2000 (7) TMI 976 - SC - Indian Laws

Summary

Issues Involved:

1. Enforceability of the Bank Guarantee.
2. Grounds for granting unconditional leave to defend the suit.
3. Applicability of foreign court orders on the bank guarantee.
4. Legal principles governing the invocation of bank guarantees.

Issue-wise Detailed Analysis:

1. Enforceability of the Bank Guarantee:

The appellant entered into a contract for the construction of undersea pipelines and the contractor furnished a bank guarantee to cover liquidated damages. The bank guarantee was unconditional and irrevocable, obliging the respondent bank to pay the appellant on demand without demur or protest. Despite this, the respondent bank refused to honor the guarantee, citing an injunction from an Italian court and the need for reimbursement from an overseas bank. The Supreme Court emphasized that the bank guarantee was autonomous and unconditional, and the respondent bank was bound to honor it irrespective of any counter guarantee or foreign court orders. The court held that the respondent bank could not raise a defense based on the injunction granted by the Italian court or the need for reimbursement.

2. Grounds for Granting Unconditional Leave to Defend the Suit:

The High Court granted unconditional leave to defend the suit on the grounds that the notice invoking the bank guarantee did not state the amount of liquidated damages, and the arbitration proceedings and the Italian court's order were pending. The Supreme Court found these grounds insufficient, stating that the absence of a plea of fraud or irretrievable injustice meant that the bank guarantee should be enforced. The court cited previous decisions, including Hindustan Steelworks Construction Ltd. v. Tarapore & Co. and Larsen & Toubro Limited v. Maharashtra State Electricity Board, to support the principle that an unconditional bank guarantee must be honored without reference to any disputes between the parties.

3. Applicability of Foreign Court Orders on the Bank Guarantee:

The respondent bank argued that the Italian court's injunction prevented it from making payments under the bank guarantee. The Supreme Court rejected this argument, noting that the injunction related to the counter guarantee, which was a separate matter from the bank guarantee furnished to the appellant. The court emphasized that the bank guarantee was governed by Indian law and that the Foreign Exchange Manual allowed authorized dealers to make rupee payments to resident beneficiaries without prior reference to the Reserve Bank, provided reimbursement was received from the overseas bank. The court concluded that the Italian court's order did not impede the respondent bank's obligation to honor the bank guarantee.

4. Legal Principles Governing the Invocation of Bank Guarantees:

The Supreme Court reiterated the legal principles governing the invocation of bank guarantees, stating that such guarantees are autonomous and must be honored irrespective of any disputes between the parties. The court emphasized that only in cases of established fraud or irretrievable injustice could a court interfere with the enforcement of a bank guarantee. The court found no evidence of fraud or irretrievable injustice in this case and held that the respondent bank's defense was untenable. The court vacated the High Court's order granting unconditional leave to defend and dismissed the respondent bank's application for leave to defend the suit.