The appeal challenges the High Court of Calcutta's decision which overturned the Single Bench's ruling from thereby validating the plaintiff's entitlement to bank guarantees amounting to Rs. 1,10,33,207.00, plus 8% ...
No Acts & Articles mentioned in this case
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO(S).9288 OF 2019
(ARISING OUT OF SLP(CIVIL) NO(s). 23430 OF 2019)
STANDARD CHARTERED BANK ….APPELLANT(S)
VERSUS
HEAVY ENGINEERING
CORPORATION LTD. & ANR. …RESPONDENT(S)
J U D G M E N T
Rastogi, J.
1.Leave granted.
2.The instant appeal is being preferred against the judgment
and order dated 8
th
May, 2019 passed by the Division Bench of the
High Court of Calcutta setting aside the judgment dated 16
th
October, 2015 of the Single Bench and accepting claim of the 1
st
respondentplaintiff holding that the bank guarantees were properly
invoked in law and accordingly the decree came to be passed for Rs.
1
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.
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
guarantees amounting to Rs. 71,35,100/ and Rs. 20,32,500/ in
terms of the letters of intent, HECCS150281 dated 19
th
May,
1981 and HECCS150281 dated 19
th
May, 1981 furnished on
behalf of the 2
nd
defendant by the appellant Bank(1
st
defendant) in
favour of the 1
st
respondentplaintiff “as advance against supply of
plant and equipment” by the 1
st
respondentplaintiff to the 2
nd
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 16
th
February, 1983
“We, GRINDLAYS BANK P.L.C., 19 Netaji Subhas
Road, Calcutta 700001 undertake the Indemnity and
keep the CORPORATION indemnified to the extent of
2
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 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 and exclusion of any action in Court by
SUPPLIER.”
Bank Guarantee No. G/1001/84/608 dated 29
th
August, 1984
“We, GRINDLAYS BANK P.L.C., 19 Netaji Subhas Road,
Calcutta 700001 do hereby undertake the Indemnity
and keep the CORPORATION indemnified to the extent
of Rs. 20,32,500(Rupees TWENTY LAKHS THIRTY TWO
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 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)
5.The said two bank guarantees were furnished for and on
behalf of 2
nd
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.”
3
Brief facts of the case :
6.By a letter of intent dated 19
th
May, 1981, 1
st
respondent
placed an order on 2
nd
respondent(Simon Carves India Ltd. ‘SCIL’)
for the complete design, supply of both indigenous and imported
equipments, erection and commissioning of requisite civil and
construction works of the Dankuni Coal Complex at a total price of
Rs. 21.10 crores. The letter of intent dated 19
th
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 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 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 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 furnish us a bank guarantee on approved
4
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 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 8
th
August, 1985 was executed by and between
SCIL. Thereafter, the 1
st
respondent (plaintiff) from time to time
advanced 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 16
th
February, 1983 and 29
th
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 time to time and revalidated.
8.In due course of time, in breach of contract with the 1
st
respondentplaintiff, 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 due to which 1
st
respondent suffered huge losses and
damages. Ultimately, a sum of Rs. 139.90 lakhs, was deducted by
5
the 1
st
respondent from final bill which pertained to the apportioned
work handed over to SCIL.
9.In view of the letter dated 6
th
November, 1998, 1
st
respondent
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
appellantdefendant bank. 1
st
respondent in continuation made
subsequent demands for encashment of the guarantees by letter
dated 19
th
December, 1998 which is reproduced hereunder:
“No.HDC/Proj/Fin/98343
Dated the 19
th
December, 1998
To
The Chief Manager
Corporate Banking
ANZ Grindlays Bank
19, Netaji Subhas Road
Post Box No.2645
Calcutta – 700001
Dear Sir,
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 nonsupply of
Plant & Equipment and also other contractual
deficiencies which has caused loss as reflected in the
6
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 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 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 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 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.
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,
Yours faithfully,
T.L.N. SOURI
GENERAL MANAGER (PROJECTS & MNTG)
(emphasis supplied)”
7
10.This was followed by the letter dated 28
th
December, 1998
which is also reproduced hereunder:
“No.GGM(CM)/ /98
28
th
December,
1998
To
The Chief Manager
ANZ Grindlays Bank
CALCUTTA.
