Recently, the Delhi High Court dealt with a First Appeal against the Order (FOA) passed by a single judge who granted stay on invocation of the advance and performance bank guarantees by the Appellant – OFB Tech Pvt. Ltd.
Brief Facts:
The Appellant had placed purchase orders from the Respondent no. 1 for manufacture and supply of certain materials worth ₹310 crore. The Appellant had provided mobilization advance against which the Respondent issued advance and performance bank guarantees.
The Appellant contended that the Respondent had supplied materials worth only ₹81 crores as against ₹310 crores which was just 25-31% of the order and the Appellant had already paid ₹94 crores.
Thus, the Appellant issued notice of invocation and invoked the bank guarantees. The Respondent obtained an ex parte ad interim Order restraining the Respondent banks from releasing any amounts against the bank guarantees.
Since bank guarantees of ₹18.27 crores had already been encashed, the Order pertained to the balance amount of ₹22 crores. Appellant’s application under Order 39 Rule 4 CPC seeking vacation of the interim order was dismissed by the single judge. Hence, the Appellant filed an FOA.
Appellant’s Main Contentions:
- They had the power to invoke advance bank guarantees for future anticipated losses and they were suffering huge losses for being unable to perform third party contracts.
- Respondent sought interim injunction on the ground of ‘irretrievable injury’ or ‘fraud’ whereas the single judge granted it on the ground of ‘special equities’.
- Single Judge conducted “fishing and roving inquiry” into the merits of the dispute while passing the order of injunction.
- Claim of the Respondent to be an unpaid seller is factually wrong as they had excess amount of ₹13 crores with them.
- Breach of contract by the Respondent no. 1 is ex facie apparent as the failed to supply the material as per the contract.
Respondent no.1’s Main Contentions:
- For supplied goods worth Rs. 81.86 Crores and appellant had paid only Rs. 54.31 Crores, there was no possibility of any loss being caused to appellant.
- Invocation gave double benefits to the Appellant since they have already adjusted mobilization advance against the goods supplied which amounted to fraud.
- Respondent could not have supplied any further goods/materials until complete payment was made by the appellant for the goods/materials already supplied.
High Court’s Observations:
The Division Bench of the Delhi High Court refused to accept the Respondent’s pleading that “unconscionability” and “unfairness” are grounds for restraining encashment of bank guarantee, on the basis of a judgment of the Court of Appeal, Singapore as these grounds are not part of Indian Jurisprudence on stay of bank guarantees. The DB stated “In India, only two grounds have been recognized for restraining encashment of bank guarantees, viz. fraud and special equities in the form of preventing irretrievable injustice between the parties (General Electric Technical Services Company Inc. v. Punj Sons (P) Ltd. and Another, 1991 Latest Caselaw 176 SC).”
The bench further stated that “it is a settled principle of law that a bank guarantee is an independent contract in itself and the disputes concerning the main agreement between the appellant and the respondent no.1 does not affect the invocation of the bank guarantee. Thus, holding that bank guarantee is to be honoured according to the terms of the guarantee and should not be concerned with the underlying contract between the parties.”
The High Court relied on a Supreme Court judgement titled U.P. Cooperative Federation Ltd v. Singh Consultants and Engineers (P) Ltd., 1987 Latest Caselaw 341 SC, in which the Apex Court had ruled:
“It must be deemed that the moment a demand was made without protest and contestation, the bank had obliged itself to pay irrespective of any dispute as to whether there had been performance in an orderly manner of the contractual obligation by the party.
In order to restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or of bank guarantee, there should be serious dispute and there should be good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Otherwise, the very purpose of bank guarantees would be negatived and the fabric of trading operation will get jeopardised. The nature of the fraud that the courts talk about is fraud of an “egregious nature as to vitiate the entire underlying transaction”.
The bench also relied on the case of U.P. State Sugar Corporation v. Sumac International Ltd., , wherein the Supreme Court had held,
“The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned.
The bank which gives the guarantee is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contractual obligation or not, nor with the question whether the supplier is in default or not. The bank must pay according to the tenor of its guarantee on demand without proof or condition.”
The first exception i.e. fraud, was descirbed by the Delhi High Court in the case of Skyline Air Conditioning Engineers Private Limited v. Public Works Department, 2023, as follows:
“Consequently, the nature of fraud on the basis of which an encashment of bank guarantee can be stayed is fraud of an egregious nature. It should be a fraud which the bank can detect with minimal investigation.”
The second exception i.e. irretrievable harm or injury, was explained by the Supreme Court in the case of Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd. And Another, 1997 Latest Caselaw 436 SC, in the following words,
“The second exception to the rule of granting injunction, i.e., the resulting of irretrievable injury, has to be such a circumstance which would make it impossible for the guarantor to reimburse himself, if he ultimately succeeds. This will have to be decisively established and it must be proved to the satisfaction of the court that there would be no possibility whatsoever of the recovery of the amount from the beneficiary, by way of restitution.”
Relying on the above-mentioned precedents, the High Court said that it clear that in the present case no prima facie case has been established by the Respondent no.1 with respect to any fraud or irretrievable injustice being committed upon it or any special equities in its favour.
Since the time for performance of the contract had already expired, the High Court ruled that there was no basis whatsoever for injuncting the invocation of the bank guarantees.
The Court also noted that the terms of the advance bank guarantee were clear that it was not only towards mobilization advance, but for existing and future losses. Thus, the Division Bench ruled that finding of the Single Judge that since the Appellant has already adjusted the mobilization advance given to Respondent no.1 against the goods supplied, permitting the invocation of advance bank guarantees would amount to a double benefit, cannot be sustained.
The High Court DB further noted that the bank guarantees include a ‘conclusive evidence’ clause as per which any assertion of loss suffered by the appellant would be conclusive upon the bank and the bank would be liable to pay.
Thus, the High Court held that the invocation of bank guarantees by the appellant is in terms of the said bank guarantees and the banks are bound to honour the same since the said bank guarantees are unconditional and unequivocal.
SLP in the Supreme Court:
Aggrieved by this judgement, the supplier (Respondent no. 1 in the FAO) had filed an SLP in the Supreme Court which was dismissed as infructuous because by that time the Appellant had already invoked all the remaining bank guarantees.
Case Title: OFB Tech Private Limited v. M/S KKspun India Ltd and Ors.
Bench: Acting Chief Justice Manmohan, Justice Mini Pushkarna
Counsels for Appellant: Mr. Tanmaya Mehta and Mr. Sanyam Khetarpal
Counsels for Respondent: Mr. Jatin Mongia, Mr. Ankit Rajgarhia, Mr. Tarun Mehta and Mr. Rohit Kumar
Date of Decision: 1st February 2024
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