Standard Chartered Bank vs Heavy Engineering Corporation … on 18 December, 2019


Supreme Court of India

Standard Chartered Bank vs Heavy Engineering Corporation … on 18 December, 2019

Author: Hon’Ble Ms. Malhotra

Bench: Hon’Ble Ms. Malhotra, Ajay Rastogi

                                                                    REPORTABLE
                                  IN THE SUPREME COURT OF INDIA
                                   CIVIL APPELLATE JURISDICTION
                                CIVIL APPEAL NO(S).9288 OF 2019
                         (ARISING OUT OF SLP(CIVIL) NO(s). 23430 OF 2019)

          STANDARD CHARTERED BANK                              ….APPELLANT(S)


                                          VERSUS


          HEAVY ENGINEERING
          CORPORATION LTD. & ANR.                              …RESPONDENT(S)


                                             JUDGMENT

Rastogi, J.

1. Leave granted.

2. The instant appeal is being preferred against the judgment

and order dated 8th May, 2019 passed by the Division Bench of the

High Court of Calcutta setting aside the judgment dated 16 th

October, 2015 of the Single Bench and accepting claim of the 1 st
Signature Not Verified

respondent­plaintiff holding that the bank guarantees were properly
Digitally signed by
ARJUN BISHT
Date: 2019.12.18
17:30:01 IST
Reason:

invoked in law and accordingly the decree came to be passed for Rs.

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1,10,33,207.00/­ as claimed in paragraph 18 of the plaint with

interest at the rate of 8 per cent per annum from the date of

institution of the suit until payment.

3. Although both the Judges of the Division Bench has delivered

their separate judgment but have expressed a concurring view on

the subject.

4. The dispute primarily arose with regard to two bank

guarantees amounting to Rs. 71,35,100/­ and Rs. 20,32,500/­ in

terms of the letters of intent, HEC­CS­1502­81 dated 19 th May,

1981 and HEC­CS­1502­81 dated 19th May, 1981 furnished on

behalf of the 2nd defendant by the appellant Bank(1st defendant) in

favour of the 1st respondent­plaintiff “as advance against supply of

plant and equipment” by the 1st respondent­plaintiff to the 2nd

respondent (defendant no. 2). The two bank guarantees are on

identical terms and the only difference is the date and the amount

which are reproduced as under:­

Bank Guarantee No. 1001/03/100G dated 16 th
February, 1983
“We, GRINDLAYS BANK P.L.C., 19 Netaji Subhas
Road, Calcutta 700001 undertake the Indemnity and
keep the CORPORATION indemnified to the extent of

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Rs. 71,35,100/­(Rupees SEVENTY ONE LAKHS
THIRTY FIVE THOUSAND AND ONE HUNDRED ONLY)
against any loss or damage caused to or suffered by
the CORPORATION by reason or any breach or failure
by the said SUPPLIER, in due performance of the
aforesaid contract, we shall forthwith on demand pay
to the CORPORATION any sum or sums not exceeding
Rs. 71,35,100/­(RUPEES SEVENTY ONE LAKHS
THIRTY FIVE THOUSAND AND ONE HUNDRED ONLY)
without making any prior reference to the said
SUPPLIER with and exclusion of any action in Court by
SUPPLIER.”
Bank Guarantee No. G/1001/84/608 dated 29 th
August, 1984
“We, GRINDLAYS BANK P.L.C., 19 Netaji Subhas Road,
Calcutta 700001 do hereby undertake the Indemnity
and keep the CORPORATION indemnified to the extent
of Rs. 20,32,500(Rupees TWENTY LAKHS THIRTY TWO
THOUSAND FIVE HUNDRED ONLY) against any loss
or damage caused to or suffered by the CORPORATION
by reason or any breach or failure by the said
SUPPLIER, in due performance of the aforesaid
contract, we shall forthwith on demand pay to the
CORPORATION any sum or sums not exceeding Rs.
20,32,500/­(RUPEES TWENTY LAKHS THIRTY TWO
THOUSAND FIVE HUNDRED ONLY) without making
any prior reference to the said SUPPLIER with and
exclusion of any action in Court by SUPPLIER.”
(emphasis supplied)

5. The said two bank guarantees were furnished for and on

behalf of 2nd respondent towards the sum insured “against any loss

or damage caused to or suffered by the Corporation by reason or

any breach or failure by the said supplier, in due performance of

the aforesaid contract.”

