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2016 (9) TMI 1619 - SC - Indian LawsRestraint from invoking unconditional bank guarantee - breach of the covenants between the Appellant and the first Respondent - Whether the High Court is justified in exercising its discretionary jurisdiction Under Article 226 of the Constitution of India for restraining the Appellant from invoking an unconditional bank guarantee executed by the first Respondent? - HELD THAT - It is contended on behalf of the first Respondent that the invocation of Bank Guarantee depends on the cancellation of the contract and once the cancellation of the contract is not justified the invocation of Bank Guarantee also is not justified - We are afraid that the contention cannot be appreciated. The bank guarantee is a separate contact and is not qualified by the contract on performance of the obligations. No doubt in terms of the bank guarantee also the invocation is only against a breach of the conditions. But between the Appellant and the bank it has been stipulated that the decision of the Appellant as to the breach shall be absolute and binding on the bank. An injunction against the invocation of an absolute and an unconditional bank guarantee cannot be granted except in situations of egregious fraud or irretrievable injury to one of the parties concerned - Between the Appellant and the first Respondent in the event of failure to perform the obligations under the LoI dated 06.02.2008 the Appellant was entitled to cancel the LoI and invoke the bank guarantee. On being satisfied that the first Respondent has failed to perform its obligations as covenanted the Appellant cancelled the LoI and resultantly invoked the bank guarantee. Whether the cancellation is legal and proper and whether on such cancellation the bank guarantee could have been invoked on the extreme situation of the first Respondent justifying its inability to perform its obligations under the LoI etc. are not within the purview of an inquiry Under Article 226 of the Constitution of India. Between the bank and the Appellant the moment there is a written demand for invoking the bank guarantee pursuant to breach of the covenants between the Appellant and the first Respondent as satisfied by the Appellant the bank is bound to honour the payment under the guarantee. Appeal allowed - decided in favor of appellant.
Issues Involved:
1. Justifiability of High Court's exercise of discretionary jurisdiction under Article 226 of the Constitution of India. 2. Validity of restraining the appellant from invoking an unconditional bank guarantee. 3. Analysis of the conditions of the Letter of Intent (LoI) and the performance bank guarantee. 4. Examination of the High Court's interpretation and approach to law. 5. Criteria for granting an injunction against the invocation of an unconditional bank guarantee. Detailed Analysis: 1. Justifiability of High Court's Exercise of Discretionary Jurisdiction Under Article 226: The primary issue is whether the High Court was justified in exercising its discretionary jurisdiction under Article 226 of the Constitution of India to restrain the appellant from invoking an unconditional bank guarantee executed by the first respondent. The Supreme Court emphasized that the High Court should not have entertained the writ petition due to the presence of several disputed questions of fact. The Court referenced the case of Joshi Technologies International Inc. v. Union of India and Ors., which clarified the limited scope of writ jurisdiction in contractual matters, especially when complex factual disputes are involved. 2. Validity of Restraining the Appellant from Invoking an Unconditional Bank Guarantee: The Supreme Court noted that the bank guarantee in question was unconditional and constituted an independent contract between the guarantor-bank and the appellant. The Court reiterated that the decision of the appellant regarding the breach of conditions in the LoI was binding on the bank, and the High Court should not have interfered with this contractual arrangement. The judgment highlighted that the High Court erred in its analysis by treating the forfeiture of the security deposit and the invocation of the performance bank guarantee as interchangeable concepts. 3. Analysis of the Conditions of the Letter of Intent (LoI) and the Performance Bank Guarantee: The LoI issued to the first respondent contained specific conditions, including the submission of a detailed project report and obtaining necessary clearances within stipulated timeframes. Upon failure to meet these conditions, the appellant was entitled to cancel the LoI and forfeit the bank guarantee. The Supreme Court pointed out that the conditions of the bank guarantee were clear and unequivocal, obligating the bank to honor the guarantee upon the appellant's demand, irrespective of any disputes between the appellant and the first respondent. 4. Examination of the High Court's Interpretation and Approach to Law: The Supreme Court criticized the High Court for misinterpreting the facts and the law. The High Court's reliance on the argument that the contract had frustrated due to impossibility was deemed incorrect. The Supreme Court clarified that the invocation of the bank guarantee was a separate matter from the performance of the contract and that the High Court should not have delved into the justifiability of the appellant's decision to invoke the guarantee. 5. Criteria for Granting an Injunction Against the Invocation of an Unconditional Bank Guarantee: The Supreme Court reiterated established legal principles regarding the invocation of bank guarantees. It emphasized that an injunction against the invocation of an unconditional bank guarantee can only be granted in cases of egregious fraud or irretrievable injury. The Court referred to the case of Himadri Chemicals Industries Limited v. Coal Tar Refining Co., which outlined the stringent criteria for restraining the enforcement of bank guarantees. The Supreme Court concluded that the High Court's decision to restrain the appellant from invoking the bank guarantee did not meet these criteria. Conclusion: The Supreme Court allowed the appeal, setting aside the impugned judgment of the High Court. It clarified that the judgment would not prevent the first respondent from pursuing its grievances through appropriate legal proceedings. The decision underscored the independence of bank guarantees and the limited scope of judicial intervention in their invocation, reaffirming the principles governing the enforcement of unconditional bank guarantees.
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