2025 (5) TMI 568 - SC - Indian Laws

Encashment of a bank guarantee - Rejection of prayer for ex parte ad interim injunction made in an application under Order XXXIX Rule 3 and Section 151 of the Code of Civil Procedure 1908 - no order of injunction could be passed without affording an opportunity of hearing to the opposite parties - High Court while exercising its supervisory jurisdiction under Article 227 of the Constitution of India can decide a matter on merits - exercise of extraordinary jurisdiction under Article 227 in a matter pertaining to the encashment of an unconditional bank guarantee - interim order passed under Order XXXIX Rule 3 CPC accompanying a Section 9 Petition under the Arbitration and Conciliation Act 1996 ought to be treated as an order passed under Section 9 proceedings or not - initiation of parallel proceedings by approaching the High Court under Article 227 of the Constitution while simultaneously invoking arbitration thereby causing delay in the arbitral process - an interlocutory order arising out of the rejection of ex parte interim stay under Order XXXIX Rule 3 CPC accompanying a Section 9 Petition under the Arbitration Act is appealable under Section 37 of the Arbitration and Conciliation Act or not - interlocutory order passed on an Order XXXIX Rule 3 application by the Commercial Court in a Section 9 arbitration petition is barred from challenge by virtue of the specific bar under Order XLIII Rule l(r) read with Section 104 CPC and is not appealable under Section 37 of the Arbitration Act thereby permitting recourse only under Article 227 of the Constitution. HELD THAT - It is the established legal principle that the Courts should refrain from interfering with the invocation of a bank guarantee except in cases of fraud of an egregious nature or in cases where allowing encashment would result in irretrievable injustice. This Court in Hindustan Construction Co. Ltd v. State of Bihar and others 1999 (10) TMI 760 - SUPREME COURT emphasized that bank guarantees serve as the backbone of commercial transactions and must be honoured in accordance with their terms. However it cannot be disputed that after hearing both sides and with the consent of the parties the High Court disposed of the writ petition by the order impugned herein inter alia stating that if the appellants were permitted to invoke the bank guarantee the prayer made in the Section 9 arbitration petition would likely become infructuous. Furthermore the High Court clearly observed that the Commercial Court shall proceed in accordance with law and adjudicate upon the prayers made in the arbitration petition on its own merits considering the pleadings and documents placed on record without being influenced by any of the observations made therein. Ultimately it was directed that the interim order restraining the appellants from encashing the bank guarantee shall remain in force until the disposal of the arbitration petition pending before the Commercial Court subject to Respondent No. 1 extending the validity of the bank guarantee - the order passed by the High Court is merely an interim measure intended to protect the interests of both parties. Admittedly Respondent No. 1 initiated arbitration proceedings to resolve the disputes with the appellants. In the Section 9 arbitration petition filed by them the arguments on behalf of Respondent No. 1 and Respondent No. 2 have already been concluded and the matter stands partly heard pending further arguments on behalf of the appellants - in view of the ongoing arbitration proceedings concerning the bank guarantee it is imperative to maintain the existing position regarding the bank guarantee until the final outcome of the Section 9 arbitration petition. Since the Section 9 arbitration petition is now ripe for arguments before the Commercial Court on behalf of the appellants the parties are directed to advance all their contentions along with necessary documents and the Commercial Court shall pass appropriate orders within a period of eight weeks thereafter. Until such time the bank guarantee shall be kept alive and shall be subject to the outcome of the Section 9 arbitration petition. Conclusion - i) Bank guarantees are independent contracts and generally enforceable without regard to underlying disputes. ii) The High Court s supervisory jurisdiction under Article 227 is extraordinary and should be exercised sparingly primarily to prevent grave injustice. iii) Interim orders restraining invocation of bank guarantees pending arbitration are permissible to protect the efficacy of arbitration proceedings. Appeal disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

The Court considered the following core legal questions:

(a) Whether the High Court, exercising its supervisory jurisdiction under Article 227 of the Constitution of India, can decide a matter on merits, particularly in the context of an interim order restraining encashment of a bank guarantee.

(b) Whether the High Court ought to exercise its extraordinary jurisdiction under Article 227 in matters concerning the encashment of an unconditional bank guarantee.

(c) Whether an interim order passed under Order XXXIX Rule 3 CPC, accompanying a Section 9 petition under the Arbitration and Conciliation Act, 1996, should be treated as an order passed under Section 9 proceedings and be challengeable under Section 37(1)(b) of the Arbitration and Conciliation Act.

