2015 (2) TMI 487 - HC - Indian Laws

Encashment of bank guarantee - Conditional bank guarantee or unconditional bank guarantee - petitioner had submitted bank guarantee to the respondent No.1 on execution of MoUThe respondents' case is that these are unconditional bank guarantees. - Held that - The petitioner has not pleaded anywhere, either in his petition or in his rejoinder that these bank guarantees were unconditional bank guarantees. However, during the course of arguments and also in his written submissions, it is argued by the petitioner that the bank guarantees were not unconditional, but were related to the MoU, hence these are conditional bank guarantees and cannot be encashed unless the terms and conditions of the MoU are fulfilled. It is argued that one of the terms and conditions of the MoU was that the respondent No.1 was to clear the RA bills and also make the payment of the escalation amount, as per the schedule. It is submitted that part of the money towards RA bills is still due and that no payment has been made towards escalation charges, therefore, the respondent cannot encash the bank guarantee. The bank guarantee is an independent contract between the beneficiary and the bank. So, if it is unconditional, then this contract between the beneficiary and the bank has to be honoured. The Court cannot restrain the two contracting parties to honour their agreement, unless except on the two grounds, i.e., an egregious nature of fraud has been played upon the petitioner, which had issued this bank guarantee, or that he shall suffer an irretrievable loss. The bank guarantees in dispute had been issued towards mobilization, advance purpose/execution of the works awarded. The language used in all the three bank guarantees is the same, except that one qualifies as bank guarantee towards mobilization and other towards advance purpose/execution of work. The language and the title of subject bank guarantees emphatically show that it is an unconditional irrevocable bank guarantee and not the conditional one, as argued by learned counsel for the petitioner. The contention that this bank guarantee is in relation to MoU does not make the bank guarantee as conditional one because all the bank guarantees are given by the contractors, pursuant to the some agreement and thus all the bank guarantees are pursuant to some agreement. That does not make a bank guarantee a conditional one, unless it is shown in the bank guarantee that the banks are to honour the bank guarantee on fulfilment of some condition on the part of any party. Under this bank guarantee, the bank was under obligation to encash the bank guarantee in favour of the beneficiary on demand. Thus, the bank guarantees are unconditional bank guarantees and the argument of the petitioner to the contrary has no force. Whether any fraud has been played upon the petitioner for obtaining the bank guarantees in dispute - Held that - Fraud can be ascertained on the basis of facts. The person who comes before the Court with the allegation that a fraud has been played upon him has to establish those facts on record, which constitute the fraud. In its pleading, the petitioner has only pleaded in para 21 that threat to encash the bank guarantee amounts to a clear egregious fraud by respondent No.1. No other fact has been pleaded by the petitioner which constitute fraud. In rejoinder also, the petitioner has not pleaded any facts which constitute fraud, except that the egregious fraud is made out from documents and pleadings. In written synopsis and during arguments, it has been submitted that the fraud on the part of respondent No.1 is clear from the fact that the respondent did not pay the escalation charges under MoU and also failed to pay the balance amount of RA bills and that the encashment of bank guarantee was a consideration towards such payment. From the bare reading of the MoU, it is apparent that payment of escalation charges was not the condition precedent of submitting the bank guarantee. Encashment of the bank guarantee was also not made conditional to the clearance of RA bills. It is thus clear that the submission of bank guarantee was unconditional. During the course of arguments, however, it is argued by the learned counsel for the petitioner in a desperate attempt to succeed that the petitioner was induced into the MoU by misrepresentation and fraudulent representations by respondent with the sole intention to obtain the three bank guarantees with sole purpose to encash them in order to save themselves from financial crisis and to get enriched. These facts they were cheated into the MoU are not pleaded by the petitioner, rather in the petition, contrary facts have been pleaded. The petitioner, therefore, has failed to satisfy this Court that he has been induced by respondent No.1 into this MoU and has put him in a position of undue disadvantage, while putting respondent in a position of undue advantage. Both parties have voluntarily as part of a settlement entered into MoU and pursuant to that while the respondent refunded the cash amount of ₹ 4,28,00,000/-, the petitioner executed the present unconditional bank guarantee. The petitioner, therefore, has failed miserably to show that any egregious fraud had been played upon him for execution of the present bank guarantees. There is no dispute to the fact that the respondent is a company worth of ₹ 6270.83 crores as an individual and worth of ₹ 7568.69 crores as a group and is not a sick company, as stated by respondent No.1 on affidavit. - It, therefore, cannot be said that the petitioner shall suffer an irretrievable injury if the stay is not granted to it. - petitioner is not entitled to any relief - Decided against Petitioner.

Summary

Issues Involved:
1. Restraint on invoking bank guarantees under Section 9 of the Arbitration and Conciliation Act, 1996.
2. Allegations of fraud and irretrievable injustice in the invocation of bank guarantees.
3. Nature and conditions of the bank guarantees.
4. Financial status and obligations of the respondent.

Detailed Analysis:

1. Restraint on Invoking Bank Guarantees:
The petitioner sought to restrain the respondent from invoking three bank guarantees totaling Rs. 3,39,56,750/-. The guarantees were provided as part of a settlement under a Memorandum of Understanding (MoU) dated 18.09.2013, following disputes over a construction contract. The respondent had previously encashed bank guarantees worth Rs. 4,28,00,000/-, which were refunded under the MoU in exchange for new guarantees.

2. Allegations of Fraud and Irretrievable Injustice:
The petitioner alleged that the respondent's threat to encash the bank guarantees amounted to "egregious fraud." The petitioner claimed that the respondent had financial difficulties, failed to pay due amounts under RA bills, and did not pay escalation charges as agreed in the MoU. The petitioner argued that the respondent's actions constituted fraud and would cause irretrievable injustice.

3. Nature and Conditions of the Bank Guarantees:
The court examined whether the bank guarantees were conditional or unconditional. The guarantees were found to be "irrevocable and unconditional," obligating the bank to pay the beneficiary on demand without any inquiry into the underlying contract or disputes. The court emphasized that a bank guarantee is an independent contract, and its invocation can only be restrained in cases of established fraud or irretrievable injustice.

4. Financial Status and Obligations of the Respondent:
The respondent argued that the petitioner had not established any facts constituting fraud. The respondent also highlighted its financial solvency, with a turnover of Rs. 6270.83 crores individually and Rs. 7568.69 crores as a group. The court noted that the petitioner failed to show that the respondent was in a position of undue advantage or that the petitioner would suffer irretrievable injury if the guarantees were encashed.

Conclusion:
The court concluded that the petitioner did not establish that an egregious fraud had been played upon them. The bank guarantees were found to be unconditional and irrevocable, and the petitioner failed to demonstrate irretrievable injury. Consequently, the court vacated the stay on the invocation of the bank guarantees and dismissed the petition.