Bank Guarantees are separate contracts not bound any other contractual relations between parties

Delhi High Court: A Division Bench comprising of Ravindra Bhat and A.K. Chawla, JJ., dismissed a First Appeal against an order declining grant of interim relief under Section 9 of the Arbitration and Conciliation Act, 1996.

The contract between the parties was the result of bidding in a public tendering process. The consideration of the contract was over Rs. 69 crores, with the period of execution being of 15 months along with an option to apply for extension. The appellant was aggrieved by the termination of contract after several defects and deficiencies during performance were pointed out. The grievance of the appellant was threefold viz. against invocation of performance guarantee, mobilization of advance bank guarantee and alleged unlawful termination of contract.

The Court directed that the issue of wrongful termination was a matter to be decided on merits during the arbitral proceedings and proceeded to decide upon the issues of invocation.

On that issue, the Court held that the performance guarantee mandates the bank to honour without demur any demand by the principal, who is the real beneficiary of any sums, claimed by it as due under the contract. In other words, the bank cannot adjudicate as to whether the claim by the beneficiary was in fact determined by it in accordance with the underlying contract between it and a third party. It was further held, that guarantee is an independent contract and has only a referential connection to the contract between the two parties, who agree upon the execution of performance of a particular contract for which the bank guarantee is issued. In the circumstances, mere invocation of a guarantee does not provide valid grounds for interdicting the invocation of guarantee. [M/s Classic KSM Bashir JV v. Rites Ltd., 2018 SCC OnLine Del 9056, decided on 14-05-2018]

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