THE UPHEAVALS OF RESTRAINING INVOCATION OF BANK GUARANTEES - The Daily Guardian
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THE UPHEAVALS OF RESTRAINING INVOCATION OF BANK GUARANTEES

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Bank guarantees are individual contracts between the bank and the creditor and are independent of the underlying contract between the beneficiary and the person at whose instance the bank guarantee is given. In simple terms it is an assurance to a beneficiary that the financial institution will uphold the contract between the customer and beneficiary if the customer is unable to do so. Bank guarantees provide better negotiating position in business conclusions and helps in securing one’s claims and performance of the other party in the transaction. Further, the rights and obligations therein are to be determined on its own terms. Bank guarantees frequently play an important role in disputes, either in the background as a relevant fact of the dispute or an active role for one party to commence litigation or arbitration proceedings, for example, to prevent wrongful invocation.

INVOCATION

It is relevant to note that in case of an unconditional bank guarantee the bank cannot even question the invocation, notwithstanding a dispute between the parties. In the case of a conditional bank guarantee, there can be no injunction, if the stipulated conditions are satisfied. It was further clarified in Hindustan Construction Co. Ltd. v. State of Bihar AIR1997SC3710 that if at the time of invocation of the bank guarantee, it is well within the terms it is not even necessary that the beneficiary should assess the quantum of loss and mention that figure.

In National Thermal Power Corpn. Ltd. v. Flowmore (P) Ltd., (1995)4SCC515, the Supreme Court of India noted that the respondent had kept all the bank guarantees alive by renewing them from time to time during the pendency of arbitration and that the appellant did not invoke the bank guarantees while the arbitration was in progress does not lead to the conclusion that the bank guarantees cannot be invoked while the arbitration is pending.

EXCEPTIONS TO INVOCATION

It is a settled law that invocation of unconditional and irrevocable bank guarantees cannot be stayed by the courts, except in the following cases:

1) Fraud

Invocation of a bank guarantee can be injuncted in cases of fraud. The Supreme Court of India in the case of U.P. State Sugar Corporation v. Sumac International Ltd., (1997) 1 SCC 568 held that a fraud in connection with an unconditional bank guarantee, for grant of a stay, should be such that it vitiates the very foundation of such a bank guarantee. No other fraud is good enough to meet the test, and moreover, the concerned bank needs to have notice of such fraud.

2) Irreparable harm and special equities

The Supreme Court in Dwarikesh Sugar Industries Ltd v. Prem Heavy Engineering Works (P) Ltd & Another, (1997)6SCC450 reiterated the Massachusetts Court in Itek Corporation v. First National Bank of Boston Etc. 566 Fed Supp 1210 stating that an irretrievable injury would mean existence of exceptional circumstances where it is absolutely impossible for the guarantor to reimburse himself if he ultimately succeeds in final adjudication of the disputes. Further, this will have to be decisively established and it must be proved to the satisfaction of the tribunal that there would be no possibility whatsoever of the recovery of the amount from the beneficiary, by way of restitution.

PRACTICALITY OF THE EXCEPTIONS

The above mentioned are established principles of law, it is also important to note that every case has to be decided with reference to the facts involved therein. Bank guarantees often raise complex practical questions. A party that fears that its contractual partner will invoke the bank guarantee based on unjustified grounds must act quickly and must decide how it will act and against whom, the bank or against its contractual partner. On approaching the courts, they are granted any interim relief and mostly give a specific time period to invoke the arbitration, failing which, the interim relief granted is vacated.

In SES Energy Services India Ltd. v. Vedanta Limited and Ors. [O.M.P. (I) (COMM.) 285/2021] the parties executed three agreements wherein as per one of them the petitioner had to furnish a bank guarantee towards the respondent. The respondent attempted to invoke the bank guarantee. The parties invoked an arbitration and subsequently the petitioner preferred an application under Section 9 of the Arbitration and Conciliation Act, 1996 (“Act”), alleging that it is a case of fraud. The Court was inclined to examine the matter in depth as all the obligations under the three agreements stood discharged by the petitioner. The High Court of Delhi noted that the petitioner failed to make out a case of fraud, in the execution of the bank guarantee, or that of the bank guarantee, per se.

