Judicial Bulging of Grounds
Bank Guarantee is the common mode, of securing payment of money in commercial
dealings as the beneficiary, under the Guarantee, is entitled to realise the
whole of the amount under that Guarantee in terms thereof irrespective of any
pending dispute between the person on whose behalf the Guarantee was given and
the beneficiary as laid down in the case of Hindustan Construction Co. Ltd. v.
State of Bihar & Ors., AIR 1999 SC 3710.
In Himadri Chemicals Industries Limited v. Coal Tar Refining Co., (2007) 8 SCC
110 apex court laid down the principles for grant or refusal to grant of
injunction to restrain enforcement of a bank guarantee;
While dealing with an application for injunction where unconditional bank
guarantee is given or accepted, the beneficiary is entitled to realize such a
bank guarantee irrespective of any pending disputes relating to the terms of the
The bank giving such guarantee is bound to honour it as per its terms
irrespective of any dispute raised by its customer.
The courts should be slow in granting an order of injunction to restrain the
realization of a bank guarantee.
Since a bank guarantee is an independent and a separate contract and is absolute
in nature, the existence of any dispute between the parties to the contract is
not a ground for issuing an order of injunction to restrain enforcement of bank
Fraud of an egregious nature which would vitiate the very foundation of such a
bank guarantee and the beneficiary seeks to take advantage of the situation.
Allowing encashment of an unconditional bank guarantee would result in
irretrievable harm or injustice to one of the parties concerned.
Performance Bank Guarantee (PBG) being an independent contract, yet
subject to various exceptions developed by judicial adjudication and
interpretation in various cases, has swollen its own compartment. Where an
injunction against encashment could only be granted in a case where- Invocation
is not in terms of the bank guarantee, or a case of established egregious fraud
is made out which is known to the bank and is practiced by the beneficiary of
the bank guarantee, or where a case of special equities is made out so as to
prevent irretrievable injustice between the parties, or Irretrievable Injury, or
under Economic duress; is now available to the plaintiff on grounds which are
too remote from causing grave injustice or prejudice to the defendant. Thence,
diluting the autonomous character of the contract of PBG and blurring the right
of the beneficiary.
Fraud has further been broadened to include “all acts, omissions and
concealments which involve a breach of legal or equitable duty, trust or
confidence, justly reposed and are injurious to another or by which undue and
unconscientiously advantage is taken of another.” Fraud must be specifically
pleaded so as to be taken up as a ground mere representation of circumstances
may not lead to inference/instance of fraud, same was held in the case of Omaxe
Const. Ltd. v. UOI, (2004) 2 ArbLR 1985 Cal 23.
Where sufficient area for work to proceed was not provided the court
found it correct to grant injunction over encashment of guarantee. In a
similar case of A.M.F. (International) Ltd. V. Marshall, (1986) 208 EG (3d) 542
Court propounded if the site for construction isn’t ready to be handed over or
lacks what had been promised Bank Guarantee cannot be encashed. Further, in a
case, if contractor/ builder puts any change with respect to time length/ line
or performance and the same is authorized or agreed upon by parties, contractor
cannot substitute and get the same done by some other party as laid down in Tencred Arrol &Co. v. Steel Co.
of Scotland, (1974) 48 ALJR 461.
Doctrine of substantial performance is yet another ground which is
considered by Courts outside India but has not been argued in India much. In Dakin v. Lee, (1916) 1 KB 566 substantial performance was held to be a ground
to refute the claim of encashment of bank guarantee. Sufficient performance of a
contract is referred to as substantial performance.
In case of delay caused by the owner i.e. party claiming encashment of
BG no liquidated damages can be granted is a settled rule since the case of Holme v. Guppy, (1838) 3 M&W 387 had been decided. In circumstances where
substantial work is done and encashment of BG is claimed an amount only to the
extent of non-paid bills can be encashed, same has been observed by Hon’ble High
Court of Delhi in Nangia Construction (India) Ltd. V. International Airport
Authority of India, AIR 1992 Del 242. In a similar case of National Project
Const. Corporation v. G. Ranjan, AIR 1985 Cal 23, Court held in a case where
mobilization advance was given, only the balance amount which is not recovered
can be encashed via Bank Guarantee.
Further, Courts have also included the elements of misrepresentation and
suppression to be valid grounds for grant of injunction against encashment of
The above catena showcases- how a compartment develops and spacifies its
components. From a few available grounds for seekinginjunction over encashment
of Bank Guaratees, Couts have looked into the genuineness of applications;
seeking such injunction, and have laid down various grounds for the same.
Parampujya Solar Energy Private Limited v. Union of India and Ors.,
MANU/DE/1026/2018DSC Limited v. Rail Vikas Nigam Limited & amp
Ors.,MANU/DE/2437/2013,Larsen & Toubro Limited v. Maharashtra State
Electricity Board and Others, (1995) 6 SCC 68 etc
Dai-ichi Karkaria Private Ltd., Bombay vs. Oil & Natural Gas Commission
Bombay and another,MANU/MH/0053/1992
R. v. Walter Cabott Construction Ltd., (1975) 69 DLR (3d) 542