1989 (12) TMI 358 - HC - Indian Laws

Summary

Issues Involved:
1. Whether the Bank should be restrained from releasing the amount of the Bank guarantee to the Corporation during the pendency of the suit.
2. The nature and enforceability of the Bank guarantee.

Summary:

Issue 1: Restraint on Bank Guarantee Release

This petition challenges the appellate Judge's order affirming the trial Judge's decision to restrain respondent No. 3 from releasing the Bank guarantee amount to the petitioner during the suit's pendency. The National Hydro Electric Power Corporation Limited (N.H.P.C.) had invited tenders for the Chamera Project, which was allotted to National Project Construction Corporation Limited (the Corporation). The Contractor's tender was accepted, and a Bank guarantee of Rs. 5 lacs was furnished by Punjab and Sind Bank. The Corporation invoked the Bank guarantee, leading to the Contractor filing a suit for a permanent injunction to restrain the Corporation from enforcing the Bank guarantee. The trial Judge granted the injunction, which was affirmed on appeal. The Corporation then filed a revision petition.

Issue 2: Nature and Enforceability of the Bank Guarantee

The Courts below misunderstood the controversy and erroneously invoked the agreement provisions between the Corporation and the Contractor. The Bank guarantee constitutes an independent contract between the Bank and the Corporation, with an absolute obligation on the Bank to pay the amount on demand. The Bank is prohibited from raising any objections, and the demand made on the Bank is conclusive regarding the amount due. The Bank guarantee is an "autonomous" contract imposing an "absolute obligation" on the Bank, irrespective of disputes between the Contractor and the Corporation. The law is well settled that banks must honor such guarantees according to their terms, except in clear cases of fraud.

The Court cited precedents, including B.L.R. Mohan v. P.S. Co-op. S. & M. Federation Ltd., where it was held that performance guarantees are independent contracts, and banks must honor them irrespective of the underlying contract disputes. The Court also referred to the Supreme Court's ruling in United Commercial Bank v. Bank of India, emphasizing that banks' obligations under letters of credit or guarantees are independent of the underlying contracts.

The Court concluded that the Contractor cannot restrain the Bank from releasing the guaranteed amount to the Corporation. The orders of the Courts below were set aside, allowing the Corporation to enforce the Bank guarantee.

Conclusion:

The revision petition is allowed, and the Corporation is entitled to enforce the Bank guarantee.

Petition allowed.