In Appeal u/s 37 of A&C Act No.16 of 2022-ALL HC- Fraud, as exception to rule of non-interference with encashment of BGs, should be of egregious nature, going to foundation of such BG and must be established: Allahabad HC 
Justices Rahman Masoodi & Om Prakash Shukla [02-12-2022]

Read Order: U.P. EXPRESSWAYS INDUSTRIAL DEVELOPMENT AUTHORITY THRU CHIEF EXECUTIVE OFFICER V. M/S SAHAKAR GLOBAL LTD. THRU THRU AUTHORIZED SIGNATORY STEPHEN LOBO

LE Correspondent

Prayagraj, December 8, 2022: The Allahabad High Court has made it clear that the condition, in the agreement between the parties, under which the bank guarantees could be enforced, cannot be cited as a ground to stay the invocation and encashment thereof. 

The Division bench of Justice Rahman Masoodi and Justice Om Prakash Shukla allowed   the present appeal preferred under section 37 of the Arbitration & Conciliation Act, 1996 by the Uttar Pradesh Expressways industrial Development Authority against an ad interim Injunction order passed by the Commercial Court, under section 9 of the Arbitration & Conciliation Act, 1996. 

The Division Bench was of the view that any reference to the original dispute between the parties, relating to the performance of the contract, is completely irrelevant, insofar as the issue of stay of invocation of the bank guarantees is concerned. 

 Apparently, in the said impugned order the  Commercial Court directed the parties to maintain ‘status quo” with respect to the performance Bank Guarantee, furnished by the Respondent Contractor – M/s Sahakar Global Ltd.

The appellants  submitted that the said “Status Quo” order not only amounts to restraining the invocation and/or encashment of Performance Bank Guarantee by them but also amounts to final adjudication of the pending section 9 petition itself as the nature of relief, which can be obtained/granted under a proceeding under section 9 of the Arbitration & Conciliation Act, 1996 can be only interim in nature as any dispute can be finally decided in an arbitration proceedings before the Arbitral Tribunal. 

Thus, it was urged by the appellant that since a status quo order was passed nothing remains in the pending section 9 petition to be decided and as such this court was called upon to set aside the impugned order as well as dismiss the pending section 9 petition.

 As per M/s Sahakar global Ltd. a serious dispute arose between the parties in connection with the contract Agreement  dated October 13, 2020 with regard to Stamp Duty and Force Majeure reliefs, which required to be adjudicated by a duly constituted Arbitral Tribunal.  It was the case of M/s Sahakar global Ltd that UPEIDA was threatening to invoke and encash the Bank Guarantee contrary to the terms of the Contract as according to them UPEIDA on the one hand was  not fulfilling its obligation to grant force majeure relief to them and on the other hand demanding deposit of full contractual remittance and in that regard was threatening to forfeit the performance securities by encashing the Bank Guarantees. 

Thus, the respondent filed an application under section 9 of the Act seeking interim relief.  The Commercial court granted status quo order relating to the invocation of the Bank Guarantees. Thus, the appellant chose to file the present Appeal.

Referring to the judgments in U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., U.P State Sugar Corporation Vs Sumac International Limited, Hindustan Steel Workers Construction Ltd. Vs. G.S. Atwal & Co (Engineers) Pvt. Ltd, the Court was of the view that the law with respect to grant of an injunction which has the effect of restraining encashment of a bank guarantee, is no longer res integra.

Clearly, the Bank Guarantees are unconditional and irrevocable. Under the Bank Guarantee, the bank undertakes to pay the appellant immediately on demand, without any deductions, setoff or counterclaim whatsoever, any or, all money payable by the respondent without any demur, reservation, contest, recourse, cavil, arguments, or protest and/or without any reference to or enquiry from the respondent and without the appellant needing to prove or show grounds or reasons for their demand for the sum specified therein, the Court noted. 

The Bank Guarantee in the instant matter in  unequivocal terms states  that any demand made by the appellant on the Bank shall be conclusive and binding notwithstanding any difference between the appellant and the respondent or any dispute pending before any Court, Tribunal, Arbitrator or any other authority. It is very much contained in the BG that the Bank has agreed that the Guarantee contained shall be irrevocable and shall continue to be enforceable till the appellant discharges this guarantee, the Court further noted. 

It was further stated that the terms of the Bank Guarantee, clearly stated that for invocation no statement of shortcoming or defect in performance is required to be made by the appellant to the Bank. 

In view of the well crystallized law on the subject, the Bench opined that any reference to the original dispute between the parties, relating to the performance of the contract, is completely irrelevant, insofar as the issue of stay of invocation of the bank guarantees is concerned. That dispute has necessarily to form substratum of an entirely different proceeding, to be resolved either by arbitration or by adjudication by a Court. Thus, in the present interim proceedings, the enquiry is confined to, whether on the basis of the documents, a case of fraud of egregious nature in the matter of obtaining/furnishing BGs, was made out.

Referring to section 9, the Bench opined that this provision itself bears the heading Interim measure etc. by court,  which sufficiently means that the power of the court has been given for interim measure only as the substantial dispute has to be decided in an Arbitration proceeding. The said interim measure is of special importance as it intends to give immediate succour to a party as the very first line of the section mentions that the party may approach the court, before or during arbitral proceedings or at any time after the making of the arbitral award.

As per the Bench, the proceedings by its very nature are interim in nature under section 9 and thus by that analogy as is being proposed by the respondent, the impugned order seems to be an interim order of an interim relief. 

However, the Court found that the Commercial court extensively dealt with all the allegations and counter allegation of the parties to arrive at a conclusion that if the benefit of the force majeure clause is given to the respondent during the Covid-19 period, there would not be any amount payable to the appellant. In view of such observations made above, the appeal was allowed.