Unconditional Bank Guarantee: Supreme Court 2016 in GMB vs L&T Sets AsideHigh Court Order Restraining Invocation. The Supreme Court in Gujarat Maritime Boardvs L&T Infrastructure Development Projects Ltd dealt with invocation of unconditionalperformance bank guarantee for port development. The Court on 28.09.2016 set asideGujarat High Court order restraining GMB from encashing Rs.5 Crore BG. The Court heldthat writ jurisdiction under Article 226 cannot be used to restrain invocation of BGexcept in fraud or irretrievable injury. The Court also noted breach of environmentclearance and CRZ clearance condition in LoI. This blog explains GMB vs L&T on bankguarantee, Article 226, and contractual obligations.
Facts: Port Project; LoI Cancelled; Bank Guarantee Invoked. The Supreme Court inGMB vs L&T para 1: GMB issued LoI dated 06.02.2008 to L&T for development ofSutrapada Port. LoI conditions:1.7 Submit Detailed Project Report in 12 months1.8 Obtain environment clearances and coastal regulation zone (CRZ) clearanceswithin 18 months1.9 Submit Performance Bank Guarantee of Rs 5 Crores. "Bank guarantee shall beforfeited" if conditions not met.The Supreme Court in GMB vs L&T: Location changed toKachchigarh in 2010. Yes Bank furnished BG on 26.11.2011 for Rs.5 Crores. BG clause:"Decision of GMB as to any breach...shall be absolute and binding".The Supreme Courtin GMB vs L&T: By letter dated 10.03.2015 GMB cancelled LoI citing "inability to developport...due to presence of corals" and "breach of conditions". Same day invoked BG.L&Tfiled writ petition. High Court allowed petition and restrained encashment.A commonmistake is confusing BG with security deposit. GMB vs L&T says BG is independentcontract.
Bank Guarantee Law: Independence And Unconditional Nature. The Supreme Courtin GMB vs L&T: "Bank guarantee is an independent contract between guarantor-bankand guarantee-appellant. The guarantee is unconditional".The Supreme Court in GMB vsL&T: Cited Himadri Chemicals vs Coal Tar Refining (2007) 8 SCC 110 para 14.Principles:(i) Beneficiary entitled to realise BG irrespective of pending disputes(ii) Bank bound to honour irrespective of customer dispute(iii) Courts should be slow in granting injunction(v) Exception only for "Fraud of egregious nature" or "irretrievable harm"The SupremeCourt in GMB vs L&T: BG terms: "Without any demur, merely on demand from GMBstating breach". "Demand...shall be conclusive, absolute and binding".The SupremeCourt in GMB vs L&T: "Whether cancellation is legal...are not within purview of inquiryunder Article 226".In our experience, once breach is communicated, bank must pay.Dispute on breach is between GMB and L&T in separate suit.Article 226 & Contractual Matters: Limits Of Writ Jurisdiction. The Supreme Court inGMB vs L&T: Cited Joshi Technologies vs UOI (2015) 7 SCC 728 and ABL Internationalvs UOI (2004) 3 SCC 553.The Supreme Court in GMB vs L&T para 69: "Normally, Courtwould not exercise discretion" when:69.2 Mode of settlement provided in contract69.3 Serious disputed questions of fact requiring oral evidence69.4 Money claims per se arising out of contractThe Supreme Court in GMB vs L&Tpara 70.4: "Writ jurisdiction...was not intended to facilitate avoidance of obligationvoluntarily incurred".High Court erred by going into "frustration of contract" and"impossibility" due to corals. That is for civil suit/arbitration.The Supreme Court in GMBvs L&T: "If decision of GMB to cancel...is found erroneous...question of allowingencashment would arise". But that must be decided elsewhere.
Conclusion
Gujarat Maritime Board vs L&T establishes that unconditional bank guaranteeinvocation supreme court 2016 law protects beneficiary rights. Supreme Court28.09.2016 held High Court wrong to restrain BG invocation under Article 226. BG isindependent and absolute. Breach includes failure to obtain environment clearance andCRZ clearance as per LoI 1.8. As the law stands, only egregious fraud or irretrievableinjury can stop BG. For infrastructure projects, this judgment is key on risk and bankguarantees. The Supreme Court’s ruling in GMB vs L&T upholds commercial certainty.
