How special are “special equities”- Analysis of invocation of bank guarantee during COVID-19

A pandemic, of the nature which affects the world today, has not visited us during the lifetime of any of us and, hopefully, would not visit us hereinafter either. The devastation, human, economic, social and political, that has resulted as a consequence thereof, is unprecedented. The measures, to which the executive administration has had to resort, to somehow contain the fury of the pandemic, are equally unprecedented. The situation of nationwide lockdown, in which we find ourselves today, has never, earlier, been imposed on the country. The imposition of the lockdown was by way of a sudden and emergent measure, of which no advance knowledge could be credited to the petitioner – or, indeed, to anyone else.” – C. Hari Shankar, J., April 20, 2020.

The above quote aptly sums up the current situation globally and domestically. The COVID-19 outbreak has created a void in terms of performance of commercial contracts and has in many cases left the parties on edge. Through this article, we aim to provide an insight into the orders passed by the judiciary during COVID-19, dealing with an otherwise settled issue i.e. the invocation of bank guarantee.

It is well settled that a bank guarantee is an independent contract between the bank and the creditor and the bank is always obliged to honour on demand, the amount of liability undertaken in the guarantee, irrespective of any dispute raised by the debtor, as long as it is unconditional and irrevocable. It is independent of the underlying contract between the beneficiary and the person at whose instance the bank guarantee is given[1].

What happens in an unconditional bank guarantee is that the bank 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, whereas in a conditional bank guarantee, the bank has to pay the guarantee amount, only after the specific conditions for invocation in the contract are fulfilled. It is important to do a wholesome reading of the relevant clause to understand the nature of a bank guarantee as the stakes for a court interfering in an unconditional bank guarantee by way of granting an injunction are very high.

The law relating to invocation of bank guarantees is well settled. The jurisprudential disposition has carved out three exceptions when an injunction can be granted to restraint invocation of bank guarantee:

  1. Fraud of an egregious nature, which goes to the root of the bank guarantee (and not the underlying contract): A clear evidence, both as to the fact of fraud and as to the bank’s knowledge of such fraud, which would vitiate the very foundation of such a bank guarantee can go a long way in restraining invocation of a bank guarantee; or
  2. Irretrievable injury/harm or injustice: If the harm or injustice is of such an exceptional and irretrievable nature as would override the terms of the guarantee and cause adverse effect of such an injunction on commercial dealings in the country, the courts can treat such situations as exceptional and accordingly grant an injunction; or
  3. Special equities: Relief on account of injuries caused due to exceptional circumstances.

The courts have, however, been slow in granting an injunction to restrain the realisation of unconditional bank guarantees and mostly do not interfere with the invocation or encashment so long as the invocation is in terms of a bank guarantee. These principles have been reiterated by the Supreme Court in the recent case of Standard Chartered Bank Ltd v. Heavy Engineering Corporation Ltd.[2]

While these are established principles of law, it is also important to note that every case has to be decided with reference to the facts of the case involved therein.[3] It is on the basis of this principle that the Indian courts in their recent orders have considered the key facts of the cases involving invocation of bank guarantees during COVID-19.

The first order dealing with the invocation of bank guarantee during COVID-19 was passed by the Hon’ble Delhi High Court in M/s Halliburton Offshore Services Inc.(“Halliburton”) v. Vedanta Limited and Anr. (“Vedanta”)[4]. Halliburton had entered into a contract with Vedanta for development of certain blocks and had furnished bank guarantees as security. Due to the complete lockdown prevailing in the country and consequent restrictions on industrial activities as well as movement of persons, Halliburton has not been able to complete its part of the contract. Apprehending the contract likely to be terminated by Vedanta and the consequential invocation of bank guarantees, it had filed an application for interim protection. Vedanta’s argument is that Halliburton has failed to establish the existence of “egregious fraud”, which is the prima facie requirement of seeking an injunction against invocation of bank guarantee. However, Halliburton relied on numerous cases to argue that there is a second exception to invocation of bank guarantee, which is “special equities”, where refusal to grant a stay would result in injustice to them and it is indeed what the court upheld.

The Hon’ble Delhi High Court observed that the countrywide lockdown, which came into place on March 24, 2020 was prima facie in the nature of force majeure and such a lockdown was unprecedented and was incapable of having been predicted. Taking cognizance of the fact that Halliburton continued to work on the project till the imposition of lockdown on March 22, 2020, or at least shortly prior thereto and that the government has also been issuing instructions, from time to time, to mitigate the difficulties that have resulted, as a result of the lockdown, the Hon’ble Delhi High Court held that it would justify an ad-interim injunction, restraining invocation or encashment of the bank guarantees.

The court observed, where “special equities” exist, it is empowered, in a given set of facts and circumstances, to injunct invocation, or encashment, of a bank guarantee. In the present case, special equities did exist, and it was justiciable to injunct Vedanta from invoking the bank guarantees, forming subject matter of these proceedings, till the expiry of a period of one week from May 3, 2020, till which date the lockdown has been imposed.

