Case Briefs
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Hindustan Construction Co. Ltd vs State Of Bihar And Ors on 8 October 1999


Author:  Rishi Raaj, 3rd Year student at Amity University, Lucknow.

Introduction

  • The case was lodged in the year 1992 in the Bombay High Court and the judgement was delivered on 8th October 1996. HCCL filed the case against the State bank of India, State bank of Patiala and Indian Bank and the State of Bihar and its officers for several reliefs.

Essential Details of the Case

  • Citation- AIR 1999 SC 3710 or 1999 AIR SCW 3747
  • Petitioner(s)- HINDUSTAN CONSTRUCTION CO. LTD.
  • Respondent(s)- STATE OF BIHAR AND ORS.
  • CASE NO.: Appeal (civil) 5856 of 1999
  • Concerned statue and Provision- Companies Act, 1956 and India Act 1955
  • For the Appearing Parties- Mr F.S. Nariman, Mr Rafiq Dada, Mr V.A. Bobde, Senior Advocates with Mr Bhavesh Panjwani, Mr H.V. Shankar, Mr P. Sanacheti, Mr Sameer Parekh, Mr T.N. Subramanian, Mr S. Wajifdar, Mr Lalit Chauhan, Mr P.H. Parekh, Mr Beloslay Kumar, Mr Rajesh, Mr B.B. Singh, Mr D.M. Popat, Mr J.S. Goswami, Ms Vanita Bhargava, Ms Bina Gupta and Sanjay Kapur, Advocates.
  • Bench- S. SAGHIR AHMAD & D.P. WADHWA 
  • Date of Judgement- 08.10.1999.

Facts of the case

  • HCCL was given a contract to construct a Dam (Icha Dam across the river Kharkai in village Kuju) by the State of Bihar.
  • The contract had a period of 42 months according to which the work on the dam was supposed to be completed by the 24th of October, 1992.
  • HCCL furnished its work. A Bank Guarantee for 10 percent of the contract price as “Performance Guarantee” in the sum of Rupees Three Crores Ninety Seven Lakhs Thirteen Thousand One Hundred and Two only. 
  • Another Bank Guarantee was the Guarantee against “Mobilisation Advance”. HCCL furnished fifty “Mobilisation Advance” bank Guarantees aggregating in all to Rs. 532 lacs. 

Issue Raised

  • In the above case, the High Court completely disregarded and unduly interfered with the Single Judge bench’s decision of injunction prohibiting the defendants from invoking the bank guarantee.

Arguments from the Petitioner

  • The defendants invoked both the bank guarantees. An interim order was passed by the Single Judge in the case on 27th October 1992. The defendants were barred from relying on the Bank Guarantees, and the Banks were barred from paying the defendants the amount protected by the Bank Guarantees.
  • Mr. F.S. Nirman criticized the order of the Division Bench of the Bombay High Court on several grounds, including the claim that invoking the Bank Guarantee on the “Mobilisation Advance” was completely illegal and that the High Court erred in dismissing the restraining judgement relating to the Guarantee.
  • It is contended that this Bank Guarantee could be invoked only if the amount lent to HCCL. The invocation itself was bad because “Mobilisation Advance” became payable on the basis of Clause 9 of the principal contract, which was directly referred to in the Bank Guarantee, and because the conditions envisioned by Clause 9 did not exist. It is argued that the Single Judge made the correct decision in granting the injunction, which should not have been overturned by the Division Bench.

Arguments from the Respondent

  • HCCL had not adhered to the work schedule and had rather abandoned the work after receiving “Mobilisation Advance,” and both Bank Guarantees were invoked as a result.
  • The suit’s defendants 4 to 6 argued, among other things, that HCCL had not adhered to the work schedule and had instead abandoned the task after receiving “mobilisation advance,” and that it was for this reason that both bank guarantees were invoked.
  • The defendants appealed the Single Judge’s order to the Division Bench.
  • The bench, in the impugned judgement on 20-3-1998, dismissed the injunction order in respect of the bank guarantee relating to “mobilisation advance”.
  • But the bench upheld the injunction order in respect of the “performance guarantee.”
  • The defendants have filed a second appeal against the section of the judgement in which the Division Bench upheld the injunction order about the “performance guarantee.”

Judgement

  • The “performance guarantee,” which constituted a separate and distinct contract between the defendants and the Bank, was unconditional and unequivocal and that because the Bank had agreed to pay the defendants the amount covered by that guarantee on-demand, the High Court’s injunction order was liable to be set aside.
  •  What matters is that the bank guarantee is written in clear, unconditional terms, and states that the amount will be paid without question or objection, regardless of any dispute that may have arisen or is pending between the bank guarantee beneficiary and the person on whose behalf the guarantee was given.
  • The terms of the bank guarantee are vitally important, and the invocation must be done in line with those terms, or else the invocation will be invalid.
  • After (i) execution the form of agreement by the parties thereto, (ii) provision by the contract of the performance security following clause 5, and (iii) provision by the contractor of a bank guarantee in an amount equal to the advance loan by a bank acceptable to the employer, payment of the loan will be due under separate certification by the Engineer.
  •  The High Court completely ignored this part of the case, interfering unduly with the Single Judge’s judgement prohibiting the defendants from invoking the bank guarantee.
  • Concerning the defendants’ other appeal concerning the “performance guarantee,” it should be noted that the injunction decision was upheld by the Single Judge as well as the Division Bench of the High Court, preventing the defendants from invoking the guarantee. The Banks have also been barred from paying the defendants the money stipulated in the “performance guarantee.”
  • They were requested that the bank draft for Rs 3,97,13,102.00 (Rupees three crores ninety-seven lakhs thirteen thousand two) payable to the Executive Engineer, Kharkai Dam Division II, Icha, Chaliama, PO Kesargarhia, District West Singhbhum, Chaibasa to the undersigned as soon as possible as a claim against the said bank guarantee.

Critical Analysis

  • With terms following the Guarantee, The beneficiary is entitled to recover the full amount. This makes Bank Guarantee the most common method for commercial transactions. 
  •  It is one the most secure way of payment of money in commercial transactions. This is regardless of any pending dispute between the parties.
  • It is mostly used and required, to private individuals that are given government contracts. These include construction and other such contracts that involve a very high sum of money.
  • This is made to secure payments to these individuals like “Advance”  to make sure of the performance of work given to them. These are given to them on a time to time basis during the contract.

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