2025 (7) TMI 1722 - HC - IBC

Unconditional Bank Guarantees Must Be Honored on Demand Despite Disputes Under Contract Law

Kotak Mahindra Bank Limited Versus Union Of India & Ors.

The HC held that the unconditional and irrevocable BGs issued by the Plaintiff in favor of MoRTH must be honored upon demand, irrespective of disputes ... Encashment of BGs while proceedings of CIRP have been initated - Suit for decree for declaration that Plaintiff is discharged from its obligations under Bank Guarantees - invocation and encashment of unconditional Bank Guarantee - Unilateral alteration of payment methodology by Defendants No. 1 and 2 - violatiion of Doctrine of Promissory Estoppel - HELD THAT:- It is clearly annotated in the BGs that in accordance with Clause 19.2 of the Agreements, MoRTH shall make to the contractor an interest free advance payment equal to 10% of the contract price and that the advance payment shall be made in three installments subject to the contractor furnishing an irrevocable and unconditional guarantee by a Scheduled Bank for an amount equivalent to 110% of such installment to remain effective till the complete and full repayment of the installment of the advance payment as security for compliance with its obligations in accordance with the Agreements. Plaintiff Bank unconditionally and irrevocably guaranteed the due and faithful repayment on time of the installments of the advance payment under and in accordance with the Agreements and undertook to pay to MoRTH, upon its mere first written demand and without any demur, reservation, recourse, contest or protest and without any reference to the contractor, such sum or sums, upto an aggregate sum of the guarantee amount, as MoRTH shall claim, without MoRTH being required to prove or to show grounds or reasons for its demand and/or for the sum specified therein. Indisputably, the BGs in question are ‘unconditional’ and ‘irrevocable’. Indisputably, the BGs were unconditional and irrevocable and as the terms of BGs, one of which has been extracted above, Plaintiff unconditionally guaranteed due and faithful repayment by Defendant No. 3 of the installments of the advance payment upon a mere first written demand by MoRTH without any protest, demur or reservation. Clearly and admittedly, opening of the Escrow Account with the Plaintiff Bank and/or issuance of NOC by the Bank before the receivables/payments were paid into another account of Defendant No. 3, was not a term of the BGs - A Bank Guarantee is an independent contract from underlying Agreements and therefore to test the validity of invocation of a BG, one can only look at the terms of the BG and not the underlying contract or even the main contract and it is trite that the Bank is bound to honour the unconditional and irrevocable BGs irrespective of and de hors the dispute between the principal debtor and the beneficiary/creditor. The question of discharge of Defendant No. 2 as a surety was one of the issues that the Court decided in the aforesaid paragraph in the facts of the said case and observed that when a principal-debtor is discharged or released of its liability, then the surety is also so discharged. In the facts of the case, the Court first rendered a finding under Issue No. 1 that there was no contract between Plaintiff and Defendant No. 1 and the period of validity of the offer had expired. In this backdrop, it was held that Defendant No. 1 i.e. the creditor could not forfeit the EMD and therefore could not insist on the surety/Defendant No. 2 to discharge its liability under the BG - in the present case, the liability of the principal-debtor is not discharged. Plaintiff had clearly undertaken by furnishing unconditional BGs to indemnify MoRTH in the event of default by Defendant No. 3/ Joint Venture and there is no variation to any terms of the contract between the principal-debtor and the creditor with respect to the Escrow Account, which was never a condition of the Agreements. It is also not the Plaintiff’s case that MoRTH has committed any act or omission, legal consequences of which is the discharge of the principal-debtor so as to result in discharging the Plaintiff. The judgment, therefore, does not inure to the advantage of the Plaintiff. In the present case, there is no variance in the terms of the contract between the principal-debtor i.e. Defendant No. 3 and the creditor i.e. MoRTH since opening of the Escrow Account was not a term of the Agreements between the two parties. Once there is no variance inter se between the Defendants, Section 133 of the 1872 Act does not come into play and Plaintiff cannot seek discharge of its liability under the unconditional BGs issued in favour of MoRTH, as the beneficiary. The suit is