Delhi High Court Dismissed the petition seeking injunction against the encashment of the subject bank guarantee


Date of Decision: 12.07.2023

+ W.P.(C) 8456/2023 & CM APPLs. 32233-32234/2023



Delhi High court Dismissed the writ petition seeking injunction against the encashment of the bank guarantee as It is well settled that an injunction against invocation of an unconditional bank guarantee can be granted only in egregious cases of fraud or special equities, giving rise to irretrievable injury.

Facts of the case

The petitioner is a small business that has been authorised under the Micro, Small and Medium Enterprises [“MSME”] Development Act of 2006 to operate. It took part in the aforementioned tender and received a letter of acceptance dated 17.11.2021 from the Ministry of Railways, Government of India, announcing that it had won the tender. The letter of acceptance stated that the delivery term would be “D+30 weeks,” where “D” stands for the date of the Development Order. Undisputedly, the Development Order in this instance was issued on December 29, 2021, and the 30-week term that followed would end on July 26, 2022.

In the writ case, the petitioner claims that it was due to the expenditure necessary to manufacture the axles in accordance with the conditions of the aforementioned contract, technical requirements in the bid. The petitioner stated that it had not previously provided axles and that it had previously been in the forging industry. The size of the investment necessary to manufacture axles, particularly in relation to the necessary heat treatment facility, was unknown to the petitioner, and such information was not also included in the bidding document. She claims that the petitioner was unable to devote the necessary amount of resources. In reality, the petitioner visited the Indian Railways wheel and axle facility in Bangalore in June 2022 and was shocked by its size and the machinery needed for the production process. This led to a request that the Development Order be revoked by the Ministry of Railways.

The present writ suit was brought in an effort to overturn a letter given by the Ministry of Railways, Government of India, on June 8, 2023, in which that agency announced its intention to forfeit and encash a performance bank guarantee for the amount of $25.20 lakhs that had been provided on November 30, 2021. The petitioner filed the performance bank guarantee in support of a bid for the delivery of 1000 Box N/BG Axles in accordance with the requirements listed in the tender papers.

Analysis of the case

High court held that  At this time, there is no way to prevent the performance bank guarantee from being invoked. The petition includes a copy of the bank guarantee dated 30.11.2021. It is unconditional, and the petitioner’s banker has agreed to pay the respondent’s claimed sum upon demand regardless of any disagreements the petitioner may have. It is generally established that only extreme instances of fraud or unusual circumstances that result in irreparable harm are eligible for an injunction against the use of an unconditional bank guarantee. For illustration, the Supreme Court’s ruling in Standard Chartered Bank vs. Heavy Engineering Corporation Ltd. may be cited.

Regarding performance security, clause 2(iv) of the Scheme stipulates that the initial delivery term or completion period must fall within the range of 19.02.2020 and 31.03.2022. Admittedly, the current situation does not fit under these restrictions. Therefore, in my opinion, the Government of India’s argument in its message of May 22, 2023, cannot be criticised.

The High Court first believed that the petitioner’s reliance on paragraph 2(v) of the scheme was unwarranted. The aforementioned provision is applicable in situations where bid security is forfeited, such as when earnest money is deducted or a tender is disqualified. In this instance, the bank guarantee in question was filed in accordance with Clause 13 of the “Instructions to Tenderers” and was intended to assure contract execution. The Instructions to Tenderers’ Clause 11 makes it clear that no earnest money deposit was necessary. As a result, the matter is covered by paragraph 2(iv) of the Scheme, which deals with “performance security,” rather than paragraph 2(v).

In the absence of the petitioner being able to benefit from the Scheme, the court does not find any evidence of fraud or unusual circumstances that would support a restraining order against the use of the bank guarantee. According to the petitioner, it was not aware of the infrastructure needed to fulfil its contractual duties. According to the writ petition, the petitioner only made a tender for the supply of 1000 axles since a quote for less than 50% of the amount provided was deemed unresponsive.

At least for now, the court was unwilling to believe that a contracting party, even an MSME, can be released from its contractual responsibilities on this basis. Before taking part in a tender, a party must ascertain for itself that it is capable of carrying out a contract. In fact, the respondent has called my attention to a communication from the petitioner dated 03.07.2021, in which the petitioner declares that it has reviewed the pertinent specifications, is aware of the kinds of stores needed, and agrees to provide the stores in accordance with the specifications.

Given this situation, the court does not believe there is sufficient justification to enjoin the encashment of the subject bank guarantee in the current proceedings under Article 226 of the Constitution. As a result, the petition is denied, and the interim order from June 13, 2023 is revoked. All open applications have been closed.

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Written By – Shreyanshu Gupta

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