SC on when can courts interfere with the invocation of bank guarantees

The Hon’ble Supreme Court, on 18th December 2019, in the matter of Standard Chartered Bank v. Heavy Engineering Corporation Ltd. & Anr. pronounced that a dispute between the beneficiary and the party at whose instance the bank has given the guarantee is immaterial and is of no consequence on the encashment or invocation of bank guarantee so long as the invocation is in terms of the bank guarantee. It is not even open for the Court to interfere with the encashment and invocation of bank guarantee so long as the invocation was in terms of the bank guarantee.

The Hon’ble Supreme Court observed that;

The bank guarantee is an independent contract between bank and the beneficiary and the bank is always obliged to honour its guarantee as long as it is an unconditional and irrevocable one. The dispute between the beneficiary and the party at whose instance the bank has given the guarantee is immaterial and is of no consequence. There are, however, exceptions to this Rule when there is a clear case of fraud, irretrievable injustice or special equities. The Court ordinarily should not interfere with the invocation or encashment of the bank guarantee so long as the invocation is in terms of the bank guarantee. (Para 23)

Once the demand is made in due compliance of bank guarantees, it is not open for the Bank to determine as to whether the invocation of the bank guarantee is justified so long as the invocation is in terms of the bank guarantee. (Para 26)

In absence of any defence which falls in any of the exception to the rule i.e. case of fraud, irretrievable injustice and special equities, it is not even open for the Court to interfere with the invocation and encashment of the bank guarantee so long as the invocation was in terms of the bank guarantee. (This inference has been drawn on the basis of Para 26)

Copy of judgement: Judgement_18-Dec-2019

-Adv. Tushar Kaushik

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