India Vs. Nangia
Constructions (I) Pvt. Ltd.& Ors.  INSC 934 (15 May 2008)
IN THE SUPREME COURT OF INDIA CIVIL APPEALLTE
JURISDICTION CIVIL APPEAL NO.1315 OF 2001 Bank of India .. Appellant
Versus Nangia Constructions (I) Pvt. Ltd. & Others .. Respondents WITH
CIVIL APPEAL NO. ......... OF 2008 (Arising out of SLP (CIVIL) No.3644 OF 2007)
Dalveer Bhandari, J.
1. This appeal is directed against
the judgment and order dated 26.10.1999 of the High Court of Delhi at New Delhi in FAO (OS)
No.81 of 1999.
2. The learned Single Judge of the
High Court has taken the view that the invocation of bank guarantee was within
the validity period of the bank guarantee and the bank cannot decline to make
the payment. The Division Bench in the impugned judgment while dismissing the
appeal has clearly observed that the bank guarantee was invoked on 19th May,
1989 within the validity period of the guarantee. The bank guarantee was merely
renewed under orders of the court as there was a stay order against encashment
of the bank guarantee. Once the stay order was vacated there was no question of
any invocation of the bank guarantee. In the instant case, the invocation had
already taken place within the validity period. Thereafter, all that was to be
done was to intimate the Bank that the stay has been vacated and that now
payment had to be made under the bank guarantee.
3. The Division Bench in great
anguish has observed thus:
3 "It is surprising that a
nationalized bank, which has given an unconditional on demand bank guarantee
takes up such a contention. No ground to refuse payment was shown to the Lower
Court or to us. It is surprising that Nationalized Bank wants to use delays of
law in order not to comply with its unconditional obligations under a bank guarantee.
The nationalized bank should know
that it is such conduct which is adversely affecting the faith of the public in
banking institutions and in transaction of bank guarantee."
The Court dismissed the appeal
4. The nationalized bank despite
the concurrent findings of both the courts and such a strong observation of the
Division Bench of the High Court has still chosen to file this appeal before
this Court. Even before this Court, this is not disputed that the bank
guarantee was invoked within the validity period of the bank guarantee.
5. Mr. K.N. Bhat, the learned
senior counsel appearing for the appellant bank submitted that there was a
substituted agreement of contract, therefore, the invocation of the bank
guarantee by respondent no.2 on 19th May, 1989 was of no consequence.
6. It may be relevant to mention
here that after the bank guarantee was invoked, an application was filed in the
court for stay of payment under the bank guarantee. To that application, the
bank was not a party. Initially, an injunction was granted by the High Court on
29th May, 1989. This was on a condition that the bank guarantee should be kept
This injunction was confirmed on
23rd April, 1990 again on the condition that the bank guarantee should be kept
The constituent who had obtained
injunction and who was to keep the bank guarantee alive, did not pay the
charges of the Bank in respect of renewals of the bank guarantees.
Consequently, the appellant bank
refused to renew the bank guarantee after 26.5.1996. Thus, the beneficiary of
the bank guarantee took out an application wherein the following prayer was
"In the circumstances it is,
therefore, most humbly and respectfully prayed that the petitioner be directed
to extend the bank guarantee for an initial period of one year and the
petitioner be directed to continue to extend the bank guarantees and furnish
the same to the respondent at least fifteen days before the expiry till the
disputes are finally adjudicated upon by arbitration and on the failure of the
petitioner to renew the bank guarantees as aforesaid the respondent may be
permitted to encash the above bank guarantee."
7. As the question was whether the
bank guarantee was to be renewed, notice was issued to the appellant bank to
remain present in the court. This was in order to find out whether they would
be willing to renew the bank guarantee. The appellant bank appeared and made it
clear to the court that they were not ready to renew the bank guarantee as
according to them the charges are not being paid.
8. The appellant bank has
reiterated the same argument before this court that since the bank guarantee
has not been renewed, therefore, the bank is under no obligation to pay the
amount under the bank guarantee.
9. Learned counsel for the
appellant has placed reliance on two judgments of this court, on The Union of
Kishorilal Gupta & Brothers
1960 (1) SCR 493 and Makharia Brothers v. State of Nagaland & Others (2000)
10 SCC 503.
10. In Kishorilal Gupta (supra),
this court has held that it was well settled that the parties to an original
contract could by mutual agreement enter into a new contract in substitution of
the old one.
11. There is no quarrel with this
proposition. The parties are always at liberty to enter into afresh contract
but this case has no application to the facts of the present case.
12. In Makharia Brothers (supra),
the question was : what was the State's remedy against the contractor when the
contractor failed to furnish the security deposit in cash or, in lieu thereof,
by a bank guarantee. The State could not have filed a suit requiring the
contractor to do these things for it would have tantamount to asking for a
decree of specific performance, a decree which would have been incapable of enforcement
if the contractor was unable or unwilling to pay out money or put a bank in
funds to provide a bank guarantee. When the contractor declined to extend the
terms of the bank guarantee, the proper course for the State was to terminate
the contract on the ground of breach of the terms 7 thereof, make a claim for
damages and recover on the bank guarantee, if necessary by filing a suit.
13. We are afraid that even this
case is of no help to the appellant because the facts of the instant case are
quite different. Admittedly, the bank guarantee has been invoked during the
validity period of the bank guarantee. The bank guarantee was unconditional on
demand bank guarantee.
The bank was bound to honour its
commitment and pay the amount of guarantee.
14. It is unfortunate that a
nationalized bank is finding excuses for refusing to make the payment on
totally untenable and frivolous grounds. The Division Bench was fully justified
in making observations regarding the conduct of the nationalized bank. The entire
trust, faith and confidence of people depend on the conduct and credibility of
the nationalized bank. In the present day world, the national and international
commercial transactions largely depend on bank guarantees. In case the banks
are permitted to dishonour their commitments by adopting such subterfuges, the
entire 8 commercial and business transactions will come to a grinding halt.
This principle has been reiterated in large number of cases by this court. We
do not deem it appropriate to burden this judgment by reiterating all those
15. This appeal being devoid of
any merit is accordingly dismissed with costs to be paid to respondent nos. 1
CIVIL APPEAL NO. ......... OF 2008
(Arising out of SLP (CIVIL) No.3644 OF 2007) 16. Leave granted.
17. In view of our aforesaid
decision, this appeal is also dismissed with costs.
(Dalveer Bhandari) New Delhi;
May 15, 2008.