(d) Whether writ jurisdiction under Article 227 can be invoked when an equally efficacious alternative remedy is available by way of an appeal under Section 37(1)(b) of the Arbitration and Conciliation Act, 1996, against the Commercial Court's order.

(e) Whether an interim application under the Code of Civil Procedure can be filed in a Section 9 petition under the Arbitration and Conciliation Act, given that the Arbitration Act is a self-contained and exhaustive code.

(f) Whether a party can initiate parallel proceedings by approaching the High Court under Article 227 while simultaneously invoking arbitration, thereby causing delay in the arbitral process.

(g) Whether an interlocutory order arising from the rejection of an ex parte interim stay under Order XXXIX Rule 3 CPC accompanying a Section 9 petition under the Arbitration Act is appealable under Section 37 of the Arbitration and Conciliation Act, and whether such an order bars recourse to the High Court under Article 227.

(h) Whether an interlocutory order passed on an Order XXXIX Rule 3 application by the Commercial Court in a Section 9 arbitration petition is barred from challenge by virtue of the specific bar under Order XLIII Rule 1(r) read with Section 104 CPC, and is not appealable under Section 37 of the Arbitration Act, thereby permitting recourse only under Article 227.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Exercise of Supervisory Jurisdiction under Article 227 in Matters of Bank Guarantee Encashment

Legal Framework and Precedents: The supervisory jurisdiction of the High Court under Article 227 is an extraordinary power to correct grave injustice or failure of justice, such as when a court or tribunal acts without jurisdiction, fails to exercise jurisdiction, or oversteps its jurisdiction. The Court referred to established principles that courts should refrain from interfering with the invocation of bank guarantees except in cases of established fraud or where irretrievable injustice would result.

Court's Interpretation and Reasoning: The High Court exercised its jurisdiction to grant an interim status quo order restraining encashment of the bank guarantee, observing that allowing invocation would render the arbitration petition infructuous. The Supreme Court noted that the High Court's order was an interim protective measure and did not decide the matter on merits. It further observed that the High Court directed the Commercial Court to proceed on merits without being influenced by the interim order.

Application of Law to Facts: The Court acknowledged that the bank guarantee was irrevocable and unconditional, but also noted the High Court's prima facie view that "special equities" in favour of Respondent No.1 existed, justifying interim protection. The Court emphasized that the interim order aimed to balance interests pending final adjudication.

Conclusions: The Court held that the High Court's exercise of supervisory jurisdiction in granting interim protection was justified as an interim measure to prevent irretrievable prejudice pending arbitration. It did not amount to deciding the matter on merits.

Issue (c), (g), and (h): Appealability of Interim Orders under Order XXXIX Rule 3 CPC in Section 9 Arbitration Proceedings

Legal Framework and Precedents: Section 9 of the Arbitration and Conciliation Act, 1996, provides for interim measures by courts. Section 37(1)(b) allows appeal against orders granting or refusing such measures. The Commercial Courts Act, 2015, and CPC provisions on appealability, including Order XLIII Rule 1(r) and Section 104 CPC, also regulate interlocutory orders.

Court's Interpretation and Reasoning: The appellants contended that any order passed under Section 9, including interim injunctions under Order XXXIX Rule 3 CPC, is appealable under Section 37(1)(b). The respondents argued that interim orders under Order XXXIX Rule 3 CPC are interlocutory and not appealable under Section 37, and that the Commercial Courts Act bars appeals or revisions against interlocutory orders.

The Supreme Court refrained from deciding these complex legal questions in this appeal, as the arbitration proceedings were ongoing and the dispute was yet to be finally adjudicated. The Court noted the importance of minimizing judicial interference in arbitration and the need to avoid parallel proceedings.

Application of Law to Facts: The Court observed that the Commercial Court had rejected the ex parte injunction application and issued notice to the appellants. The High Court's interim order was to maintain status quo pending final adjudication.

Conclusions: The Court left open the questions on appealability of such interim orders and the applicability of the bar on appeals, as the matter was still pending before the Commercial Court and the arbitral tribunal.

Issue (d) and (f): Availability of Alternative Remedies and Parallel Proceedings

Legal Framework and Precedents: It is settled law that writ jurisdiction under Article 227 should not be invoked when an equally efficacious alternative remedy exists, such as an appeal under Section 37 of the Arbitration and Conciliation Act. The Arbitration Act mandates minimal judicial intervention and discourages parallel proceedings that delay arbitration.

Court's Interpretation and Reasoning: The appellants argued that the respondent had an alternative remedy by way of appeal under Section 37 and that the High Court erred in entertaining the writ petition. The respondents contended that no appeal lay against the interim order and thus the writ petition was necessary.

