2015 (2) TMI 486 - HC - Indian Laws

Encashment of bank guarantee - petitioner submitted that bank guarantees were deposited towards security deposit in terms of clause 9.1 of the GCC - Held that - There is no dispute to the fact that under Clause 9.1 of GCC the petitioner was required to furnish security deposit. This clause also gives liberty to the petitioner to deposit the security either in cash or in the form of government securities or fixed deposit receipts or bank guarantees furnished by any of the nationalised banks. The petitioner had chosen to furnish the said security deposit in the form of bank guarantees. From the language of the bank guarantee it is apparent that all the bank guarantees are unconditional bank guarantees. The bank has clearly stated to unconditionally pay the amount claimed by the Corporation on demand and without demur to the extent aforesaid . The bank guarantees in dispute, clearly in unequivocal terms and unconditionally recite that the amount would be paid without demure or objection. The bank guarantee thus is an independent contract between the bank and the beneficiary and can be challenged only on the ground of fraud and irreparable injury. Petitioner has challenged the invocation of the bank guarantee only on the ground of irreparable injury. The plea of irreparable injury is based on the contentions that the petitioner since having financial problems would suffer irreparable loss, if the respondent be allowed to encash the band guarantees. Whether this constitutes irreparable injury of the nature which is sufficient to restrain the respondent from invoking the bank guarantees is the matter which requires consideration. Now what is an irreparable loss and injury on the basis of which court can restrain the respondents, has been discussed and the principle laid down by the supreme court in the U.P.State Sugar Corporation s case (1996 (12) TMI 294 - SUPREME COURT OF INDIA). From the principles laid down in the Itek Corporation v. First National Bank of Boston 1983 (6) TMI 203 - UNITED STATES DISTRICT COURT , it is apparent that the petitioner can be said to have suffered irreparable injury if he has been able to show that he shall suffer irreparable harm. - petitioner has failed to bring on record which can show that the petitioner shall suffer an irreparable harm. The petitioner has failed to show that in case he succeeds before the arbitrator, he will not be able to recover the refund of his security amount. It is not his case that the respondent is not financially sound or would not be in a position to refund the decretal amount. Clause 9.1 of GCC clearly contemplates that the security deposit is refundable only on completion of the work and after the engineer-in-charge certifies in writing that the work has been completed as per the condition 31. Admittedly, in the present case the petitioner has only completed work of 35% worth of contract amount and thus in view of clause 9.6 of GCC the petitioner is not entitled for the refund of security deposit and the security deposit is to remain with respondent no.1. For this reason also the petitioner is not entitled for the relief. - Mere pendency of a reference before the arbitrator is also not a ground to issue restrain order to the bank guarantee. Therefore, the pendency of the arbitration proceedings also is not a ground to restrain the respondent no.1 from invoking the bank guarantees. Also in the case of Vinitec Electronics Private Ltd. vs. HCL Infosystems Ltd. reported in 2007 (11) TMI 588 - SUPREME COURT the Supreme Court has clearly held that the process of the arbitral proceedings is not a ground to restrain the invocation of the bank guarantees especially when there is no allegation that it would be difficult to realise the amount from the respondent. no ground to hold that the petitioner is entitled to any relief. - Decided against Petitioner.

Summary

Issues Involved:
1. Restraining the respondent from invoking and encashing the bank guarantees.
2. Determination of whether the bank guarantees are performance guarantees or security deposits.
3. Examination of irreparable injury as grounds to restrain the invocation of bank guarantees.
4. Consideration of the impact of arbitration proceedings on the invocation of bank guarantees.

Detailed Analysis:

1. Restraining the respondent from invoking and encashing the bank guarantees:
The petitioner sought to restrain the respondent from invoking and encashing the bank guarantees, arguing that such action was contrary to the provisions of the contract. The petitioner had furnished security in the form of bank guarantees as part of the contract for township work near a power plant. The respondent terminated the contract due to the petitioner's failure to complete the work within the stipulated period and threatened to encash the bank guarantees. The petitioner contended that the invocation of the bank guarantees was unlawful.

2. Determination of whether the bank guarantees are performance guarantees or security deposits:
The petitioner argued that the bank guarantees were security deposits and not performance guarantees, and hence could not be invoked. The petitioner relied on specific clauses of the General Conditions of Contract (GCC) to support this claim. However, the court found that the bank guarantees were unconditional and unequivocal, stating that the bank would "unconditionally pay the amount claimed by the Corporation on demand and without demur to the extent aforesaid." The court emphasized that the nature and purpose of bank guarantees, as discussed in various Supreme Court judgments, indicated that they are independent contracts between the bank and the beneficiary and can be invoked irrespective of any pending disputes.

3. Examination of irreparable injury as grounds to restrain the invocation of bank guarantees:
The petitioner claimed that invoking the bank guarantees would cause irreparable injury due to financial hardships. The court examined the principle of irreparable injury, referring to the Supreme Court's judgment in U.P. State Sugar Corporation's case, which held that irreparable injury must be of a kind that causes genuine and immediate harm. The court concluded that the petitioner failed to demonstrate such irreparable harm, noting that the petitioner did not provide evidence that it would be unable to recover the security amount if it succeeded in arbitration. The court also highlighted that the petitioner's financial difficulties alone did not constitute irreparable injury sufficient to restrain the invocation of the bank guarantees.

4. Consideration of the impact of arbitration proceedings on the invocation of bank guarantees:
The petitioner invoked the arbitration clause and raised claims against the respondent. However, the court held that the mere pendency of arbitration proceedings was not a valid ground to issue a restraining order against the invocation of bank guarantees. The court cited previous judgments, including Vinitec Electronics Private Ltd. vs. HCL Infosystems Ltd., which established that arbitration proceedings do not preclude the invocation of bank guarantees, especially when there is no allegation that it would be difficult to realize the amount from the respondent.

Conclusion:
The court dismissed the petition, finding no grounds to restrain the respondent from invoking the bank guarantees. The court emphasized that the bank guarantees were unconditional and could be invoked irrespective of any disputes between the parties. The petitioner failed to demonstrate irreparable injury or any other valid reason to prevent the invocation of the bank guarantees. The stay granted by the court was vacated.