IMPORTANT POINT
Where bank guarantee was unconditional on demand bank guarantee, bank was held bound to honour its commitment and pay amount of guarantee.

JUDGMENT

Dalveer Bhandari, J.—

1. This appeal is directed against the judgment and order dated 26.10.1999 of the High Court of Delhi at New Delhi in FAO (OS) No.81 of 1999.

2. The learned Single Judge of the High Court has taken the view that the invocation of bank guarantee was within the validity period of the bank guarantee and the bank cannot decline to make the payment. The Division Bench in the impugned judgment while dismissing the appeal has clearly observed that the bank guarantee was invoked on 19th May, 1989 within the validity period of the guarantee. The bank guarantee was merely renewed under orders of the court as there was a stay order against encashment of the bank guarantee. Once the stay order was vacated there was no question of any invocation of the bank guarantee. In the instant case, the invocation had already taken place within the validity period. Thereafter, all that was to be done was to intimate the Bank that the stay has been vacated and that now payment had to be made under the bank guarantee.

3. The Division Bench in great anguish has observed thus:

“It is surprising that a nationalized bank, which has given an unconditional on demand bank guarantee takes up such a contention. No ground to refuse payment was shown to the Lower Court or to us. It is surprising that Nationalized Bank wants to use delays of law in order not to comply with its unconditional obligations under a bank guarantee. The nationalized bank should know that it is such conduct which is adversely affecting the faith of the public in banking institutions and in transaction of bank guarantee.”

The Court dismissed the appeal with costs.

4. The nationalized bank despite the concurrent findings of both the courts and such a strong observation of the Division Bench of the High Court has still chosen to file this appeal before this Court. Even before this Court, this is not disputed that the bank guarantee was invoked within the validity period of the bank guarantee.

5. Mr. K.N. Bhat, the learned senior counsel appearing for the appellant bank submitted that there was a substituted agreement of contract, therefore, the invocation of the bank guarantee by respondent no.2 on 19th May, 1989 was of no consequence.

6. It may be relevant to mention here that after the bank guarantee was invoked, an application was filed in the court for stay of payment under the bank guarantee. To that application, the bank was not a party. Initially, an injunction was granted by the High Court on 29th May, 1989. This was on a condition that the bank guarantee should be kept alive. This injunction was confirmed on 23rd April, 1990 again 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 guarantees. Consequently, the appellant bank refused to renew the bank guarantee after 26.5.1996. Thus, the beneficiary of the bank guarantee took out an application wherein the following prayer was made:

“In the circumstances it is, therefore, most humbly and respectfully prayed that the petitioner be directed to extend the bank guarantee for an initial period of one year and the petitioner be directed to continue to extend the bank guarantees and furnish the same to the respondent at least fifteen days before the expiry till the disputes are finally adjudicated upon by arbitration and on the failure of the petitioner to renew the bank guarantees as aforesaid the respondent may be permitted to encash the above bank guarantee.”

7. As the question was whether the bank guarantee was to be renewed, notice was issued to the appellant bank to remain present in the court. This was in order to find out whether they would be willing to renew the bank guarantee. The appellant bank appeared and made it clear to the court that they were not ready to renew the bank guarantee as according to them the charges are not being