The Supreme Court, while acknowledging the principle against parallel proceedings, did not conclusively rule on the availability of alternative remedies or the propriety of the writ petition, leaving the issue open for determination in the ongoing proceedings.

Application of Law to Facts: The Court noted that the respondent had invoked arbitration and simultaneously sought interim relief from courts, which could delay arbitration. However, the respondent had extended the bank guarantee and the arbitration petition was partly heard.

Conclusions: The Court emphasized the importance of expeditious arbitration and discouraged parallel litigation but did not decide on the propriety of the writ petition in this appeal.

Issue (e): Filing Interim Applications under CPC in Section 9 Arbitration Petitions

Legal Framework and Precedents: The Arbitration and Conciliation Act is a self-contained code for arbitration proceedings. The scope of filing interim applications under CPC in Section 9 petitions is debated, with some authorities holding that CPC provisions supplement the Arbitration Act unless inconsistent.

Court's Interpretation and Reasoning: The appellants contended that interim applications under CPC should not be entertained in Section 9 petitions. The respondents relied on CPC provisions to seek interim relief.

The Supreme Court did not explicitly decide this issue in the present appeal, as the focus was on the interim order and ongoing arbitration proceedings.

Conclusions: The Court left open the question of the applicability of CPC interim applications in Section 9 arbitration petitions.

Issue (i) (Implicit): Invocation and Encashment of Bank Guarantees

Legal Framework and Precedents: The Court extensively relied on settled principles from prior decisions that bank guarantees are independent contracts and must be honoured in accordance with their terms. Courts generally refrain from interfering with invocation of unconditional bank guarantees except in cases of established fraud or where irretrievable injustice would result.

Court's Interpretation and Reasoning: The Court reiterated that the bank guarantee was irrevocable and unconditional, and invocation must comply with its terms. The High Court's interim order was justified as a protective measure to prevent irretrievable prejudice pending arbitration.

Key Evidence and Findings: The appellants had issued the bank guarantee to secure advance payments. The respondent alleged delays caused by appellants and non-compliance with contractual terms by appellants. The High Court found prima facie "special equities" favouring the respondent.

Application of Law to Facts: The Court noted that the bank guarantee was extended by the respondent, ensuring no prejudice to appellants pending final adjudication.

Conclusions: The Court held that interim relief restraining invocation of the bank guarantee was justified pending arbitration, without prejudice to final adjudication on merits.

3. SIGNIFICANT HOLDINGS

"Now, a bank guarantee is the common mode of securing payment of money in commercial dealings as the beneficiary, under the guarantee, is entitled to realise the whole of the amount under that guarantee in terms thereof irrespective of any pending dispute between the person on whose behalf the guarantee was given and the beneficiary. ... It is for this reason that the courts are reluctant in granting an injunction against the invocation of bank guarantee, except in the case of fraud, which should be an established fraud, or where irretrievable injury was likely to be caused to the guarantor."

"What is important, therefore, is that the bank guarantee should be in unequivocal terms, unconditional and recite that the amount would be paid without demur or objection and irrespective of any dispute that might have cropped up or might have been pending between the beneficiary under the bank guarantee or the person on whose behalf the guarantee was furnished. The terms of the bank guarantee are, therefore, extremely material. Since the bank guarantee represents an independent contract between the bank and the beneficiary, both the parties would be bound by the terms thereof. The invocation, therefore, will have to be in accordance with the terms of the bank guarantee; or else, the invocation itself would be bad."

Core principles established include:

• Bank guarantees are independent contracts and generally enforceable without regard to underlying disputes.
• Injunctions against invocation of bank guarantees are exceptional and require established fraud or irretrievable injustice.
• The High Court's supervisory jurisdiction under Article 227 is extraordinary and should be exercised sparingly, primarily to prevent grave injustice.
• Interim orders restraining invocation of bank guarantees pending arbitration are permissible to protect the efficacy of arbitration proceedings.
• Arbitration and Conciliation Act, 1996, provides a self-contained code for interim measures and appeals under Section 37(1)(b), but questions regarding appealability of interim orders under CPC remain open.
• Parallel proceedings that delay arbitration are discouraged, and parties should utilize statutory remedies to avoid multiplicity of litigation.

Final determinations on each issue were deferred to the ongoing arbitration and Commercial Court proceedings, with the Supreme Court directing that the bank guarantee remain valid and the Commercial Court conclude the Section 9 petition expeditiously within eight weeks.