Bank guarantees cannot be interdicted on account of mere contractual disputes between the parties: High Court of Delhi

It is well settled that a bank guarantee can be interdicted only in exceptional circumstances. Mere contractual disputes cannot be asserted to give rise to special equities. The expression “special equities” is not nebulous. It means peculiar or special circumstances which result in irretrievable injustice. These special equities or special circumstances must be pleaded. This was held in KUBER ENTERPRISES v. DOOSAN POWER SYSTEMS INDIA PVT LTD [O.M.P. (I) (COMM.) 158/2021] in the High Court of Delhi by a single bench consisting of JUSTICE VIBHU BAKHRU.

Facts are that the parties had entered into an Agreement whereby the respondent sub-contracted Thermal Power Station to the petitioner. In terms of the Agreement, the petitioner furnished the Bank Guarantee as a Performance Guarantee, it also issued a cheque for an equivalent value. The petitioner claims that there was a significant delay in making the payments under the Agreement. The respondent alleged delay and sent notice to reduce the scope of work of the petitioner.

The counsel for the petitioner submitted that he is not seeking an order restraining invocation of the Bank Guarantee on the ground of any alleged fraud. The petitioner rests its case on the ground of special equities and he has invoked clause 25 of the Agreement and sought an amicable resolution of the disputes.

The court made reference to the judgment of Apex court in the case of Svenska Handelsbanken v. M/s. Indian Charge Chrome and Others., wherein it was held that “…in case of confirmed bank guarantees/irrevocable letters of credit, it cannot be interfered with unless there is fraud and irretrievable injustice involved in the case and fraud has to be an established fraud…..there should be prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Mere irretrievable injustice without prima facie case of established fraud is of no consequence in restraining the encashment of bank guarantee”.

The court also made reference to the apex court judgment in Hindustan Steel Works Construction Ltd. v. Tarapore & Co. and Anr., wherein it was held that “We are, therefore, of the opinion that the correct position of law is that commitment of banks must be honored free from interference by the courts and it is only in exceptional cases, that is to say, in case of fraud or in a case where irretrievable injustice would be done if bank guarantee is allowed to be encashed, the court should interfere”.

Considering the facts of the case and the legal precedents, the court observed that any allegation that the respondent has been reluctant to join the proceedings for an amicable resolution of the disputes in terms of the Contract is not per se a ground for interdicting an unconditional bank guarantee. Thus as there were no valid grounds for interdicting the invocation of the Bank Guarantee. The court whilst rejecting the petitioner’s prayer disposed of the petition.

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