Ordinarily Courts Shouldn't Interfere With Invocation Or Encashment Of A Bank Guarantee If It Adheres To Guarantee Terms : Chhattisgarh HC

The bench of Chief Justice Ramesh Sinha and Justice Ravindra Kumar Agrawal held that the Court should not interfere with the invocation or encashment of a Bank guarantee so long as the invocation is in terms of the Bank guarantee.

The Court also relied upon on Joshi Technologies International Inc. vs. Union of India and Union of India vs. Puna Hinda where the Supreme Court held that parties must be relegated to alternate remedy before the appropriate forum in cases of contractual disputes.

The case in brief 

The Petitioner (Sutlej Textile) is a textile manufacturing company registered in Rajasthan. For its power plant, it obtained coal linkage for procuring coal from South-Eastern Coalfields Limited (SECL), a subsidiary of Coal India Ltd. Coal was being supplied to the petitioner on demand for 3-4 months.

In 2017, an e-auction for coal was conducted wherein the petitioner entered into two separate Fuel Supply Agreements (FSAs) for the supply of 17,000 MT and 9,200 MT of coal. Though the petitioner provided the required bank guarantees, the petitioner alleged that the coal was not supplied, which led to the closure of the petitioner's power plant.

Due to the closure of its power plant and facing heavy losses because of the non-supply of coal, the petitioner wrote to the respondent to cancel the agreements without any penalties.

While one agreement was terminated with the condition that Performance Security Deposited against the said agreement will be refunded subject to settlement of all dues, penalties and pending bookings, if any, the other agreement was terminated with retrospective effect, forfeiting the Security Deposit. Though the petitioner requested a refund, the respondents encashed the bank guarantees.

Essentially, SECL terminated the second agreement retrospectively, meaning they backdated the termination to March 18, 2020, even though the decision to terminate was made on June 4, 2021. This retroactive termination became the root cause of the dispute between the parties as the petitioner contended that the said termination fell within the 2-year "lock-in period" of the contract, during which, the termination typically incurs penalties.

The reason that the respondent (SECL) gave for the termination of the agreement was that any delay in coal supply or issues related to the delivery of coal cannot be blamed on them, as once the coal is allotted and the rakes (rail transport) are assigned by the Railways, the responsibility for transportation—whether by rail or road—lies with the petitioner.

SECL also stated that any delay in the transportation of the coal after allotment is not due to them, but rather due to the petitioner's handling of the transportation, which was under the petitioner's control. 

Lastly, they argued that the petitioner entirely took the decision to cancel the rakes and the reasons cited for such cancellation (inactive CPP plant, lack of unloading facilities, financial difficulties) were not attributable to SECL; thus, it claimed that these issues fell outside the scope of the FSA.

Furthermore, the respondents did not agree to reconciliation and settlement attempts made by the petitioner. Respondent rejected the petitioner's request to refund the bank guarantees, advance payments, illegal retrospective termination of the FSAs and other related matters. Consequently, the petitioner approached the High Court.

Before the HC, the petitioner argued that the retrospective termination of the FSAs was an arbitrary exercise of power by the respondent, SECL. The petitioner contended that their letter dated 03.03.2020 (to SECL) was not a termination notice but it was merely a request to cancel the FSAs without penalties due to the respondent's alleged default in meeting their obligations. The respondent erred in misinterpreting the same as a termination notice.

Thus, the petitioner contended that since the termination is retrospective and the respondents are the State authority, their action constitutes an arbitrary exercise of power. As such, the Court has jurisdiction to intervene and nullify the unlawful retrospective termination

On the other hand, SECL defended the retrospective termination of the FSAs, claiming that it was in accordance with the provisions of the FSA. They argued that the petitioner's letter was correctly interpreted as a termination request and retrospective termination was valid under the terms of the agreement.

High Court's observations

Against the backdrop of the arguments made by both parties, the Court, at the outset, found that the SECL had acted in accordance with the terms of the FSAs and the petitioner was aware of the clauses in the FSA, including the lock-in period of 2 years and that what would be the consequences of terminating the agreement before this period ended.

The court noted that the petitioner had requested the cancellation of the FSAs due to SECL's alleged failure to supply coal. Thus, the decision to terminate FSA retrospectively was in line with the petitioner's request and the FSA terms.

The Court also upheld SECL's decision to forfeit the petitioner's Performance Security Deposit as it reasoned that the termination had occurred within the 2-year lock-in period, and the FSA explicitly allowed SECL to invoke the security deposit if the purchaser (petitioner) terminates the agreement during this period for reasons other than the seller's (SECL's) default.

The Court also referred to Clause 5.8.1(a) & 5.8.1(b) of the FSA, which provided that the petitioner would be responsible for paying for the coal, even if it was not physically delivered, because the petitioner initiated the cancellation.

Furthermore, the Court relied on Joshi Technologies International Inc. vs. Union of India and Union of India vs. Puna Hinda where the Supreme Court held that parties must be relegated to alternate remedy before the appropriate forum in cases of contractual disputes.

Observing that the existence of alternate remedies must be kept in mind while dealing with contractual disputes, the bench led by Chief Justice Sinha held

“Again, the question as to whether the writ petitioner must be told off at the gates, would depend upon the nature of the claim and relief sought by the petitioner, the questions, which would have to be decided, and, most importantly, whether there are disputed questions of fact, the resolution of which is necessary as an indispensable prelude to the grant of the relief sought. Undoubtedly, while there is no prohibition, in the writ Court even deciding disputed questions of fact, particularly when the dispute surrounds demystifying of documents only, the Court may relegate the party to the remedy by way of a civil suit.”

Holding that the petitioner had failed to show arbitrariness or illegality in the rejection order of the respondent, the Court dismissed the writ petition.

Case title - Sutlej Taxtiles And Industries Limited vs. South Eastern Coal Fields Limited and others 

Case Citation :

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