Performance Securities - Legal Principles and early decisions on enforcement during COVID-19

08 五月 2020

Bank guarantees, letters of credit, pledges and other similar instruments cement commercial dealings by securing payment against default of a contract. A key aspect of such security instruments is also that they are usually exercisable at the unilateral option of the holder, in order to ensure timely cashflow, despite a pending dispute as to whether the default has occurred.

Such instruments thus play a vital role in contractual disputes; the contractual default which triggers the security, being usually disputed. In this note, we attempt to summarize the legal principles on invocation of such instruments and the ability of parties to prevent their invocation by seeking urgent relief from courts and arbitral tribunals, for example under the provisions of the Arbitration & Conciliation Act, 1996 (‘Arbitration Act’).

While courts have been largely reluctant to interfere in the invocation of such instruments, some well-intended exceptions do exist. We address the following issues in this note, in seriatim.

  • What is the general principle in respect of restraining invocation of bank guarantees and other similar instruments?
  • Are there multiple exceptions or only a single exception to this rule?
    o prima facie ‘egregious fraud’ and/or;
    o ‘irretrievable harm’
  • Injunctions based on terms of the instrument: When is an instrument ‘unconditional’?
  • Recent court decisions in light of COVID-19

I. General principle against restraining invocation of Bank Guarantees and other instruments

It is a settled proposition that instruments such as unconditional bank guarantees, or letters of credit are separate agreements from the underlying contract whose performance they secure. Being an independent (although related) instrument, the beneficiary of the instrument should be entitled to realize the amount in the bank guarantee/ letter of credit irrespective of any pending disputes in the underlying contract.

In U. P. State Sugar Corporation v. Sumac International Ltd.[1] (‘Sumac International’) the Supreme Court restated, in the context of a Bank Guarantee (which has been applied to other instruments such as letters of credit) as follows:
“The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The Courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee.”.
Although practically, the enforcement of an unconditional security instrument will depend on an event of ‘default’ under the underlying contract – the question as to occurrence of a default is usually (unless a contrary indication appears in the instrument)[2] left to the subjective unilateral decision of the guarantee-holder. Had the position been to the contrary, i.e. a default had to be established under the main contract in arbitral or civil proceedings, – the object of ensuring timely cashflow through such security would be greatly diminished.

II. Exception(s) to legal restraint: are there multiple exceptions or only a single one?

In the strongest of common law traditions, courts have carved out limited exceptions to restrain invocation of such instruments by the holder (who alleges default under the underlying contract). As is inherent in court-crafted exceptions, the scope of the same have been revisited in several judgments, with some nuanced differences in approach being visible.

The ‘exceptions’ (the plurality of the term being debatable, as will be explained below) have revolved around ‘egregious fraud’ (by the holder of the instrument) and ‘irretrievable harm’ (caused to the party against whom default is alleged, thus triggering the invocation of the instrument).

Whether both ‘egregious fraud’ and ‘irretrievable harm’ must be cumulatively satisfied – to restrain the holder from invoking the instrument, or whether either of them can be used as independent exceptions (without having to prove the other) is a fundamental question, which continues to be revisited until date.

In U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd[3] (‘Singh Consultants’) a two-judge bench of the Supreme Court took the latter view and held that that:
“An irrevocable commitment either in the form of confirmed bank guarantee or irrevocable letter of credit cannot be interfered with except in case of fraud or in case of question of apprehension of irretrievable injustice has been made out. This is the well-settled principle of the law in England. This is also a well-settled principle of law in India” (Emphasis Supplied)
Thus, the Court in Singh Consultants considered there to be two different exceptions applicable independently of each other – and approached its decision in that manner.

However, a three-judge bench of the Supreme Court subsequently in Svenska Handelsbanken v. Indian Charge Chrome[4], (‘Svenska’) made a nuanced departure from this approach. The Court adopted the result of the decision of the United States District Court of Massachusetts in Itek Corporation v. The First National Bank etc[5] (‘Itek’).

