Bank Guarantee – Invocation of

In U.P. State Sugar Corporation v. Sumac International Ltd., (1997) 1 SCC 568 it was stated that the law relating to bank guarantees is well settled. When on the course of commercial dealings an unconditional bank guarantee is given or accepted, beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. Bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. Any other view would frustrate and defeat the very purpose of such unconditional bank guarantee furnished by the party concerned. It was also observed that when an injunction is sought, Court should be slow in granting an injunction to restrain the realization of such a bank guarantee. There are two exceptions recognized, (1) a fraud in connection with such a bank guarantee and (2) where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned.
In Dwarikesh Sugar Industries v. Prem Heavy Engineering Works (P) Ltd., (1997) 6 SCC 450, it was held as under:
“If the bank could not in law avoid the payment, as the demand had been made in terms of the bank guarantee, then the Court ought not to have refused an injunction which had the effect of restraining the bank from fulfilling its contractual obligation in terms of the bank guarantee. An injunction of the court ought not to be an instrument which is used in nullifying the terms of a contract, agreement or undertaking which is lawfully enforceable.”
In Himadri Chemicals Industries Ltd. v. Coal Tar Refining Company¸ (2007) 8 SCC 110, the principles to be followed in the matter of injunction to restrain encashment of a Bank Guarantee or a Letter of Credit were laid down as under:
“(1) While dealing with an application for injunction in the course of commercial dealings and when an unconditional bank guarantee or Letter of Credit is given or accepted, the Beneficiary is entitled to realize such a Bank Guarantee or a Letter of Credit in terms thereof irrespective of any pending disputes relating to the terms of the Contract.
(2) The Bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer.
(3) The Courts should be slow in granting an order of injunction to restrain the realization of a Bank Guarantee or a Letter of Credit.
(4) 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 partries to the contract is not a ground for issuing an order of injunction to restrain enforcement of Bank Guarantees or Letters of Credit.
(5) 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.
(6) 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.”
In Adani Agri Fresh Ltd. v. Mahaboob Sharif and Others, 2016 (114) ALR 871, it was held that bank guarantee is an independent contract between the bank and the beneficiary thereof. 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 bank has given guarantee is immaterial and of no consequence. Drake and Scull Water and Energy India Pvt. Ltd. v. Paschimanchal Vidyut Vitran Nigam Ltd., 2018 (128) ALR 843.

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