Holding

A bank guarantee is an independent contract; if it is conditional or limited to a specific officer, the beneficiary’s right to invoke it is not unfettered, and an injunction may be granted to restrain such invocation.

Summary

Hindustan Construction Co. Ltd. (HCCL) entered into a dam construction contract with the State of Bihar and furnished two bank guarantees – a Performance Guarantee to the Chief Engineer and a Mobilisation Advance Guarantee to the Executive Engineer. The State invoked both guarantees, prompting HCCL to seek an injunction restraining payment. The High Court initially granted an injunction on both guarantees, later vacating it only for the Mobilisation Advance Guarantee. On appeal, the Supreme Court held that a bank guarantee is an independent contract; if it is conditional or limited to a specific officer, it cannot be invoked unconditionally. The Mobilisation Advance Guarantee was found to be conditional on non‑fulfilment or misappropriation, and the Performance Guarantee was limited to the Chief Engineer, not the Executive Engineer. Consequently, the Court upheld the injunction restraining invocation of both guarantees. The appeal by HCCL was allowed, and the order vacating the injunction on the Performance Guarantee was set aside.

Issues considered

The nature of a bank guarantee – whether it is an independent contract and the effect of conditional versus unconditional terms.
Whether an injunction can be granted to restrain the invocation of a bank guarantee.
Whether the Performance Guarantee could be invoked by the Executive Engineer despite being addressed to the Chief Engineer.
Whether the Mobilisation Advance Guarantee was unconditional and thus subject to immediate invocation.

Legislation cited

Code of Civil Procedure, 1908s. Order 39
Companies Act, 1956
Indian Contract Act, 1872s. 126
State Bank of India Act, 1955

Subjects

bank guaranteeinjunctionconditional guaranteeperformance guaranteemobilisation advanceindependent contractcivil procedurecontract lawgovernment contract

Judgment

A HINDUSTAN CONSTRUCTION CO. LTD.
v.
STATE OF BIHAR AND ORS.

OCTOBER 8, 1999

B (S. SAGHIR AHMAD AND D.P. WADHWA, JJ.]

Code of Civil Procedure, I908 : Order 39.

Bank Guarantee-Nature of-Invocation there of-Grant of injunction
C against-Bank guarantee was not unequivocal and unconditional-Held :
Tenns of the bank guarantee are extremely material-If the bank guarantee is
unequivocal and unconditional and recites that the amount is payable without
demur or objections and imspective of any dispute, court should not grant
injunctiol't"'-But if the bank guarantee is conditional, the beneficiary cannot
have an unfettered right to invoke the guarantee-In the circumstances of the
D case, trial court justified in granting the injunction---<:ontract Act, 1872, S.126.
Bank Guarantee-Nature of-Held: constitutes a separate, distinct and
independent contract-It is independent of the main contract and, there[ore,
definition of any term in the main contract cannot be read into the bank
E guarantee.
Bank Guarantee-Furnished to Chief Enginee,..-./nvocation of-Com-
petent authority fo~o definition of "Chief Engineer" in the bank guarantee
nor was it provided that "Chief Engineer" would include "Executive En-
gineer"-Held: the bank guarantee can be invoked only by the Chief Engineer
F and not by the Executive Engineer.
The appellant-Company was awarded a contract by the respondent-
State for construction of a dam. The appellant furnished a bank guarantee
called "Performance Guarantee" and also a guarantee relating to
G "Mobilisation Advance" which was to be provided by the respondent from
time to time to the appellant during the course of the contract. The
"Performance Guarantee" was furnished to the Chief Engineer whereas
the guarantee relating to "Mobilisation Advance" was furnished to the
Executive Engineer. The bank guarantee relating to "Mobilisation Ad·
vance" was payable only if the obligations under the contract were not
H fulfilled by the appellant or the appellant had misappropriated any of the
554
HINDUSTAN CONST. CO. LTD. v. STATE 555

"advance mobilisation loan". A
The Executive Engineer invoked both the bank guarantees. There-
upon, the appellant filed a suit for injunction before the High Court. A
Single Judge of the High Court restrained the respondent from invoking
the bank guarantees. The Division Bench of the High Court vacated the
injunction order relating to the "Mobilisation Advance" but maintained B
the injunction order relating to the "Performance Guarantee". Hence this
appeal.

