This Case Commentary is written by Kaavya Sarin, a Second-year law student of SLS, Noida

INTRODUCTION

The case between “Oil & Natural Gas Corporation Ltd.” (ONGC) and “State Bank of India Overseas Branch, Bombay”, presents a complex legal scenario revolving around the encashment of a bank guarantee in the context of a contractual dispute. The concept of a guarantee is enshrined in Section 126 of the Indian Contract Act 1872[1] Where surety must pay creditors, if the principal debtor defaults. Extending the scope, Bank guarantee has been an important principle in recent years. It is a tri-legal agreement, considered to be autonomous and independent of the parent contract. Mostly in commercial transactions bank guarantee is demanded. Banks are usually the best option for these contracts because they are capable of handling exhausting financial burdens.

Subsequently, the concept of an “unconditional bank guarantee” came to the forefront because of its essence of being enforced instantly. Thus, it is a preferred option in the market. Additionally, the concept of counter bank guarantee is more prominent in the international market because it provides a layer of protection to the original contractor who is mainly a resident of the foreign country. In order, to make the entire transaction suitable and efficient counter guarantee is enforced.

The analysis develops deeper into the mentioned concepts with contentions and final verdicts.

RULE

Provisions

1. “Section 126 of Indian Contract Act 1872”.

2. “Foreign Exchange Manual 1999”.

3. “The Constitution of India,1950”.

4. “Arbitration and Conciliation Act 1996”.

5. “Order XXXVII of Code of Civil Procedure 1908”.

Cases Referred

1. “Navinchandra Babulal Bhavsar v. Bachubhai Dhanabhai Shah 1969.”

2. “Raj Duggal v. Ramesh Kumar 1991.”

3. “Bharat Bank Ltd. v. The Employees of Bharat Bank Ltd., Delhi, 1950”.

4. “Tarapore & co Madras v Tractors Export, 1969”.

5. “U.P. Coop Federation Ltd v Singh Consultants and Engineers(P) Ltd, 1988.”

6. “U.P State Sugar Corpn v Sumac International Ltd,1997.”

7. “Hindustan Steelworks Construction Ltd. V. Tarapore and Co. and Anr 1996.”

8. “ONGC v. SBI Overseas Branch, Bombay AIR 2000.”

FACTS

Appellants: “Oil &Natural Gas Corporation Ltd.”

Respondent: “State Bank of India, Overseas Branch, Bombay”.

In the given matter, a Special Leave Petition was filed by appellants for quashing the Honorable High Court Order, granting unconditional Leave to defend suit regarding the enforcement of a Bank guarantee, upon which an order of injunction was obtained by the respondent bank.

Facts corresponding to the aforementioned appeal are as follows:

1. The contract for the construction of the undersea pipeline known as the Gas Lift Pipeline, was signed between “ONGC” and the “consortium of M/S Suipem SPA/ Snamprogetti of Italy”. Specifications along with a contract Price of “US $ 6,38,75,000” plus “Indian Rupee 80,60,000” subject to the completion date of April 30, 1991, were mentioned in the argument.

2. The contract extends the scope by providing a levy of liquidated damages for failure on the part of the contractor. In advancement, of contractual obligations, the contractor had to furnish a Bank guarantee for 10% of the contract price, subject to expiration four months before the contract's completion date.

3. Nonetheless, the contractor must obtain an extension of the bank guarantee's validity, subject to the project completion date being extended. Performance Bank Guarantee can be enchased by the appellant on account of failure by the contractor to provide a bank guarantee within the assigned time. All disputes were subject to the jurisdiction of Indian courts and by Indian Laws.

4. In compliance with contractual requirements, the contractor obtained an unconditional Bank guarantee amounting to “US$ 63,875,000” plus “Indian Rupee 80,60,000” from the “State Bank of India”.

5. As a result of the extension and multiple delays, on March 17, 1993, the company assessed damages at “US$ 43,20,432” plus “Indian rupee 55,15,955”. Accordingly, on the advice of the appellant and in the lieu of mentioned damages, the Bank Guarantee was extended for 6 months i.e. 4th October.

6. In a letter dated September 13, 1993, the appellant recommended that the contractor prolong the bank guarantee's validity. The contractor then requested arbitration to settle the disagreement.

7. September 27,1993 letter by the appellant vociferously laid down conditions read as, if the Bank Guarantee was not extended on or before October 1, 1993, then the letter of September 13, would be treated as a “Notice for encashment of Bank Guarantee”.

8. The contractor as well as the bank conveniently ignored all the intimations. The calendar year turned December the respondent bank laid down minuscule headers encompassing sub-judication of subject matter, an order of injunction obtained through Italian court by the contractor through which the Italian Bank was restrained from transferring any funds to the respondent bank under the shadows of counter-guarantee. This appeared, to be the main cause for the refusal of encashment of Bank Guarantee.

ISSUE:

1. Whether the order of injunction, obtained from an Italian court based on foundation stoned of counter-guarantee, can be termed as erroneous?