According to the Supreme Court in Svenska, the holding in Itek was based on a cumulative finding of ‘fraud’ as well as ‘irreparable harm’. In Itek the ‘fraud’ was prima facie established since the plaintiff had shown that despite a legitimate force majeure event preventing performance by plaintiff, the defendant had invoked the security instrument. However, the possibility of ‘irretrievable harm’ was also shown by the plaintiff, as the court found that even if the plaintiff could ultimately succeed against the defendant and seek a return of the amounts wrongly recovered under the guarantee, the decree against the defendant would not be executable in Iran during the US-Iran crisis. The Court in Svenska thus summarized the principle to be culled from Itek as follows:
“It is thus clear that this judgment is based on peculiar facts, particularly of situations in the Government of Iran which came into power after the revolution in Iran and its relation with the United States of America and in any case on the prima facie finding of fraud being given by the learned court read within finding of irreparable harm which could not be avoided by adequate remedy at law due to peculiar situation in Iran."(Emphasis Supplied)

Thus, according to the Supreme Court, Itek was a case where ‘irreparable harm’ had to additionally be shown (“read within”), even if ‘egregious fraud’ was prima facie proven. The Court further clarified its view by holding as follows:
“Irretrievable injury is of the nature as noticed in the case of Itek Corporation (supra). Here there is no such problem. Once the plaintiff is able to establish fraud against the suppliers or suppliers-cum-lenders and obtains any decree for damages or dimunition in price, there is no problem for affecting recoveries in a friendly country where the bankers and the suppliers are located.”

The Court thus clearly held that even fraudulent invocation of the guarantee could be adequately remedied by damages against the holder invoking the instrument. Prima face ‘fraud’ alone was therefore not sufficient and further irreparable harm had to be shown that could not be adequately remedied by subsequent damages against the holder.

The three-judge bench even (albeit subtly) noted an apparent error in the decision of the two-judges in Singh Consultants in coming to the conclusion that ‘irretrievable injustice’ was a separate exception that could independently restrain the invocation of a guarantee. In Singh Consultants, the court had relied upon the decision of the English Court of Appeal in Elian and Rabbath v Matsas and Matsas[6], for explaining the exception of as to ‘irretrievable injustice’. The 3 judges in Svenska however diluted the effect of Elian and Rabbath (as considered in Singh Consultants) thus indirectly noting a fallacy in Singh Consultants, in the following words:
“The expression ‘to prevent irretrievable injustice’ appears to have been taken from the decision of the Court of Appeal in England in the case of Elian and Rabbath …if we closely analyse the facts of that case, irretrievable injustice which was made for the basis for grant of injunction really was on the ground that the guarantee was not encashable on its terms...” (Emphasis Supplied)

The thrust of the court was thus towards diluting ‘irretrievable injustice’ as a standalone ground which could restrain a holder from invoking the instrument of guarantee. In the result, the 3 judges of the Supreme Court authoritatively observed that

Mere irretrievable injustice without prima facie case of established fraud is of no consequence in restraining the encashment of bank guarantee.”  (Emphasis Supplied)

The rationale for a strict approach requiring irretrievable injustice be shown in addition to fraud – was clearly to allow an injunction against invocation only in the most extraordinary circumstances.  This approach of a cumulative requirement of both ‘egregious fraud’ as well as ‘irretrievable justice’ does not appear to have been strictly appreciated or applied in subsequent decisions of the Supreme Court. Several decisions still refer to the two exceptions being alternative to each other.

For instance, in the case of Hindustan Steel Works Construction Ltd.  v. Tarapore and Co. and Ors[7], a two-judge bench of the Supreme Court noted that one cannot attach much importance to the use of the word "and" as used by the judges in Svenka, in referring to the two requirements. However, the use of the word “and” was only one of, and perhaps the weaker of, the indications that the judges in Svenska had referred to a cumulative requirement.

Even in Sumac International, decided after Svenska, the two judges appeared to have ignored the portions extracted above, even while specifically discussing Svenska. The approach of looking at the grounds as alternative exceptions has been further followed in later decisions, including, for instance by a three-judge bench in Ansal Engineering Projects Ltd. v. Tehri Hydro Development[8], where an entirely different formulation of the exception appears in the following terms:

irreparable injury by proof of special equity or fraud so as to invoke the jurisdiction of the Court by way of injunction to restrain the first respondent from encashing the bank guarantee.”

The most recent holding of the Supreme Court in Standard Chartered Bank v. HEC[9] continues down the path of loosely formulating the exceptions as: “There are exceptions to this Rule when there is a clear case of fraud, irretrievable injustice or special equities”.

While this may appear to be now adding even a third ground of ‘special equities’, the court in Standard Chartered referred to the decision of the three-judge bench in Ansal (supra), and thus cannot be taken as intended to have created a new ground. The thrust in Ansal (extracted above) was to view the two grounds as “irreparable injury by proof of special equity” or “irreparable injury by fraud”. Therefore, irreparable injury itself was not different from special equities. 