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Brief facts of the case :

6. By a letter of intent dated 19th May, 1981, 1st respondent

placed an order on 2nd respondent(Simon Carves India Ltd. ‘SCIL’)

for the complete design, supply of both indigenous and imported

equipments, erection and commissioning of requisite civil and

construction works of the Dankuni Coal Complex at a total price of

Rs. 21.10 crores. The letter of intent dated 19 th May, 1981 after

describing 4 sections of the LTC plant at Dankuni stated as under:­

“The above price covers the complete design, supply of
both indigenous and imported equipment, erection and
commissioning with requisite civil and structural
works complete in all respects except land filling upto
4.00 M level, railways siding, roads & outside drawing
and perphorial lighting which will only be outside your
scope or work.

The break up of the total price of Rs. 21.10 crores for
purpose of billing is enclosed.

We have noted the terms of payment proposed by you
in your letter dated 18.05.81. As we have indicated
about the terms of payment agreed to by us, it will not
be possible to consider your proposal for relaxation of
the same. However, attempts will be made to consider
some softening of payment terms later depending our
own cash flows on this project.

Kindly let us have your detailed technical
specifications etc to enable us to draw up a detailed
contract for the work.

Kindly communicate your acceptance of this letter of
intent and furnish us a bank guarantee on approved

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proforma to release the initial advance of Rs. 15.64
lakhs to you.

In pursuance of the letter of intent two bank
guarantees have been furnished by the defendant no. 1
on behalf of the defendant no. 2 “as advance against
the supply of plant and equipment.”

(emphasis supplied)

7. Pursuant to the letter of intent, a formal Memorandum of

Agreement dated 8th August, 1985 was executed by and between

SCIL. Thereafter, the 1st respondent (plaintiff) from time to time

advanced for the said work against several bank guarantees

furnished by SCIL. It may be noticed that the instant dispute

pertains to two bank guarantees dated 16 th February, 1983 and 29th

August, 1984, which were advanced to SCIL, the details of which

have been indicated above. The said guarantees furnished by the

appellant bank were extended from time to time and revalidated.

8. In due course of time, in breach of contract with the 1 st

respondent­plaintiff, SCIL failed to duly complete the supply of

equipment and the other conditions of the letter of intent and

further defective equipments. It is alleged that the work had to be

abandoned due to which 1st respondent suffered huge losses and

damages. Ultimately, a sum of Rs. 139.90 lakhs, was deducted by
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the 1st respondent from final bill which pertained to the apportioned

work handed over to SCIL.

9. In view of the letter dated 6th November, 1998, 1st respondent­

plaintiff demanded encashment of both the said guarantees which

were refused by the bank to honour and diverse correspondence

was exchanged by and between the 1 st respondent ­plaintiff and the

appellant­defendant bank. 1st respondent in continuation made

subsequent demands for encashment of the guarantees by letter

dated 19th December, 1998 which is reproduced hereunder:­

“No.HDC/Proj/Fin/98­343

Dated the 19th December, 1998

To
The Chief Manager
Corporate Banking
ANZ Grindlays Bank
19, Netaji Subhas Road
Post Box No.2645
Calcutta – 700001

Dear Sir,

With reference to your St. Relationship Manager’s
letter dtd. 7.12.98 regarding encashment of B.Gs
issued by you on behalf of M/s. SCIL for a total value
of Rs.91.68 lakhs you are very much aware that M/s.
SCIL owes to H.E.C. Rs.139.90 lakhs due to defective
supply of Plant & Equipment as well as non­supply of
Plant & Equipment and also other contractual
deficiencies which has caused loss as reflected in the

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handing over/taking over report of the DCC Project by
CIL. You are also aware that HEC has gone out of the
way in supporting SCIL and getting the Plant
completed with minimum damage. It is within HEC’s
full rights to invoke the BG as per Clause No.2 of the
BG’s which is reproduced below; (BG
No.G1001/83/1084 dt. 16.8.83 for Rs. 71,35,100.00
and BG No.G1001/84/608 dt. 29.8.84 for Rs.
20,32,500.00).

WE GRINDLAYS BANK PLC 19, Netaji Subhas Road,
Calcutta – 700001 do hereby undertake the Indemnity
of Rs. (Rupees ____________) against any loss
or damage caused to or suffered by the CORPORATION
by reason or any breach or failure by the said
SUPPLIER, in due performance of the aforesaid
contract, we shall forthwith on demand pay to the
CORPORATION any sum or sums not exceeding Rs.

(RUPEES without making any prior
reference to the said SUPPLIER with an exclusion of
any action in court by SUPPLIER.

The failure of M/s. SCIL in fulfilling the contractual
obligation which includes performance Guarantees of
Plant & Equipment are very well documented by HEC
& CIL. In fact, the unadjusted advance of SCIL on
account of Plant & Equipment is far in excess of the
loss suffered by HEC. The same has been brought
down to Rs.139.90 lakhs after allowing credit for
contractual settlement.