This created a precedent and soon Mr. Ashwani Mehra, as a resolution professional of M/s. Punj Lloyd Limited (“PLL”), filed a writ petition under Article 226 of the Constitution of India in the Hon’ble Delhi High Court[5], seeking to quash the actions of Indian Oil Corporation Limited (“IOC”), which sought to invoke certain bank guarantees submitted by Mr. Mehra in relation to a contract between PLL and IOC. Restrained from seeking recourse to National Company Law Tribunal (“NCLT”) due to the lockdown, Mr. Mehra invoked the high court’s jurisdiction under Article 226. Meanwhile, IOC invoked certain bank guarantees, but did not encash them. The Hon’ble Delhi High Court, therefore, without going into the merits of the case, granted limited relief to Mr. Mehra to the extent of restraining the encashment of underlying bank guarantees by IOC till the expiry of 1 (one) week from the lifting of the lockdown. Given the ad-interim nature of the order, it is merely a temporary relief that the Hon’ble Delhi High Court deemed necessary for the petitioner and should not be looked as a deviation from the standard requirements of seeking an injunction for invoking a bank guarantee.

It is important to note that, the Hon’ble Bombay High Court has, however, adopted a slightly different approach in the recent case of Standard Retail Pvt. Ltd. (“Standard Retail”) v. M/s. G. S. Global Corp & Ors. (“GS Global”)[6], wherein Standard Retail was denied an ad-interim relief by the court for encashing the underlying letters of credit, on account of the plea of the lockdown. In this case, GS Global had already performed its part of the contract by shipping the goods from South Korea. The court outrightly rejected the inability of Standard Retail to perform its part of the obligations due to the lockdown and the damages that it would entail. Therefore, it was observed that the lockdown is for a “limited period” and the lockdown cannot come to the rescue of Standard Retail to prevent it from its contractual obligations.

Similarly, where a writ petition was filed by Indrajit Power Private Limited (“Indrajit”) in the Hon’ble Delhi High Court[7] to quash the invocation of the bank guarantee by the Ministry of Coal and Union of India, the Hon’ble Delhi Court did not find that the invocation of bank guarantee by the Union of India as invalid, illegal or discriminatory. Indrajit had sought extension of deadline to complete the pending work in relation to a coal mine located in Maharashtra and prayed for the bank to renew the bank guarantee expiring on April 12, 2020. Indrajit also submitted that it ran a captive power plant for a company, which has been closed because of lockdown. In these circumstances, it was contended that it had no immediate source of revenue and if the amount from the bank guarantees was appropriated, it would ultimately result in it being declared as a non-performing asset. The argument of the Union of India was that the bank guarantee is unconditional and irrevocable and there cannot be any embargo on encashment of the case in the absence of fraud and/or irretrievable justice. The court took note of the fact that Indrajit has been in non-compliance of milestones and efficiency parameters since April-June 2018 and was granted a twelve-month extension much before the COVID-19 crisis. It was also reiterated that merely because invocation will cause financial distress is not a ground of stay unless the exception of irrevocable injury has been proved. Basis these facts, the Hon’ble Delhi High Court dismissed the petition.

In India, it is difficult to obtain a restraining order to prevent an issuing bank from paying the amount under a demand guarantee, unless the party seeking an injunction can bring its case within the exceptional grounds as enumerated above. The law on this area is well settled and has been reiterated in multiple judicial decisions. The orders passed by the Hon’ble Delhi and Bombay High Courts, as discussed above, are reflecting the approach being adopted by the judiciary because of COVID-19. The courts are being mindful of these unprecedented circumstances and are treading a more cautious route and avoiding any knee jerk reaction. However, it is important to note that the courts have not resorted to granting injunctions in cases where parties have tried to take the plea of COVID-19 for justifying their non-fulfilment of obligations, even though they were given ample time before the crisis hit the world. Further, the courts are aware of the threat posed by COVID-19 to the whole country and it is imperative for the courts to ensure that they try and mitigate any irreparable injury or damage being caused to the parties in their efforts of keeping up contractual commitments. We must also note that certain orders passed by the courts are of ad-interim nature, in circumstances where time is of the essence and are subject to further hearings by the courts in the respective matters.

[1] Delhi Lotteries v. Rajesh Aggarwal, AIR 1998 Del 332

[2] 2019 SCC Online SC 1638

[3] Gangotri Enterprises Ltd v. U.O.I., (2016) 11 SCC 720

[4] O.M.P. (I) (COMM) & I.A. 3697/2020, April 20, 2020

[5] W.P.(C) 2966/2020 & CM APPLs. 10297-99/2020, April 17, 2020

[6] Commercial Arbitration Petition (L) No. 404 of 2020, April 8, 2020

[7] W.P.(C) 2957/2020 & CM Nos.10268-70/2020 (URGENT), April 28, 2020

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