ONGC v. SBI Overseas Branch, Bombay
AIR 2000 SC 2548
ONGC had awarded a large gas pipeline contract to an Italian consortium S at a certain contract price (CP). The work was to be executed within a given date else S was liable to pay certain percentage of C.P. S was also obliged to furnish a bank guarantee (BG) not later than 4 months prior to the scheduled completion date. Failure in this regard entitled ONGC to encash the performance guarantee. In case of delay, S was to get validity of BG extended. In any dispute the jurisdiction was that of India. S furnished BG from the respondent Bank (B). Project got delayed and dispute arose regarding the extension of validity. ONGC invoked BG but B refused payment on these grounds:
- B had issued BG in favour of ONGC against the counter guarantee of an Italian Bank (I) and S had obtained an order of injunction from I from making any payment to B under the counter guarantee.
- Rupee payment under BG can be made only on receipt of re-imbursement from I in an approved manner.
- The matter being subjudice, ONGC should wait until the issue is resolved.
High Court (Bombay):
The Court granted unconditional leave to defend the suit on the following terms
- While invoking BG, the amount of liquidated damage was not stated.
- As per BG, a clear notice of demand towards liquidated damage was to be given;
- The notice of invocation was not a legal notice to communicate the liquidated damages
- Arbitration proceedings pending; Italian Court also seized of the matter.
- Whether a confirmed bank guarantee can be interfered by the court?
- Whether encashment of unconditional bank guarantee depends on adjudication of disputes?
- What effect the counter guarantee will have in this case?
Contention (ONGC): None of the grounds stated by the HC provided any basis for granting an unconditional leave to defend.
S. RAJENDRA BABU, J. (Appeal allowed)
- (.w.r.t 1st issue)As per precedents, confirmed bank guarantee/ irrevocable letters of credit cannot be interfered with unless there is fraud and irretrievable injustice involved. Mere irretrievable injustice without prima facie case of established fraud is inconsequential. Sic there is no such fraud and irretrievable injustice involved in this case, BG can be invoked by ONGC without interference.
- (w.r.t 2nd issue) Encashment of an unconditional bank guarantee does not depend upon the adjudication of disputes. In the absence of a plea of fraud, guarantee had to be given effect to.
- Arrangement of counter guarantee was between the B and I and non payment by I in no way affected the rights of the beneficiary ONGC to obtain money under the guarantee issued by the Bank. A bank cannot decline payment under a bank guarantee on the ground that the counter guarantee was restrained by a foreign court, when there was no other impediment to payment under exchange control regulations.