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Bank guarantee could not be invoked if arbitration award is challenged: HC
July, 27th 2006

The arbitration law stipulated that a bank guarantee issued in favour of a company as part of an arbitration award could not be invoked if the award itself had become inexecutable with the admission by the High Court of a petition under Section 34 of the Arbitration & Conciliation Act, 1996 challenging the award, the Madras High Court has held.

Mr Justice S. Rajeswaran, who heard an application from a Chennai-based company praying for a pro-order prohibiting Indian Overseas Bank, Chennai from paying a sum of Rs 7.8 lakh executed in favour of a firm ( Kalyanee Marine, Chennai) pending execution of the arbitration award dated March 10, 2006 against the applicant herein (IOCEE Exports Ltd), said that from the orders of the Supreme Court and a Division Bench of this Court, it was clear that the first respondent could not approach the bank to invoke the bank guarantee.

Once a petition challenging the award was admitted by the Court, the award became inexecutable, the Judge ruled.

As per the award, the applicant was directed to pay a sum of Rs 15,36,032 to the first respondent (Kalyanee Marine), and further the arbitrator directed the first respondent to invoke the bank guarantee of Indian Overseas Bank.

Challenging the award, a petition under Section 34 was filed and this Court admitted the same on July 7, 2006 and ordered private notice to the respondents. It was the case of the applicant that pending the petition, the first respondent was also attempting to invoke the bank guarantee executed by the applicant in favour of IOB. Hence the present application has been filed for injunction under Section 9 of the Act.

The Judge said that under Section 35 of the Act, an arbitration award shall be final and binding on the parties, and under Section 36, it could be enforced only after the expiry of the time for making an application under Section 34, or if an application had been made, only after it had been refused by the Court. Till such time, the award could not be enforced.

Hence, in view of the legal position, the application for restraining the bank from paying the amount covered under the bank guarantee was redundant and not maintainable.

The applicant was however directed to send a copy of this order to the bank informing them about the inexecutability of the entire award, including the direction to the bank to permit the first respondent to invoke the bank guarantee. The application was dismissed.

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