Conditional bank guarantee
In a conditional bank guarantee, the bank/guarantor has to pay the guaranteed 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.
The state of Commercial law in India is in glooms This is demonstrated in a recent decision of the Supreme Court in Gangotri Enterprises v. Union of India (Civil Appeal No. 4814/2016 dt. 05.05.2016) which is not only erroneous but against the settled principles regarding restraint of bank guarantees.
Some of the facts in the case are that Northern Railways wanted to encash bank guarantee given by the Contractor in respect of a contract which was apparently satisfactorily performed. Northern Railways wanted to do so in respect an alleged breach of another contract. Northern Railways took the support of a clause in the Contract which entitled it to encash bank guarantees given under a contract to set-off “any amounts of money… due” under that contract or any other contract.
The Contractor approached the court to restrain Northern Railways from encashing the bank guarantee. The question went up to the Supreme Court. The Supreme Court held, inter alia, the following:
- The sum due meant a sum for which is presently payable and due and therefore, such sums may be recovered from the security deposit only if the sum which is to be set-off is payable. Northern Railways has sought encashment in respect of an amount which is in the nature of damages. But the Contractor has disputed the same and is a subject matter of an arbitration.
- Sum sought to be recovered was in respect of a contract distinct from the contract under which the bank guarantee was furnished.
On the basis of the above, the Court concluded that there was “a prima facie case in their favour for granting of an injunction against the respondents so also they have made out a case of balance of convenience and irreparable loss in their favour…”
In view of the aforesaid settled position, a party seeking stay against the invocation of the bank guarantee used to find it very difficult, impossible, to obtain the favourable order. However, in its recent pronouncement, the Hon'ble Supreme Court of India seems to have made a paradigm shift by holding that each case of an injunction against the invocation of the bank guarantee has to be decided with reference to the facts involved therein.
The Apex Court in Gangotri Enterprises v. Union of India held that while there can be no quarrel to the proposition laid down in the cases pertaining to encashment of bank guarantees, the same would not be applied in every case. Holding that the in the case in hand, the law laid down in the case of Union of India Vs. Raman Iron Foundry was applicable, the apex court reversed the judgment of Allahabad High Court which declined to grant an injunction against the invocation of bank guarantee by a beneficiary party.
Restrictive Parameters Widened
The present ruling of the Supreme Court has widened the so far restrictive parameters with which a case of grant of an injunction against bank guarantees was being considered by the courts. The Supreme Court has held that facts and circumstances of the case have to be considered and t he court has not to apply or follow the general propositions relating to bank guarantee cases, regardless of the facts peculiar to each case.
The judgement suggests that invocation of bank guarantee is not justified merely because the party invoking the bank guarantee has some claim of damages against the party who furnished the bank guarantee. It has been held that a claim for damages is not a crystallised or ascertained amount or a sum due and payable in praesenti ( meaning 'at present') , therefore invocation of bank guarantee would not be justified on the basis of such claim which is yet to be decided by the competent forum. The court further held that bank guarantee given for searching the performance of one contract cannot be invoked for claims or disputes in another contract between the same parties.
This judgment has to some extent diluted the position that an unconditional bank guarantee can be invoked regardless of the dispute between the beneficiary and the principal obligation. The Supreme Court in some ways has supplemented to the line of authority of judgments against the invocation of bank guarantee by beneficiary like the Hindustan Construction Co. Ltd. v. State of Bihar, which held that the invocation of bank guarantee will have to be strictly in accordance with the terms of the contract/Bank guarantee deed.
This judgement of Gangotri Enterprises will certainly come to the rescue of litigants, primarily contractors executing work under contracts awarded by government agencies and the said agencies were exercising unbridled discretion in the matter of encashment of bank guarantees furnished by the contractor. A general belief that bank guarantees can be encashed irrespective of the main dispute between the contractor and the department, or for covering the claims for damage, which are yet to be crystallized, has been set right but this judgement.
Therefore, whenever any party would seek to encash the bank guarantees provided by other parties to the contract on the basis of their claims of damages, such an attempt would not be successful as a claim of damages is not a sum due and payable in present. Similarly, bank guarantee given for one contract cannot be encashed for breaches/disputes concerning to another contract.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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