2021 (12) TMI 1105 - HC - Indian Laws

Court Upholds Injunction on Bank Guarantee Invocation, Stresses Contractual Obligations

M/s. KSE ELECTRICALS PVT. LTD. Versus THE PROJECT DIRECTOR, BANGLADESH RURAL ELECTRIFICATION BOARD AND ANR.

The court confirmed and made absolute the interim orders restraining the invocation of the bank guarantee, disposing of the application in favor of the ... Restraint on invocation of a bank guarantee - alleged short-supply of goods - fraud or irrevocable injury or special equities which would vitiate the entire underlying transaction - HELD THAT:- Courts are usually slow to interfere with the transaction between a bank and the beneficiary which is seen as being independent of the underlying contract between the lender and the supplier unless conditions call for such interference. The three conditions, as accepted in several decisions, are fraud of an egregious nature; special equities or the invocation not being in terms of the bank guarantee. It is sufficient if a party seeking a restraint on the invocation is able to establish any one of the three requirements. The test of special equity or irrevocable injustice is a matter of an assessment by a court on the particular facts presented to it for stay on a notice of invocation. The injury or injustice must be irrevocable, irremediable and irreversible In the present case, the petitioner has satisfied two of the three ingredients, namely special equity and the invocation not being in terms of the guarantee. The clauses in the contract and more particularly the GCC clearly demonstrate that the bank guarantee was furnished towards performance security. There can be no issue with regard to performance since the petitioner has already received 90% of the contract price as discussed above. The invocation letter also demonstrates that there cannot be any performance issue with regard to the supplies effected by the petitioner. The invocation letter does not contain any allegation of a breach of performance obligations by the petitioner. The special equity also stands satisfied by reason of the petitioner facing an immediate and irreversible financial loss if the payment is made by Citibank NA, Dhaka to the respondent No. 1 in terms of the Letter of Invocation. Application disposed off. Issues Involved:1. Grounds for restraining the invocation of a bank guarantee.2. Territorial jurisdiction of the court.3. Whether Citibank NA should be treated as two different entities.4. Conduct of Citibank NA.5. Substantive jurisdiction and merits of the dispute.6. Legal principles governing bank guarantees and the conditions for court interference.Detailed Analysis:1. Grounds for Restraining the Invocation of a Bank Guarantee:The court examined whether the invocation of the bank guarantee by the respondent No. 1 could be restrained. The petitioner argued that the invocation was not in terms of the guarantee and that special equities existed in their favor. The court found that the petitioner had fulfilled its contractual obligations, as evidenced by the receipt of 90% of the contract price and the absence of any performance-related claims by the respondent No. 1. The invocation was related to retention money rather than performance obligations, thus justifying the restraint.2. Territorial Jurisdiction of the Court:The court addressed the objection regarding territorial jurisdiction by referring to the General Conditions of Contract (GCC) and the Arbitration and Conciliation Act, 1996. The GCC specified that the contract would be governed by the laws of Bangladesh, but this did not preclude the court from assuming jurisdiction. The court relied on Section 2(1)(e)(ii) and Section 2(2) of the Act, which allow for jurisdiction in international commercial arbitration cases. The court concluded that it had jurisdiction to entertain the application.3. Whether Citibank NA Should Be Treated as Two Different Entities:The court analyzed the relationship between Citibank NA, Kolkata, and Citibank NA, Dhaka. It was evident that Citibank NA, Kolkata issued a Standby Letter of Credit in favor of Citibank NA, Dhaka, which then issued the performance security. The court found no evidence to treat Citibank NA as two separate entities, as the transactions indicated a unified operation between the Kolkata and Dhaka branches.4. Conduct of Citibank NA:The court noted that Citibank NA, Dhaka, had informed the petitioner and Citibank NA, Kolkata, about the invocation of the performance guarantee despite being aware of the court's orders. The conduct of Citibank NA suggested that it was acting on behalf of the respondent No. 1, who did not contest the proceedings. The court found that Citibank NA's actions undermined the argument that the Kolkata and Dhaka branches were independent entities.5. Substantive Jurisdiction and Merits of the Dispute:The court considered the merits of the dispute, noting that the petitioner had completed the supply of goods by February 2018, and the warranty period had expired in February 2019. The respondent No. 1's demands for short-supply and other issues were settled by the petitioner, and the invocation of the bank guarantee was related to retention money rather than performance obligations. The court found that the invocation was not justified and confirmed the order restraining the invocation.6. Legal Principles Governing Bank Guarantees and Conditions for Court Interference:The court reiterated the principles governing bank guarantees, emphasizing that courts are generally reluctant to interfere unless there is fraud, special equities, or the invocation is not in terms of the guarantee. The petitioner demonstrated special equities and that the invocation was not in terms of the guarantee. The court highlighted the importance of preventing irrevocable financial loss to the petitioner and confirmed the interim orders restraining the invocation.Conclusion:The court confirmed and made absolute the interim orders dated 10th May 2021 and 18th May 2021, restraining the invocation of the bank guarantee. The application was disposed of in favor of the petitioner, with the court finding substantial merit in the petitioner's contentions.