Allowing the appeal, this Court

HELD : I.I. A bank guarantee is the common mode of securing c
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 D
involve huge expenditure, as, for example, construction contracts, bank
guarantees are usually required to be furnished in favour of the Govern-
ment 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 E
of the work or in paying back the "Government Advance" in which case
the guarantee is invoked and the amount is recovered from the bank. It
is for this reason tbat the courts are reluctant in granting an injunction
against the invocation of bank guarnatee, except in the case of fraud,
which should be an established fraud, or where irretrievable injury was F
likely to be ct>.used to 'the guarantor. [559-C; D; E; F]

UP. Cooperative Federation Ltd. v. Singh Consultants & Engineers
Pvt. Ltd., [1988] 1 SCC 174; Svenska Handlelsbanken v. Indian Charge
Chrome, [1994] 1 SCC 502, Larsen & Toubro Ltd. v. Maharashtra State
Electricity Board, [1995] 6 SCC 68; Hindustan Steel Works Construction G
Ltd. v. G.S. Atwal & Co. (Engineers) (P) Ltd., [1995] 6 SCC 76; National
Thennal Power Corporation Ltd. v. Flowmore (P) Ltd., [1995] 4 SCC 515;
State of Maharashtra v. National Construction Co., [1996] 1 SCC 735;
Hindustan Steel Works Construction Ltd. v. Tarapore & Co., [1996] 5 SCC
34 and U.P. State Sugar Corporation v. Sumac International Ltd., [1997] 1 H.
556 SUPREME COURT REPORTS (1999] SUPP. 3 S.C.R.

A sec 568, relied on.
Bolivinter Oil SA v. Chase Manhattan Bank, [1984] 1 All ER 351,
referred to.

1.2. What is important, is that the bank guarantee should be in
-
B 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,
C 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. [560-C; DJ

D 1.3. In the instant case, 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 the appellant or the appellant has misappropriated
any portion of the "Advance Mobilisation Loan". It is in these circumstan-
E ces that the whole of the amount covered by the "Mobilisation Advance" .
would become payable on demand. The bank guarantee thus could be
invoked only if the obligations are not fulfilled or there is misappropria-
tion. That being so, the bank guarantee could not be said to be uncondi-
tional or unequivocal in terms so that the defendants could be said to
have had an unfettered right to invoke the guarantee and demand imme-
F diate 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 respondents were
restrained from invoking the bank guarantee. [563-F; G; H; 564-A; B]

G 2. A bank guarantee constitutes a separate, distinct and independent
contract. This contract is between the bank and the respondents. It is
independent of the main contract between the appellant and the respon-
dents. Since the bank guarantee relating to "Performance 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 the "Chief
H Engineer" would also include Executive Engineer, the bank guarantee
HINDUSTAN CONST. CO. LTD. v. STATE [S. SAGHIR AHMAD. J.] 557

could be invoked by none except the Chief Engineer. The invocation by A
the Executive Engineer was thus wholly wrong and the bank was under
no obligation to pay the amount covered by the "Performance Guarantee"
to the Executive Engineer. [568-F; G]

3. The lapse was on the part of the respondents who were not
possessed of sufficient funds for completion of the work. The allegation B
of the respondents that the appellant itself had abandoned the work does
not, prima facie, appear to be correct and that the "special equities" are
wholly in favour of the appellant. [568-H; 569-A]

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 5856 of
1999 Etc.
c
From the Judgment and Order dated 20.3.98 of the Bombay High
Court in A. No. 1346/96 in Notice of Motion No. 2475/92 in Suit No. 3295
of 1992.

