The Delhi High Court on June 3, 2020 in the case of Bhubaneshwar Expressways Pvt. Ltd. vs. National Highways Authority of India OMP (I) (COMM.) No. 218/2019, decided upon whether the party at whose instance the bank issues the guarantee can be a third party, having no connection with the contract between the parties. 

Facts of the case:

The petitioner had furnished an unconditional and irrevocable bank guarantee dated January 13, 2020 issued by the Hongkong and Shanghai Banking Pvt. Ltd. in favour of the respondent (NHAI) for an amount of Rs.3,37,73,19,434.10/-. The bank guarantee has been issued at the request of the petitioner’s lender i.e. Arcelor Mittal India Private Limited. (“Arcelor Mittal”), to whom “debt due” amount is due and payable. Arcelor Mittal is the assignee of the debt of the petitioner.

The respondent objected to the said bank guarantee on the ground that the bank guarantee was to be furnished by the petitioner and not by any other party at its instance. Further reference was placed on the order of November 25, 2019 wherein the Delhi High Court had directed that:

“(a) Petitioner will furnish an unconditional and irrevocable Bank Guarantee in favour of NHAI undertaking to pay to the NHAI an amount of Rs.3,37,73,19,434.10/- towards the 90% of the debt due as Termination Payment within a period of two weeks from today.

(b) On furnishing of the Bank Guarantee, the respondent shall deposit the said amount in the sum of Rs.3,37,73,19,434.10/- in the escrow account, within three weeks thereafter.”

As per the respondent, the petitioner had not complied with the order of the court dated November 25, 2019. 

Case of the respondent: 

The respondent argued that Arcelor Mittal is a complete stranger to the transaction and no bank guarantee can be given at its instance which would be legal and valid. It was stressed that the bank guarantee is a contract under section 126 of the Contract Act, 1872 for which there can only be three parties, namely, the creditors, principle debtors and surety. It does not envisage a fourth party to the contract. Reliance was also placed on H.Mohd. Khan vs. Andhra Bank Limited, AIR 1983 Karnataka 73. The respondent also argued that the court cannot thrust a third party on to the respondent and hence, the bank guarantee filed by the petitioner cannot be accepted. The respondent also argued that it does not wish to deal with a stranger i.e. Arcelor Mittal. 

Court`s view: 

The court was of the view that the petitioner had to furnish an unconditional and irrevocable bank guarantee in favour of NHAI. Thereafter, NHAI will deposit the said amount in the escrow account. The encashment of the bank guarantee was subject to the final award of the arbitral tribunal. It is manifest that the bank guarantee was directed to be issued by the petitioner as a security for the payments being released by the respondent. That was the simple object of the said direction. The petitioner has given the bank guarantee. The bank guarantee is issued at the behest of Arcelor Mittal, a third party.

A perusal of the bank guarantee dated January 13, 2020 shows that the banker has undertaken to make such payment upon the beneficiary’s demand in writing without any protest, demur or cavil and without being entitled to raise any objection for any reason whatsoever. It is a normal bank guarantee and contains necessary stipulations, which are usually contained in such bank guarantees.

Also, Arcelor Mittal has filed an affidavit through its authorised representative that Arcelor Mittal will keep the bank guarantee current and valid in accordance with the orders of the court dated November 25, 2019 and December 4, 2019 till pendency of the arbitral proceedings and for a period of six months from the date of the arbitral award. 

Findings of the Court:

The court held that it is clear that the object of directing the petitioner to furnish the bank guarantee vide order dated November 25, 2019 was to secure the payment which the respondent was directed to deposit in the escrow account. The bank guarantee now furnished by the petitioner with the assistance of Arcelor Mittal, satisfies the said purpose and secures the respondent.

The court also pointed out that a bank guarantee is a contract between the bankers and the beneficiaries. The respondent for the purpose of the bank guarantee has to deal with the guarantor, namely, the bankers and not the party at the instance of whom the bank guarantee has been given.

The court further directed Arcelor Mittal to furnish on affidavit an undertaking by one of its directors stating as follows:

i. That it unconditionally would abide by the orders of this court or the arbitral tribunal pertaining to all issues relating to or arising out of bank guarantee furnished by Hongkong and Shanghai Bank in favour of the respondent.

ii. It will not in any manner seek to initiate legal proceedings challenging or opposing the orders, directions or award that may be passed by the arbitral tribunal dealing with or relating to the bank guarantee in question in any manner whatsoever.

This update has been contributed by R. Sudhinder (Senior Partner) and Ekta Bhasin (Senior Associate).