Delve into the intricacies of a court’s decision on the substitution of a bank guarantee in a recent legal case. The focus is on the court’s detailed legal analysis and interpretation of relevant laws and regulations. Understanding the rationale behind such directives is essential in comprehending the legal landscape. Stay tuned for insights into the legal complexities involved in this case.
Facts
- The appeals are against the dismissal of the Appeal filed by the Appellant under Section 37 of the Arbitration and Conciliation Act 1996
- The order dated 16.05.2019 refused to recall the order directing the Appellant to substitute the Bank Guarantee issued by ICBC with a Bank Guarantee of a Scheduled Indian Bank
- The Appellant filed a Review Petition which was also dismissed by the Division Bench
- The Appellant incurred significant expenditure for furnishing the Bank Guarantee and had funds frozen in their account with ICBC in China
- The Respondent filed an application seeking directions on the Appellant to secure the amount of the Arbitral Award
- On 12.02.2019, the Commercial Court ordered the Appellant to provide a Bank Guarantee of Rs.30 Crores from a Scheduled Bank in India.
- Later, on 09.04.2019, the Court asked the Appellant to replace the Bank Guarantee from ICBC with an equivalent amount from an Indian Scheduled Bank.
- On 16.05.2019, the application to dismiss this order was rejected by the Single Bench, clarifying that their intention was not to question ICBC’s credentials.
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Issue
- High Court refused to accept a valid irrevocable Bank Guarantee of Rs.30 Crores issued by ICBC, a Scheduled Bank in India
- High Court insisted on a fresh Bank Guarantee from a ‘Scheduled Indian Bank’
- Appellant incurred expenses in obtaining the Bank Guarantee from ICBC
- Appeals limited to the legality of the High Court’s direction to substitute the Bank Guarantee
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Arguments
- Mr. Abhishek Manu Singhvi, Senior Counsel for the respondents, failed to demonstrate any real prejudice caused by furnishing a Bank Guarantee from ICBC over Scheduled Indian Banks.
- No plausible reason was provided for preferring Scheduled Private Sector Banks in India over Scheduled Foreign Banks like ICBC.
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Analysis
- The senior Counsel representing the Respondent vehemently objected to the Bank Guarantee of ICBC, arguing that the Appellant had initially offered a Bank Guarantee of a Scheduled Indian Bank but retracted from the offer.
- The confusion arose due to the direction to furnish a Bank Guarantee of a Scheduled Bank located in India.
- The Court did not define ‘Scheduled Indian Bank’ in the RBI Act, and it may include Indian branches of Scheduled Banks.
- The Appellant filed an appeal to replace the ICBC Bank Guarantee with a Bank Guarantee of a Scheduled Indian Bank.
- The Registrar of the High Court verified the ICBC Bank Guarantee and found it valid till 19.03.2020.
- ICBC is listed as a Scheduled Foreign Bank in India and is governed by RBI and Banking Regulation Act provisions.
- The Court’s direction for a Bank Guarantee of a Scheduled Bank in India was legally sound.
- URDG 758 regulates demand guarantees and counter-guarantees, although not legally binding unless incorporated by parties.
- The appeal for review of the Court’s Order was dismissed, and the direction to replace ICBC’s Bank Guarantee stood.
- The Court compared ICBC with other Scheduled Indian Banks to emphasize its credibility in the commercial market.
- The Division Bench upheld the appealability of the order requiring a Bank Guarantee of a Scheduled Indian Bank.
- The Bank Guarantee by ICBC was found to be unconditional, subject to URDG 2010 Revision.
- The Court’s direction was intended to align with the offer made by the Appellant on a Bank Guarantee of a Scheduled Indian Bank.
- ICBC’s high ranking in global banking lists was cited to support its reliability.
- The Court has the discretion to insist on a Bank Guarantee from a specific bank class to protect the beneficiary’s interests.
- The legal validity of the Court’s order was affirmed, and the review application was rejected.
- There was no typographical error in the Court’s order according to the findings on 16.05.2019.
- Any company engaged in manufacturing goods or carrying on trade that accepts deposits of money is considered a banking company according to the Banking Regulation Act, 1949 and the RBI Act.
- The definition of a banking company includes companies that transact banking business in India.
- The High Court erred in directing the Appellant to replace the Bank Guarantee of ICBC without any adverse material against ICBC’s financial soundness.
- High Court’s directive disregarded practical difficulties in obtaining a Bank Guarantee from new banks and the costs already incurred by the Appellant.
- Complying with the order dated 09.04.2019 may have saved costs, but the initial expenditure of Rs. 30 lakhs was already incurred.
- Invocation of the Bank Guarantee only requires an order from the High Court relating to the Arbitral Award.
- The Bank Guarantee, subject to the URDG, is not conditional and does not prejudice the beneficiary.
- The High Court’s alteration of the direction after the Appellant’s compliance and expenditure was not justified.
Decision
- The impugned judgment and order of the Division Bench dated 27.11.2020 in FAO(OS) (COMM) No 136 of 2019 and orders dated 09.04.2019 and 16.05.2019 in OMP (I) (COMM) 523/2017 are set aside.
- The appeal from the impugned judgment and order of the Division Bench dated 27.11.2020 in FAO(OS) (COMM) No 136 of 2019 is allowed.
Case Title: SEPCO ELECTRIC POWER CONSTRUCTION CORPORATION Vs. POWER MECH PROJECTS LTD. (2021 INSC 417)
Case Number: C.A. No.-004936-004937 / 2021
