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.