Case Note & Summary
The present appeal was filed by Larsen & Toubro Limited (L&T), the original plaintiff, challenging an ad-interim order passed by a learned Single Judge of the Bombay High Court on 29 February 2016. The dispute arose out of a performance bank guarantee issued by Allahabad Bank (Respondent No. 1) in favour of L&T, which was invoked by L&T. The learned Single Judge restrained the bank from paying the proceeds to L&T and directed the bank to deposit the amount in the account of GVK Projects & Technical Services Ltd. (Respondent No. 2), a third party. L&T appealed against this order. The court noted that the matter was heard substantially on 9 March 2016 and finally on 6 May 2016, with parties consenting to final disposal at the admission stage. The court examined the principles governing bank guarantees, emphasizing that they are independent contracts and can only be restrained in cases of fraud or irretrievable injustice. The court found that no such exceptional circumstances existed in this case. The direction to deposit the proceeds in a third-party account was held to be without jurisdiction and effectively restrained the beneficiary from receiving the amount. The court allowed the appeal, set aside the impugned order, and directed the bank to pay the proceeds to L&T. The court also clarified that the suit and notice of motion would proceed on merits.
Headnote
A) Banking Law - Performance Bank Guarantee - Invocation - Restraint - The court considered whether an ad-interim order restraining invocation of a performance bank guarantee and directing deposit of proceeds in a third-party account was justified. Held that bank guarantees are independent contracts and can only be restrained in cases of fraud or irretrievable injustice; the beneficiary is entitled to the proceeds. The direction to deposit in a third-party account was without jurisdiction and unsustainable. (Paras 1-21)
B) Civil Procedure - Ad-Interim Relief - Third-Party Deposit - The court examined the propriety of directing the bank to deposit the guarantee amount in the account of Respondent No. 2 (GVK Projects) instead of the beneficiary. Held that such a direction effectively restrains the beneficiary from receiving the amount and is not permissible in law; the beneficiary has a right to the proceeds. (Paras 10-21)
C) Contract Law - Bank Guarantee - Autonomy - The court reiterated the principle that a bank guarantee is an independent contract between the bank and the beneficiary, and the bank must honour it according to its terms. The court cannot interfere except in exceptional circumstances. (Paras 8-15)
Issue of Consideration
Whether the learned Single Judge was justified in passing an ad-interim order restraining the invocation of a performance bank guarantee and directing the bank to deposit the proceeds in the account of a third party (Respondent No. 2) instead of the beneficiary (Appellant)?
Final Decision
The appeal is allowed. The impugned order dated 29 February 2016 is set aside. The bank (Respondent No. 1) is directed to pay the proceeds of the bank guarantee to the appellant (L&T). The suit and notice of motion to proceed on merits.
Law Points
- Bank guarantee invocation cannot be restrained except in case of fraud or irretrievable injustice
- beneficiary is entitled to proceeds of bank guarantee
- court cannot direct deposit of proceeds in third-party account without consent
- principles of bank guarantee autonomy
Case Details
2016 LawText (BOM) (06) 65
APPEAL (LODGING) NO. 106 OF 2016 IN NOTICE OF MOTION (LODGING) NO. 120 OF 2016 IN SUIT (LODGING) NO. 28 OF 2016 WITH NOTICE OF MOTION (LODGING) NO. 732 OF 2016 IN APPEAL (LODGING) NO. 106 OF 2016 IN NOTICE OF MOTION (LODGING) NO. 120 OF 2016 IN SUIT (LODGING) NO. 28 OF 2016
ANOOP V. MOHTA, A.A. SAYED
Mr. Iqbal Chagla, Senior Counsel, Mr. Atul Rajyadhaksha, Senior Counsel, Mr. Dinyar Madon, Senior Counsel, Mr. Firoz Bharucha, Mr. Jehan Mehta a/w Mr. Sachin Chandarana, Mr. Akhil Tiwari and Mr. Pranav Khatavkar i/by M/s. Manilal Kher Ambalal & Co. for the Appellant/Applicant; Mr. V.N. Ajitkumar for Respondent No.1; Mr. Janak Dwarkadas, Senior Counsel, Mr. Chirag Kamdarm Mr. Farid Karachiwala with Ms. Shoma Maitra i/by M/s. Wadia Ghandy & Co. for Respondent Nos. 2 and 3.
Larsen and Toubro Limited
Allahabad Bank, GVK Projects & Technical Services Ltd., GVK Ratle Hydro Electrict Project Pvt. Ltd.
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Nature of Litigation
Appeal against ad-interim order restraining invocation of performance bank guarantee and directing deposit of proceeds in third-party account.
Remedy Sought
Appellant sought to set aside the ad-interim order and direct the bank to pay the proceeds of the bank guarantee to the appellant.
Filing Reason
The learned Single Judge passed an ad-interim order restraining the bank from paying the proceeds of the performance bank guarantee to the appellant and directing deposit in the account of Respondent No. 2.
Previous Decisions
The learned Single Judge passed the ad-interim order on 29 February 2016 pending the Notice of Motion in the Suit.
Issues
Whether the learned Single Judge was justified in passing an ad-interim order restraining the invocation of a performance bank guarantee and directing the bank to deposit the proceeds in the account of a third party instead of the beneficiary?
Whether the principles governing bank guarantees permit such restraint and direction?
Submissions/Arguments
Appellant argued that the bank guarantee is an independent contract and cannot be restrained except in cases of fraud or irretrievable injustice, and the direction to deposit in a third-party account is without jurisdiction.
Respondents argued that the order was justified to protect the interests of all parties pending the suit.
Ratio Decidendi
A bank guarantee is an independent contract between the bank and the beneficiary, and the court cannot restrain its invocation or direct deposit of proceeds in a third-party account except in cases of fraud or irretrievable injustice. The beneficiary is entitled to the proceeds of the bank guarantee.
Judgment Excerpts
The present Appeal is filed by the AppellantOriginal Plaintiff challenging an adinterim order of the learned Single Judge, in the matter of invocation of performance bank guarantee and against the direction to deposit the proceeds in the account of third party and not of the beneficiary.
The parties have no objection for hearing of this Appeal finally at admission stage itself.
The Appellant/Plaintiff(Subcontractor), Larsen & Toubro Limited (for short, “L & T”), a company engaged in business of construction of large infrastructural projects, has filed this Appeal and challenged Judgment and order dated 29 February 2016 passed by the learned Single Judge, pending the Notice of Motion in the Suit.
Procedural History
The appellant filed a suit (Suit (Lodging) No. 28 of 2016) and a Notice of Motion (Lodging) No. 120 of 2016 seeking ad-interim relief. The learned Single Judge passed an ad-interim order on 29 February 2016. The appellant filed the present appeal on 9 March 2016, which was heard substantially and kept on 23 March 2016. The appeal was finally heard on 6 May 2016 and judgment pronounced on 20 June 2016.
Acts & Sections
- Indian Companies Act, 1913:
- Companies Act, 1956:
