Case Note & Summary
The second defendant bank (Canara Bank) filed a second appeal against the judgment and decree of the first appellate court, which had directed the bank to repay the amount of Rs.3,87,000/- with interest to the plaintiff (Gopala Rathinam). The plaintiff had entered into a construction contract with the first defendant (National Building Construction Corporation Limited) on 22.05.1990 for a contract value of Rs.77,37,814/-. As per the agreement, the plaintiff furnished a bank guarantee from the appellant bank for 5% of the contract value (Rs.3,87,000/-) to ensure due performance. Disputes arose between the plaintiff and the first defendant regarding delay and non-payment. The first defendant invoked the bank guarantee. The plaintiff filed a suit seeking permanent injunction restraining the first defendant from invoking the bank guarantee and the bank from making payment. The trial court directed the first defendant to deposit the entire bank guarantee amount before the bank. Both parties appealed. The first appellate court allowed the plaintiff's appeal and directed the bank to repay the amount with interest. The bank appealed to the High Court. The High Court held that a bank guarantee is an independent contract and can be restrained only in cases of fraud or irretrievable injustice. Since no such case was made out, the first appellate court's direction was erroneous. The High Court allowed the appeal, set aside the first appellate court's decree, and restored the trial court's decree.
Headnote
A) Bank Guarantee - Invocation - Restraint - Fraud or Irretrievable Injustice - Bank guarantee is an independent contract between the bank and the beneficiary; courts can restrain invocation only if there is a clear case of fraud or irretrievable injustice. In the absence of such exceptional circumstances, the bank is bound to honour the guarantee. (Paras 10-14) B) Civil Procedure - Second Appeal - Substantial Question of Law - Section 100 CPC - The High Court can interfere in second appeal only if there is a substantial question of law. The first appellate court's direction to repay the bank guarantee amount without finding fraud or irretrievable injustice raises a substantial question of law. (Paras 9, 15) C) Contract - Bank Guarantee - Payment - Once the bank guarantee is invoked and paid, the bank cannot be directed to repay the amount to the contractor unless the invocation is fraudulent or causes irretrievable injustice. The dispute between the contractor and the beneficiary does not affect the bank's obligation. (Paras 10-14)
Issue of Consideration
Whether the first appellate court was justified in directing the bank to repay the amount under the bank guarantee after it had been invoked and paid, in the absence of any established fraud or irretrievable injustice.
Final Decision
The High Court allowed the second appeal, set aside the judgment and decree of the first appellate court dated 31.01.2006 in AS No.196/2004, and restored the judgment and decree of the trial court dated 13.07.2004 in OS No.196/2000. No costs.
Law Points
- Bank guarantee is an independent contract
- invocation cannot be restrained except in case of fraud or irretrievable injustice
- Section 100 CPC
- substantial question of law
