Court Restrains Invocation of Performance Bank Guarantee Due to Irretrievable Injustice From Revocation of Agreed Compensation

In brief

The question

1. Whether the Defendant granted compensation to the Plaintiff as recorded and agreed in writing between the parties in lieu of the loss of toll collection for 25 days.

The court held

The court held that the Plaintiff made out a prima facie case of irretrievable injustice.

It also directed

The court allowed the Interim Application and granted the injunction, restraining the Defendant from recovering ₹1,09,96,23,389/- from the Plaintiff by encashing bank guarantees or otherwise, pending the final disposal of the suit.

01Facts

The Plaintiff (a sub-concessionaire) and Defendant entered into an agreement on February 28, 2020, for the operation and maintenance of the Yashvantrao Chavan Expressway.

¶ 3

Due to the COVID-19 lockdown in March 2020, toll collection was suspended for 25 days.

¶ 5

Via letters dated April 20 and 21, 2020, the parties mutually agreed in writing to a compensation of ₹71.06 crores, to be adjusted against the Plaintiff's upfront fee payment.

¶ 6, 28-29

The Defendant subsequently declared June 18, 2020, as the "Appointed Date," acknowledging full payment satisfaction after this adjustment.

¶ 7, 31

Two years later, based on an audit query by the Accountant General (Audit-II) Maharashtra, the Defendant sought to revoke this compensation and demanded ₹1,09,96,23,389/- (principal + interest), threatening to encash the Plaintiff’s performance bank guarantees for non-payment.

¶ 9, 14-15

The Plaintiff sought an interim injunction to restrain this recovery.

¶ 1

02Issues

i.1. Whether the Defendant granted compensation to the Plaintiff as recorded and agreed in writing between the parties in lieu of the loss of toll collection for 25 days.

¶ 27

ii.2. Whether the Defendant is entitled to unilaterally reverse or revoke the grant of said compensation based on the recommendation of the Accountant General.

¶ 27

iii.3. Whether the Defendant can recover the amount by invoking unconditional performance bank guarantees.

¶ 27

03Law Applied

Settled legal principles governing the invocation of bank guarantees specify that courts should be slow to grant injunctions against unconditional bank guarantees except in cases of egregious fraud or "irretrievable harm/injustice".

¶ 35, 38

Reliance on U.P. State Sugar Corporation v. Sumac International Ltd. regarding the exceptions to the rule of non-interference.

¶ 35

Reliance on Hindustan Construction Co. Ltd v. State of Bihar regarding the requirement that invocation must be in accordance with the terms of the guarantee.

¶ 37

Reliance on Mahatma Gandhi Sahakara Sakkare Karkhane v. National Heavy Engg Coop. Ltd regarding the independence of the bank guarantee contract.

¶ 36

Provisions in the judgment · 1 · Linked ones open on LawLens

Code of Civil Procedure, 1908 Section 39

04Reasoning

The court found that the letters exchanged on April 20 and 21, 2020, constituted a "concluded contract" regarding the ₹71.06 crore compensation.

¶ 30

The Defendant had already acted upon this agreement by declaring the "Appointed Date" and recording satisfaction of the Plaintiff's financial obligations.

¶ 31, 39

The court reasoned that the Defendant could not unilaterally revoke a settled contractual benefit based on an internal audit communication/query from the Accountant General, to which the Plaintiff was not a party.

¶ 40

While the bank guarantee was unconditional, the court determined that allowing its invocation to recover an amount already settled and adjusted by written agreement would result in "serious prejudice, injustice and an irretrievable loss" to the Plaintiff.

¶ 43

The court held that the plea of irretrievable harm was not vague but supported by substantial evidence of the Defendant's own prior written commitments.

¶ 39-40