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of <h1>Supreme Court Upholds Bank Guarantee Integrity</h1> <h3>UP. Co-OPERATIVE FEDERATION LTD Versus SINGH CONSULTANTS & ENGINEERS (P) LTD.</h3> The Supreme Court allowed the appeal, setting aside the High Court's order and restoring the Civil Judge's order. The Court held that commitments of banks ... - Issues Involved:1. Whether the invocation of the performance guarantees by the appellant was legal.2. Whether the High Court was justified in restraining the appellant from invoking the bank guarantees.3. The applicability of principles governing irrevocable letters of credit to performance guarantees.Issue 1: Legality of Invocation of Performance GuaranteesThe appellant, a State Government enterprise, entered into a contract with the respondent for the supply and installation of a Vanaspati manufacturing plant. The contract required the respondent to furnish performance bank guarantees. The appellant contended that the respondent defaulted at various stages and failed to complete the work within the stipulated time, thus invoking the performance guarantees. The High Court, however, held that the invocation of the performance guarantees was illegal, terming the appellant's contentions as 'technical pleas.'Issue 2: Justification of High Court's Restraint on InvocationThe respondent filed a petition u/s 41 of the Arbitration Act, 1940, seeking to restrain the appellant from realizing and encashing the bank guarantees. The Civil Judge dismissed the application, but the High Court allowed the revision petition, restraining the appellant from invoking the bank guarantees. The Supreme Court, however, disagreed, emphasizing that the principles governing bank guarantees are well-settled. The Court reiterated that an irrevocable commitment, either in the form of a confirmed bank guarantee or an irrevocable letter of credit, cannot be interfered with except in cases of fraud or irretrievable injustice.Issue 3: Applicability of Principles Governing Irrevocable Letters of CreditThe Supreme Court referred to various precedents, including English and Indian cases, to underline that the principles governing irrevocable letters of credit also apply to performance guarantees. The Court cited cases like Hamzeh Melas & Sons v. British Imex Industries Ltd. and Edward Owen Engineering Ltd. v. Barclays Bank International Ltd., emphasizing that banks must honor their commitments under such guarantees, irrespective of disputes between the contracting parties, unless there is clear evidence of fraud or irretrievable injustice.Conclusion:The Supreme Court allowed the appeal, setting aside the High Court's order and restoring the Civil Judge's order. The Court held that commitments of banks must be honored free from interference by the courts, except in exceptional cases of fraud or irretrievable injustice. The Court emphasized that the respondent could seek damages but could not restrain the appellant from invoking the bank guarantees. Both judges concurred in the judgment, highlighting the importance of maintaining the integrity of bank guarantees in commercial transactions.
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