Supreme Court of India
G H STANDARD CHARTERED BANKversusHEAVY ENGINEERING CORPORATION LTD. & ANR.
- Citation
- 2019 INSC 1405
- Decided
- 18 December 2019
- Disposal
- Dismissed
Holding
A bank must honour an unconditional, irrevocable guarantee when the demand complies with its terms, and no exception of fraud, irretrievable injustice or special equity is established.
Summary
The plaintiff Heavy Engineering Corporation (HEC) ordered equipment from Simon Carves India Ltd. (SCIL) and obtained two bank guarantees from Standard Chartered Bank (formerly ANZ Grindlays) as security for advances. SCIL failed to deliver, and HEC demanded encashment of the guarantees, which the bank refused. The High Court held the guarantees were properly invoked and decreed payment with interest. On appeal, the Supreme Court reiterated that a bank guarantee is an independent, unconditional contract between the bank and the beneficiary, and the bank must honor it unless fraud, irretrievable injustice, or special equity is proved. The court found the demand complied with the guarantee terms, no exception applied, and dismissed the appeal.
Issues considered
- Whether the bank guarantees were validly invoked despite the dispute between HEC and SCIL.
- Whether the bank is obligated to honour unconditional, irrevocable guarantees irrespective of underlying contract disputes.
- Whether any exception such as fraud, irretrievable injustice or special equity applies to bar payment.
- Whether the demand for encashment complied with the terms of the guarantees.
Subjects
bank guaranteeindependent contractunconditional guaranteeinvocationencashmentfraud exceptionirretrievable injusticespecial equitycommercial bankingfixed deposit liendecreeinterest
Judgment
368 [2019]
SUPREME COURT 15 S.C.R. 368
REPORTS [2019] 15 S.C.R.
A STANDARD CHARTERED BANK
v.
HEAVY ENGINEERING CORPORATION LTD. & ANR.
(Civil Appeal No. 9288 of 2019)
B DECEMBER 18, 2019
[L. NAGESWARA RAO AND AJAY RASTOGI, JJ.]
Banks/Banking – Bank guarantees – Law relating to
invocation of – By letter of intent dtd. 19.05.81, 1 st respondent
placed order on the 2nd respondent for the complete design, supply
C of both indigenous and imported equipments, erection and
commissioning of requisite civil and construction works of the
Dankuni Coal Complex at Rs.21.10 crores – Two bank guarantees,
dtd.16.02.83 and 29.08.84 amounting to Rs.71,35,100/- and Rs.
20,32,500/- furnished on behalf of the 2 nd respondent by the
D appellant-Bank in favour of the 1st respondent – Memorandum of
Agreement executed – In due course of time, the 2 nd respondent
failed to complete the supply of equipment and the other conditions
of the letter of intent – 1 st respondent demanded encashment of
both the bank guarantees – Refused by the bank – Eventually, the
1 st respondent filed suit before the High Court of Calcutta for
E Rs.1,10,33,207.07/- with interest being the aggregate sum of both
the bank guarantees – Dismissed – Division Bench passed decree
for Rs.1,10,33,207.00/- with interest @ 8% p.a. – Held: Bank
guarantee is an independent contract between bank and the
beneficiary – Bank is always obliged to honour its guarantee as
F long as it is an unconditional and irrevocable one – Dispute
between the beneficiary and the party at whose instance the bank
has given the guarantee is immaterial and is of no consequence –
However, exceptions to this Rule are when there is clear case of
fraud, irretrievable injustice or special equities – Court ordinarily
should not interfere with the invocation or encashment of the bank
G guarantee so long as the invocation is in terms of the bank
guarantee – In the instant case, guarantees were unconditional,
specific in nature and limited in amount – Guarantee documents,
as a whole and clause 2 in particular cover the advance paid by
the 1 st respondent by reason of any breach or failure by 2 nd
H respondent in due performance of the contracts i.e. against the
368
STANDARD CHARTERED BANK v. HEAVY ENGINEERING 369
CORPORATION LTD.
