Case BriefsHigh Courts

Delhi High Court: Vibhu Bhakru, J. allowed a writ petition filed against the action of Andhra Bank in debiting a sum of Rs 68.93 lakhs in the petitioner’s current account as commission charges for the unexpired period of a bank guarantee that was surrendered by the petitioner.

The petitioner, represented by Tarun Johri and Ankit Saini, claimed that the Bank had not informed them at the time of issuance of the bank guarantee that any such charges would be payable, and therefore, levy of such charges was illegal and contrary to guidelines issued by the Reserve Bank of India. The Bank, represented by P.B.A. Srinivasan, claimed that it was entitled to levy such charges.

The foremost question to be considered by the High Court was whether the Bank was obliged to disclose the charges to the petitioner at the time of according to the request of providing the guarantee. Referring to the relevant circulars issued by the RBI, and it’s earlier decision in DLF Ltd. v. Punjab National Bank, 2011 SCC OnLine Del 2465, noted that the RBI clearly stated that levy of charges, which were not initially disclosed to the borrower, would constitute an unfair practice. The Court reiterated the principal to be:

“a person, who is visited with any charges for a facility, should be aware of the same at the time of availing the facility and not at the time of discharging the same. This is a principle of fair play and fair practice, which the banks are obliged to follow. It would make little difference whether the facilities extended by the banks are fund based or non-fund based.” In such view of the matter, the charges levied by the Bank were held to be unsustainable and the Bank was directed to refund the same with an interest at the rate of 6 per cent per annum. [Athena Energy Ventures (P) Ltd. v. Andhra Bank, 2019 SCC OnLine Del 8854, decided on 30-05-2019]

Case BriefsHigh Courts

Kerala High Court: The Bench of Dama Seshadri Naidu, J. granted a stay on encashment of bank guarantee by tax authorities until the statutory appeal preferred in that regard was considered by the competent court.

Petitioner herein was transporting certain goods from Tamil Nadu to Perinthalmanna. When the authorities checked the documents carried along with the goods, they found the same to be defective. Suspecting tax evasion, authorities detained the goods and demanded a penalty, as well as tax. Aggrieved, the petitioner filed a petition for the release of goods and for the expeditious completion of adjudication. In terms of the judgment delivered in the said petition, the petitioner furnished a bank guarantee for the entire amount demanded and had the goods released.

Later, the primary authority completed the adjudication and issued an order under imposing a penalty under Section 129(3) of the State Goods & Services Tax Act, 2017 and also appropriating the bank guarantee. The petitioner filed an appeal under Section 107 of the Act against the said order. However, by way of caution, he preferred the instant appeal as he apprehends that the authorities, in the meanwhile, may encash the bank guarantee.

In view of the fact that a statutory appeal had already been filed, the Court directed the respondent authority to keep the bank guarantee untouched till the appeal is considered. [Vinod P.A. v. Assistant State Tax Officer, 2019 SCC OnLine Ker 39, dated 03-01-2019]

Case BriefsHigh Courts

Delhi High Court: A Division Bench comprising of Ravindra Bhat and A.K. Chawla, JJ., dismissed a First Appeal against an order declining grant of interim relief under Section 9 of the Arbitration and Conciliation Act, 1996.

The contract between the parties was the result of bidding in a public tendering process. The consideration of the contract was over Rs. 69 crores, with the period of execution being of 15 months along with an option to apply for extension. The appellant was aggrieved by the termination of contract after several defects and deficiencies during performance were pointed out. The grievance of the appellant was threefold viz. against invocation of performance guarantee, mobilization of advance bank guarantee and alleged unlawful termination of contract.

The Court directed that the issue of wrongful termination was a matter to be decided on merits during the arbitral proceedings and proceeded to decide upon the issues of invocation.

On that issue, the Court held that the performance guarantee mandates the bank to honour without demur any demand by the principal, who is the real beneficiary of any sums, claimed by it as due under the contract. In other words, the bank cannot adjudicate as to whether the claim by the beneficiary was in fact determined by it in accordance with the underlying contract between it and a third party. It was further held, that guarantee is an independent contract and has only a referential connection to the contract between the two parties, who agree upon the execution of performance of a particular contract for which the bank guarantee is issued. In the circumstances, mere invocation of a guarantee does not provide valid grounds for interdicting the invocation of guarantee. [M/s Classic KSM Bashir JV v. Rites Ltd., 2018 SCC OnLine Del 9056, decided on 14-05-2018]

Case BriefsSupreme Court

Supreme Court: Dealing with an interesting question as to the retrospective applicability of the 1997 Amendment to Section 28 of the Contract Act, 1872, the Bench of C. Nagappan and R.F. Nariman, JJ, answered in the negative and said that Section 28 of the Contract Act, being substantive law, operates prospectively as retrospectivity is not clearly made out by its language as the Amendment does not purport to be either declaratory or clarificatory.

In the present case, the bank guarantees dated 31.1.1996 which restricted the period within which they could be invoked were in question and it was contended by the Union of India that such Bank Guarantees would not be affected by an amendment made one year later i.e. on 8.1.1997 and the relevant date and the relevant law applicable would be as on 31.1.1996, which would be the unamended Section 28. Accepting the aforementioned contention, the Court said that the unamended Section 28 would be the law applicable as on 31.1.1996, which is the date of the agreement of bank guarantee.

The Court considered the Statements of Object and Reasons of the Amendment as stated in the 97th Law Commission Report where it was stated that the Amendment seeks to bring about a substantive change in the law by stating, for the first time, that even where an agreement extinguishes the rights or discharges the liability of any party to an agreement, so as to restrict such party from enforcing his rights on the expiry of a specified period, such agreement would become void to that extent. The Amendment therefore seeks to set aside the distinction made in the case law up to date between agreements which limit the time within which remedies can be availed and agreements which do away with the right altogether in so limiting the time. The Court, hence, noticed that these are obviously substantive changes in the law which are remedial in nature and cannot have retrospective effect. [Union of India v. Indusind Bank Ltd.2016 SCC OnLine SC 944, decided on 15.09.2016]

Case BriefsHigh Courts

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]