[Chiranth Mukunda and Vikram Raj Nanda are 2nd Year BA.LLB (Hons.) Students at the National Law School of India University, Bengaluru]
In a recent decision, the Delhi High Court in Director General Project Varsha v. Navayugavanoordjv, dealt at length with the ‘special equities’ exception to the invocation of unconditional bank guarantees. Though the law in this regard is generally regarded as ‘crystal clear’, there appears to be some confusion in recent times vis a vis the existence of the ‘special equities’ ground as existing independently of the ‘irretrievable’/’irreparable’ harm standard. This confusion was apparent in the Court’s judgement, wherein it made contradictory statements.
The Court in this case was dealing with an appeal against an arbitral tribunal’s interim order granting an injunction restraining the invocation of bank guarantees on grounds of ‘special equities‘. The arbitral tribunal based its decision on the grounds that invocation would cause the aggrieved party ‘serious financial prejudice‘. Rejecting this contention, the HC categorically held that ‘serious financial prejudice‘ cannot satisfy the threshold of ‘special equities’ which exists only when invocation would result in ‘irretrievable injustice‘ (para 139). In reaching this conclusion, the Court relied on decisions of the Supreme Court in Svenska Handelsbanken v. Indian Charge Chrome and BSES Ltd. v. Fenner India Ltd, which held that ‘special equities’ must be in the form of preventing irretrievable injury or that special equities must partake the character of irretrievable injury.
This position, however, contradicts the Court’s earlier observations wherein it held that an injunction restraining invocation can be granted on one or more of three independent grounds of ‘egregious fraud‘, or ‘irretrievable injustice‘ or ‘special equities‘ (para 91). This confusion can be traced to the so-called ‘post 2019’ position resulting from the Supreme Court’s judgement in Standard Chartered Bank v. HECL which has often been relied upon (see here and here) to argue in favour of the existence of ‘special equities’ as divorced from the ‘irretrievable injustice’ threshold. This has resulted in some courts being liberal in granting injunctions restraining the invocation of bank guarantees based on an independent ground of ‘special equities’ by bringing in abstract considerations of ‘fairness’ or ‘equity’ based on the underlying transaction.
This post makes two arguments. Firstly, Standard Chartered Bank did not recognise nor could it have intended to recognise bare ‘special equities’ removed from irreparable harm requirement as an independent ground to prevent invocation bank guarantees. Secondly, this reliance on Standard Bank to construct ‘special equities’ as an independent ground of injunction is a violation the well-settled principle of autonomy of bank guarantees.
Bank Guarantees and Principle of Autonomy
Bank guarantees primarily function as risk-management tools, aimed at securing payment irrespective of underlying contractual disputes. Their utility is premised on the reliability of payment by the bank which, in turn, rests upon the judicial recognition of the independence of the bank’s obligation to pay. Essentially, this forms the autonomy principlewhich posits the underlying contractual obligations and the bank guarantee as two independent and distinct contracts. This principle has been consistently recognized by courts and forms the basis of the consistent judicial practice that the courts must be slow in granting injunctions restraining invocation of bank guarantees. This principle of autonomy also requires that in the context of irrevocable and unconditional bank guarantees, contractual terms or disputes relating to underlying contract between the parties are not relevant considerations for the refusal to allow the enforcement/encashment of the bank guarantees (Ansal Engineering Projects Ltd v. Tehri Hydro Development Corporation, para 4).
Special Equities/Irretrievable Injustice as an Exception
In this regard, the courts have, however, laid down two exceptional scenarios as alternative grounds on which an injunction restraining the invocation of bank guarantees could be granted: (1) in cases of ‘egregious fraud’ or (2) in cases where a party would suffer from ‘irretrievable’ harm or injustice upon encashment (U.P. State Sugar Corporation v. Sumac International Ltd). Even with respect to ‘egregious fraud’, courts have laid down a high threshold, requiring the fraud to be of such a nature as to vitiate the entire underlying transaction.
It is pertinent to note that the generally accepted position before Standard Chartered Bank was that it is the ‘irretrievability’ of harm that constitutes the essence of the second exception. This was emphasized in the case U.P. State Sugar Corporation where the Supreme Court held that the harm must be of an ‘irretrievable’ nature as laid down in the US case of Itek Corporation v. The First National Bank of Boston. In the backdrop of diplomatic tensions between US and Iran, the US Court upheld the American exporter’s contention that any claim for damages against the Iranian purchaser if decreed by the American courts would not be executable in Iran and under these circumstances the bank guarantee, if invoked, would cause them ‘irreparable’ harm. Drawing on this irretrievability standard, the Supreme Court held that to avail of this second exception, exceptional circumstances must be ‘decisively established’ that make it impossible for the party to reimburse himself of the amount of bank guarantee if he ultimately succeeds i.e., if restitution becomes near impossible. A mere apprehension that the other party will not be able to pay is not enough.
In U.P. Co-Operative Federation Ltd v. Singh Consultants & Engineers, the Supreme Court, drawing on English precedents labelled the second exception as ‘special equities’, specifying that it covered situations where the harm sought to be prevented was ‘irretrievable’. This linkage between special equities and the requirement showing irretrievable injustice/irreparable harm has been further recognised in many cases including, Svenska Handelsbanken v. Indian Charge Chrome, Ansal Engineering Projects Ltd. v. Tehri Hydro Development Corporation Ltd, BSES Ltd. v. Fenner India Ltd. More explicitly, the Delhi High Court in Indu Projects Ltd. v. Union Of India had observed that courts have interchangeably used the expression ‘special equities’, with expressions, such as, ‘irretrievable injury’. Therefore, the consistent position which emerges is that ‘special equities’ must be in the nature of irretrievable injustice and does not have a status of an independent ground, hence positing a higher standard for injunctive relief.
