Holding

The bank is bound to honour the unconditional on‑demand guarantee and must pay the amount upon invocation within its validity period, irrespective of later non‑renewal.

Summary

Bank of India issued an unconditional on‑demand guarantee to Nangia Constructions (I) Pvt Ltd. The guarantee was invoked on 19 May 1989, within its validity period, but a stay order was obtained and the beneficiary failed to pay renewal charges, leading the bank to refuse renewal after 26 May 1996 and claim it was no longer liable. The High Court held that the bank must honour the guarantee because the invocation occurred within the original period, and the Supreme Court affirmed this, rejecting the bank's argument of a substituted contract and deeming its refusal to pay untenable. The Court emphasized the importance of banks honoring unconditional guarantees to maintain public confidence. Consequently, the appeal was dismissed with costs.

Issues considered

Whether a bank is obligated to honour an unconditional on‑demand guarantee that has been invoked within its validity period despite subsequent non‑renewal.
Whether a substituted agreement can extinguish the bank's liability under the original guarantee.
Effect of a stay order and injunction on the enforceability of the guarantee.

Subjects

bank guaranteeunconditional on‑demand guaranteerenewalstay orderinjunctionsubstituted contractnationalized bankcommercial transactions

Judgment

[2008] 8 S.C.R. 1020

I
-~
•'
A BANK OF INDIA
v.
NANGIA CONSTRUCTIONS (I) PVT. LTD. AND ORS.
(Civil Appeal No.1315 of 2001)
MAY 15, 2008
B
[TARUN CHATTERJEE AND DALVEER BHANDARI,
JJ.] ~

Bank Guarantee:
c Nationalized Bank - Unconditional on-demand bank
, )
guarantee - Invoked during validity period of the bank guar-
antee - On facts, held: The bank was bound to honour its com-
mitment and pay the amount of guarantee - The bank refused
to make payment on totally untenable and frivolous grounds
D - High Court was fully justified in deprecating the conduct of 'of
Appellant-bank. •
The bank guarantee in question was an uncondi-
tional on-demand bank guarantee. It was invoked during
the validity period of the bank guarantee. Thereafter, an
E application was filed in the Court for stay of payment un-
der the bank guarantee. To that application, the Appel-
lant-bank was not a party. Initially, an injunction was
granted by the High Court on the condition that the bank \\'I)

"tI f
guarantee should be kept alive. This injunction was con-
F firmed again on the condition that the bank guarantee
should be kept renewed. The constituent who had ob-
tained injunction and who was to keep the bank guaran-
tee alive, did not pay the charges of the Bank in respect ;
of renewals of the bank guarantees. Consequently, the
G Appellant bank refused to renew the bank guarantee and
thereafter took the stand that since the bank guarantee "+-
was not being renewed, the bank was under no obliga-
tion to pay the amount under the bank guarantee.

H 1020

.Ji
BANK OF INDIA v. NANG IA CONST~UCTIONS 1021
(I) PVT. LTD. AND ORS.

A Single Judge of the High Court however held that A
the invocation of bank guarantee was within the validity
period of the bank guarantee and hence the Appellant
bank could not have declined to make the payment. The
Division Bench in the impugned judgment while dismiss-
ing the appeal observed that the bank guarantee was B
merely renewed under orders of the Court as there was a
stay order against encashment of the bank guarantee; that
once the stay order was vacated there was no question of
any invocation of the bank guarantee; that in the instant
case, the invocation had already taken place within the c
validity period and thereafter, all that was to be done was
to intimate the Bank that the stay has been vacated and
that payment has to be made under the bank guarantee.
In appeals to this Court, the Appellant bank con-
tended that there was substituted agreement of contract, D
therefore, he invocation of the bank guarantee by Respon-
• dent No.2 was of no consequence.
Dismissing the appeals, the Court
HELD: The bank was bound to honour its commit- E
ment and pay the amount of guarantee. It is unfortunate
that a nationalized bank is finding excuses for refusing
to· make the payment on totally untenable and frivolous
grounds. The Division Bench was fully justified in mak-
1 ing observations regarding the conduct of the national- F
ized 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 interna-
tional commercial transactions largely depend on bank
guarantees. In case the banks are permitted to dishonour G
their commitments by adopting such subterfuges, the
entire commercial and business transactions will come
to a grinding halt. [Paras 13, 14] [1025-C,D, & ]
The Union of India v. Kishorila/ Gupta and Brothers
(1960) 1 SCR 493 and Makharia Brothers v. State of Nagaland H
1022 SUPREME COURT REPORTS [2008] 8 S.C.R.