contract for supply of plant and equipment – On reading of letters A
exchanged by and between the 1 st respondent and the appellant
pertaining to invocation of the guarantees, the condition of the
guarantees had been duly complied with – Once the demand was
made in due compliance of bank guarantees, it was not open for
the appellant to determine as to whether the invocation of the bank
B
guarantee was justified – Standard Chartered Bank’s predecessor
in interest, ANZ Grindlay’s Bank had opened fixed deposit of
Rs.91,67,600/- on 18.05.01, which was lien marked to Heavy
Engineering Corporation Ltd. (HEC) and is being held under the
control of the Registry of the High Court of Calcutta – Current
fixed deposit is valued at Rs. 2,32,69,129.71/- and the total liability C
under the impugned order as on date will be Rs.2,78,03,681.64/-
– Registry of the High Court of Calcutta may release the money
lying in the account in favour of the 1st respondent – It is for the
appellant (judgment debtor) to settle and satisfy the decree
impugned in the instant proceedings – Contract.
D
Dismissing the appeal, the Court
HELD: 1.1 A bank guarantee constitutes an independent
contract. The bank guarantee is an independent contract between
bank and the beneficiary and the bank is always obliged to
honour its guarantee as long as it is an unconditional and E
irrevocable one. The dispute between the beneficiary and the
party at whose instance the bank has given the guarantee is
immaterial and is of no consequence. There are, however,
exceptions to this Rule when there is a clear case of fraud,
irretrievable injustice or special equities. The Court ordinarily F
should not interfere with the invocation or encashment of the
bank guarantee so long as the invocation is in terms of the bank
guarantee. The guarantees in the instant case were
unconditional, specific in nature and limited in amount. The terms
of the guarantee categorically covered money which the 1 st
respondent had advanced against supply of the plant and G
equipment by SCIL. The said guarantees covered any loss and
damage caused to or suffered by the 1st respondent-plaintiff in
due performance of the contract for supply of plant and
equipment. The guarantee documents dated 16th February, 1983
and 29th August, 1984, as a whole and clause 2 of the guarantee H
370 SUPREME COURT REPORTS [2019] 15 S.C.R.
A document in particular cover the advance which had been paid
by the 1st respondent-plaintiff by reason of any breach or failure
by SCIL in due performance of the aforesaid contracts i.e. against
the contract for supply of plant and equipment. On reading of
letters exchanged by and between 1 st respondent and the
appellant Bank pertaining to invocation of the guarantees, the
B
condition of the guarantees had been duly complied with. [Paras
20, 23-25] [379-G; 381-G-H; 382-A-C-G]
Ansal Engineering Projects Ltd. v. Tehri Hydro
Development Corporation Ltd. and Another (1996) 5
SCC 450 : [1996] 4 Suppl. SCR 226 ; Hindustan
C
Construction Co. Ltd. v. State of Bihar & Others
(1999) 8 SCC 436 : [1999] 3 Suppl. SCR 554 ; State
Bank of India and Another v. Mula Sahakari Sakhar
Karkhana Ltd. (2006) 6 SCC 293 : [2006] 3 Suppl.
SCR 320 ; Himadri Chemicals Industries Limited v.
D Coal Tar Refining Co. (2007) 8 SCC 110 : [2007] 8
SCR 869 ; Gujarat Maritime Board v. Larsen &
Toubro Infrastructure Development Projects Limited
and Another (2016) 10 SCC 46 : [2016] 8 SCR 692
– relied on.
E Gangotri Enterprises Ltd. Vs. Union of India and
Others (2016) 11 SCC 720 : [2016] 2 SCR 1074 –
referred to.
1.2 Once the demand was made in due compliance of bank
guarantees, it was not open for the appellant Bank to determine
F as to whether the invocation of the bank guarantee was justified
so long as the invocation was in terms of the bank guarantee.
The demand once made would oblige the bank to pay under the
terms of the bank guarantee and it is not the case of the
appellant Bank that its defence falls in any of the exception to
the rule of case of fraud, irretrievable injustice and special
G equities. In absence thereof, it is not even open for the Court
to interfere with the invocation and encashment of the bank
guarantee so long as the invocation was in terms of the bank
guarantee and this what has been observed by the Division
Bench of the High Court in the impugned judgment and that
H reflected the correct legal position. It is informed that the
STANDARD CHARTERED BANK v. HEAVY ENGINEERING 371
CORPORATION LTD.
