Validity of invocation of bank guarantee to be judged on facts of each case: Supreme Court

Legitimacy of invocation of bank guarantees has always been a bone of contention between the parties who have entered into commercial arrangements. While the general view of the courts in India has been that invocation of bank guarantee should generally be not interfered by the courts when challenged, as it will defeat the purpose of such guarantees in commercial contracts. However, there is no dearth of judicial pronouncements against invocation of bank guarantees albeit in exceptional circumstances.

A bank guarantee is a written contract given by a bank on behalf of its customer. By issuing this guarantee, a bank takes responsibility for payment of a sum of money in case, if it is not paid by the customer in performance of its contractual obligations.

There are two types of bank guarantees:

  • Unconditional bank guarantee- In anunconditional bank guarantee, the bank/guarantor has to pay the guarantee amount to the beneficiary in whose favour the bank guarantee has been issued on demand, irrespective of any pending disputes;
  • Conditional bank guarantee- In a conditional bank guarantee, the bank/guarantor has to pay the guarantee amount to the beneficiary in whose favour bank guarantee has been issued on demand, only after the specific conditions for invocation in the contract are fulfilled.

The law with respect to the grant of injunction against invocation of bank guarantee has been settled by catena of judicial pronouncements. Courts have consistently held that an unconditional bank guarantee, which is an independent agreement between beneficiary and the Bank, can be invoked by the beneficiary, regardless of the disputes between the beneficiary and principal obligation (i.e. the party on whose behalf the bank guarantee has been given).

It is a settled position that invocation of unconditional bank guarantee cannot be stayed by the courts except

  • In case of fraud which would destroy the very purpose for which such bank guarantee was issued
  • In a case where encashment of the bank guarantee would result in irreparable harm or injustice to one of the parties concerned. In view of the aforesaid settled position, a party seeking stay against invocation of the bank guarantee used to find it very difficult, nay impossible, to obtain favourable order.

However, in its recent pronouncement, the Hon’ble Supreme Court of India seems to have made a paradigm shift by holding that each case of injunction against invocation of the bank guarantee has to be decided with reference to the facts involved therein. The Apex Court in Gangotri Enterprises v. Union of India held that while there can be no quarrel to the proposition laid down in the cases pertaining to encashment of bank guarantees, the same would not be applied in every case. Holding that the in the case in hand, law laid down in the case of Union of India Vs. Raman Iron Foundry was applicable, the apex court reversed the judgment of Allahabad High Court which declined to grant injunction against invocation of bank guarantee by beneficiary party.

The present ruling of the Supreme Court has widened the so far restrictive parameters with which a case of grant of injunction against bank guarantees were being consider by the courts. The Apex Court has held that facts and circumstances of the case have to be considered and the court has not to apply or follow the general propositions relating to bank guarantee cases, regardless of the facts peculiar to each case. The judgement suggests that invocation of bank guarantee is not justified merely because the party invoking the bank guarantee has some claim of damages against the party who furnished the bank guarantee. It has been held that a claim for damages is not a crystallised or ascertained amount or a sum due and payable in praesenti( meaning ‘at present’), therefore invocation of bank guarantee would not be justified on the basis of such claim which are yet to the decided by the competent forum. The court further held that bank guarantee given for searching the performance of one contract cannot be invoked for claims or disputes in another contract between the same parties. This judgment has to some extent diluted the position that an unconditional bank guarantee can be invoked regardless of the dispute between the beneficiary and the principal obligation. The Supreme Court in some ways has supplemented to the line of authority of judgments against invocation of bank guarantee by beneficiary like the Hindustan Construction Co. Ltd. v. State of Bihar, which held that the invocation of bank guarantee will have to be strictly in accordance with the terms of the contract/Bank guarantee deed.

This judgement of Gangotri Enterprises will certainly come to the rescue of litigants, primarily contractors executing work under contracts awarded by government agencies and the said agencies were exercising unbridled discretion in the matter of encashment of bank guarantees furnished by the contractor. A general belief that bank guarantees can beencashed irrespective of the main dispute between the contractor and the department, or for covering the claims for damage, which are yet to be crystallized, has been set right but this judgement. Therefore, whenever any party would seek to encash the bank guarantees provided by other party to the contract on the basis of their claims of damages, such an attempt would not be successful as a claim of damages is not a sum due and payable in present. Similarly, bank guarantee given for one contract cannot be encashed for breaches/disputes concerning to another contract.

