Hindustan Steel Works v. Tarapore and co. and another

Citation: (1996) 5 SCC 34

Court: Supreme Court of India

Bench: Justice S.S Agarwal, Justice G.T Nanavati

Facts:

In its Visakhapatnam Steel factory, Hindustan Steel Construction Ltd. (HSCL) had contractually hired Tarapore & Co. for Construction Project. The deal was sealed on 25.04.84 with Rs. 19,21,36,804 in lump sum. The job was unfinished and the contractors asked for an extension to accomplish the work, yet it still missed to meet the deadlines following extension of the duration to finish. A conflict emerged among the sides, and both of them chose an arbitrator to settle the matter, where workload was decreased, there was contractual consent, and the cost was Rs. 4,5 Crore. The contractor utterly failed yet again to accomplish the job well within long period specified and HSCL withdrew from the deal. During that period the Bank of India provided a sum of 14 guarantees in favour of HSCL to provide the contractor with working cash on the project.[1]

Issues Raised

Was the judgement of the High Court to prevent the Appellant from implementing the Bank Guarantees correct?[2]

Rule

That the correct position of law is to fulfil Bank commitments without any interference from the judiciary, and that the tribunals are supposed to intervene only in extraordinary circumstances of fraud or irreversible injustice.[3]

Analysis:

The decision in this matter overturned the previous ruling and order. During the remaining appeals no stay was granted. The court cannot intervene in the disagreement; it can only intervene in instances of fraud and irreversible wrongdoing by enforcing the Bank Guarantee, according to the ruling. The High Court erred in intruding and issuing an injunction against the appellant since the case of fraud was not proved and did not contribute to the court’s involvement. The respondent, on the other hand, attempted to make it a matter of unusual circumstances or particular equities in terms of who broke the contract. The appropriate law is that banks ought to be free from interbank involvement; only in the event of fraud or irreversible injustice, which can be accomplished with the encashment of the bank guarantee, can the judiciary intervene. Thus , the tribunal discarded it, ruling that the bank guarantee could not be encashed until and unless the conflict was resolved first with the arbitrators.[4]

In the matter of U.P. Co-operative Federation Limited. v. Singh Consultants and Engineers (P) Ltd.,[5] the right legal stance concerning the implementation of the Bank Guarantee granted by the Bank is undisputed. It is also stated that the individual who receives the bank guarantee does not have the right to an injunction. It is known that this is the rule by which several economic transactions are held and it would result in an interruption of business flow. In such instances the court would be required to interfere in cases involving fraud that would detrimentally affect the actual transaction of the Bank Guarantee and make the financial institution aware of such fraudulent activities. In this transactions the Beneficiaries must have executed such deception, but there were none. A bank guarantee also gives the Beneficiaries the right to cash the full sum or a portion of it, regardless of whether or not there is a conflict over the person whom the guarantee was given.[6]

Conclusion

International commerce thrives on bank guarantees. Until there is a particular allegation of deception and exceptional equities, courts should typically urge on the bank guarantee’s implementation and enable it to be executed. Apart from such unusual circumstances, if courts meddle with the mechanism of irreversible commitments undertaken by banks, confidence in international trade will be irrevocably harmed. The necessity for bank guarantees stems mostly from the uncertainty and lack of faith in the major debtor’s capacity to fulfil the obligation. Bank guarantees refer to the surety bank’s supplementary liabilities, which is intended to ensure that the principal debtor does not defraud the creditor and to assure the beneficiaries that the contractual risks he is taking will be fulfilled. It ensures that the contract’s payments or execution is not jeopardised. Bank guarantees, as business tools, become even more significant in situations of financial uncertainty.


[1] Hindustan Steelworks v. Tarapore, JT 1996 (6) 295.

[2] Richard Ekka, Hindustan Steelworks v. Tarapore, JT 1996 (6) 295.

[3] The law of bank Guarantees: Important tools of Modern day Commercial transactions: available at: The Law

of Bank Guarantees: Important Tools of Modern Day Commercial Transactions – The CBCL Blog (nliu.ac.in).

[4] Id.

[5] UP co-operatiev federation ltd v. Singh Consultants and engineers, Air 1988 Sc 2239.

[6] Supra note 2.

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