INJUNCTION AGAINST INVOCATION OF BANK GUARANTEE

The law is well settled that the court could not grant any injunction against
invocation of an unconditional bank guarantee except where fraud of egregious
nature is alleged.

Case law: Sintex oil and Gas Limited v. Union Of India

Facts :
 petitioner was awarded "S" Type Block in Cambay Basin to undertake the
exploration activities under the above mentioned agreement.
 The initial exploration period in respect of Block-1 was for a period of four
years from the effective date, i.e., 15.10.2010 to 14.10.2014. An extension
of six months was granted vide 12th MCR dated 08.10.2014 extending the
period till 14.04.2015.
 The petitioner was also granted a Petroleum Exploration license on
15.10.2014 (hereinafter referred to as PEL) validity whereof was extended
till 14.10.2017. The petitioner contends that on grant of PEL, the petitioner
floated tender for pre-seismic Environmental Impact Assessment ("EIA")
and 3D seismic data acquisition and also proceeded to appoint consultant
for this work.
 The consultant was unable to accept the proposal, a fresh tender had to be
issued where after a fresh consultant was appointed, who also refused to
carry out the work.
 It is alleged that in January 2014, the petitioner was finally able to engage
the services of a consultant and commenced the work of digging of 123
upholes, which were completed between January 2014 and March 2014.
 However, as soon as the activities were commenced, the petitioner started
getting rigid resistance from the villagers who started to obstruct / create
hurdles as the villagers were afraid that the exploratory activities to be
undertaken by the petitioner might shake the upper strata of earth dis-
balancing the water table, which was earlier experienced by them when
similar activities were undertaken by an another operator in the same area.
 The villagers further feared that the activities of the petitioner may damage
their crops resulting in loss of livelihood.
 Relying upon Article 9.1 of the agreement, it was contended that it was the
duty of the respondent no.1 to provide to the petitioner, the right to
ingress and egress from the contract area and to assist the petitioner in
procurement or commencing of facilities required for execution of work,
which the respondent nos. 1 and 2 failed to comply with.
 The petitioner further claims that various litigations were filed against it
making it impossible for the petitioner to carry out the work and the same
constituted 'force majeure' (clause article 31 of the contract).
 The petitioner claims that it kept informing the respondent no.2 regarding
the force majeure condition, however, in regard of the same and in an
arbitrary and unjustified manner, the respondent no.2 vide letter dated
30.11.2016 asked the petitioner for payment of USD 11,215,000 as
liquidated damages.
 the respondent no.1 terminated the agreement retrospectively with effect
from 14.04.2015.
 It is further submitted that the petitioner has invested an amount of Rs. 17
Crores towards the exploration operation as on 31.03.2017. As far as the
bank guarantees are concerned, the only plea of fraud or irretrievable
injustice is to be found in paragraphs 48 and 49 of the petition and same
are reproduced herein below:-

"48. Therefore, the Petitioner intends to invoke arbitration in

accordance with Article 33 of the PSC, however, unless interim protection is
granted under this petition, grave prejudice and harm will be caused to the
Petitioner. It is most respectfully submitted that the Petitioner has, at their
own cost and expenses, engaged contractors, tried to overcome the
hurdles and protests by the villagers, fight and defend multiple litigations,
and began undertaking the MWP, as nevertheless, if the termination of the
PSC is held to be valid then irretrievable injustice and injury shall be caused
to the Petitioner. The Petitioner hereby reserves its right to raise claims,
demands, costs, expenses, damages, etc. at a later stage before the Arbitral
Tribunal.
 49. That if the Respondents invoke and encash the Bank
Guarantees then irretrievable injustice and injury shall be caused to the
Petitioner. It is respectfully submitted that the Respondents' invocation/
encashment of the Bank Guarantees is fraudulent, unwarranted and
without any basis in law, and any such invocation/encashment shall
perpetuate a fraud of an egregious nature and result in irretrievable
injustice to the Petitioner".
The petitioner has prayed for the following relief.
"(a) grant an ad interim ex-parte stay on the effect and operation of the
termination letter dated 01 st September, 2017 issued by the Respondent No.1 to
the Petitioner thereby terminating the PSC dated 30th June 2010;
(b) pass ad-interim ex-parte orders restraining the Respondents from taking any
coercive or precipitate steps in respect of, or invoking, encashing,
depositing/receiving any payment

COURT OBSERVATION:
The only averments with respect to the fraud and irretrievable injustice made by
the petitioner in the petition. In my opinion, the same cannot be sufficient to
grant an injunction as per the principles laid down by the Supreme Court in the
above referred judgments and accordingly the petitioner has not made out any
case for grant of an injunction against the invocation of the bank guarantees
mentioned in the prayer (b)
The interim order granted in favour of the petitioner shall stand vacated.
The observations are only prima facie in nature and shall not be binding or
influence the final adjudication of the disputes between the parties before the
Arbitral Tribunal.
CASES REFFERED
Numerous decisions of this Court rendered over a span of nearly two decades
have laid down and reiterated the principles which the courts must apply while
considering the question whether to grant an injunction which has the effect of
restraining the encashment of a bank guarantee.
U.P. State Sugar Corporation vs M/S. Sumac International Ltd
“When in the course of commercial dealings an unconditional bank guarantee is
given or accepted, the beneficiary is entitled to realize such a bank guarantee in
terms thereof irrespective of any pending disputes. The bank giving such a
guarantee is bound to honour it as per its terms irrespective of any dispute raised
by its customer. The very purpose of giving such a bank guarantee would
otherwise be defeated. The courts should, therefore, be slow in granting an
injunction to restrain the realization of such a bank guarantee.”
Vinitec Electronics Private Ltd. v. HCL Infosystems Ltd.
The Supreme Court after relying upon various earlier judgments of the Court
reiterated that the allegation with regard to alleged breach of contract by the
Respondent is not a plea of fraud of a egregious nature so as to vitiate the entire
transaction.
Gujarat Maritime Board v. Larsen and Toubro Infrastructure Development
Projects Limited and Anr.
Supreme Court once again cautioned that the bank guarantee is a separate
contract and is not qualified by the contract under which it is given. It was held:
 The justifiability of the decision is a different matter between the appellant
and the first respondent and it is not for the High Court in a proceeding
under Article 226 of the Constitution of India to go into that question since
several disputed questions of fact are involved.(para 9)
 The bank guarantee is a separate contract and is not qualified by the
contract on performance of the obligations. But between the appellant and
the Bank, it has been stipulated that the decision of the appellant as to the
breach shall be absolute and binding on the Bank.(para 11)
 An injunction against the invocation of an absolute and an unconditional
bank guarantee cannot be granted except in situations of egregious fraud
or irretrievable injury to one of the parties concerned. This position also is
no more res integra.(para 12)
 The principles for grant or refusal to grant of injunction to restrain
enforcement of a bank guarantee or a letter of credit.(para 14)
 Between the Bank and the appellant, the moment there is a written
demand for invoking the bank guarantee pursuant to breach of the
covenants between the appellant and the first respondent, as satisfied by
the appellant, the Bank is bound to honour the payment under the
guarantee.(para13)