Injunction on Invocation of bank guarantees #indianlaws

The Courts, thus, should, be slow in putting a restrain in realizing such a bank guarantee.

In the judgment as passed by the Supreme Court in U.P. State Sugar Corporation vs. Sumac International Ltd. [(1997) 1 SCC 568] dated 04.12.1996 the Court dealt with the issue relating to invocation of bank guarantees and law relating thereto vis-à-vis passing of injunction against encashment thereof. The holding arrived at in this matter can certainly be considered as timeless ratio and worth including in this category.

It was held that when in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer otherwise the very purpose of giving such a bank guarantee would be defeated.

The Courts, thus, should, be slow in putting a restrain in realizing such a bank guarantee. There are only two exceptions to the above, i.e., firstly, if there is a fraud in connection with such a bank guarantee as it would vitiate its very foundation, and secondly, such circumstances where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned.

It would further be worth including the reference of State of Maharashtra & Anr. vs. National Construction Company & Anr. [(1996) SCC (1) 735], wherein it was held that a bank issuing a guarantee is not concerned with the underlying contract between the parties to the contract. The duty of the Bank under a performance guarantee is created by the document itself. Once the documents are in order, the bank giving the guarantee must honor the same and make payment.

Ordinarily, unless there is an allegation of fraud or the like, the Courts will not interfere, directly or indirectly, to withhold payment, otherwise trust in commerce, internal and international, would be irreparably damaged.