Invocation of bank guarantee can be restrained only if there is existence of fraud, irretrievable injury/injustice or special equities

Delhi High Court: While deciding a crucial matter relating to work contracts and  bank guarantee the Division Bench comprising of Sanjeev Sachdeva and B.D. Ahmed JJ., observed that invocation of a bank guarantee cannot be restrained unless fraud, irretrievable injury/injustice or special equities is proved. In the present case, the petitioner had issued a letter of intent to the respondent no. 1 for construction of a power project. The respondent no. 1 in response gave a bank guarantee. The petitioner had invoked the bank guarantee alleging the respondent no. 1 failed to act according to terms of the contract. The Single Judge had restrained encashment of this bank guarantee under Section 9 of the Arbitration and Conciliation Act, 1996 as per a plea filed by the respondent no. 1. The order of restraint was challenged in front the High Court in view of the settled legal principles governing bank guarantees.

The Court observed ‘The petition under section 9 was filed after the Bank Guarantee was invoked and as such, the contract of guarantee had come into operation. The Respondent no. 1 in the petition under Section 9 of the Act has not even raised a plea of fraud leave alone aver facts to establish the plea of fraud. There is not even the plea of “irretrievable injury” or “irretrievable injustice”. The respondent no. 1 has not even pleaded “special equities”. The respondent no. 1 apart from raising disputes on merits has merely stated that “the petitioner would be highly prejudiced if the Bank Guarantee is invoked and the properties are alienated as the petitioner has a prima facie case and is likely to succeed in the Arbitration” and “that the petitioner would in fact, suffer irreparable loss, in case the reliefs prayed for are not granted”. Since none of the three mandatory pleas, fraud, irretrievable injury/injustice or special equities has been pleaded, the respondent no. 1 is not entitled to any order of restraint from invocation of bank guarantee. The unconditional bank guarantee has been provided in the course of commercial dealings. The appellant is entitled to realize the bank guarantee in terms thereof irrespective of any pending dispute. The respondent no. 2/bank is bound to honour the bank guarantee as per its terms irrespective of any dispute raised by its customer/the respondent no. 1. Otherwise, the very purpose of giving such a bank guarantee would be defeated. The existence of any dispute between the appellant and respondent no. 1 with regard to the underlying contract cannot be a ground for issuing an injunction to restrain the enforcement of the bank guarantee.’ [Zillion Infra Projects (P) Ltd. v. Fab-Tech Works & Constructions Pvt. Ltd.,   2015 SCC OnLine Del 13163decided on 2-11-2015]

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