Standard Chartered Bank’s predecessor in interest, ANZ A
Grindlay’s Bank had opened a fixed deposit of Rs. 91,67,600/-
on 18 th May, 2001, which was lien marked to HEC (Heavy
Engineering Corporation Ltd.) and is being held under the
control of the Registry of the High Court of Calcutta and the
current fixed deposit is valued at Rs. 2,32,69,129.71/- and the
B
total liability under the impugned order as on date will be Rs.
2,78,03,681.64/-. The Registry of the High Court of Calcutta may
release the money lying in the account in favour of the 1 st
respondent and it is for the appellant Bank(judgment debtor) to
settle and satisfy the decree which is impugned in the instant
proceedings. [Paras 26, 27] [382-G-H; 383-A-D] C
Case Law Reference
[2016] 2 SCR 1074 referred to Para 16
[1996] 4 Suppl. SCR 226 relied on Para 19
[1999] 3 Suppl. SCR 554 relied on Para 20 D
[2006] 3 Suppl. SCR 320 relied on Para 21
[2007] 8 SCR 869 relied on Para 22
[2016] 8 SCR 692 relied on Para 22
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 9288 E
of 2019.
From the Judgment and Order dated 08.05.2019 of the High
Court of Calcutta in A.P.D. No. 198 of 2016.
Amit Sibal, Sr. Adv., Ajay Monga, Ms. Devmani Bansal, F
Vikas Kumar, Advs. for the Appellant.
Ms. Madhavi Diwan, ASG, Amit Meharia, Abinash Agarwal,
Ms. Rupali Bansal, M/S. Meharia & Company, Ayush Puri, Sougat Sinha,
Dhananjay Garg, Advs. the Respondents.
The Judgment of the Court was delivered by G
RASTOGI, J.
1. Leave granted.
2. The instant appeal is being preferred against the judgment and
order dated 8th May, 2019 passed by the Division Bench of the High H
372 SUPREME COURT REPORTS [2019] 15 S.C.R.
A Court of Calcutta setting aside the judgment dated 16th October, 2015
of the Single Bench and accepting claim of the 1st respondent-plaintiff
holding that the bank guarantees were properly invoked in law and
accordingly the decree came to be passed for Rs. 1,10,33,207.00/- as
claimed in paragraph 18 of the plaint with interest at the rate of 8 per
cent per annum from the date of institution of the suit until payment.
B
3. Although both the Judges of the Division Bench has delivered
their separate judgment but have expressed a concurring view on the
subject.
4. The dispute primarily arose with regard to two bank
C guarantees amounting to Rs. 71,35,100/- and Rs. 20,32,500/- in terms
of the letters of intent, HEC-CS-1502-81 dated 19th May, 1981 and
HEC-CS-1502-81 dated 19th May, 1981 furnished on behalf of the 2nd
defendant by the appellant Bank(1st defendant) in favour of the 1st
respondent-plaintiff “as advance against supply of plant and equipment”
D by the 1st respondent-plaintiff to the 2nd respondent (defendant no. 2).
The two bank guarantees are on identical terms and the only difference
is the date and the amount which are reproduced as under:-
Bank Guarantee No. 1001/03/100G dated 16th February, 1983
“We, GRINDLAYS BANK P.L.C., 19 Netaji Subhas Road,
E Calcutta 700001 undertake the Indemnity and keep the
CORPORATION indemnified to the extent of Rs. 71,35,100/-
(Rupees SEVENTY ONE LAKHS THIRTY FIVE
THOUSAND AND ONE HUNDRED ONLY) against any loss
or damage caused to or suffered by the CORPORATION by
F reason or any breach or failure by the said SUPPLIER, in due
performance of the aforesaid contract, we shall forthwith on
demand pay to the CORPORATION any sum or sums not
exceeding Rs. 71,35,100/-(RUPEES SEVENTY ONE LAKHS
THIRTY FIVE THOUSAND AND ONE HUNDRED ONLY)
without making any prior reference to the said SUPPLIER with
G
and exclusion of any action in Court by SUPPLIER.”