2. Whether the order of the Honorable High Court favouring Respondent Bank by granting unconditional leave to defend the suit, was a mistake in light of the above circumstances?

APPLICATION/ANALYSIS:

By the facts postulated above, the contractor approaching the arbitrator for settlement of the dispute marks the beginning of the litigation process.

Meanwhile, the council for both the “appellant” and “respondent” appeared before the Italian court.

Appellant: Contentions by the appellant claimed that bank guarantee is autonomous, and unconditional irrespective of stages of counter-guarantee, thus it should be enforced. The principle mentioned can be backed by verbatim of Interior’s India v. Balmer Lawrie and Section 126 of Indian Contract Act 1872 mentions bank guarantee as an “autonomous contract”.

Respondents: The Bank questioned the validity of the letter dated 27 September which was treated as notice. In compliance with the principles of the Foreign Exchange Manual 1999, Payment in rupees under the guarantee must only be made if the foreign bank reimburses the original payment.

Furthermore, the appellant ought to hold off until the dispute is settled as it was before arbitration counsel.

Order of Injunction: In favor of the respondent, the “Italian Court” issued an order on March 2, 1994, directing the “State Bank of India Overseas Branch in Bombay” and the legal agent to forgo payment of any sum in return for a guarantee.

Summary suit filed.

Summary suit is a legal procedure, specifically related to cases dealing with payment of a debt or liquidated demand of money. According to the “Gujarat High Court”, the primary objective of summary actions is to encourage business and industry by assuring entrepreneurs that their money claims—especially those involving liquidated amounts—will be promptly settled. By doing this, their funds won't be frozen for too long, enabling them to quickly resume their commercial operations.[2] Further, for summary suits defendants need to obtain unconditional leave which is granted when the court finds that the defense raises a triable or fair dispute, it should not reject the request for leave to defend.[3]

Aggrieved by an Italian court order and for quick disposal of the matter, the appellant filed a summary procedure under “Order XXXVII of CPC” before the “Honorable High Court, Mumbai”. Pleadings for a decree about complete repayment to sum with 18 percent interest, subject to further enhancement of interest till payment of realization.

Order of Honorable High Court, Mumbai.

In compliance, with certain terms such as the number of liquidated damages not defined in the letter dated 27th September 1993 thus, the validity of the said letter was questioned. Moreover, the pendency of the arbitration proceeding and the injunction of the Italian court served as triable issues for granting unconditional leave to defend the suit. [4]

Honorable Supreme Court

The verbatim of “Article 136”, has been used as broadly as feasible. The Supreme Court is given the authority to issue "special leave to appeal" from any judgment, decree, decision, sentence, or order that has been "passed or made" by "any court or tribunal" within the borders of India "in any cause or matter." The nonobstante, phrase makes clear that the authority supersedes any restrictions on the court's ability to consider appeals.[5] Thus, the case being in the interlocutory stage in the “High Court,” the “Special Leave Appeal” was filed under “Article 136” of the Indian Constitution.[6] By the Appellant.

Counsel appearing on behalf of the appellant submitted that all the grounds stated by the Honorable “High Court” don’t have an iota of applicability in the given order.

Principles laid down in court through the cluster of cases, that there should be minimum interference of judiciary in matters emanating from encashment of bank guarantee unless there is fraud and irretrievable injustice involved in the case. The “Supreme Court” stated that only in exceptional circumstances they shall interfere[7].

Lord DENNING MR, “Otherwise, the very purpose of Bank Guarantee would be negatived and the fabric of trading operations would be jeopardized”[8].Therefore, some exceptions such as fraud, irretrievable injustice, and special equities were carved out for the grant of an injunction to restrain the encashment of the guarantee[9]. Mere irretrievable injustice without prima facie evidence of fraud won’t suffice the essentials. Thus, the respondent while arguing the matter should emphasize verbatim prima facie. “The respondent needs to prove that the liquidated damages quantified the same before invoking the guarantee.” [10]

The learned single judge bench held that the letter dated September 14, 1994, addressed to the bank for extension or otherwise would be treated as notice for encashment, thus appellants fulfilled their part, thus it cannot be maintained that the invocation took place after the bank guarantee's expiration date.

One of the principles applied in the listed matter was established in a landmark case, where it was corroborated that encashment of Bank guarantee does not depend on the adjudication of the dispute. Considering the Bank Guarantee to be autonomous would not be affected by pendency in the arbitration tribunal.[11] Further, the court reiterated, that arbitration proceedings were left open before the concerned parties presented evidence. Both parties were given the chance to determine the number of liquidated damages that would be due, and if any excess had already been paid, it could be recovered through the Honorable “High Court’s” order.