Comments on Indian GST Reform 2016

  1. Undoubtedly the passing of the GST Constitutional Amendment Bill by Rajya Sabha is a landmark in the annals of India’s fiscal reform after independence. It is bigger than the tax reform by Raja Chelliah and Manmohan Singh, and the introduction of VAT in 2004. The Goods and Services tax unifies the Indian market for goods and services into a single market with a common tax code and hopefully a single rate (18 % RNR) on a pan India basis. It removes the barriers to the movement of goods and services within India.
  2. The tax system and administration will also be based on a superior tax design and uniform threshold limits for covering the maximum units of tax payers in the system to expand the tax base to support lower and moderate tax than an extortionate tax system. Hopefully India will hold fast to a moderate tax regime to curb the inflationary impact of a higher GST rate. To make the Indian export in the global market competitive this is a must. This has been a selling point for the GST reform which can be a game changer only if it makes our export internationally competitive.
  3. Services which constitute over 50 % of the GDP are bound to become more expensive with a higher rate of GST and this is a forbidding thought for consumers of services both at an industry and individual level. The actual impact is difficult to express at this stage.
  4. On the contra side, a poorly administered GST with the state-machinery working at cross- purposes would defeat the purpose of a single code and single rate and uniform interpretation. The dual system of GST which means a two tier Central and State assessments and collection and initiation of audits and refund processes, is fraught with the risk of local distortion in individual States and the tax payer may yet suffer from an inefficient, untrained and corrupt tax administrators. The pain of transition to a new system has been felt in Malaysia which also adopted GST recently, and the Indian experience may be hit by our own unique set of problems.
  5. The GST operates through an IT Infrastructure which is likely to be implemented and go through trial runs only after the legislations have been finally passed by the States. This is a critical component and how quickly the tax paying companies and other entities doing business can mesh their own systems into GSTN is a question of adopting new systems all across the country. One can only be optimistic and hope for the best at least in the short to medium term.
  6. Finally, the entire ecosystem in the manufacturing and service supply chain has also to fit into the requirements of GST and how quickly this is done by all the stakeholders will be a challenge that should not be underestimated for the smooth transition and implementation of the GST.
  7. It is best to avoid euphoria and to prepare for a checklist of what can go wrong so that all the players, and above all the Central and State governments, are willing and ready to intervene when bottlenecks and hurdles are encountered. This is a huge experiment on a huge scale and tax administration must be prepared to assist tax payers without the old suspicions of the past and in a genuine spirit of understanding. Remember, implementation is the key as industry and business would need a period of trial and error to adapt their systems and unless approached in the right sprit, businesses may suffer.

Indian Aviation Laws Update 2017

I INTRODUCTION

The Indian civil aviation industry is a promising sector owing to increased demand from upper midde-class, higher disposable incomes, favourable demographics and rapid economic growth. It has the prospect of becoming the third-largest aviation market by 2020 and reaching the zenith by 2030. The industry is following a progressive trajectory, paving the way for a new wave of growth and expansion with a substantial focus on low cost carriers, modern airports, foreign direct investment (FDI) in domestic airlines, information technology developments and regional connectivity. The Indian civil aviation industry is among the top 10 in the world with a value of around US $16 billion[1], which only forms a fragment of the latent potential and capabilities of the industry. With the National Civil Aviation Policy 2016, which came into effect on 15th June, 2016 r, it is necessary to analyse the current framework of the aviation sector.

The Ministry of Civil Aviation (MoCA) is responsible for the administration of the aviation industry in India. It plays a significant role in the formulation of national policies and programmes for development and regulation of civilian aviation, and for devising and implementing schemes for methodical and efficient growth of civilian air transport. The MoCA also ensures the implementation of the Aircraft Act 1934.

The following are the principal regulatory authorities of the civil aviation industry functioning under the authority of the MoCA in India: Directorate General of Civil Aviation (DGCA); Airports Authority of India (AAI); and the Airport Economic Regulatory Authority (AERA).

The DGCA is the principal establishment tasked with the responsibility of regulating civil aviation in India, including air transport services, enforcement of civil air regulations, air safety and airworthiness standards. It also coordinates all regulatory functions with the International Civil Aviation Organisation (ICAO).[2]

The AAI is a nodal organisation entrusted with the responsibility of creating, upgrading, maintaining and managing civil aviation infrastructure, both on the ground and in the country’s air space. Its responsibilities include passenger services, air navigation services, security services and managing aerodrome facilities.[3]

AERA was established in 2008 to regulate the tariff for aeronautical services rendered at major airports in India. The authority also monitors the performance standards of the established airports as set out by the central government or any other body authorised by it.[4] Its primary responsibility is to set aeronautical charges on a five-year cycle, taking into account the economic viability of an airport, in line with ICAO principles of transparency, cost-relatedness, non-discrimination and user consultation.[5]

Some of the prominent features of the civil aviation sector in India include a large number of consumers (passengers and cargo), a relatively small number of airlines with significant market share, high cost barriers to market entry, differentiated services and competitive firms affecting each other’s business decisions. These market characteristics indicate that India’s civil aviation sector has an inherent oligopolistic market structure.[6] Read More…

 

 

[1] FICCI-KPMG, Hyderabad, ‘India Aviation Report 2016’, 5th International Exhibition & Conference on Civil Aviation; India Brand Equity Foundation. Available at: http://www.ibef. org/industry/indian-aviation.aspx

[2] For the functions of the DGCA, see the Organisation Manual of the Office of the Director General of Civil Aviation (8 December 2015); http://dgca.nic.in/dgca/func-ind.htm.

