Not right to direct for substitution of lawful bank guarantee by ‘Scheduled Bank in India’, with bank guarantee of ‘Scheduled Indian Bank’, after its compliance: SC

Read Judgment: Sepco Electric Power Construction Corporation vs. Power Mech Projects Ltd

Pankaj Bajpai

New Delhi, August 27, 2021: The Supreme Court has set aside the direction given by the High Court to the Appellant to replace the Bank Guarantee of the Industrial and Commercial Bank of China Ltd (ICBC) already furnished, with another Bank Guarantee, observing the practical difficulties faced in obtaining a Bank Guarantee from banks with which the applicant has no transaction and the bank charges already incurred for obtaining the guarantee. 

A Division Bench of Justice Indira Banerjee and Justice V. Ramasubramanium observed that when the Appellant had altered its position to its detriment by extending Rs.30 lakhs in obtaining a Bank Guarantee of ICBC, then the High Court was not justified in altering and/or modifying the direction after almost two months of its compliance. 

The observation came pursuant to an appeal questioning the legality of the direction of the High Court, requiring the Appellant to substitute a legally valid irrevocable Bank Guarantee, issued by the Industrial and Commercial Bank of China Limited, which is a Scheduled Bank carrying on business in India, with a Bank Guarantee of equivalent amount issued by a “Scheduled Indian Bank”. 

The question which arose for consideration was as to whether the High Court was right in refusing to accept a legally valid irrevocable Bank Guarantee of Rs.30 Crores, issued by the ICBC, Mumbai, and insisting that the Appellant should furnish a fresh Bank Guarantee of the same amount, with identical terms, issued by a “Scheduled Indian Bank”, notwithstanding the expenditure incurred by the Appellant in obtaining the Bank Guarantee from ICBC.

Going by the background of the case, the Appellant, an entity incorporated in China, was awarded contracts in relation to various coal-based power projects in India and the Respondent, a company incorporated in India, was engaged as a sub-contractor of the Appellant. Due to differences between the Respondent and the Appellant, the dispute was referred to Arbitration, which culminated in an Arbitral award of approx. Rs 142 crores. 

The said Arbitral Award came to be challenged in the Commercial Division of the Delhi High Court, which is pending. At the same time, the Respondent filed an application in the Commercial Division of the High Court u/s 9 of the Arbitration and Conciliation Act seeking directions on the Appellant to secure the amount of the Arbitral Award. Resultantly, the Single Bench directed the Appellant to furnish to the Registry of the High Court, a Bank Guarantee for a sum of Rs 30 crores from a Scheduled Bank located in India. 

Complying with the said direction, the Appellant got ICBC to issue an unconditional, irrevocable Bank Guarantee for a sum of Rs 30 crores payable on demand to the Registrar General of the Delhi High Court.

However, the Single Bench directed the Appellant to substitute the Bank Guarantee issued by ICBC, which had been filed in the Registry of the High Court, by a Bank Guarantee of equivalent amount from a Scheduled Indian Bank. This came to be confirmed by the Division Bench of the High Court. 

After considering the arguments and the relevant provisions, the Apex Court said that there may not be any infirmity in the order rejecting the prayer of the Appellant for review, having regard to the limited scope of an application for review, as a matter cannot be re-argued in the garb of an application for review and nor does the Review Court exercise appellate powers. 

Noting that no prerequisites exists for review in the present case, the Apex court said that a Court is empowered to review its own order only if the conditions precedent for a review, as laid down in Section 114 read with Order 47 Rule 1 of the Code of Civil Procedure exist. 

The Top Court also found that all the concerned parties proceeded on the understanding that there was no difference between a ‘Scheduled Indian Bank’ and ‘Scheduled Bank located in India’, in the absence of any specific definition of the expression ‘Scheduled Indian Bank’ in the RBI or the Banking Regulation Act. 

Since ICBC has its principal branch registered in the People’s Republic of China and is listed in the category of Scheduled Foreign Banks in India, the Top Court opined that the High Court had made a distinction between ICBC and a ‘Scheduled Indian Bank’.

“The ICBC has unequivocally agreed to honour the Bank Guarantee on an order and/or judgment of the High Court allowing enforcement of the Arbitral Award, and as per Order/Direction/Judgment by the High Court in the pending legal proceedings. The statement that the Bank Guarantee is subject to the Uniform Rules for Demand Guarantees (URDG) 2010 Revision, does not dilute the terms of the Bank Guarantee. Nor does the URDG render the Bank Guarantee any less effective. Furthermore, the High Court did not direct the Appellant to furnish an unconditional guarantee,” observed the Top Court. 

Justice Banerjee observed that the Court has the discretion to insist on a Bank Guarantee from any specific bank or class of banks to safeguard the interests of the beneficiary of the Bank Guarantee, and they may legitimately disapprove a Bank Guarantee of a bank with a history which raises doubts with regard to its credibility. 

However, there is nothing on record in the present case to give rise to any doubts with regard to the credibility of ICBC or its financial ability or willingness to honour guarantees, added Justice Banerjee. 

Although, Justice V. Ramasubramanium in his dissenting opinion deemed it fit to dismiss the SLP as not giving rise to any substantial question of law warranting interference under Article 136 of the Constitution. 

The present is a case where the petitioner, after making a clear offer to furnish a bank guarantee of a scheduled Indian bank, has chosen to take advantage of a mistake that crept in the order of the High Court, and therefore, he is not entitled to take advantage of the Latin maxim “actus curiae neminem gravabit”, added Justice Ramsubramanium.