Bank Guarantee No. G/1001/84/608 dated 29th August, 1984
“We, GRINDLAYS BANK P.L.C., 19 Netaji Subhas Road,
Calcutta 700001 do hereby undertake the Indemnity and keep
H the CORPORATION indemnified to the extent of Rs.
STANDARD CHARTERED BANK v. HEAVY ENGINEERING 373
CORPORATION LTD. [RASTOGI, J.]
20,32,500(Rupees TWENTY LAKHS THIRTY TWO A
THOUSAND FIVE HUNDRED ONLY) against any loss or
damage caused to or suffered by the CORPORATION by reason
or any breach or failure by the said SUPPLIER, in due
performance of the aforesaid contract, we shall forthwith on
demand pay to the CORPORATION any sum or sums not B
exceeding Rs. 20,32,500/-(RUPEES TWENTY LAKHS
THIRTY TWO THOUSAND FIVE HUNDRED ONLY)
without making any prior reference to the said SUPPLIER with
and exclusion of any action in Court by SUPPLIER.”
(emphasis supplied) C
5. The said two bank guarantees were furnished for and on
behalf of 2nd respondent towards the sum insured “against any loss or
damage caused to or suffered by the Corporation by reason or any
breach or failure by the said supplier, in due performance of the
aforesaid contract.” D
Brief facts of the case :
6. By a letter of intent dated 19th May, 1981, 1st respondent
placed an order on 2nd respondent(Simon Carves India Ltd. ‘SCIL’)
for the complete design, supply of both indigenous and imported
equipments, erection and commissioning of requisite civil and E
construction works of the Dankuni Coal Complex at a total price of
Rs. 21.10 crores. The letter of intent dated 19th May, 1981 after
describing 4 sections of the LTC plant at Dankuni stated as under:-
“The above price covers the complete design, supply of both
indigenous and imported equipment, erection and commissioning F
with requisite civil and structural works complete in all respects
except land filling upto 4.00 M level, railways siding, roads &
outside drawing and perphorial lighting which will only be outside
your scope or work.
The break up of the total price of Rs. 21.10 crores for purpose G
of billing is enclosed.
We have noted the terms of payment proposed by you in your
letter dated 18.05.81. As we have indicated about the terms of
payment agreed to by us, it will not be possible to consider your
proposal for relaxation of the same. However, attempts will be H
374 SUPREME COURT REPORTS [2019] 15 S.C.R.
A made to consider some softening of payment terms later
depending our own cash flows on this project.
Kindly let us have your detailed technical specifications etc to
enable us to draw up a detailed contract for the work.
Kindly communicate your acceptance of this letter of intent and
B
furnish us a bank guarantee on approved proforma to release
the initial advance of Rs. 15.64 lakhs to you.
In pursuance of the letter of intent two bank guarantees have
been furnished by the defendant no. 1 on behalf of the defendant
C no. 2 “as advance against the supply of plant and equipment.”
(emphasis supplied)
7. Pursuant to the letter of intent, a formal Memorandum of
Agreement dated 8th August, 1985 was executed by and between SCIL.
Thereafter, the 1st respondent (plaintiff) from time to time advanced
D for the said work against several bank guarantees furnished by SCIL.
It may be noticed that the instant dispute pertains to two bank
guarantees dated 16th February, 1983 and 29th August, 1984, which were
advanced to SCIL, the details of which have been indicated above. The
said guarantees furnished by the appellant bank were extended from
E time to time and revalidated.
8. In due course of time, in breach of contract with the 1 st
respondent-plaintiff, SCIL failed to duly complete the supply of
equipment and the other conditions of the letter of intent and further
defective equipments. It is alleged that the work had to be abandoned
F due to which 1 st respondent suffered huge losses and damages.
Ultimately, a sum of Rs. 139.90 lakhs, was deducted by the 1st
respondent from final bill which pertained to the apportioned work
handed over to SCIL.