[3] Organisation, Airports Authority of India; www.aai.aero/public_notices/aaisite_test/orign.jsp.

[4] Objectives and Functions, The Airports Economic Regulatory Authority; http://aera.gov.in/content/innerpage/objective–and-functions.php.

[5] Vital Role for the Airports Economic Regulatory Authority, Centre for Asia Pacific Aviation (April 2009); www.capaindia.com/PDFs/AERA per cent20April per cent2009.pdf.

[6] Report of the Committee constituted for the examination of the recommendations made in the study report on the Competitive Framework of Civil Aviation Industry in India, MoCA (June 2012); http://civilaviation.gov.in/sites/default/files/moca_001870_0.pdf.

 

 

 

Enforcement of Foreign Awards in India

Under the Arbitration and Conciliation (Amendment) Act, 2015. There are two avenues available for the enforcement of foreign awards in India, viz., the New York Convention and the Geneva Convention, as the case may be.

  1. Enforcement under the New York Convention

Sections 44 to 52 of the Arbitration and Conciliation (Amendment) Act, 2015 deals with foreign awards passed under the New York Convention.

The New York Convention defines “foreign award” as an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India, made on or after the 11th day of October, 1960-

  • In pursuance of an agreement in writing for arbitration to which the Convention set forth in the First Schedule applies, and
  • In one of such territories as the Central Government, being satisfied that reciprocal provisions have been made may, by notification in the Official Gazette, declare to be territories to which the said Convention applies.[1]

From the abovementioned conditions, it is clear that there are two pre-requisites for enforcement of foreign awards under the New York Convention. These are:

  • The country must be a signatory to the New York Convention.
  • The award shall be made in the territory of another contracting state which is a reciprocating territory and notified as such by the Central Government.

Section 47 provides that the party applying for the enforcement of a foreign award shall, at the time of the application, produce before the court (a) original award or a duly authenticated copy thereof; (b) original arbitration agreement or a duly certified copy thereof; and (c) any evidence required to establish that the award is a foreign award. As per the new Act, the application for enforcement of a foreign award will now only lie to High Court.

Once an application for enforcement of a foreign award is made, the other party has the opportunity to file an objection against enforcement on the grounds recognized under Section 48 of the Act. These grounds include:

  1. the parties to the agreement referred to in section 44 were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or
  2. the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or
  3. the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration: Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be enforced; or
  4. the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or
  5. the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.
  6. the subject-matter of the difference is not capable of settlement by arbitration under the law of India; or
  7. the enforcement of the award would be contrary to the public policy of India.

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A Conceptual Framework of Corporate Social Responsibility In India

Introduction

The tool of Corporate Social Responsibility (hereafter referred to as ‘CSR’) has been introduced under the Companies Act, 2013 (hereafter referred to as ‘CA13’), effective from April 1, 2014, to address the social obligations of the corporate world. The objective of CSR is a noble one and necessary for a robust and sustainable development. The general reaction of the corporate industry towards the reform has been positive. Various companies have undertaken extensive projects addressing the socio-economic problems, facing the society at large. In light of the reform, the present paper endeavours to provide a detailed analysis of CSR regime in India.

Framework of the Corporate Social Responsibility Under the Companies Act, 2013.

The vehicle of CSR has been driven into CA13 in order to bridge the gap of inequality and fulfil various social obligations that require certain amount of capital and other resources. CSR is basically an obligation towards the nation at large, which attempts to preclude confinement of the fruits of benefits to certain consumers or shareholders. It is a legal responsibility that casts upon a corporate body to address the umpteen number of socio-economic-environment concerns plaguing the country.

Although proper implementation of CSR will definitely add to the grandeur of the nation, detractors have questioned the need of such obligations in a nation such as India where generally all the policies of the government focus on striving socio-economic equality and development. The reason for imposing such obligations appears to be twofold, firstly, that the protracted problems of socio-economic equality and environmental concerns have proved to be chronic and secondly, the past endeavours demonstrate clearly that a greater extent of participation is needed for reaching the roots of such problems. Bringing the corporate world into the fold of socio-economic obligations would prove to be beneficial for the masses as well as the corporate world.

What is Corporate Social Responsibility?

The CSR has been defined in CA13 as projects or programs relating to activities specified in Schedule VII of CA13; or projects or programs relating to activities undertaken by the board of directors of a company in pursuance of recommendations of the CSR Committee of the Board as per declared CSR policy of the company subject to the condition that such policy will cover subjects enumerated in Schedule VII of CA13.

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[1] However, the definition is not an exhaustive one and has to be given widest possible meaning since the concept of CSR is an enabling one and based on socio-economic considerations.[1] Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 2(c).