The Rights of the Deceased: Moral Rights Incidental to Copyright Law
- Vanshika Agrawal
- 2024-04-25
Contents hide
2 Invocation Of Bank Guarantee
3.2 (b) Prevention of irretrievable injustice/injury
4 Special Equities Principle In Light Of Covid-19
Invocation of Bank – The underlying risks in domestic as well as international transactions paved way for providing security in making payments. One such mode of ensuring secured payments is by way of furnishing a bank guarantee. A contract of guarantee as defined under Section 126 of the Indian Contract Act, 1872 is “a contract to perform the promise, or discharge the liability, of a third person in case of his default”. The person who promises to perform or discharge the liability of the third person is called the “surety” or “guarantor”. The person for whom guarantee is given is called “principal debtor” and the person in whose favour the guarantee is executed is called the “creditor” or “beneficiary”. Thus, the Bank takes responsibility for payment of a sum of money if the same is not met by the principal debtor in accordance with its contractual obligations.
Based on the contractual arrangement entered into by the Bank/surety, bank guarantees can be classified into two categories:
1. Conditional bank guarantee – where the bank/guarantor/surety has to pay the guarantee amount to the beneficiary in whose favour bank guarantee has been issued on demand, only after the specific conditions for invocation in the contract are fulfilled;
2. Unconditional bank guarantee – where the bank/guarantor/surety has to pay the guarantee amount to the beneficiary in whose favour the bank guarantee has been issued on demand, irrespective of any pending disputes.
This article specifically addresses the latter category i.e. unconditional guarantees, and instances wherein the Courts have considered exceptions to the generally accepted rule of invocation of an unconditional guarantee without demur. The article also takes into account the prevailing scenario around the Covid-19 pandemic when such exceptions to the invocation of bank guarantee assume importance.
The general rule for invocation of a bank guarantee is that a bank is under an obligation to honour any legitimate claim:
The underlying reason is to ensure the continuance of trade irrespective of any dispute between the parties to the contract.
As stated above, an unconditional bank guaranteeentitles the beneficiary to invoke the bank guarantee irrespective of pending disputes. The only bar on such invocation can arise in the cases of fraud, irretrievable injustice, or special equities as explained hereafter. It is also pertinent to note that a mere reference to the principal agreement in the contract of guarantee would not make the said guarantee a conditional one[i].
The Courts have time and again held that once an element of fraud is established in the subject transaction, the bank is well within its rights to dishonor the beneficiary’s demand for payment. It is relevant to note here that the nature of the fraud in the subject transaction should be to an extent that it vitiates the whole transaction and renders it infructuous.
This principle was first laid down by the Supreme Court in U.P. Coop. Federation Ltd. vs. Singh Consultants and Engineers (P) Ltd.[ii] Unless a prima facie strong case of fraud is made out, the Courts cannot intervene the proceedings.[iii] Moreover, the said fraud should be on account of the beneficiary himself and not the fraud of a third party.[iv]
Pursuant thereto, the holding of the Hon’ble Apex Court in UP Federation case has been followed in Himadri Chemicals Industries Ltd. vs. Coal Tar Refining Co.[v] and Gujarat Maritime Board vs. Larsen & Toubro Infrastructure Development Projects Ltd, making it settled law.[vi]
The Courts have also granted injunctions on bank guarantees, in favour of a principal debtor, to prevent irretrievable injustice/injury from being caused. This principle too has found recognition in the UP Federation case mentioned above. However, for this exception to be operational the litmus test is that the harm and injustice caused must be of such a grave, exceptional and irretrievable nature that it countermands the terms of the guarantee and so as to cause an adverse effect on commercial transactions should encashment be allowed.
[vii] The burden of proof lies upon the principal debtor to establish the existence of compelling and exceptional circumstances making it impossible for him to reimburse himself even if he manages to ultimately succeed.[viii] A mere apprehension that the other party will not be in a position to discharge its obligations and pay will not amount to irretrievable and exceptional circumstances.[ix]
Quite recently, Courts have started recognising ‘special equities’ as a ground for granting injunction against invocation of bank guarantees. Earlier, the exceptional category ‘special equities’ was just limited to exceptional circumstances causing irretrievable injustice to either of the parties.[x] However, the decision of the Supreme Court in Standard Chartered Bank Ltd vs. Heavy Engineering Corporation Ltd. (“Standard Chartered case”) propounds a different position of law, and distinguished ‘special equity’ and ‘irretrievable injustice’ as distinct circumstances and the existence of either would justify as a valid ground for granting an order of injunction against the invocation of bank guarantee.[xi]
The aftermath of the Covid-19 pandemic will result in the “special equities principle” to the invocation of bank guarantees, assuming importance as parties seek refuge of the exception to extricate themselves from performing their obligations under the bank guarantees. In this light, it would be pertinent to analyse certain decisions of the Supreme Court as well as the Delhi and Bombay High Courts.