In Siemens Gamesa Renewable Energy Projects Private Limited v. SPRNG Vayu Vidyut Private Limited, [OMP (I)(Comm) No. 251 of 2021], the parties entered a contract wherein the respondent gave an interest free advance to the petitioner and in lieu of the same, the petitioner furnished two advance bank guarantees. Thereafter, the contract was terminated and subsequently the petitioner refunded the said advance. However, the respondent on the other hand failed to return the said bank guarantee and further requested extensions multiple times. The aggrieved Petitioner preferred a petition under section 9 of Act, seeking urgent interim protection to restrain the Respondent from invoking the advanced bank guarantees furnished and restraining bank from acting upon any such request. The High Court of Delhi granted a stay on the invocation of bank guarantees, noting that the purpose for which the bank guarantee had been rendered had concluded i.e., the advance on account which the bank guarantees were tendered had been returned. In view thereof, it is pertinent to note that in cases of termination of contracts, normally the courts do not go into the debate whether the termination was valid or not, and let that decision remain with the arbitrators. Moreover, the courts at times have also directed that the bank guarantees be extended subject to the invoker giving a short notice prior to invoking the same, so as to give time to the other party to approach the court/arbitrator to stay such invocation.

The Supreme Court of India in Gangotri Enterprises v. Union of India (2016)11SCC720 took a fresh view on invocation, herein the parties entered into two separate contracts namely Agra-Etawah and Anand Vihar respectively, wherein only one of them i.e., Anand Vihar contract constituted for the appellant to furnish a bank guarantee. The Anand Vihar contract was completed, and the appellant was intitled to a released bank guarantee. However, the respondent attempted to invoke the bank guarantee in lieu of the non-completion of the Agra-Etawah contract. To settle the dispute related to Agra-Etawah work, the appellant invoked arbitration and moved an application under Section 9 of the Act, before the District Judge, Allahabad seeking order on encashment of the bank guarantee deposited by it in the Anand Vihar, against the respondents. Ultimately, the matter reached the apex court wherein it was held that while there can be no quarrel as to the proposition laid down in the cases pertaining to encashment of bank guarantees, the same would not be applied in every case. Therefore, whenever any party would seek to encash the bank guarantees provided by other party to the contract based on their claims of damages, such an attempt would not be successful as a claim of damages is not a sum due and payable in present.

CONCLUSION

Bank guarantees have proved to be a huge advantage in a modern business setting and emerged as the backbone of several commercial transactions. The courts in India generally have refrained or kept to minimal interference on account of the invocation of bank guarantees and arbitrations, while upholding the spirit and purpose of both. It has been consistently held that unnecessary interfere with and restrain on invocation of bank guarantees would defeat the purpose of having independent guarantees as contracts. Although the general approach is to uphold the letter and spirit of bank guarantees, the courts and arbitrators are conscious of mischievous invocations and apply the exceptions to prevent miscarriage of justice by restraining one party from advantage of a legal loophole.

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Legally Speaking

MP HIGH COURT SEEKS DGP’S REPLY: DOES POLICE’S FAILURE TO COMMUNICATE FULL CRIMINAL ANTECEDENTS OF ACCUSED AMOUNTS TO MISCONDUCT, INTERFERENCE WITH JUSTICE?

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The Madhya Pradesh High Court in the case Kuldeep Dohare Versus the State of Madhya Pradesh observed, recently the Gwalior bench directed the Director General of Police, State of Madhya Pradesh to file an affidavit explaining as to whether non-communication of criminal antecedents of an Applicant or Accused to the Court is a minor misconduct or if it amounts to interference with the criminal justice dispensation system. Before the next date of hearing, the affidavit is to be filled.

The bench comprising of Justice G.S. Ahluwalia observed and remarked that the court was frequently finding that the police authorities were not sending the complete criminal antecedents, in spite of the circular issued by Police Headquarters.

It was observed that the police authorities did not send the criminal antecedents of the applicant. Furthermore, it is clear that it is a clear attempt to facilitate the applicant to obtain bail by projecting that he has no criminal antecedents. The issue raised is weather the conduct of police officers can be said to be a minor negligence or it is an interference with the criminal justice dispensation system?

In the present case, the court was dealing with a bail application moved by the accused applicant for offences punishable under section 307, Section 149, section 148, section 147, section 506, section 294, section 201. On an earlier hearing, the court had observed that even though the case diary did not reflect any criminal antecedents on the part of the Applicant. The impugned order passed by the lower court rejecting his bail application mentioned otherwise.

