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Injunction Over Encashment of Performance Bank Guarantee

Judicial Bulging of Grounds

Bank Guarantee is the common mode, of securing payment of money in commercial dealings as the beneficiary, under the Guarantee, is entitled to realise the whole of the amount under that Guarantee in terms thereof irrespective of any pending dispute between the person on whose behalf the Guarantee was given and the beneficiary as laid down in the case of Hindustan Construction Co. Ltd. v. State of Bihar & Ors., AIR 1999 SC 3710.

In Himadri Chemicals Industries Limited v. Coal Tar Refining Co., (2007) 8 SCC 110 apex court laid down the principles for grant or refusal to grant of injunction to restrain enforcement of a bank guarantee;

While dealing with an application for injunction where unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee irrespective of any pending disputes relating to the terms of the contract.

The bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer.

The courts should be slow in granting an order of injunction to restrain the realization of a bank guarantee.

Since a bank guarantee is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of bank guarantees.

Fraud of an egregious nature which would vitiate the very foundation of such a bank guarantee and the beneficiary seeks to take advantage of the situation.

Allowing encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned.

Performance Bank Guarantee (PBG) being an independent contract, yet subject to various exceptions developed by judicial adjudication and interpretation in various cases, has swollen its own compartment.

Where an injunction against encashment could only be granted in a case where:
Invocation is not in terms of the bank guarantee, or a case of established egregious fraud is made out which is known to the bank and is practiced by the beneficiary of the bank guarantee, or where a case of special equities is made out so as to prevent irretrievable injustice between the parties, or Irretrievable Injury, or under Economic duress; is now available to the plaintiff on grounds which are too remote from causing grave injustice or prejudice to the defendant. Thence, diluting the autonomous character of the contract of PBG and blurring the right of the beneficiary.

Fraud has further been broadened to include �all acts, omissions and concealments which involve a breach of legal or equitable duty, trust or confidence, justly reposed and are injurious to another or by which undue and unconscientiously advantage is taken of another.� Fraud must be specifically pleaded so as to be taken up as a ground mere representation of circumstances may not lead to inference/instance of fraud, same was held in the case of Omaxe Const. Ltd. v. UOI, (2004) 2 ArbLR 1985 Cal 23.

Where sufficient area for work to proceed was not provided the court found it correct to grant injunction over encashment of guarantee. In a similar case of A.M.F. (International) Ltd. V. Marshall, (1986) 208 EG (3d) 542 Court propounded if the site for construction isn't ready to be handed over or lacks what had been promised Bank Guarantee cannot be encashed. Further, in a case, if contractor/ builder puts any change with respect to time length/ line or performance and the same is authorized or agreed upon by parties, contractor cannot substitute and get the same done by some other party as laid down in Tencred Arrol &Co. v. Steel Co. of Scotland, (1974) 48 ALJR 461.

Doctrine of substantial performance is yet another ground which is considered by Courts outside India but has not been argued in India much. In Dakin v. Lee, (1916) 1 KB 566 substantial performance was held to be a ground to refute the claim of encashment of bank guarantee. Sufficient performance of a contract is referred to as substantial performance.

In case of delay caused by the owner i.e. party claiming encashment of BG no liquidated damages can be granted is a settled rule since the case of Holme v. Guppy, (1838) 3 M&W 387 had been decided. In circumstances where substantial work is done and encashment of BG is claimed an amount only to the extent of non-paid bills can be encashed, same has been observed by Hon'ble High Court of Delhi in Nangia Construction (India) Ltd. V. International Airport Authority of India, AIR 1992 Del 242. In a similar case of National Project Const. Corporation v. G. Ranjan, AIR 1985 Cal 23, Court held in a case where mobilization advance was given, only the balance amount which is not recovered can be encashed via Bank Guarantee.

Further, Courts have also included the elements of misrepresentation and suppression to be valid grounds for grant of injunction against encashment of bank guarantee.[5]

The above catena showcases- how a compartment develops and spacifies its components. From a few available grounds for seekinginjunction over encashment of Bank Guaratees, Couts have looked into the genuineness of applications; seeking such injunction, and have laid down various grounds for the same.

  1. Parampujya Solar Energy Private Limited v. Union of India and Ors., MANU/DE/1026/2018DSC Limited v. Rail Vikas Nigam Limited & amp Ors.,MANU/DE/2437/2013,Larsen & Toubro Limited v. Maharashtra State Electricity Board and Others, (1995) 6 SCC 68 etc
  2. Dai-ichi Karkaria Private Ltd., Bombay vs. Oil & Natural Gas Commission Bombay and another,MANU/MH/0053/1992
  3. ibid
  4. R. v. Walter Cabott Construction Ltd., (1975) 69 DLR (3d) 542
  5. Synthetic Foams Ltd. v. Simplex Conc. Piles (India) Pvt. Ltd, AIR 1988 Del 207

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