As a result, the holding in Svenska treating the two grounds as one cumulative exception faded away, until brought back to the fore in Dr. Singhvi’s submissions in the Delhi HC in Halliburton Offshore Services Inc. v. Vedanta 3697/2020 (‘Halliburton’). The danger posed by the phraseology in Standard Chartered was also at full display in the judgement of the single judge in Halliburton, which is dealt with in the last section of this note.

Clearly, the test to restrain invocation of guarantees and similar instruments seems to be fluid. Interestingly however, despite the academic nuances of the tests being formulated one way or the other, the fact remains that a restraining injunction was not granted in any of the cases decided by the Supreme Court noted above. 

We now answer the questions as to the scope of ‘egregious fraud’, ‘irretrievable harm’, before dealing with post-Covid19 trends in Indian courts.

III. Prima facie ‘egregious fraud’

The Supreme Court in Singh Consultants and Engineers (P) Ltd (supra) held that an egregious fraud was such that would “vitiate the entire underlying transaction”, also relying on the observations in Bolivinter Oil SA v. Chase Manhattan Bank [(1984) 1 All ER 351] (All ER at p. 352), which were as follows

 “The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear both as to the fact of fraud and as to the bank's knowledge.”

Interestingly, the exception, although recognized, has been rarely applied in any case in India, thus providing little example of a ‘fraudulent’ demand by the holder. Some guidance could be drawn, however, from foreign judgments and Indian case law deciding what will not amount to an ‘egregious fraud’.

Where the underlying dispute is as to:


Whether a ‘prima facie egregious fraud’ allowing injunction

Defects in quality of goods in the underlying contract.

Himadri Chemicals Industries v. Coal Tar Refining Company[10]



Where the fraud is only alleged with respect to a part of the consignment and not the whole.

Himadri Chemicals Industries v. Coal Tar Refining Company[11]


Delay in completion of construction contract, where the contractor alleges that an extension has already been granted.

Ansal Engineering*


Clear ‘force majeure’ in circumstances where no remedy may be ultimately available against the holder

Itek Corporation*



Compare with Halliburton (infra)

IV. ‘Irretrievable Harm’

The Supreme Court in Sumac International  has held the nature of irretrievable harm or injustice must be of the nature as laid down in Itek. In Itek, as has been discussed above, the irretrievable harm was not that loss would be caused when the guarantee money would be paid upon invocation. It was that enforcing a US decree in Iran against the holder was impossible.

The Supreme Court in the case of Hindustan Steel Works Construction Ltd.  v. Tarapore and Co. and Ors. (supra) thus noted that irretrievable injury is caused when one has no adequate remedy in law except the injunction and the allegations of irreparable harm are not speculative but genuine & immediate.[12]

V. Injunctions based on terms of the instrument: When is an instrument ‘unconditional’?

Any instrument such as a guarantee, has to be governed by its terms. In some cases, disputes thus arise as to whether the Bank Guarantee was properly invoked under the instrument of guarantee (and not based on any dispute under the underlying contract). As held in Svenska, one example of such a situation may be found in the English case of Elian and Rabbath.

The Court in the English case of Elian and Rabbath observed that the bank guarantee was given on the understanding that lien on the goods was already raised and no further lien was to be imposed by the shipowners, and that when the shipowners in breach of this understanding imposed a further lien, they were disabled from acting on the guarantee

The instrument may itself be ‘conditional’ upon the default being established under the underlying contract, thus requiring adjudication of the underlying dispute before invocation. More often than not, security instruments will be unconditional. They may, however, refer to obligations under the underlying contract, for the sake of completeness. In such cases the question arises as to when is an instrument conditional?

The Supreme Court in the case of Hindustan Construction Co v. State of Bihar and Ors[13] stated the principle as follows:

What is important, therefore, is that the bank guarantee should be in unequivocal terms, unconditional and recite that the amount would be paid without demur or objection and irrespective of any dispute that might have cropped up or might have been pending between the beneficiary under the bank guarantee or the person on whose behalf the guarantee was furnished

The Court however found that the bank guarantee in that case referred specifically to a certain clause of the underlying contract, thus requiring a default to be first adjudged under the underlying contract.

In Mahatma Gandhi Sahakra Sakkare v. NHEC[14], the Supreme Court rejected the contention that the guarantee in that case was conditional upon default being established under the underlying contract. The Court held that the general reference to the obligations under the underlying contract, without referring to a specific clause, will not make the guarantee ‘conditional’, especially where other terms of the guarantee show that the sums guaranteed were to be paid ‘without demur’ and no right was given to the guarantor to question the invocation.  