9. In view of the letter dated 6th November, 1998, 1st respondent-
G plaintiff demanded encashment of both the said guarantees which were
refused by the bank to honour and diverse correspondence was
exchanged by and between the 1 st respondent -plaintiff and the
appellant-defendant bank. 1 st respondent in continuation made
subsequent demands for encashment of the guarantees by letter dated
H 19th December, 1998 which is reproduced hereunder:-
STANDARD CHARTERED BANK v. HEAVY ENGINEERING 375
CORPORATION LTD. [RASTOGI, J.]
“No.HDC/Proj/Fin/98-343 A
Dated the 19th December, 1998
To
The Chief Manager
Corporate Banking B
ANZ Grindlays Bank
19, Netaji Subhas Road
Post Box No.2645
Calcutta – 700001
Dear Sir, C
With reference to your St. Relationship Manager’s letter dtd.
7.12.98 regarding encashment of B.Gs issued by you on behalf
of M/s. SCIL for a total value of Rs.91.68 lakhs you are very
much aware that M/s. SCIL owes to H.E.C. Rs.139.90 lakhs
due to defective supply of Plant & Equipment as well as non- D
supply of Plant & Equipment and also other contractual
deficiencies which has caused loss as reflected in the handing
over/taking over report of the DCC Project by CIL. You are
also aware that HEC has gone out of the way in supporting SCIL
and getting the Plant completed with minimum damage. It is
within HEC’s full rights to invoke the BG as per Clause No.2 of E
the BG’s which is reproduced below; (BG No.G1001/83/1084 dt.
16.8.83 for Rs. 71,35,100.00 and BG No.G1001/84/608 dt.
29.8.84 for Rs. 20,32,500.00).
WE GRINDLAYS BANK PLC 19, Netaji Subhas Road,
Calcutta – 700001 do hereby undertake the Indemnity of F
Rs. (Rupees _______________________) against any loss or
damage caused to or suffered by the CORPORATION by reason
or any breach or failure by the said SUPPLIER, in due
performance of the aforesaid contract, we shall forthwith on
demand pay to the CORPORATION any sum or sums not G
exceeding Rs. (RUPEES without making any prior reference
to the said SUPPLIER with an exclusion of any action in court
by SUPPLIER.
The failure of M/s. SCIL in fulfilling the contractual obligation
which includes performance Guarantees of Plant & Equipment H
376 SUPREME COURT REPORTS [2019] 15 S.C.R.
A are very well documented by HEC & CIL. In fact, the unadjusted
advance of SCIL on account of Plant & Equipment is far in
excess of the loss suffered by HEC. The same has been brought
down to Rs.139.90 lakhs after allowing credit for contractual
settlement.
B Although as per terms of BG we are not bound to explain you
all these things but the above details are furnished so that good
sense will prevail and we expect you to live up to your reputation
and honour the beneficiaries claim for encashment.
Thanking you,
C Yours faithfully,
T.L.N. SOURI
GENERAL MANAGER (PROJECTS & MNTG)
(emphasis supplied)”
D 10. This was followed by the letter dated 28th December, 1998
which is also reproduced hereunder:-
“No.GGM(CM)/ /98
28th December, 1998
E To
The Chief Manager
ANZ Grindlays Bank
CALCUTTA.
(Atten: Shri Vasudeo Kundu)
F
Fax No.033-2211196
Sub: Encashment of two Bank Guarantees Nos.
1) G/1001/83/108G for Rs.71,35,100/-
2) G/1001/88/608 for Rs.20,32,500/-
G
Ref: Our letter dated 19.11.1998.
Dear Sir,
We have intimated vide our above letter to encash the above
two Bank Guarantees issued by you on behalf of SCIL India Ltd.,
H to HEC.
STANDARD CHARTERED BANK v. HEAVY ENGINEERING 377
CORPORATION LTD. [RASTOGI, J.]
You are requested to encash the above Bank Guarantees and A
send the proceeds amounting to Rs.91,67,600/- within 3 days
time. Kindly treat this as most urgent and failing on the part of
the Bank to honour the beneficiaries demand will be viewed
seriously.
Thanking you, B
Yours faithfully,
(L.M. Prasad)”
11. A further complaint was made by way of a letter dated 22nd
February, 1999 to the Banking Ombudsman, Calcutta. Ultimately, 1 st C
respondent-plaintiff was constrained to institute a suit before the High
Court of Calcutta for decree of Rs. 1,10,33,207.07/- along with interest
being the aggregate sum of both the said guarantees.