(Atten: Shri Vasudeo Kundu)
Fax No.0332211196
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/
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., to HEC.
You are requested to encash the above Bank
Guarantees and 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,
Yours faithfully,
(L.M. Prasad)”
8
11.A further complaint was made by way of a letter dated 22
nd
February, 1999 to the Banking Ombudsman, Calcutta. Ultimately,
1
st
respondentplaintiff 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 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
respondentplaintiff under either of the
said guarantees. In support of its defence, the appellant Bank
referred to the diverse correspondence exchanged between the
appellant and 1
st
respondent. In brief, the defence of the appellant
Bank was that the 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 16
th
October,
2015 which came to be challenged by the 1
st
respondent in appeal
before the Division Bench of the High Court of Calcutta. In a
9
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 1
st
respondent
plaintiff and accordingly passed a decree of Rs. 1,10,33,207.00/
together with interest at the rate of 8% 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 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.
15.Learned counsel further submits that the bank guarantees are
in reference to two category of losses (i) nonsupply/defective supply
of plant & equipment (ii) “other contractual deficiencies” and by the
10
invocation vide letter dated 19
th
December, 1998 claims caused by
“nonsupply/defective supply of plant & equipment and other
contractual deficiencies” is outside the purview of the bank
guarantee. Further, assuming the correctness of the claim, the 1
st
respondent if suffered loss for both (i) nonsupply/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 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. Ltd. Vs. State of Bihar & Others
1
and Gangotri Enterprises
Ltd. Vs. Union of India and Others
2
.
1 1999(8) SCC 436
2 2016(11) SCC 720
11
17.Per contra, Ms. Madhavi Diwan, learned ASG appearing on
behalf of the 1
st
respondent, while supporting the finding recorded
by the High Court in the impugned judgment submits that as per
precedents 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 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. The second exception to
the general rule of nonintervention is such 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.
12
19.The law relating to invocation of bank guarantees with the
consistent line of precedents of this Court is well settled and a
threeJudge 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 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 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 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 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)
3 1996(5) SCC 450
13
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 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
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.”
21.The same principle was followed in State Bank of India and
Another Vs. Mula Sahakari Sakhar Karkhana Ltd.
4
wherein a
twoJudge Bench held thus:
4 2006(6) SCC 293
14
“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.
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.”
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:
“ From the discussions made hereinabove relating to
the principles for grant or refusal to grant of injunction
to restrain enforcement of a bank guarantee or a letter
of credit, we find that the 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
5 2007(8) SCC 110
6 2016(10) SCC 46
15
dealings, and when an unconditional bank
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 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.
(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 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.
(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
between bank and the beneficiary and the bank is always obliged to
honour its guarantee as long as it is an unconditional and
16
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 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 categorically covered money which the 1
st
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
respondentplaintiff in due performance of the
contract for supply of plant and equipment. The guarantee
documents dated 16
th
February, 1983 and 29
th
August, 1984, as a
whole and clause 2 of the guarantee document in particular cover
the advance which had been paid by the 1
st
respondentplaintiff by
reason of any breach or failure by SCIL in due performance of the
17
aforesaid contracts i.e. against the contract for supply of plant and
equipment.
25.From the correspondence that has been exchanged by and
between them pertaining to invocation of the said guarantees, it
clearly manifests that the initial letter of invocation written by the
1
st
respondentplaintiff dated 6
th
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 SCIL”. However, in the later
correspondence exchanged between the parties dated 19
th
December, 1998 followed by a letter dated 28
th
December, 1998, 1
st
respondent informed the appellant Bank that due to defective
supply of plant and equipment as well as nonsupply of plant and
equipment and also other contractual deficiencies of SCIL, losses
had been suffered by the 1
st
respondent and it was duly informed 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 1
st
respondent and the appellant
18
Bank pertaining to invocation of the guarantees, the condition of
the guarantees had been 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. 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 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 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
19
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 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.
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.
…………………………….J.
(L. NAGESWARA RAO)
…………………………….J.
(AJAY RASTOGI)
NEW DELHI
December 18, 2019
20
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