The Chhattisgarh High Court reaffirmed a crucial principle of commercial law, holding that courts should generally refrain from interfering with the invocation or encashment of bank guarantees as long as the invocation adheres to the terms of the guarantee. This decision came in the case of Sutlej Textiles and Industries Limited v. South Eastern Coalfields Limited, where the petitioner challenged the forfeiture of bank guarantees and advance payments following the retrospective termination of a Fuel Supply Agreement (FSA).
Background of the Dispute
Sutlej Textiles and Industries Limited (STIL), which operates the Rajasthan Textile Mills, had entered into two FSAs with South Eastern Coalfields Limited (SECL) in 2017 and 2019 to secure coal supplies for its captive power plant (CPP). However, STIL alleged that SECL failed to supply coal in a timely manner, leading to severe operational disruptions and financial losses.
Citing these issues, STIL requested the cancellation of the FSAs in March 2020. SECL subsequently terminated one of the agreements retroactively to March 18, 2020, and invoked the bank guarantees provided by STIL under the terms of the agreement. Aggrieved, STIL filed a writ petition challenging the retrospective termination and the invocation of bank guarantees.
Key Legal Issues
1. Invocation of Bank Guarantees: The petitioner argued that the invocation was unjustified as SECL failed to fulfill its obligations under the FSAs.
2. Retrospective Termination: The retrospective termination of the FSA was challenged as arbitrary and a violation of natural justice.
3. Judicial Review in Contractual Disputes: The court examined whether it should exercise its extraordinary jurisdiction under Article 226 of the Constitution in a matter primarily involving a private contract.
Court’s Observations
A division bench comprising Chief Justice Ramesh Sinha and Justice Ravindra Kumar Agrawal dismissed the petition, emphasizing the established legal principle that bank guarantees represent independent contracts between the bank and the beneficiary.
“Ordinarily, the court should not interfere with the invocation or encashment of a bank guarantee so long as the invocation is in terms of the guarantee,” the bench observed, quoting precedents from the Supreme Court.
The court referred to Andhra Pradesh Pollution Control Board v. CCL Products (2019) and Hindustan Construction Co. Ltd. v. State of Bihar (1999), reiterating that exceptions to this principle arise only in cases of fraud, irretrievable injustice, or special equities.
On the issue of retrospective termination, the court found that SECL’s actions were in accordance with the terms of the FSA, particularly Clause 17.1, which allowed termination during the lock-in period under specific conditions. The petitioner’s claims of arbitrariness and procedural violations were dismissed as unsubstantiated.
Judgment
The court ruled that:
– SECL’s invocation of the bank guarantees complied with the terms of the FSAs and was not arbitrary.
– The petitioner failed to demonstrate fraud, irretrievable harm, or procedural unfairness to warrant judicial intervention.
– Contractual disputes should generally be resolved through civil remedies or arbitration, as outlined in the agreement, rather than invoking writ jurisdiction under Article 226.
The court concluded that “the petitioner has not demonstrated any arbitrariness, unfairness, illegality, or unreasonableness in the impugned order dated October 13, 2023.”
Representation and Case Details
The petitioner, Sutlej Textiles, was represented by Advocate Ankit Singhal, while SECL was represented by Advocate Astha Shukla. Deputy Solicitor General Ramakant Mishra appeared for the Railways, which was also named as a respondent. The case, numbered WPC No. 1102 of 2024, was heard by the court on January 15, 2025.