Although as per terms of BG we are not bound to
explain you all these things but the above details are
furnished so that good sense will prevail and we expect
you to live up to your reputation and honour the
beneficiaries claim for encashment.

Thanking you,

Yours faithfully,

T.L.N. SOURI

GENERAL MANAGER (PROJECTS & MNTG)
(emphasis supplied)”

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10. This was followed by the letter dated 28 th December, 1998

which is also reproduced hereunder:­

“No.GGM(CM)/ /98
28 th December,
1998

To
The Chief Manager
ANZ Grindlays Bank
CALCUTTA.

(Atten: Shri Vasudeo Kundu)

Fax No.033­2211196

Sub: Encashment of two Bank Guarantees Nos.

1) G/1001/83/108G for Rs.71,35,100/­

2) G/1001/88/608 for Rs.20,32,500/­

Ref: Our letter dated 19.11.1998.

Dear Sir,

We have intimated vide our above letter to encash
the above two Bank Guarantees issued by you on
behalf of SCIL India Ltd., to HEC.

You are requested to encash the above Bank
Guarantees and send the proceeds amounting to
Rs.91,67,600/­ within 3 days time. Kindly treat this
as most urgent and failing on the part of the Bank to
honour the beneficiaries demand will be viewed
seriously.

Thanking you,

Yours faithfully,

(L.M. Prasad)”

8

11. A further complaint was made by way of a letter dated 22 nd

February, 1999 to the Banking Ombudsman, Calcutta. Ultimately,

1st respondent­plaintiff was constrained to institute a suit before the

High Court of Calcutta for decree of Rs. 1,10,33,207.07/­ along

with interest being the aggregate sum of both the said guarantees.

12. The appellant Bank filed its written statement and primarily

took objection that the invocation of the bank guarantees was not

in accordance with either of the said guarantees and contrary to the

terms thereof and accordingly the appellant Bank was not liable to

make payment to the 1st respondent­plaintiff under either of the

said guarantees. In support of its defence, the appellant Bank

referred to the diverse correspondence exchanged between the

appellant and 1st respondent. In brief, the defence of the appellant

Bank was that the invocation of the said bank guarantees was

contrary to the terms or not in terms thereof.

13. On the pleadings of the parties, the suit in the first instance

came to the dismissed vide judgment & decree dated 16 th October,

2015 which came to be challenged by the 1st respondent in appeal

before the Division Bench of the High Court of Calcutta. In a

9
concurring judgment while setting aside the judgment of the Single

Judge of the High Court, it was finally held that the bank

guarantees were properly invoked in law by the 1 st respondent­

plaintiff and accordingly passed a decree of Rs. 1,10,33,207.00/­

together with interest at the rate of 8% per annum on and from the

date of institution of the suit until payment.

14. Learned senior counsel for the appellant Bank, Shri Amit Sibal

submits that the said bank guarantees only covered losses arising

out of supply of plant & equipment and according to the pleadings

on record, the plant stood installed in October, 1990 and this is the

case where the appellant Bank in its independent capacity, refused

the claim for it being clearly false to its knowledge and also not in

accordance with the terms of the guarantee, i.e. beyond the purview

of the bank guarantees and failing to apportion those losses

suffered on account of claims which would be within the terms of

the bank guarantees.

15. Learned counsel further submits that the bank guarantees are

in reference to two category of losses (i) non­supply/defective supply

of plant & equipment (ii) “other contractual deficiencies” and by the

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invocation vide letter dated 19th December, 1998 claims caused by

“non­supply/defective supply of plant & equipment and other

contractual deficiencies” is outside the purview of the bank

guarantee. Further, assuming the correctness of the claim, the 1 st

respondent if suffered loss for both (i) non­supply/defective supply

of plant and equipment (ii) “other contractual deficiencies”, it is

difficult to determine the apportionment between the two categories,

because the invocation does not state how they are apportioned.

The invocation is thus inchoate and incomplete and this according

to the appellant does not constitute a valid invocation at all and it

has not been properly appreciated by the Division Bench of the

High Court in the impugned judgment and has to be interfered by

this Court.

16. In support of his submission, learned counsel has placed

reliance on the judgment of this Court in Hindustan Construction

Co. Ltd. Vs. State of Bihar & Others1 and Gangotri Enterprises

Ltd. Vs. Union of India and Others2.