It was observed that a reply was sought by the court from the Superintendent of Police, District Bhind as to why the important information with regard to the criminal antecedents of the Applicant were withheld by the respective SHO. The SP informed the Court on the subsequent hearing that the SHO concerned as well as the Investigating Officer in the case were found guilty of misconduct and were fined with Rs. 2,000 and Rs. 5,000, respectively.

The Court observed that since the problem was stemming from different police stations. However, the DGP should file his reply regarding the prevailing situation-

Since in different police station, this situation is prevailing. Therefore, an affidavit is directed to be filled by the DGP, State of Madhya Pradesh as to whether non- communication of criminal antecedents of an applicant is a minor misconduct or it amounts to interfere with the criminal antecedents of justice dispensation system.

Accordingly, the affidavit needs to be filled within a period of 1 week, the matter would be heard next on 08.07.2022.

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HIGH COURT OF MADHYA PRADESH: SECTION 5 OF THE LIMITATION ACT APPLIES TO ARBITRATION REFERENCE UNDER NATIONAL HIGHWAY ACT, 1956

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The High Court of Madhya Pradesh in the case Ghanshyam Gupta v. State of Madhya Pradesh and Ors observed and stated that Section 5 of the Limitation Act would be applicable to reference to arbitration under the National Highways Act, 1956.

The Division Bench comprising of Justice Ravi Malimath and Justice Purushiandra Kumar Kaurav observed and reiterated that since no limitation is provided under Section 3G (5) of the National Highways Act. The bench stated that the provisions of Article 137 of the Schedule to the Limitation Act, 1963 would apply to such proceedings.

Therefore, the court held that the limitation period for filing an appeal against the decision of the competent authority before the arbitrator from the date of expiry of 90 days is three years from the decision of the competent authority.

FACTS OF THE CASE:

The petitioner, Mr. Ghanshyam Gupta was the landowner of the land which was acquired by the Respondent, Madhya Pradesh Road Development Corporation. Thereafter, the competent authority determined the quantum of compensation payable to the petitioner and passed an award to that effect on 30.07.2015.

The petitioner being dissatisfied with the quantum of compensation determined by the competent authority. On 04.12.2019, an appeal was filled by the petitioner before the arbitrator. The appeal was dismissed by the arbitrator as time-barred filed after the expiry of three years limitation period.

the petitioner filed a writ petition before the High Court, Aggrieved by the decision of the arbitrator.

Contentions Raised by the Parties:

It is stated that Section 5 of the Limitation Act is applicable to arbitration reference under Section 3G (5) of the National Highways Act, 1956.

It was observed that the petitioner was unaware of the availability of the remedy of appeal against the decision of the competent authority, the petitioner only after consulting his lawyer, that the petitioner came to know that he could seek enhancement. Further, there is a valid ground to condone the delay.

The submissions of the petitioner were countered by the Respondent on the following grounds:

Though, in the absence of a period of limitation for filing an appeal under Section 3G (5) of the Act of 1956, it was construed that the provisions of Article 137 of the Limitation Act would stand applicable.

It was stated that Article 137 provides for 3 years period, and the petitioner filed the appeal after a delay of 4 years.

COURT ANALYSIS:

The court observed and stated that since no limitation is provided under Section 3G (5) of the National Highways Act, the provisions of Article 137 of the Schedule to the Limitation Act would apply to such proceedings.

Therefore, the court held that the limitation period for filing an appeal against the decision of the competent authority before the arbitrator from the date of expiry of 90 days is three years from the decision of the competent authority.

The court observed that there is nothing in the National Highways Act that excludes the applicability of Section 5 of the Limitation Act. However, Section 5 of the Limitation Act would be applicable to reference to arbitration under the National Highways Act, 1956 and the arbitrator has the power to condone the delay against the award, in filing an appeal by the competent authority.

The court noted that the petitioner was not aware that an appeal could be filed against the decision of the Competent Authority and it is only after consulting his lawyer that the petitioner came aware of any such right, therefore, there is sufficient reason to condone the delay.

Accordingly, the application was allowed by the court and the court directed the arbitrator to decide the case of the petitioner on merit.

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KERALA HIGH COURT APPOINTS AMICUS CURIAE IN SARITHA NAIR’S PLEA; IS A STATEMENT RECORDED U/S 164 CRPC A PUBLIC DOCUMENT?

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The Kerala High Court in the case Saritha S. Nair v. Union of India & Anr observed and appointed an amicus curia to assist the court to decide the legal question of whether a statement recorded under Section 164 of the CrPC is a public document.

