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Abstract<\/span><\/strong><\/span><\/p>\n Section 17 of the Arbitration and Conciliation Act, 1996 was amended in the year 2015 increasing the scope of the Arbitral Tribunal to grant interim relief and reducing the power of the Court. Invocation of Bank Guarantee often requires urgent consideration and cannot wait the constitution of the Arbitral Tribunal. Hence, the affected party has to often approach the Civil Court for relief under Section 9 of the Act. Bank guarantees are perceived as instruments that not just guarantee monies or performance in a transaction but in the larger scheme of things, also fosters trust and confidence in both domestic and international trade. It\u2019s a tripartite contract which form the very fabric of trading and other business transactions and have become an integral part of the construction industry. Bank Guarantees have become an essential intrinsic factor in Construction contracts and the disputes that arise due to their invocation or the threat of. In the current article, the authors, through case laws. focus on evolving a better legal regime to deal with bank guarantee matters under Section 17 of the Act rather than through Section 9. The debate in relation to whether the law relating to bank guarantees must apply in arbitration matters is also discussed in this article.<\/span><\/p>\n <\/strong><\/p>\n Introduction<\/strong><\/span><\/p>\n Bank Guarantee is essentially a financial backstop provided by the lending establishment. It can be simply explained as a written tripartite contract granted by a bank, on behalf of its customer and in relation to its commercial contract with a third-party. By issuing this guarantee, the requisite bank takes responsibility of payment of money<\/span>in case of non-performance of contractual obligations by its customer towards the third party<\/a>. Primarily, two types of bank guarantees exist in the realm of law; Conditional and Unconditional guarantees. In the former case, the bank (guarantor) makes the payment only after requisite conditions for invocation are fulfilled. Whereas in the latter case, the guarantor makes the payment of the guarantee to the beneficiary on simply the invocation of the bank guarantee, devoid of any prerequisite conditions.<\/span><\/span><\/p>\n <\/strong><\/p>\n Law in relation to invocation of Bank Guarantees<\/strong><\/span><\/p>\n The law insofar as restraint against invocation of bank guarantee was first laid down in<\/span>UP Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd.<\/em><\/a>\u00a0as – \u201ccommitments of banks must be honoured from interference by the courts. An irrevocable commitment either in the form of confirmed bank guarantee or irrevocable letter of credit cannot be interfered with. In order to restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or of bank guarantee, there should be serious dispute and there should be good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Otherwise, the very purpose of bank guarantees would be negatived and the fabric of trading operation will get jeopardised. Upon bank guarantees revolves many of the internal trade and transactions in a country.\u201d<\/em><\/span>\u00a0<\/em><\/span><\/p>\n This position has thereafter been followed in<\/span>General Electric Technical Services Company Inc. v. M\/s. Punj Sons (P) Ltd. and Another<\/em><\/a>;<\/span>BSES Ltd. (Now Reliance Energy Ltd.) v. Fenner India Ltd. and Anr.<\/em><\/a>;<\/span> Mahatma Gandhi Sahakra Sakkare Karkhane v.<\/em> National Heavy Engg. Coop. Ltd<\/em> and Anr<\/em><\/a>.<\/em>;<\/span> \u00a0Adani Agri Fresh Ltd.<\/em> v. Mahaboob Sharif and Ors.<\/em><\/a>, among others.\u00a0<\/span><\/span><\/p>\n Bank guarantees and letters of credit are instruments that not just guarantee monies or performance in a transaction but in the larger scheme of things, also fosters trust and confidence in both domestic and international trade. \u00a0They form the very fabric of trading and other business transactions and have become an integral part of the construction industry. \u00a0Therefore, from a legal and commercial point a of view, banks are traditionally allowed to honour guarantees and letters of credit without any interference from the Courts.\u00a0<\/span><\/p>\n It is only under<\/span>special circumstances that the Courts have interfered<\/a> and carved out certain exceptions. The first<\/em> of these arises when there is observed a clear case of fraud of which the bank has notice or a fraud in the underlying contract by the beneficiary of the bank guarantee. Such fraud must be of an egregious nature in order to vitiate the entire underlying transaction. The second<\/em> exception to the general rule of non-intervention comes into play when there are special equities in favour of injunction such as when irretrievable injury or irretrievable injustice would result if such an injunction were not granted.