1 1999(8) SCC 436
2 2016(11) SCC 720
11

17. Per contra, Ms. Madhavi Diwan, learned ASG appearing on

behalf of the 1st respondent, while supporting the finding recorded

by the High Court in the impugned judgment submits that as per

precedents laid down by this Court, the question of law is no more

res integra and is well settled that the bank guarantee is an

independent contract between the bank and the beneficiary and the

bank is always obliged to honour its guarantee as long as it is an

unconditional and irrevocable one. At the same time, the dispute

between the beneficiary and the party at whose instance the bank

has given the guarantee is immaterial and is of no consequence and

two exceptions to the rule have been carved out. The first is when

there is a fraud of which the Bank has notice and a fraud of the

beneficiary from which it seeks to benefit. The second exception to

the general rule of non­intervention is such when there is a

‘irretrievable injury’ or ‘irretrievable injustice’ that would occur to

the Bank.

18. We have heard learned counsel for the parties and with their

assistance perused the material available on record.

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19. The law relating to invocation of bank guarantees with the

consistent line of precedents of this Court is well settled and a

three­Judge Bench of this Court in Ansal Engineering Projects

Ltd. Vs. Tehri Hydro Development Corporation Ltd. and

Another3 held thus:­

“4. It is settled law that bank guarantee is an
independent and distinct contract between the bank
and the beneficiary and is not qualified by the
underlying transaction and the validity of the primary
contract between the person at whose instance the
bank guarantee was given and the beneficiary. Unless
fraud or special equity exists, is pleaded and prima
facie established by strong evidence as a triable issue,
the beneficiary cannot be restrained from encashing
the bank guarantee even if dispute between the
beneficiary and the person at whose instance the bank
guarantee was given by the bank, had arisen in
performance of the contract or execution of the works
undertaken in furtherance thereof. The bank
unconditionally and irrevocably promised to pay, on
demand, the amount of liability undertaken in the
guarantee without any demur or dispute in terms of
the bank guarantee. The object behind is to inculcate
respect for free flow of commerce and trade and faith in
the commercial banking transactions unhedged by
pending disputes between the beneficiary and the
contractor.

5. …..The court exercising its power cannot interfere
with enforcement of bank guarantee/letters of credit
except only in cases where fraud or special equity is
prima facie made out in the case as triable issue by
strong evidence so as to prevent irretrievable injustice
to the parties.”
(emphasis supplied)
3 1996(5) SCC 450
13

20. A bank guarantee constitutes an independent contract. In

Hindustan Construction Co. Ltd. Vs. State of Bihar and

Others(supra), a two Judge Bench of this Court formulated the

condition upon which the invocation of the bank guarantee depends

in the following terms:­

“9. What is important, therefore, is that the bank
guarantee should be in unequivocal terms,
unconditional and recite that the amount would be
paid without demur or objection and irrespective of any
dispute that might have cropped up or might have
been pending between the beneficiary under the bank
guarantee or the person on whose behalf the guarantee
was furnished. The terms of the bank guarantee are,
therefore, extremely material. Since the bank
guarantee represents an independent contract between
the bank and the beneficiary, both the parties would
be bound by the terms thereof. The invocation,
therefore, will have to be in accordance with the terms
of the bank guarantee, or else, the invocation itself
would be bad.”

21. The same principle was followed in State Bank of India and

Another Vs. Mula Sahakari Sakhar Karkhana Ltd.4 wherein a

two­Judge Bench held thus:­

4 2006(6) SCC 293
14
“33. It is beyond any cavil that a bank guarantee must
be construed on its own terms. It is considered to be a
separate transaction.

34. If a construction, as was suggested by Mr
Naphade, is to be accepted, it would also be open to a
banker to put forward a case that absolute and
unequivocal bank guarantee should be read as a
conditional one having regard to circumstances
attending thereto. It is, to our mind, impermissible in
law.”

22. Taking note of the exposition of law on the subject in Himadri

Chemicals Industries Limited Vs. Coal Tar Refining Co.5, a two­

Judge Bench of this Court in Gujarat Maritime Board Vs. Larsen

& Toubro Infrastructure Development Projects Limited and

Another6 has laid down the principles for grant or refusal for

invocation of bank guarantee or a letter of credit. The relevant

paragraph is as under:­

“ From the discussions made hereinabove relating to
the principles for grant or refusal to grant of injunction
to restrain enforcement of a bank guarantee or a letter
of credit, we find that the following principles should
be noted in the matter of injunction to restrain the
encashment of a bank guarantee or a letter of credit:

(i) While dealing with an application for
injunction in the course of commercial

5 2007(8) SCC 110
6 2016(10) SCC 46
15
dealings, and when an unconditional bank
guarantee or letter of credit is given or
accepted, the beneficiary is entitled to realise
such a bank guarantee or a letter of credit in
terms thereof irrespective of any pending
disputes relating to the terms of the contract.

