Covid-19 and commercial thrombosis

Covid-19 and commercial thrombosis
Covid-19 and commercial thrombosis

The impact of Covid-19 on the obligation to comply with an unconditional and irrevocable bank guarantee is a critical issue which has arisen particularly in the case of performance of bank guarantees. Does the lockdown amount to special circumstances justifying an injunction on an unconditional bank guarantee?

The pandemic spawned an interesting judgement by the Delhi High Court in this regard. The court held that the inability of the company to complete a construction contract was due to the pandemic, a cause totally unanticipated and beyond the control of the company. When the company which suffered due to the non performance sought to invoke the performance bank guarantee, the court restrained it from doing so inter-alia on the ground that the pandemic led to a case of special equities which merited interference.

Prashanto Chandra Sen, Senior Advocate, BA LL.B BCL (Oxon)

It is time that the exact scope of the doctrine of special equities in the context of bank guarantee law is clarified by the apex court. The law of injunction against bank guarantees is otherwise well settled. A bank guarantee contract is a separate contract from the underlying contract in relation to which they are given. The bank is not concerned with the merits or demerits of the underlying transactions.

This is because free and unrestricted flow of commerce is the prime consideration in the case of bank guarantees. Irrevocable bank guarantees have been described as the lifeblood of commerce. In the Intraco Case [(1981) 2 Lloyd’s Report 256 at 257], Donaldson LJ declared, “Thrombosis will occur if, unless fraud, is involved, the courts intervened and thereby disturbed the mercantile practice of treating rights thereunder as being cash in hand.”

It is this mercantile practice which has led to the court over the years to be shy of issuing injunctions against the invocation of an irrevocable bank guarantee except in certain well-defined exceptions. Three exceptions have been recognised over the years–fraud, irretrievable injustice/ injury and special equities. Fraud should be egregious in nature vitiating the entire transaction of the bank guarantee.

Irretrievable injustice has been defined as a situation where if the bank guarantee invocation is not restrained, it will make it impossible for the party at whose instance the bank guarantee was issued to recover the amount if the bank guarantee were found to be wrongly invoked at a later stage.

The standard of irretrievable injustice/injury has been famously set by the Itek Corporation case in which the imposition of sanctions by the US against Iran made it impossible for the guarantor to reimburse himself if he ultimately succeeded in the trial. A mere apprehension that the party would not pay is not enough. It the third exception of special equities which needs clarity.

The origin of the words “special equities doctrine” in the context of bank guarantees in India has been engagingly discussed in the SBI Case (2019)SCConline2650. It is in the Texmaco Case AIR (1979)Cal 44 that Sabyasachi Mukharji J first coined the term in the Indian context, after referring to a number of English decisions.

The same judge when in the Supreme Court in the UP Cooperative Federation Case (1988) 1 SCC 174 reiterated special equities in the form of irretrievable injustice to be an exception warranting interference with a bank guarantee. The Supreme Court has conceptualised the test of special equities as being of such injuries which are of an irretrievable, irremediable, unrecoverable and irreversible kind.

There have, however, been instances where High Courts have given injunctions against bank guarantees in certain cases, on the grounds of special equity even if not leading to irretrievable injustice e.g. when invocation is done after unilaterally changing the terms of the main contract to the detriment of the guarantor; exceptional circumstances of financial hardship in addition to a strong case on merits; refusal by the beneficiary, to return the bank guarantee despite a clear agreement to do so and instead attempt made to invoke the ;circumstances which “prick the judicial conscience.”

These are some instances. No clear test has been laid down till date. In the Halliburton case, which came up in the Delhi High Court, the exception of special equities came under spotlight when the guarantor pleaded inability to perform the contract because of the lockdown in industrial activities on account of Covid-19. The court observed that the apex court had held that special equities should be in the form of preventing irretrievable injustice for it to weigh in with the court for the grant of injunction.

It went on to highlight that while earlier special equities were limited to cases where irretrievable injustice resulted, the decision in Standard Chartered Bank seemed to visualise irretrievable injustice and special equities as distinct circumstances. The Standard Chartered judgement had relied on the Ansal Case (1996)5SCC450 when discussing special equities.

This case linked special equities to irretrievable injustice. Therefore, the Standard Chartered case may not be asserting special equities as a concept independent of irretrievable injustice. However, the Delhi High Court has flagged an important issue which needs to be set at rest by the Supreme Court. If special equities is indeed a part of the concept of irretrievable injustice then what is the need for mentioning the same separately from irretrievable injustice/injury.

The choice is whether to take the narrower view of special equities as an inseparable twin of irretrievable justice (as described by the Calcutta High Court) or of special equities encompassing a wider range of events which may or may not lead to irretrievable injustice. The danger of delinking special equities as a special circumstance from irretrievable injustice is that well-established principles of bank guarantee law would be diluted.

In the absence of a clarity of what exactly constitutes special equities, it would give a carte blanche to courts to interfere. The concept of special equities is too broad to define. The concept of equity itself has its origin in the arbitrary length of the chancellor’s foot. In the context of bank guarantee law where the principles of commerce require iron cast certainty, the special equity uncertainty is something which would sit uneasily with the need for established principles.

It is difficult balancing commercial certainty with the need to ensure justice and equity. It may normally be more prudent for the courts to rely on the doctrine of fraud for the purpose of injunction. Fraud can cover a wide variety of situations as it is nothing but a deliberate deception with the design of taking unfair advantage over another. It is, however, arguable, that in case of wholly unanticipated events making the performance of the contract impossible, as in the case of the present pandemic, the doctrine of special equities may have their utility.

One possible test touched upon by the Delhi High Court in the Sharma Kalypso case (2016) SCC Online Del 5236 was of exceptional circumstances of hardship and a strong case on merits. The Covid-19 crisis is being described as a pivotal moment challenging the old order. It is moments like this which will perhaps compel the court to set the issue at rest finally.