Fairness over Certainty? Relaxing the ‘Special Equities’ Standard?
This position was unambiguous until the Supreme Court in Standard Chartered Bank v. Heavy Engineering Corporation Ltd, muddled the waters with seemingly ambiguous statements. It stated that the courts may interfere in the invocation of bank guarantees in “clear case of fraud, irretrievable injustice or special equities” (para 21). This has been interpreted by some courts as recognizing three independent grounds for granting an injunction against the innovation of bank guarantees. For example, in the Delhi High Courts’ interim order in Halliburton v. Vedanta Ltd (I), it was observed that Standard Chartered Bank purported to lay down ‘special equities’ as a distinct ground from ‘irretrievable injustice’. Though the interim order was vacated in the final judgment in Halliburton v. Vedanta Ltd (II) on factual grounds, the controversy over the observations with respect to Standard Chartered Bank was not commented upon.
It is a well-settled legal principle that a court’s decision must not be read as a statute. Moreover, the above exposition is also to show that the Supreme Court in Standard Chartered Bank should have been clearer if it wished to change the consistent position of law since U.P. State Sugar Corporation. Furthermore, even the judgments relied upon in Standard Chartered Bank (Ansal Engineering Projects Ltd, Himadri Chemicals Industries Ltd v. Coal Tar Refining Company, Gujarat Maritime Board v. L&T Infrastructure Development) explicitly state that there are only two exceptions of egregious fraud and irretrievable injustice to the general rule of non-interference with invocation of bank guarantees. Therefore, Standard Chartered Bank cannot be said to have broken new ground in the law by adding ‘special equities’ as a third independent ground for granting injunctions.
Nevertheless, this judgement has caused considerable confusion as to the grounds available for restraining invocation of bank guarantees. For instance, the Delhi High Court in SES Energy Services India Ltd. v. Vedanta Ltd), conscious of overwhelming authority to the contrary, held that three grounds essentially “dovetail” into two. In another case, taking note of the conflicting views, the Delhi High Court in CRSC Research and Design Institute Group Co. v. Dedicated Freight Corridor Corpn. of India Ltd (2021) held that ‘special equities’ is but a “facet of the second exception aforesaid of irretrievable harm or injustice.”
This confusion has also led to courts lightening the burden on the party pleading ‘special equities’. For instance, in the case of Technimont Pvt Ltd v. ONGC Petro Additions (2021), the Delhi High Court took note of the apparent change in law and held that ‘special equities’ does not require proof of irretrievable injustice/ harm post the Standard Chartered Bank judgment. On the factual matrix, the petitioners had furnished bank guarantees and on resorting to arbitration, had obtained an arbitral award in their favour. The respondents had challenged the award. Pending this challenge, the petitioners sought interim measures under section 9 of Arbitration and Conciliation Act, 1996 seeking an injunction against the invocation of bank guarantees. The Court ruled ‘special equities’ in their favour, on the grounds that they had an award in their favour and that invocation would be ‘inequitable’ and ‘prejudicial’ at this stage. This is seemingly a much lower threshold than that of ‘irretrievable’ harm. It was specifically argued that restitution would not be impeded upon a final determination because the respondents were a Public Sector Undertaking. Furthermore, this violated the autonomy principle as well since the courts’ decision was based on the underlying contractual dispute rather than limiting the inquiry to the terms of the bank guarantee itself.
More recently, in BGR Energy Systems Ltd v. Chhattisgarh State Power Generation Co. Ltd (2024), the Chhattisgarh High Court, following Standard Chartered Bank, restrained encashment of bank guarantee on the grounds of ‘equity’ because the actual loss or damage was not crystalized and claims of the parties were still pending adjudication. This flies in the face of the Supreme Court’s decision in Ansal Engineering Projects that adjudication of claims is not a precondition to invoke the bank guarantee and nor is it a ground to issue injunction restraining the enforcement of bank guarantee.
Similarly, the Madras High Court in Chennai Metro Rail Ltd v. Transtonnelstroy Afcons (2021) held that ‘proportionality’ also falls within the ambit of special equities, wherein the crystallised liability is significantly lower than the value of bank guarantee. It is unclear how the Court reached this conclusion especially since ‘special equities’ requires the irretrievability standard, i.e., near impossibility of future restitution if party ultimately succeeds, not mere disproportionality between the amount of liability and amount of the bank guarantee sought to be invoked (Indu Projects Ltd. v. Union Of India). Hence, this suffers from the same interpretative ambiguity as the aforementioned cases.
The Path Forward
In conclusion, this post has tried to show that the recent incorrect interpretations of the Standard Chartered Bankjudgment have led to vague considerations of ‘equity’ or ‘fairness’ being roped into an otherwise settled position of law. This can significantly impact the certainty of encashment of bank guarantees, thereby threatening their commercial utility. To address this, the authors suggest that the correct approach, consistent with the long-established jurisprudence on bank guarantees, is to unambiguously and conclusively anchor the ‘special equities’ exception with the irretrievable injustice standard. Special equities must only be established in exceptional circumstances that are of such a nature as would override the ‘twin considerations’ of the express terms of the guarantee and the adverse effect an injunction has on the commercial dealings of the country. This approach would uphold the autonomy of bank guarantees by maintaining high thresholds for judicial intervention in encashment and ensure that the role of bank guarantees in facilitating commercial transactions is not unduly compromised by vague equity-based claims.
– Chiranth Mukunda & Vikram Raj Nanda