Summary
The Commercial Court refused an ex parte ad interim injunction against encashment of a bank guarantee sought in an application under Order XXXIX Rule 3 CPC within a Section 9 arbitration petition; the High Court, under Article 227, stayed encashment until disposal of the Section 9 petition. The Supreme Court declined to decide the questions of law raised (maintainability of the Article 227 petition in view of Section 37(1)(b) of the Arbitration Act, and interference with an unconditional bank guarantee), leaving them open, because the High Court's order was only an interim measure protecting both sides, the arbitration was under way, and the guarantee was being kept alive; it directed the Commercial Court to decide the Section 9 petition within eight weeks.
Issues
- Whether the High Court could, under Article 227 of the Constitution, interfere with the Commercial Court's refusal of an ex parte injunction against encashment of a bank guarantee when an appeal under Section 37(1)(b) of the Arbitration and Conciliation Act, 1996 was said to be available.
- Whether an order on an Order XXXIX Rule 3 CPC application filed in a Section 9 petition is an order refusing an interim measure under Section 9, appealable under Section 37(1)(b), or is barred from challenge under Order XLIII Rule 1(r) read with Section 104 CPC.
- Whether the High Court ought to have interdicted encashment of an unconditional bank guarantee in the absence of fraud or special equities.
- Whether a party may pursue parallel proceedings under Article 227 while simultaneously invoking arbitration.
Provisions considered
- Section 9, Arbitration and Conciliation Act, 1996The respondent's petition for interim measures restraining termination and encashment of the bank guarantee was pending and partly heard before the Commercial Court. The Court maintained the existing position regarding the bank guarantee until the final outcome of that petition and directed the Commercial Court to decide it within eight weeks after hearing the appellants. (¶¶ 3.7, 12, 13, 14, 15)
- Section 37(1)(b), Arbitration and Conciliation Act, 1996The appellants argued that an order refusing ex parte interim relief in a Section 9 petition is an order refusing 'any measure under Section 9' and hence appealable, excluding Article 227; the respondent argued the appeal lies only against a final order under Section 9. The Court left this question open without deciding it. (¶¶ 4, 4.3, 5.3, 7, 14)
- Article 227, Constitution of IndiaThe High Court exercised supervisory jurisdiction to stay encashment of the bank guarantee pending the Section 9 petition. Whether that jurisdiction could be invoked given the alleged alternative remedy, and whether the High Court could decide the matter on merits, were among the questions left open; the order was treated as a mere interim measure to protect both parties. (¶¶ 2, 4.1, 7, 10, 12, 14)
- Order XXXIX Rule 3, Code of Civil Procedure, 1908The Commercial Court rejected the respondent's prayer for an ex parte ad interim injunction, observing that no injunction could be granted without hearing the opposite parties, and issued notice. Whether such an order in a Section 9 petition is appealable under the Arbitration Act or challengeable only under Article 227 was argued but not decided. (¶¶ 2, 3.7, 7, 10)
Held
- Courts should refrain from interfering with the invocation of a bank guarantee except in cases of fraud of an egregious nature or where allowing encashment would result in irretrievable injustice; as held in Hindustan Construction Co. v. State of Bihar, bank guarantees are the backbone of commercial transactions and must be honoured in accordance with their terms. (¶ 11)
- The High Court's order, passed after hearing both sides and with the parties' consent, was merely an interim measure to protect the interests of both parties: it recorded that permitting encashment would likely render the Section 9 petition infructuous, directed the Commercial Court to decide the petition on its own merits uninfluenced by its observations, and continued the restraint only until disposal of the petition and subject to the respondent extending the bank guarantee. (¶ 12)
- With arbitration proceedings under way (an Arbitral Tribunal constituted and the Section 9 petition partly heard), the bank guarantee renewed till 30.06.2025 and counsel's undertaking to keep it alive until disposal of the Section 9 petition, no prejudice was caused to the appellants for the present. The Court therefore did not decide the legal issues raised and left them open. (¶¶ 13, 14)
Result
Appeal disposed of without deciding the questions of law, which are left open. Parties directed to advance all contentions with documents before the Commercial Court in the Section 9 petition, which shall pass appropriate orders within eight weeks thereafter; until then the bank guarantee to be kept alive, subject to the outcome of the Section 9 petition. No costs; connected miscellaneous applications closed.