12. The appellant Bank filed its written statement and primarily
took objection that the invocation of the bank guarantees was not in D
accordance with either of the said guarantees and contrary to the terms
thereof and accordingly the appellant Bank was not liable to make
payment to the 1 st respondent-plaintiff under either of the said
guarantees. In support of its defence, the appellant Bank referred to
the diverse correspondence exchanged between the appellant and 1st
respondent. In brief, the defence of the appellant Bank was that the E
invocation of the said bank guarantees was contrary to the terms or
not in terms thereof.
13. On the pleadings of the parties, the suit in the first instance
came to the dismissed vide judgment & decree dated 16th October, 2015
which came to be challenged by the 1st respondent in appeal before F
the Division Bench of the High Court of Calcutta. In a concurring
judgment while setting aside the judgment of the Single Judge of the
High Court, it was finally held that the bank guarantees were properly
invoked in law by the 1st respondent-plaintiff and accordingly passed a
decree of Rs. 1,10,33,207.00/- together with interest at the rate of 8% G
per annum on and from the date of institution of the suit until payment.
14. Learned senior counsel for the appellant Bank, Shri Amit
Sibal submits that the said bank guarantees only covered losses arising
out of supply of plant & equipment and according to the pleadings on
record, the plant stood installed in October, 1990 and this is the case H
378 SUPREME COURT REPORTS [2019] 15 S.C.R.
A where the appellant Bank in its independent capacity, refused the claim
for it being clearly false to its knowledge and also not in accordance
with the terms of the guarantee, i.e. beyond the purview of the bank
guarantees and failing to apportion those losses suffered on account of
claims which would be within the terms of the bank guarantees.
B 15. Learned counsel further submits that the bank guarantees are
in reference to two category of losses (i) non-supply/defective supply
of plant & equipment (ii) “other contractual deficiencies” and by the
invocation vide letter dated 19th December, 1998 claims caused by “non-
supply/defective supply of plant & equipment and other contractual
deficiencies” is outside the purview of the bank guarantee. Further,
C assuming the correctness of the claim, the 1st respondent if suffered
loss for both (i) non-supply/defective supply of plant and equipment (ii)
“other contractual deficiencies”, it is difficult to determine the
apportionment between the two categories, because the invocation does
not state how they are apportioned. The invocation is thus inchoate
D and incomplete and this according to the appellant does not constitute
a valid invocation at all and it has not been properly appreciated by the
Division Bench of the High Court in the impugned judgment and has
to be interfered by this Court.
16. In support of his submission, learned counsel has placed
reliance on the judgment of this Court in Hindustan Construction Co.
E
Ltd. Vs. State of Bihar & Others1 and Gangotri Enterprises Ltd.
Vs. Union of India and Others2.
17. Per contra, Ms. Madhavi Diwan, learned ASG appearing on
behalf of the 1st respondent, while supporting the finding recorded by
the High Court in the impugned judgment submits that as per precedents
F laid down by this Court, the question of law is no more res integra and
is well settled that the bank guarantee is an independent contract
between the bank and the beneficiary and the bank is always obliged
to honour its guarantee as long as it is an unconditional and irrevocable
one. At the same time, the dispute between the beneficiary and the
G party at whose instance the bank has given the guarantee is immaterial
and is of no consequence and two exceptions to the rule have been
carved out. The first is when there is a fraud of which the Bank has
notice and a fraud of the beneficiary from which it seeks to benefit.
1
1999(8) SCC 436
2
H 2016(11) SCC 720
STANDARD CHARTERED BANK v. HEAVY ENGINEERING 379
CORPORATION LTD. [RASTOGI, J.]
The second exception to the general rule of non-intervention is such A
when there is a ‘irretrievable injury’ or ‘irretrievable injustice’ that would
occur to the Bank.
18. We have heard learned counsel for the parties and with their
assistance perused the material available on record.
19. The law relating to invocation of bank guarantees with the B
consistent line of precedents of this Court is well settled and a three-
Judge Bench of this Court in Ansal Engineering Projects Ltd. Vs.