A and Ors. (2000) 10 SCC 503 - distinguished.
CIVILAPPELLATE JURISDICTION: Civil Appeal No. 1315
of 2001
From the final Judgment and Order dated 26.10.1999 of
B the High Court of Delhi at New Delhi in F.A.O. (OS) No. 81/
1999
K.N. Bhat, Swigin, Akanksha, Nina Gupta and Bina Gupta
for the Appellant.
c Ginny Jetley Rautray, Kanchan Kaur Dhodi, Sangeeta
Kumar, Ashwani Garg and Shivangi Thagela for the Respondents.
DALVEER BHANDARl,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.
D
2. The learned Single Judge of the High Court has taken
the view thatthe invocation of bank guarantee was within the va-
lidity period of the bank guarantee and the bank cannot decline
to make the payment. The Division Bench in the impugned judg-
E · ment 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 re-
newed 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 guar- t
F antee. 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.
G 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
H Nation:ilized Bank wants to use delays of law in order not to
l::lANK OF INDIA v. NANGIA CONSTRUCTIONS 1023
(I) PVT. LTD. AND ORS. [DALVEER BHANDARl,J.]

-+ comply with its unconditional obligations under_ a bank A
guarantee. The nationalized bank should know that it i,S 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.
B
4. The nationalized bank despite the concurrent findings
of both the courts and such a strong observation of the Division
'f
• Bench of the High Court has still chosen to file this appeal be-
fore this Court. Even before this Court, this is not disputed that
the bank guarantee was invoked within the validity period of the c
bank guarantee.
5. Mr. K.N. Bhat, the learned senior counsel appearing for
the appellant bank submitted that there was a substituted agree-
ment of contract, therefore, the invocation of the bank guarantee
by respondent no.2 on 19th May, 1989 was of no consequence. D
r
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 E
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 guaran-
tee alive, did not pay the charges of the Bank in respect of re- F
newals 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 appli-
cation wherein the following prayer was made:
G
...... "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
H
1024 SUPREME COURT REPORTS [2008] 8 S.C.R.
"
A 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
B to be renewed, notice was issued to the appellant bank to re-
main present in the court. This was in order to find out whether ...,
they would be willing to renew the bank guarantee. The appel-
lant bank appeared and made it clear to the court that they were
not ready to renew the bank guarantee as according to them
c the charges are not being paid.
8. The appellant bank has reiterated the same argument
before this court that since the bank guarantee has not been
renewed, therefore, the bank is under no obligation to pay the
amount under the bank guarantee.
D ...
9. Learned counsel for the appellant has placed reliance
on two judgments of this court, on The Union of India v.
Kishorilal Gupta & Brothers 1960 (1) SCR 493 and Makharia
Brothers v. State of Nagaland & Others (2000) 10 SCC 503.
E 10. In Kishorila/ Gupta (supra), this court has held that it
was well settled that the parties to an original contract could by
mutual agreement enter into a new contract in substitution of
the old one.
t
F 11. There is no quarrel with this proposition. The parties
are always at liberty to enter into afresh contract but this case
has no application to the facts of the present case.
12. In Makharia Brothers (supra), the question was: what
was the State's remedy against the contractor when the con-
G tractor failed to furnish the security deposit in cash or, in lieu
thereof, by a bank guarantee. The State could not have filed a +
...
suit requiring the contractor to do these things for it would have
tantamount to asking for a decree of specific performance, a
decree which would have been incapable of enforcement if the
H contractor was unable or unwilling to pay out money or put a bank

•
~·.;.·~-
BANK OF INDIA v. NANGIA CONSTRUCTIONS 1025
(I) PVT. LTD. AND ORS. [DALVEER BHANDARl,J.]
,,
.t in funds to provide a bank guarantee. When the contractor de-
clined to extend the terms of the bank guarantee, the proper course
A

for the State was to terminate the contract on the ground of breach
of the terms thereof, make a claim for damages and recover on
the bank guarantee, if necessary by filing a suit.
13. We are afraid that even this case is of no help to the B
appellant because the facts of the instant case are quite differ-
y
ent. Admittedly, the bank guarantee has been invoked during the
validity period of the bank guarantee. The bank guarantee was
unconditional on demand bank guarantee. The bank was bound
to honour its commitment and pay the amount of guarantee. c
14. It is unfortunate that a nationalized bank is finding ex-
cuses for refusing to make the payment on totally untenable and
frivolous grounds. The Division Bench was fully justified in mak-
ing observations regarding the conduct of the nationalized bank.
¥ D
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 per-
mitted to dishonour their commitments by adopting such subter-
fuges, the entire commercial and business transactions will come E
to a grinding halt. This principle has been reiterated in large num-
ber of cases by this court. We do not deem it appropriate to
burden this judgment by reiterating all those judgments.
15. This appeal being devoid of any merit is accordingly F
dismissed with costs to be paid to respondent nos. 1 & 2.
CIVIL APPEAL NO . ......... OF 2008
(Arising out of SLP (CIVIL) No.3644 OF 2007)
16. Leave granted. G
-t 17. In view of our aforesaid decision, this appeal is also
dismissed with costs.
B.B.B. Appeals dismissed
H

0