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Courts can't stop a bank guarantee from being encashed while it's still valid: Delhi High Court

The Delhi High Court has stated that a judicial order cannot be issued prohibiting the encashment of a Bank Guarantee while it is still valid. Justice Manmohan and Justice Navin Chawla of a Division Bench said, "If a cause of action emerges in the future, the Court, in our opinion, cannot enjoin the encashment of a bank guarantee while it is still effective. The term "bank guarantee" has a specific meaning and legal significance." A bank guarantee is a common method of securing payment of money in commercial transactions because the beneficiary is entitled to recover the entire amount under the Guarantee in accordance with its terms, regardless of any pending dispute between the people on whose behalf the guarantee was issued.

The Supreme Court's ruling in U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd, REED 1987 SC 11001. was cited, which said that bank guarantees must be respected without intervention from courts, or else faith in domestic and international business would be permanently harmed.

Justice Manmohan further cited a recent Supreme Court decision in the case of Andhra Pradesh Pollution Control Board v. CCL Products (India) Limited, REED 2019 SC 07007 in which the Supreme Court stated:

“23. The settled legal position which has emerged from the precedents of this Court is that absent a case of fraud, irretrievable injustice and special equities, the Court should not interfere with the invocation or encashment of a bank guarantee so long as the invocation was in terms of the bank guarantee.”

The High Court was hearing an appeal challenging an ex parte ad-interim status quo order issued by District Judge, Commercial Court-02, South-East District, Saket District Courts in relation to the encashment of Respondent No. 2 Bank Guarantees for Rs.16,20,000/-in an application filed by Respondent No. 1 under Section 9 of the Arbitration and Conciliation Act, 1996. There was also some ambiguity among the parties about the continuation of the Bank Guarantee until 31 March 2022. The Court then ordered the respondent to provide the appellant with the original extended Bank Guarantee within a week.

In light of this, the Court was disposed of not only the appeal but also the respondent no.1's Section 9 petition. However, the respondent's counsel stated that he would like to seek an injunction order from the trial court prohibiting the appellant from cashing the Bank Guarantee in question during its validity period. He called the Court's attention to an order issued by a single judge on 22 July 2021, in a similar case involving the same parties. The Court responded by saying, "At first glance, this Court believes that Bank Guarantees are not provided for photo framing and display in a drawing-room. In his ruling of 22 July 2021, the learned Single Judge used the phrase "the order has been made in view of the parties' agreement."

The Court, on the other hand, consented to give the respondent a week to file any papers he wanted to rely on. The case has been rescheduled until 13 September 2021.

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