Tehri Hydro Development Corporation Ltd. and Another 3 held thus:-
“4. It is settled law that bank guarantee is an independent and
distinct contract between the bank and the beneficiary and is not C
qualified by the underlying transaction and the validity of the
primary contract between the person at whose instance the bank
guarantee was given and the beneficiary. Unless fraud or special
equity exists, is pleaded and prima facie established by strong
evidence as a triable issue, the beneficiary cannot be restrained D
from encashing the bank guarantee even if dispute between the
beneficiary and the person at whose instance the bank guarantee
was given by the bank, had arisen in performance of the contract
or execution of the works undertaken in furtherance thereof. The
bank unconditionally and irrevocably promised to pay, on demand,
the amount of liability undertaken in the guarantee without any E
demur or dispute in terms of the bank guarantee. The object
behind is to inculcate respect for free flow of commerce and
trade and faith in the commercial banking transactions unhedged
by pending disputes between the beneficiary and the contractor.
5.…..The court exercising its power cannot interfere with F
enforcement of bank guarantee/letters of credit except only in
cases where fraud or special equity is prima facie made out in
the case as triable issue by strong evidence so as to prevent
irretrievable injustice to the parties.”
(emphasis supplied) G
20. A bank guarantee constitutes an independent contract. In
Hindustan Construction Co. Ltd. Vs. State of Bihar and
Others(supra), a two Judge Bench of this Court formulated the condition
3
1996(5) SCC 450 H
380 SUPREME COURT REPORTS [2019] 15 S.C.R.
A upon which the invocation of the bank guarantee depends in the
following terms:-
“9. 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
B 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
C
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.”
21. The same principle was followed in State Bank of India
and Another Vs. Mula Sahakari Sakhar Karkhana Ltd.4 wherein a
D
two-Judge Bench held thus:-
“33. It is beyond any cavil that a bank guarantee must be
construed on its own terms. It is considered to be a separate
transaction.
E 34. If a construction, as was suggested by Mr Naphade, is to
be accepted, it would also be open to a banker to put forward a
case that absolute and unequivocal bank guarantee should be read
as a conditional one having regard to circumstances attending
thereto. It is, to our mind, impermissible in law.”
F 22. Taking note of the exposition of law on the subject in Himadri
Chemicals Industries Limited Vs. Coal Tar Refining Co.5, a two-
Judge Bench of this Court in Gujarat Maritime Board Vs. Larsen &
Toubro Infrastructure Development Projects Limited and Another 6
has laid down the principles for grant or refusal for invocation of bank
guarantee or a letter of credit. The relevant paragraph is as under:-
G
“ From the discussions made hereinabove relating to the principles
for grant or refusal to grant of injunction to restrain enforcement
4
2006(6) SCC 293
5
2007(8) SCC 110
6
H 2016(10) SCC 46
STANDARD CHARTERED BANK v. HEAVY ENGINEERING 381
CORPORATION LTD. [RASTOGI, J.]
of a bank guarantee or a letter of credit, we find that the A
following principles should be noted in the matter of injunction
to restrain the encashment of a bank guarantee or a letter of
credit:
(i) While dealing with an application for injunction in the course
of commercial dealings, and when an unconditional bank B
guarantee or letter of credit is given or accepted, the
beneficiary is entitled to realise such a bank guarantee or
a letter of credit in terms thereof irrespective of any
pending disputes relating to the terms of the contract.
(ii) The bank giving such guarantee is bound to honour it as C
per its terms irrespective of any dispute raised by its
customer.
(iii) The courts should be slow in granting an order of injunction
to restrain the realisation of a bank guarantee or a letter
of credit. D
(iv) Since a bank guarantee or a letter of credit is an
independent and a separate contract and is absolute in
nature, the existence of any dispute between the parties
to the contract is not a ground for issuing an order of
injunction to restrain enforcement of bank guarantees or E
letters of credit.
(v) Fraud of an egregious nature which would vitiate the very
foundation of such a bank guarantee or letter of credit and
the beneficiary seeks to take advantage of the situation.