Perusing the grounds extending to the Foreign Exchange Manual 1999, considered by the Italian Court for granting the order of Injunction was rejected outrightly by the “Supreme Court”. Reasoning established behind this rejection extends to immediate payment which is embedded in rules. The lucid explanation states that the authorized bank i.e. State Bank of India should make a rupee payment to the respondent as soon as the guarantee is invoked, provided reimbursement has been obtained from an Overseas bank under the counter-guarantee The contract between the “Indian Bank” and the “Italian Bank” is independent of the principal contract of guarantee which should be governed by Indian laws thus, any injunction of the Italian court or substantial delay on the part of the Italian Bank should not hinder payment by the Indian Bank to the beneficiary. Further, the rules stated dealers must obtain reimbursement from overseas banks that issued counter guarantees. In case of non-payment, the obligation is on dealers to report the mis happenings to the Reserve Bank of India, for instant redressal of default. [12]

Final Verdict

The division bench opined that the respondent Bank's defense in relying on an injunction from an Italian court lacks merit. Their sole argument for seeking the injunction was that if the counter-guarantee could not be honored due to the court's decision, they should be excused from honouring the bank guarantee. However, a prudent examination of the “Foreign Exchange Manual” reveals that none of the cited claims should prevent payment under the bank guarantee. Consequently, the High Court's decision to grant unconditional leave to defend the case was erroneous. Therefore, the decision was overturned, dismissing the respondent Bank's application and allowing the appeal. Given the nature of the case, no costs are awarded. [13]

CONCLUSION

The critical analysis of assigned case law expounds through the application of the concept of Bank guarantee, the importance of which cannot be more emphasized in recent times. The entire world faced the shockwaves of COVID-19, commercial sector was rattled by unforeseen events. Concerned parties approached the Honorable Court, with a pleading for considering COVID-19 as special equity, which is often considered one of the exceptions for invoking Bank Guarantee. However, Indian courts have not granted injunction liberally under special equity.

Honorable Delhi High Court in the matter of “Haliburton Offshore Services v. Vedanta Ltd”[14] granted an injunction from enchasing Bank Guarantee on the grounds of nationwide lockdown and conduct of parties during the lockdown

Whereas, Honorable Bombay High Court’s ruling “Standard Retail Pvt. Ltd. vs. Global Corp. Co,”[15] It was held that COVID-19 cannot be concerned for granting injunction due to circumstances in the mentioned situation which supports the fulfillment of obligations by both parties.

Emanated from the analogy of cases, we can corroborate that in each case under the category of exceptions for invoking Bank Guarantee, judgment depends on the facts and circumstances of the specified case.[16]. Thus, the facts of the assigned case hold for not treating it under exceptions of fraud or irretrievable injustice.

Further, in the Court's ruling “Hindustan Construction Co. Ltd. v. National Hydro Electric Power Corporation Ltd”, arbitration proceedings were used as a factor in determining whether to restrain the invocation of the Bank Guarantee. Special circumstances were in favour of the party seeking to restrain the guarantee, based on arbitration in their favour and completion of the project without outstanding issues. [17] Thus, this comes under the category of exception of special equity for not invoking a bank guarantee.

Whereas, in the assigned case the arbitration proceedings were pending, this was used as a ground by the respondent bank for defending enforcement of the bank guarantee. This claim was rejected because there was no supporting evidence of external benefit to the party seeking to restrain the guarantee. Thus, this forms no basis to be included in categories of exception.

In conclusion, the assigned case analysis underscores the erroneous orders of the different courts. Evaluating, the case on its own merits and laws revolving around it, aids the order of the Honorable Supreme Court.

REFERENCES

[1] Indian Contract Act,1872, § 126. No.9, Acts of Parliament,1872(India).

[2] Navinchandra Babulal Bhavsar v. Bachubhai Dhanabhai Shah, AIR 1969 Gujrat 124 (128) DB.

[3] Raj Duggal v. Ramesh Kumar , 1991 Supp(I) SCC 191

[4] ONGC v. SBI Overseas Branch, Bombay, AIR 2000 SC 2548

[5] Bharat Bank Ltd. v. The Employees of Bharat Bank Ltd., Delhi, (1950) SCR 459.

[6] INDIA CONST.art.136, amended by The Constitution (Eightieth Amendment) Act, 2000.

[7] Tarapore & co Madras v Tractors Export, (1969) 1 SSC 233

[8] U.P. Coop Federation Ltd v Singh Consultants and Engineers( P) Ltd, (1988) 1 SSC 174, para20

[9] U.P State Sugar Corpn v Sumac International Ltd,(1997) 1 SSC 568.

[10]Ibid

[11] Hindustan Steelworks Construction Ltd. V. Tarapore and Co. and Anr ,1996 SCC (5)34.

[12] Foreign Exchange Manual,1999, No.42, Acts of Parliament,1999 (India).

[13] ONGC v. SBI Overseas Branch, Bombay, AIR 2000 SC 2548

[14] Haliburton Offshore services v. Vedanta Ltd., MANU/DE/3106/2021

[15] Standard Retail Pvt. Ltd. vs. Global Corp. Co, MANU/MH/0528/2020

[16] Gangotri Enterprises Ltd v. U.O.I., MANU/SC/0516/2016

[17] Hindustan Construction Co. Ltd. v. National Hydro Electric Power Corporation Ltd.,2023 SCC OnLine Del 819