(ii) The bank giving such guarantee is bound
to honour it as per its terms irrespective of
any dispute raised by its customer.

(iii) The courts should be slow in granting an
order of injunction to restrain the realisation
of a bank guarantee or a letter of credit.

(iv) Since a bank guarantee or a letter of
credit 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 guarantees or letters of credit.

(v) Fraud of an egregious nature which would
vitiate the very foundation of such a bank
guarantee or letter of credit and the
beneficiary seeks to take advantage of the
situation.

(vi) Allowing encashment of an unconditional
bank guarantee or a letter of credit would
result in irretrievable harm or injustice to one
of the parties concerned.”

23. The settled position in law that emerges from the precedents of

this Court is that the bank guarantee is an independent contract

between bank and the beneficiary and the bank is always obliged to

honour its guarantee as long as it is an unconditional and

16
irrevocable one. The dispute between the beneficiary and the party

at whose instance the bank has given the guarantee is immaterial

and is of no consequence. There are, however, exceptions to this

Rule when there is a clear case of fraud, irretrievable injustice or

special equities. The Court ordinarily should not interfere with the

invocation or encashment of the bank guarantee so long as the

invocation is in terms of the bank guarantee.

24. The guarantees in the instant case were unconditional,

specific in nature and limited in amount. The terms of the

guarantee categorically covered money which the 1 st respondent

had advanced against supply of the plant and equipment by SCIL.

The said guarantees covered any loss and damage caused to or

suffered by the 1st respondent­plaintiff in due performance of the

contract for supply of plant and equipment. The guarantee

documents dated 16th February, 1983 and 29th August, 1984, as a

whole and clause 2 of the guarantee document in particular cover

the advance which had been paid by the 1 st respondent­plaintiff by

reason of any breach or failure by SCIL in due performance of the

17
aforesaid contracts i.e. against the contract for supply of plant and

equipment.

25. From the correspondence that has been exchanged by and

between them pertaining to invocation of the said guarantees, it

clearly manifests that the initial letter of invocation written by the

1st respondent­plaintiff dated 6th November, 1998 indeed was per se

inadequate and did not enumerate any condition for invocation of

said guarantees save and except a reference to “a substantial

amount to be recovered from SCIL”. However, in the later

correspondence exchanged between the parties dated 19 th

December, 1998 followed by a letter dated 28 th December, 1998, 1st

respondent informed the appellant Bank that due to defective

supply of plant and equipment as well as non­supply of plant and

equipment and also other contractual deficiencies of SCIL, losses

had been suffered by the 1st respondent and it was duly informed to

the appellant Bank that the losses had been incurred both on

account of supply of plant and equipment and on account of

performance of the supply of plant and equipment. On reading of

letters exchanged by and between 1 st respondent and the appellant

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Bank pertaining to invocation of the guarantees, the condition of

the guarantees had been duly complied with.

26. In our considered view, once the demand was made in due

compliance of bank guarantees, it was not open for the appellant

Bank to determine as to whether the invocation of the bank

guarantee was justified so long as the invocation was in terms of

the bank guarantee. The demand once made would oblige the bank

to pay under the terms of the bank guarantee and it is not the case

of the appellant Bank that its defence falls in any of the exception to

the rule of case of fraud, irretrievable injustice and special equities.

In absence thereof, it is not even open for the Court to interfere with

the invocation and encashment of the bank guarantee so long as

the invocation was in terms of the bank guarantee and this what

has been observed by the Division Bench of the High Court in the

impugned judgment and that reflected the correct legal position.

27. It is informed by the learned counsel for the appellant that the

Standard Chartered Bank’s predecessor in interest, ANZ Grindlay’s

Bank had opened a fixed deposit of Rs. 91,67,600/­ on 18 th May,

2001, which was lien marked to HEC(Heavy Engineering

19
Corporation Ltd.) and is being held under the control of the Registry

of the High Court of Calcutta and the current fixed deposit is valued

at Rs. 2,32,69,129.71/­ and the total liability under the impugned

order as on date will be Rs. 2,78,03,681.64/­. The Registry of the

High Court of Calcutta may release the money lying in the account

in favour of the 1st respondent and it is for the appellant

Bank(judgment debtor) to settle and satisfy the decree which is

impugned in the instant proceedings.

28. We do not find any merit in the appeal which is hereby

dismissed. No costs.

29. Pending application(s), if any, stands disposed of.

…………………………….J.

(L. NAGESWARA RAO)

…………………………….J.

(AJAY RASTOGI)
NEW DELHI
December 18, 2019

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