Supreme Court Upholds Invocation of Bank Guarantees by Heavy Engineering Corporation

The case of Standard Chartered Bank v. Heavy Engineering Corporation Ltd. is a landmark ruling on the enforceability of bank guarantees. The Supreme Court, in its judgment dated December 18, 2019, upheld the invocation of two bank guarantees amounting to Rs. 91.67 lakhs issued by Standard Chartered Bank in favor of Heavy Engineering Corporation Ltd. (HEC). The ruling clarifies that unless fraud, irretrievable injury, or special equities are established, banks must honor unconditional guarantees.

Background of the Case

HEC had placed a purchase order with Simon Carves India Ltd. (SCIL) for the design, supply, erection, and commissioning of equipment for the Dankuni Coal Complex. To secure advance payments made to SCIL, Standard Chartered Bank (then Grindlays Bank) issued two bank guarantees:

• Rs. 71,35,100 under Bank Guarantee No. 1001/03/100G dated February 16, 1983
• Rs. 20,32,500 under Bank Guarantee No. G/1001/84/608 dated August 29, 1984

The guarantees were intended to indemnify HEC against losses due to non-performance by SCIL.

Dispute Arising from Bank Guarantee Invocation

SCIL failed to fulfill its contractual obligations, leading HEC to invoke the guarantees in 1998. However, Standard Chartered Bank refused to honor them, arguing that the invocation was not in accordance with the terms of the guarantees. HEC initiated a lawsuit, which was dismissed by a Single Judge of the Calcutta High Court but later overturned by a Division Bench. Standard Chartered Bank then appealed to the Supreme Court.

Petitioner’s Arguments

Standard Chartered Bank argued that:

• The guarantees covered only losses related to defective supply of plant and equipment, not other contractual deficiencies.
• The invocation by HEC lacked proper documentation of specific losses.
• The guarantees had expired, and the claim was time-barred.
• The invocation did not distinguish between claims arising from defective supply and other contractual breaches, making it legally untenable.

Respondent’s Arguments

HEC countered that:

• The guarantees explicitly covered losses due to SCIL’s failure to perform, and the invocation was valid.
• The bank had extended and revalidated the guarantees multiple times, showing their continued validity.
• The invocation letters clearly stated the reasons for seeking payment.
• Standard Chartered Bank was contractually bound to pay without questioning the merits of the claim.

Supreme Court’s Analysis

The Court examined the guarantees and relevant precedents, holding that:

• Bank guarantees are independent contracts that must be honored unless fraud, irretrievable injury, or special equities are proven.
• HEC’s invocation complied with the guarantees’ terms.
• The bank’s refusal to pay was unjustified as no evidence of fraud or bad faith was presented.
• The principle of autonomy in bank guarantees mandates payment upon demand unless a clear legal exception applies.

The Court emphasized:

“The settled position in law is that the bank guarantee is an independent contract between the bank and the beneficiary, and the bank is always obliged to honor its guarantee as long as it is an unconditional and irrevocable one.”

Key Legal Precedents Cited

The Supreme Court referred to various rulings, including:

• Hindustan Construction Co. Ltd. v. State of Bihar – Establishing that unconditional bank guarantees must be honored unless fraud is proven.
• State Bank of India v. Mula Sahakari Sakhar Karkhana Ltd. – Holding that banks cannot refuse payment by questioning the underlying transaction.
• Gujarat Maritime Board v. Larsen & Toubro Infrastructure – Affirming that courts should not interfere with bank guarantee invocation unless exceptional circumstances exist.

Final Judgment

The Supreme Court dismissed the appeal and ruled:

“The demand once made obliges the bank to pay under the terms of the bank guarantee. The refusal to honor the guarantees was unjustified, and the appeal is dismissed.”

The Court directed that Rs. 2,32,69,129.71, held in a fixed deposit, be released to HEC.

Impact of the Judgment

This ruling has significant implications for financial institutions and commercial contracts:

• It reinforces that banks must honor unconditional guarantees without questioning the underlying disputes.
• It strengthens contractual certainty in commercial transactions.
• It limits judicial intervention in bank guarantee enforcement.
• It clarifies that ambiguous claims do not automatically invalidate an otherwise proper invocation.

Conclusion

The Supreme Court’s decision in Standard Chartered Bank v. Heavy Engineering Corporation Ltd. underscores the importance of upholding contractual commitments in financial transactions. By reaffirming the autonomy of bank guarantees, the judgment ensures that beneficiaries can rely on them without fear of undue refusal by banks. This ruling will serve as a precedent for future cases involving the enforceability of bank guarantees.

Petitioner Name: Standard Chartered Bank.
Respondent Name: Heavy Engineering Corporation Ltd..
Judgment By: Justice L. Nageswara Rao, Justice Ajay Rastogi.
Place Of Incident: Calcutta.
Judgment Date: 18-12-2019.

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