Bank Guarantee

Last updated: 30 June 2009

Court :
Supreme Court of India

Brief :
Bank guarantee - Appellant-bank had given an unconditional on demand bank guarantee, which was invoked within its validity period - However, an application, whereof bank was not party, was filed for stay of payment under bank guarantee - High Court granted injunction on condition that bank guarantee should be kept alive and renewed - Since constituent who had obtained injunction and who was to keep bank guarantee alive did not pay charges of bank in respect of renewals of bank guarantee, bank refused to renew bank guarantee - Beneficiary of bank guarantee prayed for renewal or for payment of amount under bank guarantee - Bank refused to renew or encash bank guarantee as charges were not paid - Whether since bank guarantee had been invoked during its validity period and same was unconditional on demand bank guarantee, bank was bound to pay amount of guarantee - Held, yes

Citation :
Bank of India v. Nangia Constructions (I.) (P.) Ltd. TARUN CHATTERJEE AND DALVEER BHANDARI, JJ. CIVIL APPEAL NOS. 1315 OF 2001 AND 3592 OF 2008† MAY 15, 2008

FACTS

The appellant-bank had given an unconditional on demand bank guarantee, which was invoked within its validity period. After the bank guarantee was invoked, an application, whereof the bank was not a party, was filed for stay of payment under the bank guarantee. The High Court granted injunction on condition that the bank guarantee should be kept alive. Subsequently, the said injunction was again confirmed on the condition that the bank guarantee should be kept renewed. The constituent who had obtained injunction and who was to keep the bank guarantee alive did not pay the charges of the bank in respect of renewals of the bank guarantee. Consequently, the bank refused to renew the bank guarantee. Hence, the beneficiary of the bank guarantee filed an application praying for a direction to bank to extend the period of bank guarantee and on its failure to do so it might be permitted to encash the bank guarantee. The appellant-bank refused to renew or encash the bank guarantee as the charges were not paid. The Single Judge was of the view that since invocation of bank guarantee was within its validity period, the bank could not decline to make the payment. On appeal, the Division Bench upheld the order of the Single Judge.

On appeal to the Supreme Court :

Held

Admittedly, the bank guarantee had been invoked during its validity period. The bank guarantee was unconditional on demand bank guarantee. The bank was bound to honour its commitment and to pay the amount of guarantee.

It was unfortunate that a nationalized bank was finding excuses for refusing to make the payment on totally untendable and frivolous grounds. The Division Bench was fully justified in making observations regarding the conduct of the nationalized bank. The entire trust, faith and confidence of people depend on the conduct and credibility of the nationalized bank. In the present day world, the national and international commercial transactions largely depend on bank guarantees. In case the banks are permitted to dishonour their commitments by adopting such subterfuges, the entire commercial and business transactions would come to a grinding halt.

The appeal being devoid of any merit was, accordingly, to be dismissed.

Case Review

Decision of Delhi High Court dated 26-10-1999 in FAO (OS) No. 81 of 1999 affirmed.

Union of India v. Kishorilal Gupta & Bros. [1960] 1 SCR 493 and Makharia Bros. v. State of Nagaland [2000] 10 SCC 503 distinguished.

Cases referred to

Union of India v. Kishorilal Gupta & Bros. [1960] 1 SCR 493 and Makharia Bros. v. State of Nagaland [2000] 10 SCC 503.

K.N. Bhat, Ms. Swigin, Ms. Akanksha, Ms. Nina Gupta and Ms. Bina Gupta for the Appellant. Mrs. Ginny Jetley Rautray, Mrs. Kanchan Kaur Dhodi, Ms. Sangeeta Kumar, Ashwani Garg and Ms. Shivangi Thagela for the Respondent.