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No restraining order for bank guarantee unless fraud is established: High Court of Delhi

When a party seeks for injunction from the court with respect to encashment of a bank guarantee, it must be able to present a prima facie case of fraud without which injunction can’t be granted. This was decided in the case of BSP – SHC vs.  Dedicated Freight Corridor Corporation Of India Limited And Anr. [O.M.P. (I) (COMM.) 53/2021] in the High Court of Delhi by Hon’ble Mr. Justice Vibhu Bakhru,

The facts and circumstances mentioned are that the respondent is a Government of India Enterprise and it had issued a Notice Inviting Tender for construction of 2 Nos. Two Lane ROBs. The petitioner submitted its tender for the aforesaid works and was declared successful. The respondent issued a Letter of Acceptance after which the agreement dated 04.07.2016 was executed between the parties. In terms of the NIT, the petitioner submitted a performance bank guarantee in the sum of ₹2,08,86,500/- being 5% of the contract value. The petitioner states that in addition to the above, it also furnished a security deposit being 5% of the contract value. 4. The petitioner claims that it commenced the construction works and also provided bank guarantee in lieu of the security deposit. there has been delay in execution of the works .

The petitioner claims that delay in execution of works is entirely for reasons attributable to respondent. The petitioner contends that invocation of the bank guarantees would cause irretrievable injustice and irreparable loss to the petitioner.

The court said that it is well settled that the bank guarantees cannot be interdicted on account of contractual disputes between the parties. The grounds on which a bank guarantee can be interdicted are restricted. The Courts would interfere and injunct invocation/encashment of bank guarantees only in exceptional cases of egregious fraud and irretrievable injustice.

The court refereed to Dwarikesh Sugar Industries Ltd. V. Prem Heavy Engineering Works (P) Ltd. And Anr.:[AIR 1997 SC 2477], where the Supreme Court held as under: Numerous decisions of this Court rendered over a span of nearly two decades have laid down and reiterated the principles which the courts must apply while considering the question whether to grant an injunction which has the effect of restraining the encashment of a bank guarantee. The law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank O.M.P.(I)(COMM.) 53/2021 Page 9 of 12 guarantee in terms thereof irrespective of any pending disputes.”

It observed that in the present case, a plain reading of the present petition does not establish a case of fraud on the part of respondent. There is no averment that a fraud has been committed. the contention that the bank guarantees issued by the petitioner ought to be injuncted on the ground of irretrievable injustice, as advanced by counsel for petitioner, is unmerited. It said “Merely asserting that an act of terminating the contract or invoking the bank guarantee is fraudulent, without establishing a case of egregious fraud, would be wholly insufficient to secure an order interdicting invocation/encashment of a bank guarantee.”

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