dismissed. Liberty is, however, reserved to the Plaintiff to pursue its claims before the Liquidator, which are stated to be pending and/or to take recourse to such legal remedies as may be available to it against Defendant No. 3. ISSUES: Whether the Plaintiff is entitled to be discharged from its obligations under unconditional and irrevocable Bank Guarantees (BGs) upon unilateral alteration of payment methodology by the beneficiary without Plaintiff's consent.Whether the invocation and encashment of unconditional BGs by the beneficiary without Plaintiff's consent is invalid, illegal, or void.Whether the opening of an Escrow Account and obtaining No Objection Certificate (NOC) from the Plaintiff were pre-conditions to issuance and enforcement of the BGs.Whether Sections 133 and 139 of the Indian Contract Act, 1872 operate to discharge the surety (Plaintiff) upon variation of contract terms between principal debtor and creditor without surety's consent.Whether the Defendants' actions amount to tortious interference with the Plaintiff's contractual rights.Whether the Plaintiff can claim recovery of amounts paid under BGs or retention money held by the beneficiary. RULINGS / HOLDINGS: The Plaintiff is not discharged from its obligations under the unconditional and irrevocable BGs despite the unilateral change in payment methodology by the beneficiary, as the opening of the Escrow Account and issuance of NOC were not terms or conditions of the BGs; thus, the invocation of BGs by the beneficiary is valid and lawful.The BGs being 'unconditional and irrevocable' entitle the beneficiary to enforce the guarantee on mere demand without requiring proof or reference to the underlying contract or disputes, except in cases of 'fraud of an egregious nature' or 'irretrievable injustice.'The letters dated 17.06.2016 and 21.06.2016 evidencing the Escrow Account arrangement were communications between the Plaintiff and principal debtor only and did not bind the beneficiary; there was no contract or agreement imposing an obligation on the beneficiary to route payments through the Escrow Account.Sections 133 and 139 of the Indian Contract Act, 1872 do not apply to discharge the Plaintiff as surety because there was no variance in the terms of the contract between the principal debtor and creditor without the surety's consent; the Escrow Account was not a contractual term between them.The Defendants No. 1 and 2 did not commit tortious interference as the invocation of BGs was in accordance with the terms of the unconditional guarantees and the contractual agreements with the principal debtor.The Plaintiff's suit for refund of Rs. 48,77,13,600/- along with interest is dismissed; however, the Plaintiff is granted liberty to pursue claims against the principal debtor's Liquidator. RATIONALE: The Court applied the legal framework governing Bank Guarantees as independent contracts between the guarantor and beneficiary, emphasizing the binding nature of 'unconditional and irrevocable' guarantees enforceable on mere demand.Precedents including Himadri Chemicals Industries Ltd., Vinitec Electronics Pvt. Ltd., and BSES Ltd. were relied upon to affirm that courts are slow to interfere with invocation of unconditional BGs except in exceptional circumstances such as egregious fraud or irretrievable injustice.The Court distinguished the present case from precedents on discharge of surety under Sections 133 and 139 of the Indian Contract Act, 1872 by noting the absence of any 'variance made without the surety's consent' in the contract terms between principal debtor and creditor; the Escrow Account arrangement was not a contractual term binding the beneficiary.The Court rejected the Plaintiff's contention that the unilateral alteration of payment methodology violated the Doctrine of Promissory Estoppel and discharged the surety, holding that no privity or contractual obligation existed between the beneficiary and Plaintiff regarding the Escrow Account.The Court noted that the BGs expressly waived the surety's rights to claim discharge on account of variations in terms and conditions of advance payment, reinforcing the unconditional nature of the guarantees.The Court found no evidence of tortious interference as the beneficiary acted within its contractual rights under the EPC Agreements and BGs.The Court acknowledged the Plaintiff's admission that BGs were unconditional and irrevocable and held that accepting the Plaintiff's claim would impermissibly convert unconditional BGs into conditional ones, contrary to settled law.The Court reserved liberty for the Plaintiff to pursue recovery from the principal debtor's Liquidator, recognizing the insolvency proceedings and liquidation status of the principal debtor company.