Need for Judicial Proportionality - Legal Notes by Arvind Datar

Arvind Datar
Arvind Datar

The powers of the High Courts under Article 226 are extremely wide and virtually any direction can be issued to statutory authorities. The width of the power itself requires not just restraint but proportionality as well. Undoubtedly, proportionality has been used in the context of judicial review while dealing with the balancing of fundamental rights on the one hand and the restrictions imposed on the other. But there is a need for “proportionality” in the directions that are issued by the High Courts and the consequences of such directions also need to be considered.

Two weeks ago, the Calcutta High Court had to deal with an appeal where Bank of Baroda did not honour a bank guarantee given to Indian Oil Corporation Ltd. The order of the Division Bench shows that the reason for not honouring the unconditional bank guarantee was that the money had not been made available by the company (Simplex), on whose behalf the guarantee was issued.

It is also significant that the Delhi High Court had earlier refused any relief to Simplex under section 9 of the Arbitration and Conciliation Act, 1996, observing that the guarantee was unconditional and the payment could not be refused if the guarantee had been invoked.

Bank of Baroda and Indian Oil
Bank of Baroda and Indian Oil

Undoubtedly, the conduct of Bank of Baroda was improper and unsustainable. Bank Guarantees have to be honoured irrespective of whether the customer has deposited additional funds with the bank. It is the duty of any bank to pay the amount guaranteed and then recover it from the customer.

What is interesting is that IOCL, a public sector unit, protested against the conduct of Bank of Baroda and asked for an order to revoke the banking license of Bank of Baroda on the ground that its conduct was unbecoming of a nationalized bank. The Calcutta High Court, accepting the plea, directed the Reserve Bank of India to consider “what appropriate steps may be taken against the Bank of Baroda, including revoking its license or the authority to carry on banking business, if necessary”.

Calcutta High Court
Calcutta High Court

It is submitted that such a direction ought not to have been issued. If Bank of Baroda had failed to honour its bank guarantee, the proper course would be to impose costs, even heavy costs, against the bank and also against Simplex. On the other hand, the order of the Division Bench states that “there will be no order as to costs”. But it will be highly disproportionate to issue directions to the Reserve Bank to consider cancelling or revoking the banking license of one of the largest banks in India.

The consequences of such orders can be highly damaging and far reaching as RBI has no option but to comply with the direction of the Calcutta High Court. Bank of Baroda has 9500 branches and 80,000 employees and has Rs.7,82,000 crores as bank deposits. It was highly disproportionate to issue a direction to consider for revocation or cancellation of the bank’s license just because a particular branch of the bank had acted contrary to law.

In other cases as well, the High Courts have issued strong directions as a token of their displeasure at the conduct of statutory authorities. It is submitted that the proper step in such cases is to impose heavy costs or to confine directions against a particular authority, rather than issue directions that may affect an entire organization.

The need for "judicial proportionality" is even more necessary in PILs. Quite often, directions are issued that have far reaching consequences and cause collateral damage.

Read Calcutta High Court Order

Bank of Baroda - Calcutte HC Order.pdf

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