F.S. Nariman, Rafiq Dada, V.A. Bobde, Bhavesh Panjwani, H.V.
D
Shankar, P. Sancheti, Sameer Parekh, T.N. Subramanian, S. Wajifdar, Lalit
Chauhan, P.H: Parekh, Beloslay, Kumar Rajesh, B.B. Singh, D.M. Popat,
J.S. Goswami, Ms. Vanita Bhargava, Ms. Bina Gupta and Sanjay Kapur for
the appearing parties.
E
The Judgment of the Court was delivered by

S. SAGHIR AHMAD, J. Leave granted in both the Special Leave
Petitions.

Hindustan Construction Company Limited (for short, 'HCCL') was F
awarded a contract for the construction of lcha 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 G
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 Ad-
vance" which was to be provided by the defendants from time to time to H
558 SUPREME COURT REPORTS (1999] SUPP. 3 S.C.R.

A 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
B Guarantee is, however, not in question in these proceedings.

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
C 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
D Bank Guarantees to the defendants. The interim order was confirmed on
9.2.1996.

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
E the work after it had received" Mobilisation Advance" and it was for this
reason that both the Bank Guarantees were invoked.

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
F respect of Bank Guarantee relating to "Mobilisation Advance", but the
injunction order in respect of the "Performance Guarantee" was main-
tained.

Mr. F.S. Nirman, Senior Advocate, appearing on behalf of HCCL
has assailed the order of the Division Bench of the Bombay High Court on
G various grounds, including the ground that invocation of the Bank Guaran-
tee relating to "Mobilisation Advance" was wholly illegal and the High
Court was wrong in vacating the injunction order relating to that Guaran-
tee. It is contended that this Bank Guarantee could be invoked only if the
amount lent to HCCL as "Mobilisation Advance" had become payable in
H terms of Clause 9 of the principal contract which was specifically referred
HINDUSTAN CONST. CO. LTD. v. STATE [S. SAGHIR AHMAD. J.] 559

to in the Bank Guarantee and since the conditions contemplated by Clause A
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.

The defendants have filed a separate appeal against that part of the
order by which the injunction order in respect of the "Performance B
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 had undertaken to pay
the amount covered by that Guarantee to the defendants on their demand, c
the injunction order, granted by the High Court, was liable to be set aside.

Now, 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 D
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 re-
quired to be furnished in favour of the Government to secure payments
made to the contractor as "Advance" from time to time during the course E
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 F
reluctant in granting an injunction against the invocation of Bank Guaran-
tee, except in the case of fraud, which should be an established fraud, or
where irretrievable injury was likely to be caused to the Guarantor. This
was the principle laid down by this Court in various decisions. In U.P.
Cooperative Federation Ltd. v. Singh Consultants & Engineers Pvt. Ltd.,
[1988] 1 SCC 174, the law laid down in Bolivinter Oil SA v. Chase Manhat- G
tan Bank, [1984] 1 All E.R. 351 was approved and it was held that an
unconditional Bank Guarantee could be invoked in terms thereof by the
person in whose favour the Bank Guarantee was given and the Courts
would not grant any injunction restraining the invocation except in the case'
of fraud or irretrievable injury. In Svenska Handelsbanken v. Indian Charge H
560 SUPREME COURT REPORTS [1999] SUPP. 3 S.C.R.

A Chrome, [1994) 1 SCC 502; Larsen & Toubro Ltd. v. Maharashtra State
Electricity Board, [1995) 6 SCC 68; Hindustan Steel Works Construction Ltd.
v. G.S. Atwal & Co. (Engineers) (P) Ltd., [1995) 6 SCC 76; National Thermal
Power Corporation Ltd. v. Flowmeore (P) Ltd., [1995) 4 SCC 515; State of
Maharashtra v. National Construction Co., [1996) 1 SCC 735; Hindustan
B Steel Works Construction Ltd. v. Tarapore & Co., [1996) 5 ·sec 34 as also
in U.P. State Sugar Corporation v. Sumac International Ltd., [1997) 1 SCC
568, the same principle has been laid down and reiterated.