F
(vi) Allowing encashment of an unconditional bank guarantee
or a letter of credit would result in irretrievable harm or
injustice to one of the parties concerned.”
23. The settled position in law that emerges from the precedents
of this Court is that the bank guarantee is an independent contract G
between bank and the beneficiary and the bank is always obliged to
honour its guarantee as long as it is an unconditional and irrevocable
one. The dispute between the beneficiary and the party at whose
instance the bank has given the guarantee is immaterial and is of no
consequence. There are, however, exceptions to this Rule when there
is a clear case of fraud, irretrievable injustice or special equities. The H
382 SUPREME COURT REPORTS [2019] 15 S.C.R.
A Court ordinarily should not interfere with the invocation or encashment
of the bank guarantee so long as the invocation is in terms of the bank
guarantee.
24. The guarantees in the instant case were unconditional,
specific in nature and limited in amount. The terms of the guarantee
B categorically covered money which the 1st respondent had advanced
against supply of the plant and equipment by SCIL. The said guarantees
covered any loss and damage caused to or suffered by the 1 st
respondent-plaintiff in due performance of the contract for supply of
plant and equipment. The guarantee documents dated 16th February,
1983 and 29th August, 1984, as a whole and clause 2 of the guarantee
C document in particular cover the advance which had been paid by the
1st respondent-plaintiff by reason of any breach or failure by SCIL in
due performance of the aforesaid contracts i.e. against the contract
for supply of plant and equipment.
25. From the correspondence that has been exchanged by and
D between them pertaining to invocation of the said guarantees, it clearly
manifests that the initial letter of invocation written by the 1st respondent-
plaintiff dated 6th November, 1998 indeed was per se inadequate and
did not enumerate any condition for invocation of said guarantees save
and except a reference to “a substantial amount to be recovered from
E SCIL”. However, in the later correspondence exchanged between the
parties dated 19 th December, 1998 followed by a letter dated 28th
December, 1998, 1st respondent informed the appellant Bank that due
to defective supply of plant and equipment as well as non-supply of
plant and equipment and also other contractual deficiencies of SCIL,
losses had been suffered by the 1st respondent and it was duly informed
F to the appellant Bank that the losses had been incurred both on account
of supply of plant and equipment and on account of performance of
the supply of plant and equipment. On reading of letters exchanged by
and between 1st respondent and the appellant Bank pertaining to
invocation of the guarantees, the condition of the guarantees had been
G duly complied with.
26. In our considered view, once the demand was made in due
compliance of bank guarantees, it was not open for the appellant Bank
to determine as to whether the invocation of the bank guarantee was
justified so long as the invocation was in terms of the bank guarantee.
H The demand once made would oblige the bank to pay under the terms
STANDARD CHARTERED BANK v. HEAVY ENGINEERING 383
CORPORATION LTD. [RASTOGI, J.]
of the bank guarantee and it is not the case of the appellant Bank that A
its defence falls in any of the exception to the rule of case of fraud,
irretrievable injustice and special equities. In absence thereof, it is not
even open for the Court to interfere with the invocation and encashment
of the bank guarantee so long as the invocation was in terms of the
bank guarantee and this what has been observed by the Division Bench
B
of the High Court in the impugned judgment and that reflected the
correct legal position.
27. It is informed by the learned counsel for the appellant that
the Standard Chartered Bank’s predecessor in interest, ANZ Grindlay’s
Bank had opened a fixed deposit of Rs. 91,67,600/- on 18 th May, 2001,
which was lien marked to HEC(Heavy Engineering Corporation Ltd.) C
and is being held under the control of the Registry of the High Court
of Calcutta and the current fixed deposit is valued at Rs. 2,32,69,129.71/
- and the total liability under the impugned order as on date will be Rs.
2,78,03,681.64/-. The Registry of the High Court of Calcutta may
release the money lying in the account in favour of the 1 st respondent D
and it is for the appellant Bank(judgment debtor) to settle and satisfy
the decree which is impugned in the instant proceedings.
28. We do not find any merit in the appeal which is hereby
dismissed. No costs.
29. Pending application(s), if any, stands disposed of. E
Divya Pandey Appeal dismissed.
F
G
H
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