Case Briefs
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Association of corporation & Apex… vs State of Bihar & ANR.

Author: Himanshu Sharma, 1st year student at Amity University, Rajasthan.

Citation: N/A

Date of decision: 1st September 1999

Bench: M Shamim 

Original copy: N/A


Statutes involved: The Arbitration Act of 1940, The Arbitration and Conciliation Act 1996, The Societies Registration Act 1860


Background of the Case:

  •   Here in this case petitioner is a Society registered under The Societies Registration Act.
  • The Government of India with a view to taking up welfare schemes of the handloom sector and to look after the interests of the weavers throughout the country.
  • The State of Bihar (Respondent no. 1) in one of their welfare schemes they decided to distribute ‘dhotis’ and ‘sarees’ to the under-privileged section of the State at subsidised rates. Consequently they invited tenders from various suppliers in the month of June 1996 for supply of ‘dhotis’ and ‘sarees’.  In response to the said tenders the petitioner also submitted their tenders and ultimately got the contract on March 5, 1997 for supply of ‘dhotis’ and ‘sarees’ to the Government of Bihar valued at Rs. 200 crores approximately.
  • The petitioner was not a manufacturer of the handloom products. Consequently after having secured the contract, the petitioner approached various handloom agencies for the supply of ‘dhotis’ and ‘sarees’ to respondent No.1. As per the terms of the contract the total value of the contract is Rs. 199.8546 crores. The respondent No.1 paid a sum of Rs. 40 crores to the petitioner as mobilisation advance.
  • The petitioner in token thereof furnished a bank guarantee for the said amount in favour of respondent No.1. The respondent was under an obligation to make payment within 23 days from the date of the receipt of the goods as per the terms of the contract. However, they never made the payment within time. They have been perpetual defaulters in their compliance of the obligations under the contract. Despite letters dated April 25, 1997 and May 5, 1997 from the petitioner payments were not made in accordance with the terms of the contract.
  • Cl. 13 of the contract dated March 5, 1997 relates to two bank guarantees i.e., in the sum of Rs. 40 crores and Rs. 20 crores. The same can be invoked by the Chief Secretary, Bihar if there are sufficient reasons for the same after giving an opportunity of hearing to ACASH. It further provides that the petitioner would be provided seven working days’ time to refer the matter to the arbitrator.
  • Respondent No.1 has invoked the bank guarantee through their letter dated September 23, 1997 on the basis of an order passed by the Chief Secretary, Government of Bihar, directing respondent No.1 to invoke the bank guarantee furnished by the petitioner in terms of clause 13 of the agreement.

Issue in question:

  • The issue is, whether the respondent herein were entitled to invoke the bank guarantee and to encash the same for their benefit on their demand.


  • The bank guarantee in the instant case is not independent of the contract. As per condition No.1 of the contract it is a part and parcel of the contract. The bank guarantee is thus one of the many documents forming part of the contract. The bank guarantee could have been invoked by the Chief Secretary only if there were sufficient reasons to do so and that, too, after hearing the petitioner.
  • The petitioner was to be given seven days time to refer the matter to the arbitrator. The impugned bank guarantee is a conditional one inasmuch as a mechanism has been provided for invoking the bank guarantee. It can be invoked only for sufficient reasons and after giving an opportunity to the petitioner of being heard. Furthermore, seven working days time is to be provided to the petitioner after the invocation of the bank guarantee to approach the arbitrator.
  • It has thus been prayed that respondent No. 1 be restrained from encashing the bank guarantee and respondent No. 2 be restrained from making payment under the said bank guarantee.
  • Respondent No.1 has opposed the application, on the following grounds: that this Court has got no territorial jurisdiction to entertain the present petition. The impugned contract dated March 5, 1997 was signed and executed in Patna (Bihar). The entire performance of the contract was to take place in Bihar. The impugned bank guarantee was executed in Bihar. There is an express contractual obligation that all disputes relating to the bank guarantee shall be subject to the jurisdiction of the Patna Courts.
  • It has been urged for and on behalf of the petitioner that the bank guarantee in the instant case furnished at the instance of respondent No. 1 by Syndicate Bank, respondent No. 2, did not form an independent contract. It was very much a part and parcel of the main contract dated March 5, 1997 in between the petitioner and respondent No. 1 i.e., the State of Bihar. The same was furnished in terms of the said contract. Hence the respondent cannot be permitted to encash the same unless and until they comply with the terms of the main contract laid down therein.

Critical Analysis:

  • It is fully manifest from above that the bank issued an irrevocable letter of credit/guarantee in favour of respondent No.1 and undertook to pay an amount not more than Rs. 40 crores only on demand by the Director of Handlooms without any demur and protest. 
  • It was further categorically mentioned therein that any such demand made on the bank shall be conclusive as regards the amount due and payable by the bank under the bank guarantee and the said amount was to be paid without any demur and protest. 
  • Thus this Court is firmly of the view that the instant case is a case of unconditional guarantee.

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