What is important, therefore, is that the .Bank Guarantee should be
in unequivocal terms, unconditional and recite that the amount would be
C 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
.A'\ material. Since the Bank Guarantee represents an independent contract
between the Bank and the beneficiary, both the parties would be bound by
D, 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:

In· the instant case, the whole matter can be disposed of purely on
E the basis of the terms of the Bank Guarantee.

We will first consider the Bank Guarantee relating to "Mobilisation
Advance" .. This Guarantee was furnished in terms of Clause 9 of the
principal contract between the HCCL and the defendants which provides
as under :-
F
"9, Advance Mobilisation Loan :

The Employer will make an advance loan to the Contractor at
13 per cent simple interest per annum for the costs of mobilisation
in respect of the works in a lump sum amount equivalent upto 15
G per cent of the Contract Price named in the Letter of Acceptance,
. payable in the proportionate amounts of foreign and local curren-
cies as provided for in the Contract. Payment of the loan will be
due under separate certification by the Engineer after (i) execution
of the Form of Agreement by the parties thereto, (ii) Provision by
H the Contract of the Performance security in accordance with
HINDUSTAN CONST. CO. LTD. v. STATE [S. SAGHIR AHMAD, J.] 561

Clause 5, and (iii) provision by the Contractor of a Bank Guaran- A
tee, by a Bank acceptable to the Employer in an amount equal to
the advance loan, such Bank Guarantee to remain effective until
the advance loan has been completely repaid by the Contractor
out of current earnings under the Contract and certified accord-
ingly by the Engineer. A form of bank guarantee acceptable to the
Employer is indicated in Section 9. Annex. B. The advance loan
B
shall be used by the Contractor exclusively for mobilisation expendi-
tures, including the acquisition of Constructional Plant, in connection
with the works. Should the Contractor misappropriate any portion of
the advance loan, it shall become due and payable immediately, and
no further loan will be made to the Contractor thereafter. The c
.advance mobilisation loan, shall be paid within 15 days of the date
of certification."

It was in terms of the above clause that the Bank Guarantee was
furnished by the HCCL. It provides as under :
D
"The Executive Engineer,
Kharkai Dam Division II, Icha,
Chaliama, Post Kesargarhia,
Dist. Singhbhum, Bihar.
E
Ref.: Construction of lcha Dam -
Subernarekha Multipurpose
Project - Contractffender
Notice No. SMP/ICC/CE-8/87
(Adityapur dt. 23.10.1987.
F

In accordance with the provisions of the Conditions of Contract,
Clause 9 (Advance Mobilisation Loan) of the abovementioned
contract, the Hindustan Construction Co. Ltd., incorporated in G
Bombay under the Companies Act, 1956, and .having their

-
registered officer at Construction House, Walchand Hirachand
Marg, Ballard Estate, Bombay - 400 038 (hereinafter called 'the
Contractor') shall deposit with the Executive 'Engineer, Kharkai
Dam Division II, Icha, Chaliama, Post Kesargarhia, Dist. H
562 SUPREME COURT REPORTS [1999] SUPP. 3 S.C.R.

A Singhbhum, Bihar, a bank guarantee to guarantee their proper and
faithful performance under the said clause of the contract in an
amount of Rs. 10,00,000 (Rupees Ten lakhs only).

We, the State bank of India, incorporated under State bank of
India Act, 1955, and having one of our branches at Nyayamurti
B
C.N. Vaidya Marg, Fort, Bombay - 400 023 (hereinafter referred
to as 'the said Bank'), as instructed by the Contractor, agree
unconditionally and irrevocably to guarantee as primary obligator
and not as Surety merely, the payment of the Executive Engineer,
Kharkai Dam Division II, Icha, Chaliama, Post Kesargarhia, Dist.
c Singhbum, Bihar, on his first demand without whatsoever right of
objection on our part and without his first claim to the contractor,
in the amount not exceeding Rs. 10,00,000 (Rupees Ten lakhs only)
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
D
part of the Advance Mobilisation Loan from the contractor under
the contract.