<\/span><\/span><\/p>\n The fraud exception is established only if one is able to prove that the underlying contract was entered into by a way of fraud i.e., there was the commitment of misrepresentation by one of the parties to the contract which wrongfully induced the other party to enter into the said contract. Even at the stage of interim injunction, mere assertions made on oath is not considered sufficient. It must be supported by material particulars and evidence which clearly point out to the fraudulent misrepresentation that induced the establishment of such contract.<\/span><\/p>\n The entire basis of the law as stated above, further stresses on that banks and banking instruments must be honoured at all costs. Grant of injunction dilutes the sanctity and significance of these instruments. The Bank Guarantee is a Contract separate and distinct from the Main Contract which would contain an arbitration clause. The Courts are mindful of the fact that the Banks are third parties to the Contract and have no connection to the performance of the obligations under the Main Contract which would contain an arbitration clause and that it is open for the parties to mould the relief even if the Bank Guarantee is invoked.<\/span><\/p>\n <\/strong><\/p>\n Bank Guarantees and Construction Disputes<\/strong><\/span><\/p>\n Bank guarantees are usually sought to ensure and secure the Contractor\u2019s successful performance of his\/her obligations and to safeguard the payments made to the Contractor in advance. These are to be kept viable during the pendency of the Contract and can be invoked on the instance of breach by the Contractor. Often, the threat of invocation of the bank guarantee or the invocation of bank guarantee as a pressure tactic by the Owner has resulted in several near insolvency situations to arise for the Contractor. There is no remedy readily available to be availed by the Contractor against the same; the only course of action available to him is to raise a claim in arbitration. Even on the occurrence of the event where the Contractor were to succeed in the arbitration, the recovery of the monies at a later point in time will not offset the losses caused to the Contractor in the short term.<\/span><\/p>\n Keeping in sight the perspective of the law established around the subject of bank guarantees, the Courts are reluctant to even consider the question of<\/span>whether the invocation of bank guarantee is lawful or not under the Contract<\/a>. By treating the bank guarantee to be a separate and an independent contract between the Bank and the Owner, the possible falsity of claim in the process of invocation is blatantly ignored by the Courts. This happens because of the stringent requirement of fraud which is not met in the case of breach of contract. The Courts can also take another recourse and state that even if the invocation of the bank guarantee is improper, illegal or contrary to the terms of the Main Contract, the Contractor has the remedy of claiming damages caused due to such loss.<\/span><\/span><\/p>\n On the other side of the coin, the threat of invocation of bank guarantee sometimes also results in stifling genuine claims of the Contractors. In some cases, the Contractor is hesitant to correspond regarding genuine claims and in other cases, they will sign a no due or a no claim certificate. This is a direct consequence of the law relating to bank guarantees.<\/span><\/p>\n Recently, it has been observed that the position of law is being diluted in England and in Singapore. In<\/span>Simon Carves Limited v. Ensus UK Limited<\/em><\/a>,<\/em> the English Technology and Construction Court examined the terms of the Main Contract and on the basis of the finding that the security had become null and void once the acceptance certificate had been issued, granted an injunction against invocation. Upon review of authorities, the Court evolved the following principles:<\/span><\/span><\/p>\n Additionally, while dealing with the aspect of balance of convenience, the Court asserted that damages fail to act as an adequate remedy against unlawful invocation of bank guarantees. The Court held that \u2018the calling of the bond as in this case gives rise to a very real risk of damage to the commercial reputation, standing and creditworthiness of SCL which would be very difficult to quantify; there would be a very real risk that SCL would not pre-qualify for tenders because often tenderers have to disclose whether there have been recent calls on the bonds and if so on what grounds.<\/em>\u2019<\/span><\/p>\n This risk is very real in India as well as most Notice inviting tenders prescribe a somewhat similar pre-qualification criteria wherein the Contractors have to certify if their Contracts have been terminated anywhere or if Earnest Money Deposit or other security has been forfeited in any Contract.