The bank guarantee is an independent contract between the bank and the beneficiary, and the liability of the guarantor is not affected by the suspension of the principal debtor's liability.

Headnote:
Bank Guarantee - Contractual Dispute - West Bengal Act XIII of 1972 - 31st March, 1987 - 23rd May, 1987 - 30-6-1989 - 30th June, 1991 - Bank Guarantee as an Independent Contract - Liability of Guarantor
Fact of the Case:

The plaintiff sought to restrain defendant No. 1 Bank from paying the amount covered under a bank guarantee dated 23rd May, 1987 to defendant No. 2 and defendant No. 2 from encashing the said bank guarantee. The plaintiff argued that the contract of performance guarantee executed by defendant No. 1 bank in favor of defendant No. 2 cannot be viewed as an independent contract and is liable to be treated as suspended under the West Bengal Act XIII of 1972.
Finding of the Court:

The court found that the contract of bank guarantee is an independent contract between the bank and the beneficiary, enforceable on its own terms independently of disputes between the parties to the main contract. The liability of a guarantor to pay the amount under the guarantee is not affected merely because the liability of the principal debtor is suspended.
Issues: The issues revolved around the independence of the bank guarantee contract, the suspension of the contract under the West Bengal Act XIII of 1972, and the liability of the guarantor when the principal debtor's liability is suspended.
Ratio Decidendi: The court held that the bank guarantee is an independent contract between the bank and the beneficiary, and the liability of the guarantor is not affected by the suspension of the principal debtor's liability.
Final Decision: The notice of motion was dismissed with no order as to costs, and the ad-interim order was vacated with immediate effect.

JUDGMENT - D.R. DHANUKA, J.:---By this notice of motion, the plaintiff seeks to restrain defendant No. 1 Bank from paying the amount covered under bank guarantee dated 23rd May, 1987 to defendant No. 2 and defendant No. 2 from encashing the said bank guarantee.

2. I must state at the outset that no case is made out by the plaintiff for grant of interim injunction and the notice of motion is liable to fail for the reasons indicated below.

3. The plaintiff-company has its registered office at Calcutta in the State of West Bengal. The plaintiff company also has its office at Nirlon House, Bombay. By a contract bearing No. NPIL/ECP/85/9/782 dated 31st March, 1987, the defendant No. 2 engaged the plaintiff as sub-contractor for carrying out erection, testing and commissioning of L.P. pipe work and tube oil unloading system at Rihand Super Thermal Power Station, Stage I, at a total value of Rs. 1,07,28,060/-. At the instance of the plaintiff, the defendant No. 1 Bank furnished a bank guarantee in the sum of Rs. 10,72,806/- in favour of defendant No. 2. The defendant No. 1 obtained a counter guarantee from the plaintiff in its turn. A copy of the said bank guarantee dated 23rd May, 1987 (performance guarantee) is annexed as Exhibit 'A' to the plaint. After reciting the abovereferred contract, it was provided in the operative part of the guarantee that the defendnat No. 1 bank guarantees and undertakes to pay to defendant No. 2 on demand "any and all monies payable by the contractor to the extent of Rs. 10,72,806/- as aforesaid at any time upto 30-6-1989 without any demur, reservation, contest, recourse of protest and/ or without any reference to the Contractor". The plaintiff is described as Contractor in the said bank guarantee. The said bank guarantee in terms provided as under :---

"Any such demand made by NPIL (defendant No. 2) on the bank shall be conclusive and binding notwithstanding any difference between NPIL and contractor or any dispute pending before any Court, tribunal, arbitrator".

4. The terms of the said bank guarantee clearly show that the 1st defendant Bank had accepted an independent obligation to pay the amount to the extent of Rs. 10,72,806/- to defendant No. 2 irrevocably on demand without any demur and without any reference to the plaintiff. The said bank guarantee has been extended till 30th June, 1991.

5. Ordinarily, no injunction can ever be granted in cases where such bank guarantees are furnished by the Bank. The categories of recognised exceptions are limited by judicial decisions of cases like that of fraud or special equities.

6. Defendant No. 2 has filed an affidavit of one Mr. B.M. Baliga, being affidavit dated 26th June 1990, setting out details of huge losses suffered by defendant No. 2 by reason of the default committed by the plaintiff. I need not summarise the contents of this affidavit for the sake of brevity. It is not the case of the plaintiff that the defendant No. 2 has invoked the said bank guarantee fraudulently or mala fide. It is obvious that the said bank guarantee is invoked bona fide.

7. The Government of West Bengal has declared the plaintiff as an unemployment relief undertaking under the West Bengal Act XIII of 1972 with effect from 11th May, 1990. In paragraph 3 of the affidavit in rejoinder the plaintiff has set out details of the notifications issued by the Government of West Bengal from time to time in this behalf, the last of such notification being Notification dated 18th March, 1991 to be operative till 9th September, 1991. Under the said notification, all contracts between the plaintiff and the third parties and all the rights, obligations and liabilities arising therefrom appear to have been suspended, excluding the following contracts :

1. Contracts, assurances of property and agreements in force immediately before the relevant date between the relief undertaking and the Government;

2. Contracts between the relief undertaking and the Industrial Reconstruction Bank of India;

3. C

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