervention was sought for restraining the respondent from invocation/encashment of the petitioner’s Bank Guarantee under Section 9 of the Arbitration & Conciliation Act, 1996.The contract agreement was signed and executed between the petitioner and the respondent for setting up a 160 MW Hydroelectric Power Project in the State of West Bengal, known as Teesta Low Dam H.E. Project. The project was supposed to be completed within 41 months i.e., by September 2009, but was finally completed in February, 2016.

Meanwhile, several disputes arose which led to several arbitral proceedings which were adjudicated between the parties. The petitioner approached the High Court and the respondent was restrained from invoking the Petitioner’s Bank Guarantee and further was directed to inter alia provide one week’s notice before invoking the same.

Five awards were passed in the arbitration proceedings which had been challenged by either the petitioner or the respondent under Section 34 of the Act, and the matters were currently pending before the Court. In 2017 the Defect Liability Period was completed and certificate for the same was issued. Subsequently, in 2020, the invocation of the Bank Guarantee was attempted by the respondent through the impugned letter, against which the petitioner had approached the High Court.

The Issue before the Court was whether the instant Performance Bank Guarantee invoked by the respondent could be held to be valid.

The Court noted that the Bank Guarantee issued was an unconditional Bank Guarantee, therefore the beneficiary was entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes and even the bank was bound to honour it as per its terms irrespective of any dispute raised by its customer otherwise, the very purpose of giving such a bank guarantee would be defeated.

But there are three situations where injunction could be granted-firstly, in case of fraud, secondly, in case where irretrievable harm would be caused and thirdly, where existed special equities.

However, the petitioner had cited the exception of ‘special equities’ on the ground that the claims for which the bank guarantee was invoked had already been adjudicated upon and had been decided against the respondent in the five awards. Moreover, the Taking Over Certificate as well as the Defects Liability Certificate had already been granted to the petitioner. Therefore, there was no case of non-performance to make out a case for invocation of Bank Guarantee.

The Court observed that the facts and circumstances of the case cumulatively demonstrated special equities in favour of the Petitioner and they were-

• ‘Firstly, it was an admitted fact that the petitioner had arbitral awards with respect to the project in its favour wherein the counter-claims of the Respondent had been dismissed.
• Secondly, the Bank Guarantees given during the contract could not be said to have been given in perpetuity even for the period after the completion of project and adjudication of claims/counter-claims between the parties.
• Thirdly, even if the Respondent succeeded in its challenge to the award under Section 34, it had to resort to fresh arbitration proceedings with regard to the counterclaims.
• Fourthly, there was no prima facie case made out in light of the awards passed in favour of the petitioner, especially in light of the uncontested facts that in 2016 the project was taken over for substantial completion of works, and in 2017 the Defect Liability Period was completed, and finally in 2021 the Defect Liability Certificate was issued. Therefore, no valid basis for invocation/encashment of the bank guarantee by the respondent existed
• Fifthly, there was no stay whatsoever on either of the awards passed qua the said project in any of the Section 34 petitions.
• Sixthly, as per the provisions of the contract, the Performance Bank Guarantee ought to be returned to the contractor within 14 days of issuance of Defects Liability Certificate.’

Therefore, the respondent was restrained from invoking/encashing the Bank Guarantee.

Accordingly, the petition was disposed of.

Cause Title- Hindustan Construction Co. Ltd. v. National Hydro Electric Power Corporation Ltd. (Neutral Citation No. 2023/DHC/001006)

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