We further agree that no change or addition to or other modifica-
tion of the terms of the contract or of works to be performed
E thereunder or of any of the contract documents which may be
made between the Executive Engineer, Kharkai Dam Division II,
Icha, Chaliama, Post Kesargarhia, Dist. Singhbhum, Bihar, and the
contractor, shall in any way release us from any liability under this
guarantee, and we hereby waive notice of any such change, addition
F or modification.

Our liability under this guarantee is restricted to an amount not
exceeding Rs.10,00,000 (Rupees Ten lakhs only) and the said
guarantee shall remain in full force upto 11th October, 1990 with
a claim period of six months thereafter i.e., upto 11th April, 1991
G · twelve months after the issuing of maintenance certificate,
whichever is earlier. Unless demand or claim under this guarantee
is made on us in writing on or before 11th April, 1991 we shall be
relieved and discharged from all liabilities thereafter.

H This guarantee shall remain valid and in fl111 effect from the date
HINDUSTAN CONST. CO. LTD. v. STATE [S. SAGHIR AHMAD, J.] 563

of the advance payment under the contract until the Executive A
Engineer, Kharkai Dam Division II, !cha, Chaliama, Post
Kearagarhia, Dist. Singhbhum, Bihar, receives full repayment of
the same amount from the contractor, but not later than 11th April,
1991 any case.

Dated at Bombay this 12th October, 1989. B

For STATE BANK OF INDIA
Sd/-
MANAGER
Commercial Branch, c
J<- Bombay - 400 023"

The Bank, in the above Guarantee, no doubt, has used the expression
"agree unconditionally and irrevocably" to guarantee payment to the Ex-
ecutive Engineer on his first demand without any right of objection, but
these expressions are immediately qualified by following :- D

"~ ..... 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 Mobilisation Loan from the E
:=a:.
contractor under the contract."

This condition clearly refers to the original contract between the
HCCL and the defendants !Ind 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", F
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 G
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
:I'
become payable on demand. The Bank Guarantee thus could be invoked
only in the circumstances referred to in Clause 9 whereunder the amount H
564 SUPREME COURT REPORTS [1999] SUPP. 3 S.C.R.
A 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
be 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
B 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.

_Coming to the other appeal which has been filed by the defendants
in respect of "Performance Guarantee", it may be stated that the Single
C Judge as also the Division Bench of the High Court have maintained the
injunction order and restrained the defendants from invoking the
. Guarante.e. The Banks have also been restrained from making payment of
the amount stipulated by the "Performance Guarantee" to the defendants.

D The "Performance Guarantee" was furnished in terms of Clause 5 of
the agreement which provides as under :

"(a) For the due performance of the contract, the Tender shall
contain an undertaking by the Contractor to obtain when required
a bond or guarantee of an insurance company or bank, or other
E
approved sureties to be jointly and severally bound with the Con-
tractor to the Employer, in a sum not exceeding that stated in the
Letter of Acceptance for such bond or guarantee, the said in-
surance company or bank sureties and the terms of the said bond
or guarantee shall be such as shall be approved by the Employer.
F
The obtaining of such bond or guarantee or the provisions of such
sureties and the cost of the bond or guarantee to be so entered
into shall be at the expense in all respects of the Contractors unless
the contract otherwise provides.

G (b) The performance security shall be submitted by the Contractor
within 30 days of issue of the Letter of Acceptance and shall be
in the form of a bank guarantee or a bond (at the Contractor's
option). The amount of the bank guarantee shall be 10 (ten) per
cent of the Contract Price, or the amount of the bond provided by
H insurance or bonding company shall be 30 (thirty) per cent of the
HINDUSTAN CONST. CO. LTD. v. STATE [S. SAGHIR AHMAD, J.] 565

Contract Price. If the Performance Security is in the form of. a A
Bank Guarantee, it shall be issued either (i) by a local bank or a
foreign bank through a correspondent local bank, or (ii) directly
by a foreign bank acceptable to the Employer. The performance
security shall be denominated in the types and proportions of
currencies in which the Contract Price is payable. The perfor-
mance security will be released by the Employer not later than 30
B
days following the date of delivery of the Certificate of Completion
of works by the Engineer."

