Indian High Court Reverses Order, Denies Injunction

In Wellington Cantonment Board v. Gharpure Engineering & Constructions, the Madras High Court (India) set aside a District Judge order of injunction against a draw on a bank guarantee.

In this case decided 12 September 2022, Wellington, a division of India’s Ministry of Defence, and Gharpure Engineering entered into a work order agreement for sewer network construction and Gharpure Engineering had a bank guarantee issued by Bank of Maharashtra, Pimpri Branch, in favor of Wellington. After a dispute arose between the contracting parties over non-payment of the contract, Gharpure Engineering pursued arbitration to decide the matter. In the meantime, Wellington, claiming that Gharpure Engineering breached its obligations, attempted to draw on the bank guarantee.

Gharpure Engineering then filed an application with the District Judge, seeking an order of injunction to restrain Wellington from drawing on the bank guarantee. The District Judge found that the issue of fraud could not be gone into as there were allegations of fraud on either side and granted the injunction order.

Noting that Gharpure Engineering was unable to impress on the Court as to how drawing on the bank guarantee would cause irretrievable injury, the High Court said: “In order to establish irretrievable injury, on account of invocation of bank guarantee, the irretrievable injury must be such that there would be no possibility whatsoever of the recovery of the amount from the beneficiary, by way of restitution.”

In the circumstances presented, the High Court held that “since there is no fraud or irretrievable injury caused to [Gharpure Engineering], the question of injuncting encashment of Bank Guarantee does not arise” and therefore the order of the District Judge is to be set aside.

Gharpure Engineering then filed an application with the District Judge, seeking an order of injunction to restrain Wellington from drawing on the bank guarantee. The District Judge found that the issue of fraud could not be gone into as there were allegations of fraud on either side. The District Judge held that there is a case made on the basis of irretrievable injury since Wellington had not paid an agreed amount to Gharpure Engineering. Accordingly an injunction was granted to prevent drawing on the bank guarantee.

The Madras High Court however rejected the irretrievable injury argument, observing that Gharpure Engineering was unable to impress on the Court as to how drawing on the bank guarantee would cause irretrievable injury. The High Court said: “In order to establish irretrievable injury, on account of invocation of bank guarantee, the irretrievable injury must be such that there would be no possibility whatsoever of the recovery of the amount from the beneficiary, by way of restitution.” In other words, while non-payment of initial agreed amount may result in a financial loss to Gharpure, drawing on the bank guarantee would not cause irretrievable injury. The High Court further clarified that the Gharpure could not plead that it was impossible to recover the amount from Wellington (an entity of the Indian Government) should it eventually succeed in having such reimbursement awarded.

In the circumstances presented, the High Court held that “since there is no fraud or irretrievable injury caused to [Gharpure Engineering], the question of injuncting encashment of Bank Guarantee does not arise” and therefore the order of the District Judge is to be set aside.

Commenting on the case to DCW, New Delhi-based trade finance specialist Ashish Madan said:

“This is a welcome judgment because not only does it support the independence principle of the bank guarantee, it also elaborates on what might constitute an irretrievable injury. It is not impossible to obtain interim injunctions against encashment of letters of credit and bank guarantees, but eventually they will most likely be set aside. It would not be wrong to state that appellants seeking to dissolve an injunction order such as in this case will likely find relief more at the High Court stage. Moreover High Courts, will not take up too much time in setting aside these injunctions.”

Madan added that there are several court judgments in India (High Court and Supreme Court as well) which support the independent nature of the LC and bank guarantee instruments. The only exceptions (which are rarely seen) are if irretrievable injury or fraud of an egregious nature is established.