2020 (4) TMI 917 - HC - Indian Laws

Bank guarantees restrained due to COVID-19 lockdown constituting force majeure creating special equities for interim relief

Delhi HC granted ad interim injunction restraining invocation of eight bank guarantees until one week after May 3, 2020. Court held that unprecedented ... Invoking or encashing eight bank guarantees - COVID-19 pandemic can constitute special equities justifying the restraint of bank guarantee invocation or not - Section 9 of the Arbitration and Conciliation Act, 1996 - HELD THAT:- The legal position is noted, relating to the circumstances and situations in which interim injunctions, restraining the invocation of unconditional bank guarantees, could be granted, any further reference to judicial precedents in this regard may not be either necessary or justify, given the special circumstances placed, and the limited nature of the present order. In fact, in para 41 of the report in Gangotri Enterprises Ltd. v. U.O.I. [2016 (5) TMI 516 - SUPREME COURT], the Supreme Court, even while noting the above legal position, held that, while there could be no quarrel with the propositions emerging from the above decisions, 'every case has to be decided with reference to the facts of the case involved therein'. It is not necessary to multiply references to precedents, the law with respect to injunction of encashment, or invocation, of unconditional bank guarantees, being fairly well settled. It is significant, however, that, where the earlier understanding of the expression 'special equities', as a circumstance in which invocation of bank guarantees could be inducted, was that such equities were limited to cases where irretrievable injustice resulted, the recent decision in Standard Chartered Bank Ltd. [2019 (12) TMI 843 - SUPREME COURT] seems to visualise irretrievable injustice, and special equities, as distinct circumstances, the existence of either of which would justify an order of injunction. Viewed any which way, there appears to be no gain saying the proposition that, where 'special equities' exist, the court is empowered, in a given set of facts and circumstances, to injunct invocation, or encashment, of a bank guarantee. Where such special circumstances do exist, no occasion arises, to revert to the general principle regarding the contractually binding nature of a bank guarantee, or the legal obligation of the bank to honour the bank guarantee, these special circumstances having, in all cases, being treated as exceptions to this general principle. Ex facie, the petitioner cannot plead fraud - though the petitioner does attempt to do so, by a side wind as it were, in the petition - as a ground to seek injunction. All that is required to be seen is, therefore, whether 'special equities' can be said to exist, as would justify grant of the relief sought by the petitioner. The countrywide lockdown, which came into place on 24th March, 2020 was prima facie in the nature of force majeure. Such a lockdown is unprecedented, and was incapable of having been predicted either by the respondent or by the petitioner - special equities do exist, as would justify grant of the prayer, of the petitioner, to injunct the respondent from invoking the bank guarantees of the petitioner, forming subject matter of these proceedings, till the expiry of a period of one week from 3rd May, 2020, till which date the lockdown has been imposed. In view of the submission, of the petitioner, that it was actually working on the project till the imposition of lockdown on 22nd March, 2020, or at least shortly prior thereto, and in view of the sudden and emergent imposition of lockdown, the interests of justice would justify an ad interim injunction, restraining invocation or encashment of the aforesaid eight bank guarantees, till the expiry of exactly one week from 3rd May, 2020, till which date the lockdown stands presently extended. As to whether this interim injunction merits continuance, thereafter, or not, would be examined on the next date of hearing, consequent to pleadings being completed and all requisite material, including all relevant Governmental instructions, being placed on record. The injunction presently being granted, it is reiterated, is purely ad interim in nature, and is being granted only in view of the completely unpredictable nature of the lockdown, and its sudden imposition on 22nd March, 2020, of which the petitioner could not legitimately be treated as having been aware in advance. Let notice issue on the present petition, returnable on 11th May, 2020. Conclusion - Unprecedented events like the COVID-19 pandemic could constitute special equities justifying the restraint of bank guarantee invocation. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions addressed in this judgment include:Whether the invocation or encashment of bank guarantees can be restrained under Section 9 of the Arbitration and Conciliation Act, 1996.Whether the COVID-19 pandemic constitutes a force majeure event that justifies the non-performance of contractual obligations.Whether special equities exist that justify the granting of an injunction against the invocation of bank guarantees.Whether the petitioner is entitled to interim protection due to the alleged irretrievable injury or special equities arising from the pandemic-induced lockdown.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Restraint on Invocation of Bank GuaranteesRelevant Legal Framework and Precedents: The legal framework involves Section 9 of the Arbitration and Conciliation Act, 1996, and the principles governing the invocation of bank guarantees. Key precedents include U.P. Co-operative Federation Ltd. and Svenska Handelsbanken.Court's Interpretation and Reasoning: The court noted that judicial interference with the invocation of bank guarantees is permissible in cases of egregious fraud or special equities. The court emphasized that the COVID-19 pandemic and the resultant lockdown present unprecedented circumstances that may justify such interference.Key Evidence and Findings: The petitioner argued that the lockdown hindered its ability to fulfill contractual obligations, invoking the force majeure clause. The respondent countered that the petitioner had delayed performance long before the pandemic.Application of Law to Facts: The court applied the principle that special equities, such as the unforeseen lockdown, could justify an injunction against the invocation of bank guarantees.Treatment of Competing Arguments: The court considered the respondent's argument that the petitioner was using the pandemic as an excuse for prior delays but found that the lockdown's impact was genuine and immediate.Conclusions: The court concluded that special equities existed, warranting a temporary injunction against the invocation of the bank guarantees until one week after the lockdown's scheduled end.Issue 2: Force Majeure and Contractual ObligationsRelevant Legal Framework and Precedents: The force majeure clause in the contract and its interpretation in light of the pandemic.Court's Interpretation and Reasoning: The court recognized the lockdown as a force majeure event, impacting the petitioner's ability to perform contractual obligations.Key Evidence and Findings: The petitioner cited government orders and restrictions that impeded work, while the respondent argued that the project was exempt from lockdown restrictions.Application of Law to Facts: The court found that the lockdown, being unprecedented and unforeseeable, constituted a force majeure event.Treatment of Competing Arguments: The court acknowledged the respondent's claim of exemption but noted the lack of clarity and evidence supporting this claim.Conclusions: The court held that the lockdown justified the petitioner's inability to perform, supporting the claim of force majeure.3. SIGNIFICANT HOLDINGSVerbatim Quotes of Crucial Legal Reasoning: 'The countrywide lockdown, which came into place on 24th March, 2020 was, in my opinion, prima facie in the nature of force majeure.'Core Principles Established: The court established that unprecedented events like the COVID-19 pandemic could constitute special equities justifying the restraint of bank guarantee invocation.Final Determinations on Each Issue: The court granted an ad interim injunction against the invocation and encashment of the bank guarantees, recognizing the lockdown as a force majeure event and acknowledging the existence of special equities.