The bench comprising of Justice Kauser Edappagath appointed the amicus curiae, in the petition filled by Saritha S. Nair, the prime accused in the infamous solar panel scam seeking a direction to provide her with copies of the Section 164 statement given by Swapna Suresh, the accused in the gold smuggling case.

The court appointed Advocate K.K. Dheerendrakrishnan, as the amicus curiae in the case.

In the present case, it was observed that Saritha Nair is accused of having duped several influential people to the tune of 70 lakhs, by offering to install solar power units for them or by making them business partners and by receiving advance payments for the same.

Moreover, Swapna Suresh is accused of smuggling 30 kilograms of gold through diplomatic cargo dispatched to UAE Consulate at Thiruvananthapuram.

It was observed that when the petition came up for hearing, the counsel appearing for the petitioner, Advocate B.A Aloor appearing that the statement given by Swapna was a public document and therefore the petitioner was entitled to get a copy.

Further, Nair approached the Court apprehending that certain allegation may have been brought on record against her in the statement given by Suresh. It was prayed by Nair, that the c court allow her plea, directing the production of certified copies of the said document to her, failing which she would sustain an irreparable injury, the hardship and as well as physical and mental agony.

It was observed that the Nair had had initially moved the Principal District and Sessions Court of Ernakulam, with the same request, but this was denied. The court noted and adjourned the matter to July 11, while on a petition filed by the accuse, Saritha S. Nair in the solar scam cases, for seeking a directive to provide a copy of the statement given by Swapna Suresh, accused in the diplomatic gold smuggling case before a subordinate court.

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Supreme Court issues notice in an SLP; can section 156 (3) CRPC be invoked after failing to get desired relief in a civil suit?

It was observed that before the Calcutta High Court, it was contended by the accused that the allegations made in the application under Section 156(3) CrPC fails to make out any offence against them. Further, it was submitted that a frustrated unsuccessful litigant before the Civil Court has approached the Criminal Court and the Criminal Investigation.

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The Supreme Court in the case Usha Chakraborty vs State of West Bengal observed and issued a notice in a Special Leave Petition filled, raising an issue whether in a dispute essentially in a dispute of civil nature that can a person, after having failed to get the desired relief from a civil suit, invoke Section 156(3) of the Code of Criminal Procedure?

In the present case, an FIR was registered against the accused under Sections 323, Section 384, Section 406, Section 423, Section 467, Section 468, Section 420 and Section 120B of the Indian Penal Code, 1860 following an order passed by the Magistrate under Section 156(3) CrPC.

It was observed that before the Calcutta High Court, it was contended by the accused that the allegations made in the application under Section 156(3) CrPC fails to make out any offence against them. Further, it was submitted that a frustrated unsuccessful litigant before the Civil Court has approached the Criminal Court and the Criminal Investigation, which has commenced, is for the purposes of throttling them. The petition was dismissed by the High Court observing that the materials which have already been collected by the Investigating Agency, prima facie, make out a case for investigation. The issue raised before the court was weather the same would make out an offence after the investigation is concluded is absolutely at the end of the investigation to be analysed.

Therefore, challenging this order, one of the accused approached the Apex Court. However, It was submitted that the dispute is essentially of civil nature, for which the applicant in Section 156(3) CrPC petition filed a civil suit but having failed to get the desired relief, he invoked Section 156(3) CrPC.

The bench comprising of Justice Surya Kant and the Justice JB Pardiwala, while issuing notice also stayed further proceedings in FIR lodged against the accused.

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GAUHATI HIGH COURT QUASHES NO-CONFIDENCE MOTION AGAINST GRAM PANCHAYAT PRESIDENT CITING PARTICIPATION OF MEMBER DISQUALIFIED FOR HAVING THREE CHILDREN

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The Gauhati High Court in the case Jugitawali Pawe v State of Assam and 15 ors observed and quashed a resolution expressing no-confidence in the petitioner – the President of a Gram Panchayat, as a result of which she as removed from office. It was stated that it is as per the citing no compliance with Assam Panchayat Act, 1994, reading with Rule 62 of the Assam Panchayat (Constitution) Rules, 1995.