This appeal arose out of the judgment dated 8th May 2019 passed by the Division Bench of the Calcutta High Court setting aside the judgment dated 16th October 2015 of the single bench of the same court and accepting the contention of Respondent (HECL) that the bank guarantees were properly invoked in accordance with the law and therefore HECL was entitled to a decree to the tune of Rs. 1,10,33,2017/- as claimed.
Vide a Letter of Intent the Respondent No. 1 had placed an order upon Respondent No. 2 seeking a complete design and supply of both indigenous and imported equipment, erection and commissioning with requisite civil and structural works and other works (laid down in the work order) for the site Dankuni Coal Complex, for a sum of Rs. 21.10 crores. Pursuant to this, the Respondent No. 1 and 2 entered into an MoU basis which the Appellant bank advanced two bank guarantees to the tune of Rs. 71,35,100/- and Rs. 20,32,500/- respectively.
Respondent No. 2 was found in breach of the contract as it failed to duly complete the supply of equipment and other conditions of the Letter of Intent and provided defective equipment. Thereafter, Respondent No. 1 sought encashment of the two bank guarantees which was refused by the Appellant. This led to the Respondent No. 1 filing a suit before the Calcutta High Court seeking a decree. The said suit dismiss leading to the filing of an appeal before the Division Bench of the same court, which set aside the earlier order, and held that the bank guarantee had properly invoke by HECL. The Appellant bank challenged the decision by way of this appeal.
Holding: The Supreme Court base upon the correspondence exchange between the parties, held that the invocation by the beneficiary adequate and in compliance with the law and in compliance with the conditions of the bank guarantee as necessitated. The Court found no merit in the appeal and dismissed the same. It was further held by the Hon’ble Apex Court that the Contract of guarantee is of an independent and distinct nature and the dispute arising between the beneficiary and the principal debtor is immaterial to its invocation.
This included a batch of petitions filed by various steel importers under Section 9 of the Arbitration Act seeking directions restraining the Respondent bank from negotiating/encashing the letters of credit. The facts involved multiple Indian steel importers who had entered into contracts with Korean based steel exporters having their head office in South Korea, for the supply of shipments of certain steel products. The said shipments were to dispatched from South Korea to the Petitioners in Mumbai. Letters of credit on behalf of the Petitioners had issued by Wells Fargo Bank to the Korea based suppliers.
Owing to the Covid-19 pandemic and in view of the resultant nationwide lockdown, the steel importers invoked the force majeure clauses in their contracts asserting that the said contracts stood terminated on account of frustration, impossibility, and impracticability. Consequently, some goods which were ship by the suppliers from Korea did not reach the Petitioners in India. As a result, the Petitioners refused to make payments to the suppliers and move this application to restrain Wells Fargo Bank from negotiating/encashing the letters of credit.
Holding: The Court refuse to grant any ad-interim relief to the Petitioners holding that in the specific set of circumstances. The excuse of lockdown cannot resorted to by the Petitioners to escape from their payment obligations.
The Court further held that the present contract terms were on a Cost and Freight (CFR). Basis and the Respondent supplier. Had already performed its part of the contract by shipping the goods from South Korea. Thereafter, the fact that the Petitioners are unable to perform. Their part of the obligations in terms of its own purchasers. Could not be a factor to hold against the suppliers and refuse payment. It held that in these specific sets of circumstances the force majeure cannot invoke.
Additionally, a remark by the Hon’ble Court stating that the invocation of force majeure clauses in contracts is not a mechanical process. And requires an assessment of facts and circumstances of each case.
The Court may grant an injunction upon invocation of bank guarantee if the element of fraud. Irretrievable harm or injury or special equity may be established by the principal debtor. However, the said injunction may grant upon an assessment of the facts and circumstances of each case. And not as a thumb rule implying the mechanical application without conducting an in-depth analysis. The main motive behind the said principle remains so that no party can take undue advantage. Of its position and cause financial injury to other contracting parties.
[i] Mahatma Gandhi Sahakra Sakkare Karkhane vs. National Heavy Engineering Cooperation Ltd,(2007) 6 SCC 470
[ii] U.P. Coop. Federation Ltd. vs. Singh Consultants and Engineers (P) Ltd, (1988) 1 SCC 174
[iii] Svenska Handelsbanken v. Indian Charge Chrome, AIR 1994 SC 626
[iv] Ibid
[v] Himadri Chemicals Industries Ltd. vs. Coal Tar Refining Co., (2007) 8 SCC 110
[vi] Gujarat Maritime Board vs. Larsen & Toubro Infrastructure Development Projects Ltd, (2016) 10 SCC 46
[vii] U.P. State Sugar Corporation v. Sumac International Ltd., AIR 1997 SC 1644
[viii] Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works Ltd., AIR 1997 SC 2477
[ix] UP Federation case, supra note ii
[x] Hindustan Steelworks Construction Ltd. v. Tarapore & Co, (1996) 5 SCC 34; UP Federation case, supra note ii.
[xi] 2019 SCC Online 1638
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