The state of commercial law in India is in doldrums. This is exemplified by a recent decision of the Supreme Court in Gangotri Enterprises v. Union of India (Civil Appeal No. 4814/2016 dt. 05.05.2016) which not only erroneous but against the settled principles regarding restraint of bank guarantees.
Some of the salient facts in the case are that Northern Railways wanted to encash bank guarantee given by the Contractor in respect of a contract which was apparently satisfactorily performed. Northern Railways wanted to do so in respect an alleged breach of another contract. Northern Railways took support of a clause in the Contract which entitled it to encash bank guarantees given under a contract to set-off “any moneys… due” under that contract or any other contract.
The Contractor approached the court to restrain Northern Railways from encashing the bank guarantee. The question went up to the Supreme Court. The Supreme Court held, inter alia, the following:
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The sum due meant a sum for which is presently payable and due and therefore, such sums may be recovered from the security deposit only if the sum which is to be set-off is payable. Northern Railways has sought encashment in respect of an amount which is in the nature of damages. But the Contractor has disputed the same and is a subject matter of an arbitration.
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Sum sought to be recovered was in respect of a contract distinct from the contract under which the bank guarantee was furnished.
On the basis of the above, the Court concluded that there was “a prima facie case in their favour for granting of injunction against the respondents so also they have made out a case of balance of convenience and irreparable loss in their favour…”
It is humbly submitted that this decision is grossly erroneous. The decision of the Supreme Court does not seem to be a decision on injunction against bank guarantee but on a claim for damages for wrongful invocation of bank guarantee. Following are the reasons:
The Court has not taken into consideration the settled position of law that injunction will lie against bank guarantees only if there is fraud or special equities. In this case, no fraud was made out by the Contractor. Special equities would mean that the Contractor should establish that it would be impossible to reimburse himself even if he ultimately succeeds in a case for damages for wrongful invocation of bank guarantee. The Supreme Court in the instant case has not gone into such an enquiry at all!
It is well-established that the three pronged test of prima facie case, balance of convenience and irreparable loss would alone not be sufficient in the case of injunctions against bank guarantees but the petitioner should establish fraud or special equities.
The Supreme Court fell in gross error when it went on to the merits of correctness of the decision of Northern Railways in invoking the bank guarantee. This is not required in a proceeding relating to injunction against a bank guarantee.
For all these reasons, the decision of the Supreme Court is grossly erroneous and has to be held per incurium. The decision of the Supreme Court is binding on all courts in India. This decision is likely to be cited in several courts in India in support of injunction against bank guarantees thereby undermining the sanctity of bank guarantees and thereby commerce. It is sad that when there is an urgent pressing need to overhaul commercial law in India, decisions like these take the Indian legal system several steps backwards.
Original author: Badrinath Srinivasan
Comments
Now, going further, assume, hypothetically, that a clause like I suggest in this comment existst. If the Contractor raises a similar objection (that the Security was furnished under some other Contract), going by the SC judgement, the court has to construe the contractual term in an application for temporary injunction/ section 9 application, which is not within its domain.
The correct law is and should be that except in case of special equities and fraud, in no other case should BG invocation be restrained. Also, where ad interim relief is sought in such applications pending disposal on grounds of fraud or special equities, and such party is unable to establish it, the party must be burdened with indemnity costs.
The judgement is based on the interpretation of clause 62 (Gangotri Contract) and Clause 18 (DGS&D Contract). The report seems to suggest that the author has analysed both the contracts, but that analysis is missing in the report. The issue dealt with here seems more to be whether BG can be invoked in case a dispute arises in a different contract under which no BG is furnished.
The principles for injunction against invocation remains the same. The sanctity of the Bank Guarantees, in my opinion, has not been diluted.
I don't know what was argued during the proceedings, but could have been argued differently and the judgement could also have been written differently. It could have been possible to argue that invocation of the BG on account of the dispute arising from a different contract was fraudulent, and seek an injunction on that basis. But this is only speculative, one is not aware of the facts and circumstances.
It may be useful to keep interpretations and news updates separate. Reporting must be strictly accurate, without he author's interpretation (which could be debatable).
Now on the correctness of the views expressed above, you are absolutely right in that the SC decision goes on to interpret Article 62 of the Contract. This is exactly where the SC goes absolutely wrong. In the determination of whether grounds exist for restraining BG Invocation, a court cannot go to interpret a term of contract except to determine whether there is fraud or special inequities. This seems to be the legal position in prominent jurisdictions such as England & Wales, several jusridictions in USA, etc.
Non-sensational, Gangotri couldn't have taken the fraud ground because there was no element of concealment or deliberate misrepresentation here, at least the judgement does not say so.
Now, what is the ex post impact of Gangotri: Most of the Government Contracts have a clause allowing it to recover dues from SD/ from dues to Contractor. Every time the issue regarding restraint of BG invocation comes up, the court will decide on whether the invocation sought was correct or not by going into the merits, thereby considerably delaying the effectivess of the BG as a security. Government, then, would rather prefer to have the SD amount as cash, which again would result in several tax related issues and cash flow issues to Contractors.
similar on facts with that of the case of Union of India
(DGS&D) (supra) and hence the law laid down in that
case was applicable to this case. Even in this Court,
both the learned counsel did not bring to our notice
the law laid down in Union of India (DGS&D) case
(supra).
The case referred to as Union of India (DGS&D) is Raman Iron Foundry, which as the author points out has been overuled
It appears in effect that after arguments were heard, possibly a judicial clerk found Raman Iron Foundry and on a reading of this case alone, the Court proceeded to decide the issue without even considering Kamaluddin Ansari.
Scary....
Review ? Error apparent on face of record ?
Kindly look at the Intertoll judgment of the Delhi HC (2013) wherein it was discussed to what extent Raman Iron Foundry has been overruled.
The entire judgment is not bad law. Para 25 of Intertoll says: The decision in Raman Iron Foundry was overruled in M/s. H.M. Kamaluddin Ansari & Co. v. Union of India (1983) 4 SCC 417 on another point "that the clause in the contract applied to a claim itself and not only to an amount due". However, on the nature of the claim for damages the decision in Raman Iron Foundry has not been overruled and is good law."