Important Points
1. Where bank guarantee was furnished by the Bank to the Chief Engineer but the guarantee was invoked by the Executive Engineer, it was held that the invocation was wholly wrong and the Bank was under no obligation to pay the amount covered by the guarantee.
2. Where Bank in the Bank guarantee referring to clause in original agreement between the contractor and employer qualified its liability to pay amount covered by the guarantee only if obligation under contract were not fulfilled, the bank guarantee could not be said to be unconditional so as to refuse grant of injunction against invocation of the guarantee by the employer.

Headnote:(i) Bank guarantee-Injunction against invocation of-Condition precedent to grant-Bank guarantee referring to clause in original agreement between contractor and employer qualified its liability to pay amount covered by guarantee only if obligation under contract were not fulfilled-Hence, bank guarantee could not be said to be unconditional-Employer did not have unfettered right to invoke guarantee and demand immediate payment-Further lapse was on part of defendant (employer) who did not possess sufficient funds for completion of work-Single Judge of High Court rightly granted injunction.
       A Bank Guarantee is the common mode of securing payment of money in commercial dealings as the beneficiary, under the Guarantee, is entitled to realise the whole of the amount under that Guarantee in terms thereof irrespective of any pending dispute between the person on whose behalf the Guarantee was given and the beneficiary. In contracts awarded to private individuals by the Government, which involve huge expenditure, as, for example, construction contracts, Bank Guarantees are usually required to be furnished in favour of the Government to secure payments made to the contractor as “Advance” from time to time during the course of the contract as also to secure performance of the work entrusted under the contract. Such Guarantees are encashable in terms thereof on the lapse of the contractor either in the performance of the work or in paying back to the “Government Advance”, the Guarantee is invoked and the amount is recovered from the Bank. It is for this reason that the Courts are reluctant in granting an injunction against the invocation of Bank Guarantee, except in the case of fraud, which should be an established fraud, or where irretrievable injury was likely to be caused to the Guarantor. (Para 8)
       What is important, therefore, is that the Bank Guarantee should be in unequivocal terms, unconditional and recite that the amount would be paid without demur or objection and irrespective of any dispute that might have cropped up or might have been pending between the beneficiary under the Bank Guarantee or the person on whose behalf the Guarantee was furnished. The terms of the Bank Guarantee are, therefore, extremely material. Since the Bank Guarantee represents an independent contract between the Bank and the beneficiary, both the parties would be bound by the terms thereof. The invocation, therefore, will have to be in accordance with the terms of the Bank Guarantee; or else, the invocation itself would be bad. (Para 9)
       In the instant case the bank guarantee the bank had used the expression “agree unconditionally and irrevocably” to guarantee payment to the Executive Engineer on his first demand without any right of objection, but these expressions were immediately qualified by the following :
       “...........in the event that the obligations expressed in the said clause of the abovementioned contract have not been fulfilled by the contractor giving the right of claim to the employer for recovery of the whole or part of the Advance Mobilization Loan from the contractor under the contract.”
       Held : This condition clearly refers to the original contract between the HCCL and the defendants and postulates that if the obligations, expressed in the contract, are not fulfilled by HCCL giving to the defendants the right to claim recovery of the whole or part of the “Advance Mobilisation Loan”, then the Bank would pay the amount due under the Guarantee to the Executive Engineer. By referring specifically to Clause 9, the Bank has qualified its liability to pay the amount covered by the Guarantee relating to “Advance Mobilisation Loan” to the Executive Engineer only if the obligations under the contract were not fulfilled by HCCL or the HCCL has misappropriated any portion of the “Advance Mobilisation Loan”. It is in these circumstances that the aforesaid clause would operate and the whole of the amount covered by the “Mobilisation Advance” would become payable on demand. The Bank Guarantee thus could be invoked only in the circumstances referred to in Clause 9 whereunder the amount would become payable only if the obligations are not fulfilled or there is misappropriation. That being so, the Bank Guarantee could not be said to been unconditional or unequivocal in terms so that the defendants could be said to have had an unfettered right to invoke that Guarantee and demand immediate payment thereof from the Bank. This aspect of the matter was wholly ignored by the High Court and it unnecessarily interfered with the order of injunction, granted by the Single Judge, by which the defendants were restrained from invoking the Bank Guarantee. (Para 14)
       Held further, prima facie, the lapse was on the part of the defendants who were not possessed of sufficient funds for completion of the work. The allegation of the defendants that HCCL itself had abandoned the work does not, prima facie, appear to be correct and it is for this reason that we are of the positive view that the “special equities” are wholly in favour of HCCL. (Para 22)
       (ii) Bank guarantee - Person competent to invoke-Bank guarantee had been furnished to Chief Engineer-Guarantee invoked by Executive Engineer-Bank guarantee constitutes a separate, distinct and independent contract-Invocation wholly wrong and Bank was under no obligation to pay amount covered by guarantee to Executive Engineer.
       Held : As pointed out above, Bank Guarantee constitutes a separate, distinct and independent contract. This contract is between the Bank and the defendants. It is independent of the main contract between the HCCL and the defendants. Since the Bank Guarantee was furnished to the Chief Engineer and there is no definition of “Chief Engineer” in the Bank Guarantee nor is it provided therein that “Chief Engineer” would also include Executive Engineer, the Bank Guarantee could be invoked by none except the Chief Engineer. The invocation was thus wholly wrong and the Bank was under no obligation to pay the amount covered by the “Performance Guarantee” to the Executive Engineer. (Para 21)

