2019 (12) TMI 843 - SC - Indian Laws

Encashment/Honour of Bank Guarantee - advance against supply of plant and equipment - It is alleged that the work had to be abandoned due to which 1st respondent suffered huge losses and damages - HELD THAT - The settled position in law that emerges from the precedents of this Court is that the bank guarantee is an independent contract between bank and the beneficiary and the bank is always obliged to honour its guarantee as long as it is an unconditional and irrevocable one. The dispute between the beneficiary and the party at whose instance the bank has given the guarantee is immaterial and is of no consequence. There are, however, exceptions to this Rule when there is a clear case of fraud, irretrievable injustice or special equities. The Court ordinarily should not interfere with the invocation or encashment of the bank guarantee so long as the invocation is in terms of the bank guarantee. The guarantees in the instant case were unconditional, specific in nature and limited in amount. The terms of the guarantee categorically covered money which the 1st respondent had advanced against supply of the plant and equipment by SCIL. The said guarantees covered any loss and damage caused to or suffered by the 1st respondent-plaintiff in due performance of the contract for supply of plant and equipment - From the correspondence that has been exchanged by and between them pertaining to invocation of the said guarantees, it clearly manifests that the initial letter of invocation written by the 1st respondent-plaintiff dated 6th November, 1998 indeed was per se inadequate and did not enumerate any condition for invocation of said guarantees save and except a reference to a substantial amount to be recovered from SCIL . Once the demand was made in due compliance of bank guarantees, it was not open for the appellant Bank to determine as to whether the invocation of the bank guarantee was justified so long as the invocation was in terms of the bank guarantee. The demand once made would oblige the bank to pay under the terms of the bank guarantee and it is not the case of the appellant Bank that its defence falls in any of the exception to the rule of case of fraud, irretrievable injustice and special equities - In absence thereof, it is not even open for the Court to interfere with the invocation and encashment of the bank guarantee so long as the invocation was in terms of the bank guarantee and this what has been observed by the Division Bench of the High Court in the impugned judgment and that reflected the correct legal position. Appeal dismissed.

Summary

Issues Involved:
1. Validity of the invocation of bank guarantees.
2. Compliance with the terms of the bank guarantees.
3. Applicability of exceptions to the rule of non-interference in bank guarantees.

Issue-wise Detailed Analysis:

1. Validity of the invocation of bank guarantees:
The primary dispute arose over the invocation of two bank guarantees amounting to ?71,35,100 and ?20,32,500 furnished by the appellant bank on behalf of the second respondent in favor of the first respondent. The first respondent-plaintiff claimed that the bank guarantees were properly invoked in law, and the Division Bench of the High Court of Calcutta concurred, setting aside the Single Bench's judgment and passing a decree for ?1,10,33,207 with interest. The appellant bank contended that the invocation was not in accordance with the terms of the guarantees and was thus invalid.

2. Compliance with the terms of the bank guarantees:
The guarantees were unconditional and specific, covering losses due to non-supply, defective supply of plant and equipment, and other contractual deficiencies. The first respondent's initial invocation letter dated 6th November 1998 was inadequate, but subsequent letters dated 19th December 1998 and 28th December 1998 detailed the losses suffered due to defective and non-supply of equipment, meeting the conditions for invocation. The court held that once the demand was made in compliance with the bank guarantees, the appellant bank was obliged to honor it, as the invocation was in terms of the bank guarantees.

3. Applicability of exceptions to the rule of non-interference in bank guarantees:
The court reiterated the well-settled law that a bank guarantee is an independent contract between the bank and the beneficiary, and the bank must honor it as long as it is unconditional and irrevocable. Exceptions to this rule include cases of fraud, irretrievable injustice, or special equities. The appellant bank did not fall under any of these exceptions, and thus the court found no grounds to interfere with the invocation and encashment of the bank guarantees.

Conclusion:
The Supreme Court dismissed the appeal, affirming the Division Bench's judgment that the bank guarantees were properly invoked and directing the release of the fixed deposit amount held under the control of the High Court of Calcutta to the first respondent. The appellant bank was instructed to settle and satisfy the decree. The court emphasized the importance of honoring unconditional bank guarantees to maintain faith in commercial banking transactions and free flow of commerce.