VI. Analysis of recent decisions in light of COVID-19

These principles have been considered in the recent judgments of Bombay and Delhi High Courts, in the case of Standard Retail Pvt. Ltd. v. M/s G. S. Global Corp & Ors[15] (‘Standard Retail’) and M/s Halliburton Offshore Services Inc. v. Vedanta Limited & Anr[16] (‘Halliburton’) respectively. The two judgments have been pronounced in light of the ongoing pandemic and whether it could be seen as reason for grant of injunction against the invocation of bank guarantee.

In Standard Retail, the dispute pertained to invocation of letter of credit by the exporter of steel. The Petitioners (buyers), failed to take delivery and pay for goods supplied to them by the Sellers. The Sellers accordingly invoked the LCs and the petitioner sought an injunction against such invocation by the sellers on account of the force majeure clause in the underlying contract of supply.

The petitioners pleaded that due to the outbreak of COVID and the consequent lockdown, the petitioners were not able to take delivery for onward movement of the steel and make the payment. The Court applied the general principle and held that the letters of credit constitute independent transactions with the Bank and the Bank is not concerned with underlying disputes (including force majeure disputes) between the Parties to the contract.

Thus, it was held that the assertion that the buyer could not perform its obligations due to the lockdown (whether applying force majeure or frustration) cannot be a ground for restraining the seller against invocation of letter of credit.

Contrary to the approach of the Bombay High Court in Standard Retail¸ Delhi High Court in Halliburton Offshore did consider the exceptions to the general rule and held in favour of the petitioner observing that ‘special equities’ owing to the lockdown did exist. It accordingly granted the injunction sought by petitioner for restraining invocation of the bank guarantee in question.

In Halliburton, the contract pertained to drilling of oil wells. The Respondent sought to invoke the guarantee owing to delay in completion of the project. The Petitioner however sought to restrain the invocation, asserting that the delay in completion was solely due to the lockdown and thus excused by force majeure. The Respondent argued that the delay had been caused much prior to the lockdown and disputed the Petitioner’s assertion that any pre-lockdown delay had been extended by consent of parties.

Applying the general principle, irrespective of the cause or extent of delay in the underlying contract, the invocation of the guarantee may not have been restrained, but for a case of fraud and irretrievable harm being made out. 

However, the Court read very intently in the phraseology used in Standard Chartered, (as referred to previously) to hold that ‘special equities’ was a third category of exceptions allowing an injunction other than ‘fraud’ and ‘irretrievable harm’.

It further went on to find ‘special equities’ in the current circumstances, stating that the country-wide lockdown was prima facie in the nature of force majeure – and (surprisingly, since this was clearly disputed on the facts of the case) that the force majeure appeared to be the only cause of delay.

VII. Conclusion

The Delhi High Court in Halliburton has sparked the debate regarding the scope of exceptions to the general rule for allowing injunctions on invocation of performance securities. The High Court in this case applies the exception of special equities independently, which will have to be reconciled with the ratio laid down by Supreme Court in Svenska.

The application of this principle opens up a pandora’s box as the very purpose of invocation of unconditional bank guarantees or similar instrument stands to be diluted. While ‘special equities’ as an independent exception will of course offer much flexibility to courts to restrain invocation in a given case, the apparent lack of boundaries to this ground poses a threat to the general principle. The focus of the general principle in allowing a holder to encash the instrument at will, to ensure cashflow, perhaps assumes even greater importance during the current health and economic crisis.

[The authors are members of the Commercial and Regulatory Disputes practices of Lakshmikumaran & Sridharan, New Delhi]


[1](1997) 1 SCC 568.

[2]See for instance Hindustan Construction Co v. State of Bihar and Ors (1999) 8 SCC 436.

[3](1988) 1 SCC 174.

[4](1994) 1 SCC 502.

[5] 566 Fed Supp 1210.

[6] 1966 (2) Lloyd's Report 495

[7] AIR 1996 SC 2268

[8](1996) 5 SCC 450

[9]Civil Appeal No. 9288 of 2019, decided on 18th December 2019.

[10] AIR 2007 SC 2798

[11] AIR 2007 SC 2798

[12] AIR 1996 SC 2268

[13] (1999) 8 SCC 436.

[14] (2007) 6 SCC 470.

[15] Commercial Arbitration Petition (L) No. 404-408 of 2020, Order dated 8th April 2020.

[16] O.M.P. (I) (COMM) & I.A. 3697/2020, Order dated 20th April 2020.


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