Oil & Natural Gas Corporation Ltd. v. State Bank of India, Overseas Branch, Bombay, AIR 2000 SC 2548

Case Summary

1. Appeal before the Supreme Court by way of Special Leave Petition under Article-136 of the Constitution. Leave granted.

2. Facts of the case:

The appellant ONGC entered in a contract to lay undersea gas pipelines with an Italian contractor. Time was the essence of the contract. It was contracted that the contractor would furnish a bank guarantee, which the ONGC would have the right to encash as liquidated damages, in case the contractor is not able to complete the work in time. The bank guarantee which was at State Bank of India, Bombay, was kept alive by renewing it from time to time by the contractor. The bank promised to unconditionally pay the ONGC the money as and when it demanded, without any questions.

When the time to complete project was nearing to end, ONGC requested the contractor to renew the bank guarantee. It also wrote to the bank requesting it to renew the guarantee. The letter to the bank further stated that in case the guarantee is not renewed by the contractor by a particular date, this letter may be considered as a letter claiming liquidated damages and the bank guarantee be immediately encashed in their favour.

The bank guarantee of SBI was dependent upon a counter guarantee from an Italian bank. The contractor secured a stay order prohibiting the Italian bank to transfer money to SBI, Bombay. Instead he took the matter to arbitration.

SBI refused to honour the request of ONGC saying that its guarantee was dependent upon the counter guarantee of Italian bank and until it realizes the same, it cannot release funds.

ONGC filed a summary suit U/O-37 before the Bombay High Court against SBI. The Bombay HC granted unconditional leave to defend to the SBI on some flimsy grounds.

ONGC moved the Supreme Court through an SLP. Leave granted.

3. Questions of Law before the Supreme Court:

Whether the High Court of Bombay justified in granting unconditional leave to defend to SBI?

4. Decision of SC:

The Bombay HC was not justified in granting unconditional leave to defend as the SBI had no prima facie good defence to defend the suit. The grounds mentioned in the application U/O-37, R-3, to defend were irrelevant and untenable. The decision of HC is set aside.

5. Important paragraphs from the judgment:

Shri Ashok H. Desai, the learned senior advocate appearing for the appellant ONGC, submitted that none of the grounds stated by the High Court could provide enough basis for granting an unconditional leave to defend.

After a survey of the decisions of this Court, law as applied in England and a few American decisions, this Court in Svenska Handelsbanken v. Indian Charge Chrome, declared the law that “in case of confirmed Bank Guarantee/irrevocable Letters of Credit it cannot be interfered with unless there is fraud and irretrievable injustice involved in the case and fraud has to be as established fraud. There should be prima facie case of fraud and special equities in the four of preventing irretrievable injustice between the parties. Mere irretrievable injustice without prima facie case of established fraud is of no consequence in restraining the encashment of bank guarantee. Only in the event of fraud or irretrievable injustice the court would be entitled to interfere in a transaction involving a bank guarantee and under no other circumstances.”

The same is the principle stated by this Court in Hindustan Steelworks Construction Ltd. v. Tarapore and Co. It is held therein that encashment of an unconditional bank guarantee does not depend upon the adjudication of disputes. No distinction can also be made between bank guarantee for due performance of a work contract and a guarantee given towards security deposit for a contract or any other kind of guarantee. Where the beneficiary shall be the sole judge on the question of breach of primary contract the bank shall pay the amount covered by the guarantee on demand without a demur. In the absence of a plea of fraud, guarantee had to be given effect to.

Though these two decisions pertain to grant of injunction for enforcement of bank guarantee, the principle stated therein could be extended to understand the nature of defence raised by the respondent Bank in the present case.

Whether the respondent Bank could at all raise such a defence which is totally untenable? In the light of what is stated above, in the absence of a plea relating to fraud, much less of a finding thereto, we find that the court could not have stated that the defence raised by the respondent Bank on the grounds set forth earlier is sufficient to hold that unconditional leave should be granted to defend the suit. In the arbitration proceedings that were pending it was certainly open to the parties concerned to adduce proper evidence and establish as to what are the liquidated damages that are payable and if any excess amount had been paid, the same would be recovered.

So far as the order made by the Italian Court for not enforcing the bank guarantee is concerned, it must be stated that the said order arose out of the counter guarantee with which the appellant had nothing to do.

When, in fact, there is no defence for suit filed merely to rely upon an injunction granted or obtained in their favour does not carry the case of the respondent Bank any further. The only basis upon which the respondent Bank sought for and obtained the injunction is that in event the counter guarantee cannot be honoured by reason of the injunction granted by the Italian court the respondent Bank should be extended the similar benefit. But a perusal of the Foreign Exchange Manual makes it clear that none of the claims would be an impediment to make payment under the Bank Guarantee in question. Therefore, in our view, the High Court plainly erred in having granted leave to defend unconditionally. We vacate that order and dismiss the application filed by respondent Bank for leave to defend by allowing this appeal. Considering the nature of the case, we order no costs.