It was preferred by the petitioner to the materials available on record to argue that one of the members of the Gaon Panchayat, the respondent. The respondent voted against the petitioner and had given birth to her third child the previous year. Moreover, by virtue of Section 111(2)(a) of the Assam Panchayat Act, 1994, reading with Rule 62 of the Assam Panchayat (Constitution) Rules, 1995, the petitioner stood automatically disqualified on the date of voting. Following, which her vote was taken by passing No-confidence motion.

It was prayed by the petitioner in the plea for setting aside the impugned resolution and for issuance of a direction to restore his client back in the office. Thereafter, to initiate fresh proceedings, liberty should be granted to the respondent, following the due process.

It was agreed by the Counsel representing for the respondent that the said member of the panchayat had been disqualified but retained on the ground that the disqualification would have no bearing on the petitioner’s case, as the impugned resolution was passed before the declaration of petitioner disqualification.

In the present case, It was noticed by Justice Suman Shyam the member had voted against the petitioner and without her vote. The petitioner would not have been ousted from office. Justice Shyam also found no dispute about the fact that the member had incurred disqualification under the law prior the date of adoption of the impugned resolution. Justice Shyam found it unnecessary to delve into other aspects of the matter which includes the procedural formalities for declaring the member a disqualified candidate.

It is observed that the impugned resolution was declared to be vitiated and liable to be set aside. Further, the Court restored the petitioner to the office of the President of the Bongalmara Gaon Panchayat with immediate effect and it was stated by the court that the order will not stand in the way should the authorities or any member of the Gaon Panchayat propose a fresh motion of “no-confidence” against the petitioner and the due process of law needs to be followed.

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Halt DDA’s demolition action against jhuggis in Nizamuddin’s Gyaspur area, orders Delhi High Court

As per the JJ Rehabilitation and Relocation Policy 2015 and the Delhi Urban Shelter Improvement Board, the residents who can establish their residence prior to 01.01.2015 are eligible for rehabilitation under the JJ Rehabilitation and Relocation Policy 2015.

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plea in Delhi High Court seeking repatriation of 56 pregnant nurses

The Delhi High Court in the case Manoj Gupta & Ors. v. DDA & Ors observed and has ordered status quo on the Delhi Development Authority’s proposal to demolish jhuggi clusters in city’s Gyaspur area in Hazrat Nizamuddin. The vacation bench comprising of Justice Neena Bansal Krishna observed in the petition filled by the residents and the court granted an interim relief.

It was ordered by the court status quo till July 11, the next date of hearing.

The bench orally remarked that a ten-day delay in demolition won’t make a difference but if today it is demolished and later, we come to know that they were entitled, who’s going to… the bench will consider it on July 11, 2022 but in the Meanwhile, some protections are entitled them. Adding this, Status quo be maintained. If since 1995, they have been there, heavens won’t come down if for 10 more days they are protected.

In the plea the petitioner stated that the T-Huts settlement in the area, which was stated by the authorities to vacate. It has been in existence for almost two decades and compromise of 32 jhuggis or households.

In the plea it was alleged that the bulldozers have been parked around the camp and a DDA official has orally asked them to vacate the area and it is noted that till date no proper notice have been sent to them nor has DDA conducted any survey of the area.

Furthermore, the DDA did not provide any alternate arrangement for their rehabilitation which resulted in extreme distress among the residents.

Moreover, it was admitted by the petitioner that the land in question belongs to DDA and they may seek that status-quo to be maintained at the site. It was urged that the residents should not be physically dispose or evicted from the demolition site until the survey is conducted and rehabilitation is provided to the residents as per the DUSIB policy of 2015.

As per the JJ Rehabilitation and Relocation Policy 2015 and the Delhi Urban Shelter Improvement Board. The residents who can establish their residence prior to 01.01.2015 are eligible for rehabilitation under the JJ Rehabilitation and Relocation Policy 2015.

It is observed that in the case Ajay Maken v. Union of India, Reliance is placed on the Supreme Court decision and the High Court decision in the case Sudama Singh & Ors. v. Government of Delhi & Anr, it was held in the case that that removal of jhuggis without ensuring relocation would amount of gross violation of Fundamental Rights under Article 21 of the Constitution. Further, it was held that the agencies conducting the demolitions ought to conduct survey before undertaking any demolition.

It is submitted that these observations would apply across the board, in the entire NCT of Delhi.

Advocates Vrinda Bhandari, Shiyaz Razaq, Kaoliangpou Kamei, Jepi Y Chisho and Paul Kumar Kalai, represented the petitioner.

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