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06 December 2017

Counter-guarantee is an independent contract, separate from its underlying contract

The High Court of Delhi has held that a counter-guarantee is an independent contract, separate from its underlying contract. The Court upheld that the intentions of the parties were paramount to determining jurisdiction, and a mere omission of a technical term such as ‘only’ would not be enough to render the jurisdiction as non-exclusive.
 
In this case the Appellant (Bharat Heavy Electricals Limited) entered into a contract with the Respondent (Electricity Generation Incorporation and Ors.) at Ankara on April 21, 2015. As required by the contract, AKBank T.A.S. had furnished a performance bank guarantee to the Respondent. Bank of Baroda furnished a counter bank guarantee in favour of AKBank T.A.S. for the same amount.
 
Disputes arose between the Appellant and the Respondent, and the Respondent invoked the bank guarantee. The Appellant filed a suit for restraining encashment of the bank guarantee, and an interim injunction was passed.
 
The Appellant claimed that though the performance bank guarantee was governed by English law and had conferred exclusive jurisdiction upon the Commercial Court at London, it was impossible for the Appellant to seek relief in respect of the bank guarantees in London at such short notice.
 
 An order was passed on September 5, 2017 stating that the admissions of the Appellant were questions of fact and not law, and hence inadmissible. A second order, filed by the two banks, held that the jurisdiction was exclusively conferred upon the Commercial Court at London.
 
The Appellant submitted that the courts would normally give effect to the intention of the parties as expressed in the agreement, except when there are strong reasons to justify disregarding the contractual obligations of the parties.
 
Appellant accordingly submitted that as the two banks, namely, AKBank T.A.S. and Bank of Baroda were already present before the Delhi High Court, therefore the Delhi High Court would be the forum conveniens and court of natural jurisdiction.
 
The Court observed that the independence of a contract for guarantee simply means that the dispute concerning the bank guarantee has to be resolved in terms of the bank guarantee. A court may only injunct a bank guarantee in one of three situations, namely, fraud which vitiates the very foundation of the bank guarantee, special equities and irretrievable injury. The Court further observed that when the intention of the parties was clear and unambiguous with reference to jurisdiction of the courts, it has to be accepted.
 
The Court, thus, upheld the order passed on the September 19, 2017, holding that the counter bank guarantee given by the Bank of Baroda in favour of AKBank T.A.S. confers jurisdiction on the Commercial Courts at London and, therefore, excludes jurisdiction of other courts. Further, the performance bank guarantee was given by AKBank T.A.S. in Turkey and not in or from India. Thus, the Courts in India had no territorial jurisdiction, and the appeal was accordingly dismissed.
 
This judgment provides a critical understanding of the effect of exclusive territorial jurisdiction in commercial contracts, particularly in separate agreements from the underlying contract, which may have distinct dispute resolution provisions. In refusing to confer jurisdiction on the Indian courts, and aligning with the fact that the contracts vested jurisdiction outside India, the Court upheld the principle that the intention of the parties is essential, and cannot be abrogated.