Bombay High Court Rules Egyptian Law Governs Counter Bank Guarantee; Lifts Injunction Restraining SBI from Honoring Payment to Beneficiary, Emphasizes Irrevocability and Independence of Bank Guarantees

1. Court’s Decision:

The Bombay High Court allowed the appeal filed by Qatar National Bank Alahli (the appellant) and set aside the ex parte injunction that the Single Judge had granted to Man Industries (the plaintiff). The injunction had restrained SBI from making payments under the Counter Bank Guarantee (CBG) to the appellant.

The court made three important rulings:

1. The CBG issued by SBI was an independent and irrevocable contract, which the court could not interfere with unless exceptional grounds like fraud or irretrievable injustice were shown.
2. The governing law for the CBG, as agreed by the parties, was Egyptian law, and therefore, the Bombay High Court lacked jurisdiction over disputes relating to the CBG.
3. The plaintiff’s arguments were unsupported by the legal principles governing bank guarantees, and the appellant was entitled to the payment under the CBG.

2. Facts:

• The Tender: Fayum Gas (an Egyptian entity) issued a global tender for the supply of steel pipes, requiring participants to provide bid bonds as part of the tender conditions.
• Man Industries’ Participation: Man Industries participated in the tender. To meet the requirement for a bid bond, they approached SBI, which arranged for a Counter Bank Guarantee (CBG) to be issued in favor of Qatar National Bank Alahli.
• The CBG Terms: The CBG was for USD 150,000, issued by SBI, and was irrevocable and unconditional. It stipulated that SBI would pay the appellant upon demand without any objections.
• Contractual Dispute: A dispute arose between Man Industries and Fayum Gas regarding the payment terms under their contract. Fayum Gas terminated the contract and invoked the bid bond issued by the appellant.
• Invocation of CBG: Following the termination, the appellant invoked the CBG issued by SBI. However, before payment could be made, Man Industries obtained an ex parte injunction from the Single Judge, restraining SBI from making payments to the appellant.

3. Issues:

The court identified three critical legal questions:

1. Whether the invocation of the CBG by the appellant was lawful under its terms.
2. Whether the ex parte injunction restraining SBI from honoring the CBG was legally justified.
3. Whether the Bombay High Court had jurisdiction over disputes involving the CBG governed by Egyptian law.

4. Petitioner’s (Appellant’s) Arguments:

• Independence of CBG: The appellant argued that the CBG was an independent and irrevocable contract between SBI and the appellant. It was separate from the underlying transaction between Man Industries and Fayum Gas.
• Violation of Legal Principles: The appellant contended that the injunction violated established legal principles, which allow courts to restrain invocation of bank guarantees only in exceptional cases of fraud or irretrievable harm.
• Jurisdiction: The appellant emphasized that the governing law clause in the CBG expressly stipulated Egyptian law, excluding the jurisdiction of Indian courts.

5. Respondent’s (Plaintiff’s) Arguments:

• Impact of Underlying Dispute: The plaintiff argued that the disputes between Man Industries and Fayum Gas should affect the validity of the CBG. Since Fayum Gas’ actions in invoking the bid bond were allegedly invalid, the CBG should not have been invoked.
• Jurisdiction: The plaintiff contended that the Bombay High Court retained jurisdiction because the CBG was issued by SBI in India.
• No Legal Injury to Appellant: It was argued that the appellant was not a “person aggrieved” under Section 13 of the Commercial Courts Act, 2015, as its rights were not affected.

6. Analysis of the Law:

• Independence of Bank Guarantees: The court highlighted that bank guarantees are independent contracts between the bank (SBI) and the beneficiary (appellant). The terms of the bank guarantee govern the rights and obligations of the parties, irrespective of disputes in the underlying transaction.
• Conditions for Injunctions: Referring to established precedents, the court reiterated that injunctions against the invocation of bank guarantees can only be granted in two scenarios:
  1. Fraud of an egregious nature that vitiates the entire transaction.
  2. Irretrievable harm or special equities, which must be proven with strong evidence.
• Jurisdiction: The court examined the governing law clause in the CBG, which provided that the guarantee would be governed by Egyptian law. It held that this clause excluded the jurisdiction of Indian courts. The court rejected the plaintiff’s argument that the clause only applied to the governing law and not the jurisdiction.

7. Precedent Analysis:

The court relied on the following judgments:

1. U.P. Cooperative Sugar Factories Federation Ltd. v. Singh Consultants & Engineers (P) Ltd.: Bank guarantees are independent contracts, and courts should not interfere except in cases of fraud or irretrievable harm.
2. Standard Chartered Bank v. Heavy Engineering Corporation Ltd.: Courts cannot restrain the invocation of bank guarantees unless the terms of the guarantee or public policy require intervention.
3. Ansal Engineering Projects Ltd. v. Tehri Hydro Development Corporation Ltd.: Injunctions must be based on exceptional grounds like fraud or irretrievable harm.

8. Court’s Reasoning:

• Validity of Invocation: The court ruled that the appellant lawfully invoked the CBG in accordance with its terms, as it was an unconditional and irrevocable guarantee.
• Jurisdiction: The governing law clause explicitly provided for Egyptian law, excluding the jurisdiction of Indian courts. The court held that it could not entertain disputes related to the CBG.
• Improper Injunction: The court criticized the Single Judge for granting an injunction without addressing the settled legal principles governing bank guarantees. It noted that the injunction deprived the appellant of its contractual rights under the CBG.

9. Conclusion:

The court quashed the injunction granted by the Single Judge and held:

1. The appellant was entitled to the proceeds of the CBG.
2. Indian courts lacked jurisdiction over the CBG, as it was governed by Egyptian law.
3. The injunction violated the principles governing bank guarantees and could not be sustained.

10. Implications:

• This judgment reinforces the principle that bank guarantees are independent contracts that must be honored according to their terms.
• It underscores the importance of jurisdiction and governing law clauses in international commercial contracts, limiting judicial interference by courts in other jurisdictions.
• It serves as a reminder that injunctions on bank guarantees are permissible only in exceptional circumstances, ensuring the sanctity of such financial instruments.

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