2017 (3) TMI 1060 - HC - Companies Law

Performance guarantee - bank guarantee status - Held that - There is a clear demand because the contractor has been accused of not completing the work required under the contract. There are numerous deficiencies which are committed in performance of the contract. There is delay on the part of the contractor in performing it. The work already done is defective. Therefore, the contractor has failed to observe and perform the terms and conditions of the contract which has resulted in the first respondent suffering huge losses and damages in excess of ₹ 140 crores. That is why the bank is called upon to make payment of the full guarantee amount of ₹ 10 crore. We are of the firm opinion that the bank guarantee before us is unequivocal and unconditional. It is not a conditional bank guarantee and, therefore, the beneficiary has an unfettered right to invoke it. As a result of the above discussion, we find that the only two contentions raised before us by Mr. Chagla have no merit. Consequently, the appeal fails. It is, therefore, dismissed. In the circumstances, there shall be no order as to costs. We clarify that the disputes and differences proposed to be referred to arbitration shall be decided, uninfluenced by any tentative and prima facie findings in the impugned order and our order on this appeal. All contentions of both sides are expressly kept open. At this stage, Mr. Saraf prays for continuation of the ad-interim order dated 26th October, 2016, and which is continued till date. The request is opposed by the respondent No.1. The alternate contention also need not detain us. Given the wording which is clear and unambiguous this is an unconditional, unequivocal and irrevocable bank guarantee. It is not an indemnity for losses. It cannot be said to be conditional merely because one sentence of clause 3.1 employ the words indemnify the losses . Merely because it seeks to indemnify the losses under the contract and the first respondent has to raise a demand by alleging such losses, will not empower the second respondent-bank to question the demand or the contents of the letter of invocation. It cannot, in any manner, call upon the employer, namely, the first respondent to satisfy it about the quantum of the loss or the manner in which the same was suffered or whether that was indeed suffered at all. The demand by the first respondent and in terms of the above clauses is decisive. It has been so raised and by the letter of invocation dated 27th October, 2016. Once the demand is raised, the bank cannot question it. It is an unconditional performance guarantee in the form of a bank guarantee. The bank cannot call upon the employer to satisfy it as to how the appellant has failed to perform its terms and obligations under the parent contract. In the absence of any linking and of the above nature, even the alternate contention must fail. Having noted Mr. Saraf s request, we find that the bank guarantee is unequivocal and unconditional. Further, it is a bank guarantee as ruled by us. In such circumstances, as a independent obligation of the banker is flowing from the same, that cannot be interfered with. The request is, therefore, refused.

Summary

Issues Involved:
1. Continuation of the ad-interim order.
2. Nature of the performance guarantee: whether it is a bank guarantee or a contract of indemnity.
3. Justification for the invocation of the performance guarantee.
4. Grant of an injunction to restrain the encashment of the performance guarantee.

Issue-wise Detailed Analysis:

1. Continuation of the ad-interim order:
When the appeal was mentioned on 16th March 2017, a request was made to continue the ad-interim order, which was opposed by the respondent. The court indicated that since the impugned order refused to restrain the encashment of the bank guarantee, it would not be proper to grant ad-hoc extensions. With the consent of both parties, the appeal was placed for disposal at the admission stage on 17th March 2017. Both senior counsel stated they had no objection to the Bench hearing and disposing of the appeal. Hence, the appeal was admitted, respondents waived service, and the paper-book was dispensed with.

2. Nature of the performance guarantee:
The appeal under section 10 of the Commercial Courts Act, 2015, was directed against the order dismissing the petition under section 9 of the Arbitration & Conciliation Act, 1996. The petitioner alleged that the performance guarantee was not a bank guarantee but a contract of indemnity. The court examined clause 8.1 of the contract and the performance guarantee document. It concluded that the performance guarantee was indeed a bank guarantee. The court noted that the terms "indemnify" and "indemnified" in clause 3(i) did not alter the nature of the document, which was an unconditional and irrevocable bank guarantee.

3. Justification for the invocation of the performance guarantee:
The first respondent justified the invocation of the performance guarantee, stating there was no pleading or proof of fraud or special equities. The court agreed, noting that the performance guarantee was an independent contract and its invocation was justified. The court emphasized that the bank guarantee is an autonomous contract and the bank's obligation to honor the demand is absolute, irrespective of any disputes between the employer and the contractor.

4. Grant of an injunction to restrain the encashment of the performance guarantee:
The court reiterated that granting an injunction to restrain the encashment of an unconditional bank guarantee is an exception, with encashment being the rule. The exceptions are established cases of fraud and irretrievable injustice, neither of which were highlighted in this case. The court found no merit in the appellant's contention that the performance guarantee was a contract of indemnity. It concluded that the performance guarantee was unequivocal and unconditional, and the beneficiary had an unfettered right to invoke it. Consequently, the appeal was dismissed.

Conclusion:
The court dismissed the appeal, finding that the performance guarantee was an unconditional and irrevocable bank guarantee. The appellant's contentions were found to be without merit, and the court refused the request to continue the ad-interim order. The disputes and differences proposed to be referred to arbitration were to be decided uninfluenced by the findings in the impugned order and the court's order on this appeal.