When there is
default in performance of contract and an unconditional bank guarantee is
furnished, Courts generally do not interfere in its invocation even though the
dispute is still pending between beneficiary and person on whose behalf guarantee
is given. However there are exceptions
to this rule. Situation of egregious fraud - Fraud committed of a nature that
would vitiate the entire underlying transaction[1].
Facts[2]
A petition was
filed by appellant under Sec 9 of Arbitration and Conciliation Act, 1996 seeking
orders restraining the Respondent from encashing bank guarantees. The Ld Single
Judge in fact directed encashing the four bank guarantees and transfer the encashed
amount into the account of the learned Registrar General of this Court, to be
put in a fixed deposit subject to the outcome of the arbitration proceedings.
An appeal was preferred against this order
The case of
appellant in brief is that it was assigned contract for extraction of coal from
an ascertained coal block. The (Detailed Project Report) DPR for the same was
cleared by Respondent. Consequent to this unconditional bank guarantees were
furnished by appellant.
After sometime
it was found upon examination of coal block (by Respondent) that the amount of
coal extraction is likely to be greatly reduced. This was informed to
appellant. This variation was, according to appellant, were at great variance
to the earlier Geological Reports and called for entire fresh planning of work
execution; its associated cost changes/variations; approval of a fresh mining
plan; obtaining fresh environmental clearance; change in locations of
ventilation shaft and inclined drivages and other key issues.
The issues were
communicated to Respondent which decided to form a Committee to look into
issues. However even after 12 months to communication was made to appellant and
abruptly a shoe cause notice was issued by Respondent for cancellation of
contract.
Even though
appellant tried its best that respondent withdraws the cancellation notice but
instead a letter communicating cancellation of contract was issued. The
appellant filed the above Sec 9 petition seeking interim
measures for protection against which an appeal was filed.
Ratio
It was noted
that bank guarantees furnished by appellant are unconditional in nature meaning
thereby “the bank has undertaken to pay to the beneficiary immediately on
demand all monies payable by the contractor to the extent of the amounts
specified therein, without any demur, reservation, recourse, contest or protest
and/or without any reference to the appellant contractor”. Terms and Conditions
stipulated
in the contract give an absolute right to Respondent to encash the bank
guarantees in accordance with the terms captured above.
Appellant raises
the ground of egregious fraud by Respondent to obtain injunction against
encashment of bank guarantee. But the Court states that – “the
Appellant’s contention is vague and does not meet the requirement of law on the
concept of fraud as a ground for restraining encashment of bank guarantees, as
laid down in a plethora of judgments on the subject”
Further the appelants’s prayer that Contract be
declared void ab intio also was not accepted by the court on a simple reason
that arbitration proceedings are pending and it was beyond the scope of Sec 9
petition under the Act to grant such a relief.
The encashment of bank guarantee cannot be termed as
fraudulent only because disputes arose between parties even if it was accepted
that Respondent was at fault for failing to fulfill its obligations under the
Contract. – “The existence of disputes between the parties to the Contract is
not a ground for issuing an order of injunction to restrain enforcement of bank
guarantees.”
Also the Ld single judge has not assigned the amount
to Respondent rather has been deposited in the Court subject to outcome of
arbitration proceedings.
Thus the plea of appellant was not accepted.
