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“Courts Cannot Injunct Encashment Of Bank Guarantee During Period of Validity”: Delhi High Court cites SC’s ruling on Bank Guarantees

The Delhi High Court has stated that a judicial order cannot be issued prohibiting the encashment of a Bank Guarantee while it is still valid. The Delhi High Court cited Supreme Court’s Ruling in the matter of SPML INFRA LTD v Hitachi India PVT LTD.

Justice Manmohan and Justice Navin Chawla of a two-judge bench added,

“In our view, the Court cannot injunct encashment of a bank guarantee during its validity if a cause of action arises in future. Bank guarantee has a meaning and legal sanctity attached to it. The Supreme Court in U.P. Cooperative Federation Ltd. vs. Singh Consultants and Engineers (P) Ltd., (1988) 1 SCC 174, has held that bank guarantees must be honoured free form interference by Courts, otherwise, trust in commerce internal and international would be irreparably damaged.”

The Supreme Court’s ruling in U.P. Cooperative Federation Ltd. vs. Singh Consultants and Engineers (P) Ltd. was cited, which stated that bank guarantees must be respected without interference from courts, or else trust in domestic and international business would be irrevocably destroyed. In light of this, the Court was disposed of not only the appeal but also the respondent no.1’s Section 9 petition. However, the respondent’s counsel stated that he would like to seek an injunction order from the trial court prohibiting the appellant from cashing the Bank Guarantee in question during its validity period. He called the Court’s attention to an order issued by a single judge on July 22, 2021, in a case involving the same parties.

“Prima facie this Court is of the opinion that Bank Guarantees are not furnished for being photo framed and kept in a drawing room. The learned Single Judge in the order dated 22nd July, 2021, has advisedly used the expression that ‘the order has been passed in view of the consensus arrived at between the parties’. There is no judicial finding that a Bank Guarantee FAO (COMM) 129/2021 Page 3 of 3 cannot be encashed during its validity.”

The Court, on the other hand, consented to give the respondent a week to file whatever documents he wanted to rely on. The case will be heard on September 13th, 2021.

Click here to read the Judgement

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