The Delhi High Court has held that a bank guarantee cannot be injuncted from being encashed on the pretext that the condition for enforcing the bank guarantee in terms of the agreement entered between the parties has not been fulfilled. The seller cannot raise the dispute of whatsoever nature and prevent the purchaser from enforcing the bank guarantee by way of injunction except on the ground of fraud and irretrievable injury.
The above judgment was passed by the Delhi High Court in M/s S.N. Electricals Vs. NBCC Service Ltd. & Ors. in FAO 498/2018 on 12.11.2018.
The respondent/defendant floated the tender in which the appellant was one of the bidders. The bid submitted by the appellant was accepted by the respondent/defendant and as per the terms and conditions of the contract, the appellant/plaintiff had furnished a Performance Bank Guarantee which was unconditional and irrevocable and the Bank had undertaken to pay to the respondent/defendant immediately on demand in writing and without protest or demur all the money payable by the contractor/supplier to the respondent.
By a letter dated 10.08.2016, the respondent/defendant sought the encashment of the bank guarantee from The National Bank Limited, which led the appellant to file the suit before the learned ADJ. The appellant also moved an application under Order XXXIX Rules 1 & 2 CPC for restraining the respondent from encashing the Bank Guarantee which came to be dismissed by the Ld. ADJ and was the subject matter of the appeal before the Delhi High Court.
The Delhi High Court noted that when a bank guarantee furnished by the contractor is unconditional and irrevocable one, it is not open to the bank to raise any objection whatsoever to pay the amount under the guarantee. The Court placed reliance on the judgment of U.P. State Sugar Corpn. Vs. Sumac International Ltd., (1997) 1 SCC 568 and held that when in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a 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. The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned.
In the facts of the case, the Court held that when the appellant had furnished the unconditional and irrevocable Bank Guarantee to the respondent on demand in writing, the encashment of such Bank Guarantee cannot be prevented by way of an injunction in enforcing the guarantee for any reason that they have completed the work or there was no breach of any term and condition of the contract on their behalf.