The "Performance Guarantee" is in the following terms :

"The Chief Engineer,
c
Subernerekha Multipurpose Project,
Icha Galudih Complex,
Adityapur, Jamshedpur,
Bihar.
D
WHEREAS M/S THE HINDUSTAN CONSTRUCTION
COMPANY LIMITED, incorporated in Bombay, under the Com-
panies Act, 1956, and having their Registered Office at Construc-
tion House, Walchand Hirachand Marg, Ballard Estate,
Bombay-400 038 (hereinafter called "the CONTRACTOR") has
undertaken, in pursuance of Contract/Tender Notice No.
E
SMP/IGC/CE-8/87, Adityapur, dated 23.10.1987 to execute the
work of construction of Icha Dam, Subernarekha Multipurpose
Project (hereinafter called "the CONTRACT").

AND WHEREAS it has been stipulated by you in the said
F
Contract that the Contractor shall furnish you with a Bank Guaran-
tee by a recognised bank for the sum specified therein as security
for compliance with his obligations in accordance with t.he Con-
tract.

AND WHEREAS WE, State Bank of India, incorporated G
under the State Bank of India Act, 1955, and having our commer-
cial branches at Nyayamurthi G.N. Vaidya Marg, Bombay-400 023
(hereinafter referred to as the "BANK") have agreed to give the
contractor such a Bank Guarantee.

NOW THEREFORE WE, State Bank of India, hereby affirm H
566 SUPREME COURT REPORTS [1999] SUPP. 3 S.C.R.

A that we are the Guarantor and responsible to you, on behalf of the .
contractor upto a total of Rs. 3,97,13,102 (Rupees Three crores
ninety seven lakhs thirteen thousand one hundred and two only)
such sum being payable in the types and proportions of currencies
in which the Contract price is payable and we undertake to pay
B you, upon your first written demand and without cavil or argument,
any sum or sums within the limits of Rs. 3,97,13,102 (Rupees Three
crores ninety seven lakhs thirteen thousand one hundred and two
only) as aforesaid without your needing to prove or to show
grounds or reasons for your demand for the sum specified therein.

c We hereby waive the necessity of your demanding the said debt
from the Contractor before presenting us with the demand. --
We further agree that no change or addition to or other
modification of the terms of the Contract or the Works to be
D performed thereunder or of any of the Contract documents which
may be made between you and the Contractor shall in any way
release us, from any liability under this guarantee, and we hereby
waive notice of any such change, addition or modification.

E Our liability under this guarantee is restricted to an amount not
exceeding Rs. 3,97,13,102 (Rupees !hree crores ninety seven lakhs
thirteen thousand one hundred and two only) and the guarantee
·shall remain in force upto 16th October, 1992 with a claim period
of one year thereafter i.e., upto 16th October, 1993 or twelve
F months after the issuing of maintenance certificate. Unless a
demand or claim under the guarantee is made on us in writing on
or before 16.10.1993, we shall be relieved and discharged from all
our obligations thereafter.

Dated this 17th day of April, 1989.
G
For STATE BANK OF INDIA
Sd/-
Manager (Credit)
Commercial Branch
H Bombay - 400-023
HINDUSTAN CONST. CO. LTD. v. STATE [S. SAGHIR AHMAD,J.] 567

Seal A ..·
Dated 17th April, 1989"

This Guarantee has been furnished to the Chief Engineer but was
invoked by the Executive Engineer by a letter addressed to the Branch
Manager of the State Bank of India, Commercial Branch, Bombay reading
as under: B

"The Branch Manager,
State Bank of India,
Commercial Branch,
Bombay. c
Sub: Claim against the Bank Guarantee No. A/89/2"2B dated
17.4.1989 for Rs. 3,97,13,102.00 (Rs. Three Crores ninety
seven lacs thirteen thousand one hundred two only) issued in
favour of the Hindustan Construction Co. Limited W.H.
Marg, Bombay for Earnest Money of Construction of Icha D
Main Dam.