<\/span><\/p>\n The Hon\u2019ble Supreme Court in the case of<\/span>Gangotri Enterprises Ltd. v. Union of India<\/em><\/a> was of the view that the \u2018sum due\u2019 must be understood to be a sum which is already determined and cannot be invoked towards damages. The Supreme Court restrained the Owner from invoking the Bank Guarantee with respect to claims arising under another Contract. For the purpose of this, the Court relied on the dicta which defined the terms of the Bank guarantee which referred to \u2018sum due\u2019 and interpreted it to mean only under the Contract with respect to the bank guarantee and not of any other Contract. The Court also observed that no arbitration proceedings were initiated with respect to the claim. Hence, there was no sum due. The Supreme Court was concerned with the invocation of an unconditional guarantee by the Respondent on account of payments due with respect to a contract different than that contract under which the bank guarantee was furnished in addition to a claim of damages for the breach of contract. The Appellant had fulfilled his obligations under the contract, raised claims and the following arbitration proceedings were pending. In such circumstances, the Supreme Court applied the dicta opined in<\/span>Union of India v. Raman Iron Foundry<\/em><\/a> and held that damages are not a \u2018sum due\u2019 under the contract but only a claim which has to be adjudicated before it becomes a \u2018sum due\u2019. The Supreme Court therefore held that the Respondent was not entitled to invoke the bank guarantee and granted injunction restraining the same.<\/span><\/span><\/p>\n However, this judgment was held to be per incuriam in<\/span>State of Gujarat v. Amber Builders<\/em><\/a>. The basis of holding Gangotri as per incuriam was because Raman Iron Foundry<\/em> had been overruled by<\/span>H.M. Kamaluddin Ansari v. Union of India<\/em><\/a>.<\/em><\/span><\/span><\/p>\n Therefore, the entire debate circles back to the contention that a bank guarantee can be invoked at any point in time, even to claim damages or amounts which are due under any other Contract. There cannot be an injunction against the Bank but if we were to file an application before the Arbitral Tribunal, would the Arbitral Tribunal be bound by the same restrictions as a Court?<\/span><\/p>\n <\/strong><\/p>\n Carving an Exception under Section 17 of the A & C Act<\/strong><\/span><\/p>\n Section 17 pursuant to the 2015 Amendment to the Arbitration and Conciliation Act (hereinafter referred to as \u2018A&C Act\u2019) holds powers to secure the amount under dispute. In furtherance of this, it is possible to direct the Contractor to deposit the equivalent amount or a portion thereof or to furnish security for the amount due if the Tribunal senses the necessity. Similarly, under Section 17, whether it would be possible for the Tribunal to avoid the applicability of the general law in relation to invocation of bank guarantees is a moot question.<\/span><\/p>\n The Bank is not a party to the arbitration. The injunction will be to restrain the opposite party from invoking the Bank Guarantee. This injunction does not in any manner fall foul of the above stated law laid down by the Supreme Court. Injunction against invocation of the Bank Guarantee is a permissible relief under the Specific Relief Act. Even if the opposite party has invoked the Bank Guarantee, the entire amount can be attached or secured in an appropriate manner by the Tribunal in exercise of powers under Section 17. It is to be noted that the powers under Section 17 are much broader than the powers granted to a Court under Section 9 of the Act. Further, the order passed under Section 17 is appealable under Section 37 only on limited grounds which relates to jurisdiction of the Tribunal to pass such an order. This is because the grounds for challenge of an interim order cannot be beyond the grounds prescribed under Section 34 as the interim order would ultimately merge with the Final Award.<\/span><\/p>\n The Tribunal would first be required to decide as to whether there exists a breach or not and if there is a breach, whether the beneficiary is entitled to any amount or not. This prima-facie adjudication aids the Tribunal in arriving at the true controversy between the parties. The merits of passing such an award cannot be questioned in Section 17 or Section 37 proceeding for the reasons as mentioned above.<\/span><\/p>\n The rationale for evolving a separate law relating to invocation of the bank guarantee in relation to arbitration is as below: The invocation of bank guarantees before the Tribunal arrives at such a finding, amounts to pre-judging the matter by the beneficiary under the bank guarantee. Such a situation also results in multiplicity of claims inasmuch as the other party would then have to raise a claim for wrongful invocation of the bank guarantee or for recovery of the amounts realized under the bank guarantee if the tribunal finds that there is no breach of the contract as contended by the beneficiary. This can also result in multiplicity of proceedings inasmuch as a fresh claim would have to be raised etc. This would frustrate the arbitration proceedings.<\/span><\/p>\n\n