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Standard Chartered Bank v. Heavy Engineering Corporation Ltd.

Civil Appeal · 2019 INSC 1405Decided 18 Dec 2019
Civil Appeal No. 9288 of 2019
Justice L. Nageswara Rao · Justice Ajay Rastogi

Background

Heavy Engineering Corporation (HEC) had advanced money to a supplier, Simon Carves India Ltd. (SCIL), for plant and equipment under a 1981 letter of intent, backed by two unconditional bank guarantees issued by the appellant's predecessor bank. When SCIL failed to properly supply and install the equipment, causing HEC significant losses, HEC invoked the guarantees, but the Bank refused to honour them, arguing the invocation did not properly specify or apportion the type of loss covered. HEC sued and, after losing before a Single Judge of the Calcutta High Court, won before the Division Bench, which held the guarantees were validly invoked and decreed over Rs. 1.1 crore with interest in HEC's favour; the Bank then appealed to the Supreme Court.

Decision Breakdown

The Supreme Court reiterated settled law that a bank guarantee is an independent contract between the bank and the beneficiary, which the bank must honour on demand according to its own terms regardless of any underlying dispute between the beneficiary and the party on whose behalf the guarantee was given, subject only to narrow exceptions for fraud, irretrievable injustice, or special equities, none of which the Bank had established here. It found that while HEC's very first demand letter was vague, its subsequent letters clearly explained that losses arose from SCIL's defective and incomplete supply of plant and equipment, which was sufficient to satisfy the guarantees' terms. Since the Bank's refusal did not fall within any recognized exception, the Court held it had no right to second-guess the validity of HEC's invocation once a compliant demand was made, and upheld the Calcutta High Court's decree. The Bank's appeal was dismissed with no order as to costs.

Lesson Learnt

A bank that issues an unconditional guarantee cannot refuse to pay out once the beneficiary makes a demand that reasonably complies with the guarantee's terms: the bank cannot arbitrate the merits of the underlying contractual dispute itself, and courts will intervene to stop encashment only in rare cases of fraud or serious injustice.

Official source (sci.gov.in)View Judgment (PDF)

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