Dear sir,

A sum of Rs. 3,97,13,102.00 (Rs. Three crores ninety seven lacs E
thirteen thousand one hundred two only) was granted to the
Hindustan Construction Co. Limited W.H. Marg, Bombay against
the Bank Guarantee No. AJ89/2"2B dated 17.4.1989 the said Bank
Guarantee is valid upto 16.10.1992 only. Its period of validity has
not been extended as yet and no amount against the said Earnest
F
Money has been paid by the Contractor.

You are therefore requested that the Bank Draft for Rs.
3,97,13,102.00 (Rs. Three crores ninety seven lacs thirteen
thousand one hundred two only) drawn in favour of the Executive
Engineer, Kharkai Dam Division No. 2, lcha-Chaliama P.O. G
Kposherhariha Dist. West Singhbhum Chaibasa payable at State
Bank of India Chaibasa may· kindly be sent to the undersigned
immediately as a claim against the said Bank Guarantee.

An early action in this matter is solicited. H
568 SUPREME COURT REPORTS [1999] SUPP. 3 S.C.R..

A Yours faithfully,

Sci/-
Executive Engineer,
Kharkai Dam Division No. 2,
Icha- Chaliama"
B
It is· contended by Mr. Nariman that "Performance Guarantee"
constituted an independent contract between the Bank and the Chief
Engineer. The Guarantee was furnished by the Bank to the Chief Engineer
and, therefore, it could be invoked only by the Chief Engineer and not by
C the Executive Engineer.
Learned counsel appearing on behalf of the defendants has con-
tended that in the general conditions of contract appended to the agree-
ment between the HCCL and the State of Bihar, the word "employer" has
been defined to mean the Governor of Bihar acting through the Chief
D Engineer or his authorised representatives. The word "Engineer Incharge"
or "Engineer" has been defined separately to mean Superintending En-
gineer or the Engineer appointed from time to time by the "employer" and
notified in writing to the contractor to act as Engineer. It is contended that
Executive Engineer who has invoked the guarantee would be covered not
E only by the definition of "employer" but also by the definition of "Engineer
lncharge" or "Engineer" as set out in the general conditions of contract.
We are not prepared to accept this contention.

As pointed out above, Bank Guarantee constitutes a separate, dis-
tinct and independent contract. This contract is between the Bank and the
F 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
G except the Chief Engineer. The invocation was thus wholly wrong and the
Bank' was under no obligation to pay the amount covered by the "Perfor-
mance Guarantee" to the Executive Engineer.

We have scrutinised the facts pleaded by the parties in respect of
both the Bank Guarantees as also the document filed before us and we are,
H prima facie, of the opinion that the lapse was on the part of the defendants
HIND USTAN CONST. CO. LTQ. v. STATE [S. SAGHIR AHMAD, J.] 569

who were not possessed of sufficient funds for completion of the work. The A
• allegation of the defendants that HCCL itself had abandoned the work
does not, prim a f acie, appear to be correct and it is for this reason that we
arc of the positive view that the "special equities" are wholly in favour of
HCCL.

For the reasons stated above, the appeal arising out of SLP( C) No. B
6985/98 is allowed. The judgment and order passed by the Division Bench
,..,,. of the Bombay High Court insofar as it purports to vacate the injunction
'
order, granted by the Single Judge in respect of "Performance Guarantee",
is set aside and the injunction order granted by the Single Judge in respect
of both the Guarantees, namely, "Mobilisation Advance" and "Perfor- C
mance Guarantee" is maintained. The appeal arising out of SLP(C) No.
12143/98 is dismissed. There shall be no order as to costs.

v.s.s. C.A. No. 5856/99 allowed.
C.A. No. 5855/99 dismissed.