Case Note & Summary
The petitioner, M/s. Cipel, a construction company, filed a writ petition under Article 226 of the Constitution of India before the High Court of Judicature at Bombay seeking to restrain Respondent No. 1, Indian Oil Corporation Ltd (IOCL), from invoking and encashing a bank guarantee dated 17 September 2018 for Rs. 1,86,37,000.00, and also to restrain termination of the contract work order dated 18 September 2018 and forfeiture of security deposit of Rs. 5,59,10,738.00. The petitioner had been awarded a contract for civil and development works at Atchutapuram, Andhra Pradesh, with a total contract value of Rs. 74,54,55,380.87. The security deposit was partly paid by bank guarantee and partly to be recovered from running bills. Disputes arose between the parties regarding the performance of the contract, leading IOCL to terminate the contract by letter dated 17 October 2020 and seek to invoke the bank guarantee. The petitioner contended that the termination was wrongful and that the bank guarantee should not be invoked as the claims were disputed. The court, after hearing the parties, noted that the bank guarantee had not yet been encashed and that the dispute regarding the underlying contract was pending. The court held that an injunction against invocation of a bank guarantee can be granted only in cases of fraud or irretrievable injustice, but in the present case, since the guarantee was not encashed and the dispute was pending, the court could grant interim protection to maintain status quo. The court also observed that the contract did not contain a clear forfeiture clause for the security deposit upon termination. Accordingly, the court restrained IOCL from invoking the bank guarantee and from forfeiting the security deposit, and directed that the status quo be maintained pending further orders. The court also directed the petitioner to deposit the amount of the bank guarantee in court or furnish an equivalent bank guarantee to secure the amount.
Headnote
A) Contract Law - Bank Guarantee - Injunction against Invocation - Unconditional Bank Guarantee - The court considered whether an unconditional bank guarantee can be restrained from invocation when the underlying contract is disputed and the guarantee has not been encashed. Held that an injunction against invocation of a bank guarantee can be granted only in cases of fraud or irretrievable injustice, but where the guarantee is not encashed and the dispute is pending, the court may grant interim protection to maintain status quo. (Paras 1-14) B) Contract Law - Termination of Contract - Forfeiture of Security Deposit - Disputed Claims - The court examined whether the termination of a contract and forfeiture of security deposit can be restrained when the claims are disputed and the contract does not contain a clear forfeiture clause. Held that where the contract does not expressly provide for forfeiture of security deposit upon termination, the court may restrain such forfeiture pending adjudication of disputes. (Paras 4-14)
Issue of Consideration
Whether the invocation of an unconditional bank guarantee can be restrained by the court when there is a dispute regarding the underlying contract and the guarantee is not encashed before the injunction order.
Final Decision
The court restrained Respondent No. 1 from invoking and encashing the bank guarantee and from forfeiting the security deposit, and directed that status quo be maintained pending further orders. The court also directed the petitioner to deposit the amount of the bank guarantee in court or furnish an equivalent bank guarantee to secure the amount.
Law Points
- Bank Guarantee
- Invocation
- Injunction
- Contract Termination
- Security Deposit
- Forfeiture
- Disputed Claims