Judgement Key Points

The court emphasized that a Bank Guarantee (BG) must be invoked strictly in accordance with its explicit terms. If the BG specifies that it is applicable only for a particular stage of work or under certain conditions, then any invocation outside those stipulated conditions would be considered invalid. Deviating from the prescribed terms or conditions undermines the enforceability of the invocation, rendering it illegal. The guarantee's language and conditions are fundamental, and any invocation that does not adhere precisely to these terms would not be legally valid.

Judgment

S. Saghir Ahmad, J.-Leave granted in both the Special Leave Petitions.

2. Hindustan Construction Company Limited (for short, ‘HCCL’) was awarded a contract for the construction of Icha Dam across the river Kharkai in village Kuju by the State of Bihar (for short, ‘the defendants’). The contract was awarded in the sum of Rs. 39,71,31,019/- on 25.4.1989. The period of contract was 42 months and the work was to be completed by 24th of October, 1992. In terms of the agreement, HCCL was required to furnish, and it did furnish, a Bank Guarantee for 10 per cent of the contract price as “Performance Guarantee” in the sum of Rupees Three Crores Ninety Seven Lakhs Thirteen Thousand One Hundred and Two only. Another Bank Guarantee which was required to be furnished by HCCL, and which it did furnish, was the Guarantee against “Mobilisation Advance” which was to be provided by the defendants from time to time to the HCCL during the course of the contract. HCCL has already furnished fifty “Mobilisation Advance” Bank Guarantees aggregating in all to Rs. 532 lacs. In addition to these Bank Guarantees, HCCL had also furnished another “Mobilisation Advance” Bank Guarantee dated 2.7.1991 for Rs. 40 lacs, for which no advance has been paid by the State of Bihar. This Bank Guarantee is, however, not in question in these proceedings.

3. Both the Bank Guarantees were invoked by the defendants and it was, at this stage, that HCCL filed a suit on 21.10.1992 in the Bombay High Court against State Bank of India, State Bank of Patiala and Indian Bank (defendants 1 to 3) and the State of Bihar and its officers (defendants 4 to 6) for various reliefs, including principal relief that defendants 1 to 3 may be restrained from making payment of the amount covered by the aforesaid Bank Guarantees to defendants 4 to 6. An interim order was passed by the Single Judge in the suit on 27.10.1992 and under this interim order, the defendants were restrained from invoking the Bank Guarantees and the Banks were restrained from making payment of the amount covered by the Bank Guarantees to the defendants. The interim order was confirmed on 9.2.1996.

4. Defendants 4 to 6, who contested the suit, pleaded, inter alia, that HCCL had not adhered to the schedule of work and had rather abandoned the work after it had received “Mobilisation Advance” and it was for this reason that both the Bank Guarantees were invoked.

5. The order passed by the Single Judge was challenged in appeal by the defendants before the Division Bench and the Division Bench, by the impugned judgment dated 20.3.1998, vacated the injunction order in respect of Bank Guarantee relating to “Mobilisation Advance”, but the injunction order in respect of the “Performance Guarantee” was maintained.

6. Mr. F.S. Nariman, Senior Advocate, appearing on behalf of HCCL has assailed the order of the Division Bench of the Bombay High Court on various grounds, including the ground that invocation of the Bank Guarantee relating to “Mobilisation Advance” was wholly illegal and the High Court was wrong in vacating the injunction order relating to that Guarantee. It is contended that this Bank Guarantee could be invoked only if the amount lent to HCCL as “Mobilisation Advance” had become payable in terms of Clause 9 of the principal contract which was specifically referred to in the Bank Guarantee and since the conditions contemplated by Clause 9 did not exist, the invocation itself was bad. The Single Judge, it is contended, was right in granting the injunction order which should not have been disturbed by the Division Bench.

7. The defendants have filed a separate appeal against that part of the order by which the injunction order in respect of the “Performance Guarantee” has been upheld by the Division Bench. It is contended on their behalf that the “Performance Guarantee”, which constituted a separate and distinct contract between the defendants and the Bank, was unconditional and unequivocal and since the Bank

Click Here to Read the rest of this document

1999 Supreme(SC) 1176

Cases Referred (8)