Delhi High Court Overturns Arbitral Tribunal’s Order, Allowing Invocation of Bank Guarantees in Naval Construction Dispute, Citing Failure to Meet Specific Requirements for Invocation and Breach Declaration

Delhi High Court Overturns Arbitral Tribunal’s Order, Allowing Invocation of Bank Guarantees in Naval Construction Dispute, Citing Failure to Meet Specific Requirements for Invocation and Breach Declaration

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Court’s Decision:

The Delhi High Court allowed the appeal, setting aside the impugned order dated 10 January 2024, passed by the Arbitral Tribunal. The High Court found that the invocation of the Bank Guarantees (BGs) by the appellant was not in accordance with the terms of the BGs and that the respondent had failed to demonstrate that special equities existed to justify an injunction against the invocation of the BGs.


Facts:

The dispute arose from a construction contract between the appellant, Director General Project Varsha of the Indian Navy, and the respondent, Navayuga-Van OORD JV, for the construction of the Outer Harbour Package at Project Varsha in Andhra Pradesh. The contract was signed on 19 December 2017, and as required, the respondent provided multiple Bank Guarantees (BGs) to secure its obligations under the contract.

Due to delays in performance, disputes arose, leading to the invocation of the BGs by the appellant. The respondent approached the Arbitral Tribunal under Section 17 of the Arbitration and Conciliation Act, 1996, seeking an interim injunction to restrain the appellant from invoking the BGs. The Tribunal granted the injunction, which was then challenged by the appellant in the Delhi High Court under Section 37 of the Arbitration and Conciliation Act.


Issues:

  1. Whether the invocation of the BGs by the appellant was in accordance with the terms of the BGs.
  2. Whether special equities existed to justify an injunction against the invocation of the BGs.

Petitioner’s Arguments (Appellant’s Arguments):

  1. The appellant argued that the respondent had defaulted on its contractual obligations, justifying the termination of the contract and the invocation of the BGs.
  2. It was submitted that the BGs were unconditional, and the respondent could not seek to restrain their invocation except in cases of egregious fraud or irretrievable harm, neither of which was present in this case.
  3. The appellant contended that the Arbitral Tribunal had wrongly concluded that the BGs were conditional and that the letters of invocation were not in accordance with the terms of the BGs.

Respondent’s Arguments:

  1. The respondent argued that the invocation of the BGs was not in accordance with the terms, as the appellant had failed to comply with the specific conditions required for invocation.
  2. It was contended that the respondent had made significant efforts to complete the project but was hindered by factors beyond its control, including the COVID-19 pandemic and issues with the original design of the project.
  3. The respondent also argued that special equities existed in the case, as invoking the BGs would cause irreparable financial harm to the respondent, especially given that the project was delayed due to reasons beyond its control.

Analysis of the Law:

The court examined the principles relating to the invocation of Bank Guarantees, particularly the conditions under which an injunction could be granted against such invocation. It reiterated that BGs are generally unconditional, and courts should be slow to interfere with their invocation except in cases of egregious fraud or irretrievable harm.


Precedent Analysis:

The court referred to several precedents, including Ansal Engineering Projects Ltd v Tehri Hydro Development Corporation Ltd, Hindustan Construction Company Ltd v State of Bihar, and Himadri Chemicals Industries Ltd v Coal Tar Refining Co, to analyze the conditions under which BGs can be invoked or restrained. These precedents established that the invocation of BGs should generally proceed unless there is a clear demonstration of fraud or irreparable harm.


Court’s Reasoning:

The court found that the letters of invocation issued by the appellant were not in conformity with the terms of the BGs. Specifically, the letters failed to meet the requirements set out in the BGs for invocation, which included specific declarations by the appellant that the respondent had breached its contractual obligations. Since these requirements were not met, the court held that the invocation of the BGs was not legally valid.

The court also rejected the respondent’s claim of special equities, stating that the respondent had failed to provide sufficient evidence that the invocation of the BGs would cause irreparable financial harm. The court noted that the respondent was a large joint venture engaged in multiple contracts and that there was no concrete evidence to suggest that it would suffer irretrievable harm if the BGs were invoked.


Conclusion:

The court concluded that the invocation of the BGs by the appellant was not in accordance with the terms of the BGs and that the respondent had failed to demonstrate any special equities justifying an injunction. Consequently, the court allowed the appeal and set aside the order of the Arbitral Tribunal that had restrained the appellant from invoking the BGs.

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