1991 (8) TMI 349 - SC - Indian Laws

Bank must honor guarantee independently of contract terms. Appeal allowed with costs.

General Electric Technical Services Company Inc. Versus. Punj Sons (P) Ltd. and Ors.

The Supreme Court allowed the appeal, setting aside the High Court's judgment and order. The Court emphasized that the Bank must honor its commitment ... - Issues Involved:1. Validity and enforcement of the bank guarantee.2. Rights and obligations of the parties under the bank guarantee.3. Court's justification in restraining the bank from honoring the guarantee.4. Allegations of fraud or suppression of material facts.Detailed Analysis:1. Validity and Enforcement of the Bank Guarantee:The General Electric Technical Services Company (GETSCO) entered into a contract with Indian Airlines, which included constructing and fabricating an aircraft testing center/engine repair center in Delhi. GETSCO subcontracted the work to M/s. Punj Sons (P) Ltd (respondent-1), who was required to provide performance bonds and a bank guarantee to secure a mobilization advance. Respondent-1 provided a bank guarantee of Rs. 1,86,00,000 through Hongkong & Shanghai Bank (the Bank, respondent-2). Later, a composite bank guarantee was furnished for Rs. 2,12,25,000, splitting the amount into two parts valid until 30 June 1988 and 30 June 1989, respectively.2. Rights and Obligations of the Parties under the Bank Guarantee:Respondent-1 failed to complete the project within the stipulated time. Consequently, GETSCO terminated respondent-1's right to continue the project and sought to encash the bank guarantee. The terms of the bank guarantee specified that the Bank would pay GETSCO the guaranteed amount without any demur upon demand, stating that the amount was due by way of loss or damage caused by respondent-1's breach of the contract terms. The Bank's liability was to remain intact irrespective of the recovery of the mobilization advance or the non-payment under the running bills.3. Court's Justification in Restraining the Bank from Honoring the Guarantee:The High Court restrained the Bank from paying under the guarantee, reasoning that GETSCO's failure to mention the mobilization advance in the encashment letter constituted suppression of material facts. The Supreme Court, however, found that the High Court misconstrued the terms of the bank guarantee and the inter-se rights of the parties. The Supreme Court emphasized that the Bank's obligation to honor the guarantee was independent of the underlying contract and that the Bank must pay when a demand is made, barring any fraud or special equities.4. Allegations of Fraud or Suppression of Material Facts:The Supreme Court noted that the law regarding bank guarantees is well-settled, requiring the Bank to honor its commitments unless there is a prima facie case of fraud or special equities preventing irretrievable injustice. The High Court's observation that GETSCO's omission to mention the mobilization advance would necessitate further inquiry by the Bank was deemed irrelevant. The Supreme Court clarified that the Bank's liability was not contingent upon the recovery of the mobilization advance or the outstanding amounts under the running bills.Conclusion:The Supreme Court allowed the appeal, setting aside the High Court's judgment and order. The Supreme Court reiterated that the Bank must honor its commitment under the bank guarantee, and the Court should not interfere in the absence of fraud or special equities. The appeal was allowed with costs, and the Special Leave Petition was dismissed accordingly.