Arbitration and Conciliation Act, 1996 โ Sections 9, 37 โ Article 226 of Constitution โ Bank Guarantees โ Encashment โ Maintainability of Writ Petition โ Fairness by State Instrumentality.
Petitioner, operating duty-free shops under license agreements with Airports Authority of India (AAI), challenged AAIโs encashment of bank guarantees worth Rs. 3.96 crores amid disputes over license fees. Commercial Courtโs closure of Section 9 petition, without refusing relief, held not appealable under Section 37, making writ petition under Article 226 maintainable. AAIโs encashment post-expiry of interim stay deemed unfair, given pending arbitration and Supreme Courtโs stay on arbitratorโs appointment, causing prejudice to petitioner. Encashment constituted โinjusticeโ per precedent, warranting relief.
Held: W.P(C) No. 24021/2023 infructuous as guarantees encashed; in W.P(C) No. 7025/2025, AAI directed to deposit encashed amounts in interest-bearing fixed deposit pending arbitration. Principles of fairness under Article 14 and actus curiae neminem gravabit applied.
[Key Precedents: High Court Bar Association v. State of Uttar Pradesh (2024) 6 SCC 267; ABL International Ltd. v. Export Credit Guarantee Corporation (2004) 3 SCC 553; Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co. (2007) 8 SCC 110]
Citation: 2025 KER 31609
Case Number: W.P(C) No. 24021 of 2023 and W.P(C) No. 7025 of 2025, High Court of Kerala at Ernakulam
Judge: Honourable Mr. Justice Harisankar V. Menon
Date of Judgment: April 11, 2025
Parties:
- Petitioner: Flemingo (DFS) Private Limited
- Respondents: Airports Authority of India (AAI); ICICI Bank Limited (in W.P(C) No. 7025/2025)
Facts:
Flemingo (DFS) Private Limited operated duty-free shops at Trivandrum and Calicut International Airports under license agreements with the Airports Authority of India (AAI) until August 31, 2017. Disputes arose regarding the license fees, leading to the appointment of a sole arbitrator by the Kerala High Court. Two bank guarantees (BGs) worth Rs. 1,29,60,406/- and Rs. 2,66,93,694/- were issued in favor of AAI. When arbitration proceedings stalled, Flemingo sought a new arbitrator, but AAI demanded over Rs. 8.8 crores and threatened to encash the BGs. Flemingo obtained a 90-day injunction from the Commercial Court, Thiruvananthapuram, under Section 9 of the Arbitration and Conciliation Act, 1996, which lapsed on July 20, 2023.
Flemingo then filed W.P(C) No. 24021/2023 to restrain AAI from encashing the BGs, securing interim stays from the High Court. However, the stay expired after September 26, 2024, and AAI encashed the BGs on January 22-23, 2025. Meanwhile, a new arbitrator was appointed on June 21, 2024, but AAI challenged this before the Supreme Court, which stayed the appointment. Flemingo filed W.P(C) No. 7025/2025, seeking a declaration that the BG encashment was illegal and requesting the amounts be held in an interest-bearing fixed deposit pending arbitration.
Issues:
- Is W.P(C) No. 24021/2023 maintainable under Article 226 against the Commercial Courtโs order dated July 20, 2023?
- Was AAI justified in encashing the bank guarantees?
- What reliefs, if any, are appropriate given the encashment of the BGs?
Holding and Reasoning:
- Maintainability of W.P(C) No. 24021/2023:
- The Commercial Courtโs order closing the Section 9 petition was not a refusal to grant relief but a closure based on the mistaken belief that arbitration had commenced. Thus, it was not appealable under Section 37 of the Arbitration Act.
- Given the peculiar circumstances, the High Court held that the writ petition was maintainable under Article 226 to address the Commercial Courtโs error.
- Justification of BG Encashment:
- AAI, as a state instrumentality under the Airports Authority of India Act, 1994, is obligated to act fairly per Article 14 of the Constitution (ABL International Ltd. v. Export Credit Guarantee Corporation, 2004).
- Although the interim stay lapsed after September 26, 2024, AAI was aware of the ongoing dispute and the arbitratorโs appointment (stayed by the Supreme Court). Encashing the BGs in these circumstances was deemed unfair and prejudicial to Flemingo, especially as it could have sought relief under Section 17 of the Arbitration Act but for the Supreme Courtโs stay.
- Citing High Court Bar Association v. State of Uttar Pradesh (2024), the Court emphasized that interim orders should not lapse automatically without fault on the litigantโs part, invoking the principle actus curiae neminem gravabit (no litigant should suffer due to court delays).
- While AAI argued the BGs were irrevocable and encashable per precedent (e.g., Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co., 2007), the Court found that encashment caused โinjusticeโ to Flemingo, an exception to restraining BG enforcement.
- Reliefs Granted:
- W.P(C) No. 24021/2023 was rendered infructuous as the BGs had already been encashed.
- In W.P(C) No. 7025/2025, the Court declined to restore the BGs but directed AAI to deposit the encashed amounts (Rs. 1,29,60,406/- and Rs. 2,66,93,694/-) in an interest-bearing fixed deposit with a scheduled bank, pending resolution of the arbitration dispute. This balanced the need to protect Flemingoโs interests with the ongoing legal proceedings.
Disposition:
- W.P(C) No. 7025/2025: Allowed in part. AAI directed to deposit the encashed BG amounts in an interest-bearing fixed deposit with a scheduled bank.
- W.P(C) No. 24021/2023: Closed as infructuous.
Key Precedents Cited:
- High Court Bar Association v. State of Uttar Pradesh (2024) 6 SCC 267: Against automatic vacation of interim orders without litigant fault.
- ABL International Ltd. v. Export Credit Guarantee Corporation (2004) 3 SCC 553: State instrumentalities must act fairly under Article 14.
- Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co. (2007) 8 SCC 110: BG encashment can be restrained in cases of fraud or injustice.
- Harihar Collections v. Union of India (2020) SCC OnLine Bom 1622: Actions during pending writ petitions may be unjustified.
Significance:
The judgment reinforces the judiciaryโs role in ensuring fairness by state instrumentalities, particularly in arbitration disputes involving bank guarantees. It clarifies the scope of writ jurisdiction when statutory remedies under the Arbitration Act are inadequate and emphasizes protecting litigants from prejudice due to procedural delays or interim order expirations.