Article

Note: To assure timely performance of a contract to expand U.P. State Sugar Corporation's (Beneficiary/Owner) sugar facilities, M/S. Sumac International Ltd. (Applicant/Builder) had five bank guarantees issued in favor of Beneficiary/Owner. The Supreme Court's summary of these bank guarantees is set out below. When the expansion project was cancelled, disputes arose between Applicant/Builder and Beneficiary/Owner, and Beneficiary/Owner attempted to draw on the bank guarantees.

Applicant/Builder filed for arbitration and sued Beneficiary/Owner to enjoin payment of the bank guarantees during the pending arbitration. Senior Divisions, Muzaffarnager, J. dismissed the case and Applicant/Builder appealed. On appeal, the High Court granted the injunction, preventing Beneficiary/ Owner from enforcing the bank guarantees. Beneficiary/Owner appealed this decision on the basis that the bank guarantees were not subject to resolution of any underlying contractual disputes. The Supreme Court, Punchhi, J., Manohar, J., in an opinion by Manohar, J., allowed the appeal.

The Supreme Court found that the bank guarantees "provide that the right of [Beneficiary/ Owner] to recover from the guarantor any amount shall not be affected or suspended by reason of any disputes that may have been raised by the [Applicant/ Builder] with regard to its liability or on the ground that proceedings are pending before any Tribunal, Arbitrator or Court with regard to such dispute. The guarantor shall immediately pay the guaranteed amount to the [Beneficiary/Owner] on demand."

The Judge observed that courts should be unwilling to enjoin these types of bank guarantees and they should be paid on demand unless one of two conditions exist; (1) the issuing bank knows the demand for payment is fraudulent or (2) payment of the bank guarantee will result in irreparable harm or injustice to one of the parties. The Judge concluded that neither fraud nor extreme circumstances were present in this case and the bank guarantees should be paid.

Court's Summary of Contract Provisions regarding Bank Guarantees:

1. A bank guarantee for timely delivery of plant and machinery as provided in Clause 14.1 representing five percent of the contract price referred to in Clause 2.1. This was required to be furnished within 3-1/2 months of the signing of the agreement.

2. The seller was required to furnish a bank guarantee in respect of guaranteed performance of the plant and machinery for an amount representing 5% of the contract price. This guarantee was required to be furnished eight months before the scheduled date of commissioning mentioned in Clause 4.1 or within six months from the date of the signing of the agreement or after 2-1/2 months of the opening of the Letter of Credit whichever of these dates was earlier.

3. Three bank guarantees in respect of advance payments to be made by the appellant to the respondent under Clause 13.2(a) to 13.3(c) were required to be for Rs.89 lacs, Rs.178 lacs and Rs.89 lacs respectively, representing 5%, 10% and 5% of the contract price respectively. Under Clause 13.2 on receipt of the first of these bank guarantees for Rs.89 lacs the first installment of advance would be paid within a week from the date of signing of the agreement. Or receipt of the second bank guarantee for Rs.178 lacs the second advance would be paid by the appellant to the respondent within 2-1/2 months of the signing of the agreement subject to the respondent furnishing various statements, certificates etc. as set out in that clause. The third bank guarantee for Rs.89 lacs was to be furnished against the advance to be paid by the appellant to the respondent within 3-1/2 months from the date of the signing of the agreement. These three bank guarantees are thus in respect of the advance payments required to be made by the appellant to the respondent. Under Clause 15.5 all these bank guarantees are payable on demand. It is expressly provided that it shall not be open to the guarantor to know the reasons of or to investigate or to go into the merits of the demand invoking the bank guarantee or to question or challenge the demand or to require the proof of the liability of the seller before paying the amount demanded. It is further provided that the invocation of the bank guarantee shall be binding on the respondent and that the invocation of the bank guarantee would not be affected in any manner by reason of the fact that any dispute or disputes had been raised by the respondent with regard to its liability. Nor would it be affected by the fact that proceedings were pending before any Tribunal, Arbitrator or Court with regard thereto. Accordingly, the respondent furnished, inter alia, four bank guarantees, one being a guarantee for due delivery and the other three being the bank guarantees in respect of advance payment of price. The total amount covered by the bank guarantees securing advance payments is Rs.3.56 crores, which amount was paid by the appellant to the respondent as advance.

[JEB/rhw]

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