Article 226 Cannot Restrain Bank Guarantee: Supreme Court 2016 in GMB vs L&TOn Port Project And CRZ Breach. The Supreme Court in Gujarat Maritime Board vs L&TInfrastructure Development Projects Ltd examined whether High Court could restraininvocation of performance bank guarantee in a port project. The Court on 28.09.2016held no. The Court found L&T committed breach by failing to obtain environment andCRZ clearances within 18 months of LoI. The Court set aside High Court judgment andallowed GMB to invoke Rs.5 Crore BG. This blog explains GMB vs L&T on writ petitions,BG law, and environmental conditions in contracts.
Facts: LoI Conditions Breached; Presence Of Corals. The Supreme Court in GMBvs L&T para 1.8: L&T was to "obtain all environment clearances and coastal regulationzone (CRZ) clearances...within 18 months".The Supreme Court in GMB vs L&T: L&Tinformed GMB of "inability to develop port at Kachchigarh due to presence of corals".The Supreme Court in GMB vs L&T: Govt of Gujarat approved cancellation and forfeitureon 23.02.2015. GMB cancelled LoI on 10.03.2015 and invoked BG.High Court in para 24:Took view that "if contract had frustrated on account of impossibility" GMB cannotforfeit. Also said L&T not expected to do environmental assessment before suggestingKachchigarh.The Supreme Court in GMB vs L&T: Rejected this. LoI itself requiredEC/CRZ clearance. Risk was on L&T.A common mistake High Courts make is treatingBG dispute as contract dispute. GMB vs L&T separates them.
Egregious Fraud Or Irretrievable Injury: Only Grounds To Restrain BG. The SupremeCourt in GMB vs L&T: Cited Himadri Chemicals 6 principles. Only 2 exceptions: Fraud ofegregious nature Irretrievable harm/injusticeThe Supreme Court in GMB vs L&T: Noallegation of fraud against GMB. No proof of irretrievable injury to L&T. The SupremeCourt in GMB vs L&T: "Between bank and appellant, moment there is writtendemand...bank is bound to honour".The Supreme Court in GMB vs L&T: Left openremedy: "This judgment will not stand in way of first respondent working out grievancesin appropriate proceedings".Lesson for Developers: Do due diligence on EC/CRZ beforebidding. For Banks: Pay on demand, ask questions later. For Govt: Use BG as riskmitigation tool.
Judicial Review Of Administrative Contracts. The Supreme Court in GMB vs L&Tpara 70: Summarised law. State in contract must act fairly under Article 14. But "Writpetition was not maintainable to avoid contractual obligation".The Supreme Court inGMB vs L&T para 70.5: "Occurrence of commercial difficulty...cannot providejustification in not complying with terms of contract".The Supreme Court in GMB vsL&T: Disputed facts about breach, frustration, impossibility require evidence. Notsuitable for Article 226.In our practice, this case is authority that BG invocation is notstayed just because main contract is under challenge.
Conclusion
GMB vs L&T Infrastructure establishes that article 226 bank guarantee writjurisdiction supreme court principles bar interference in BG invocation. Supreme Court28.09.2016 set aside High Court and upheld GMB’s right to forfeit BG for breach of LoIincluding failure to get environment and CRZ clearance. Court followed HimadriChemicals and Joshi Technologies. As the law stands, unconditional BG must behonoured on demand. For port, mining, infrastructure projects, EC/CRZ compliance is acontractual obligation. The Supreme Court’s ruling in GMB vs L&T balances publicinterest with commercial sanctity.
