Contract Law

Hindustan Steelworks Construction Ltd. v. Tarapore & Co.

(1996) 5 SCC 34

Facts

Hindustan Steelworks awarded Tarapore & Co. a major construction contract.
The work was repeatedly delayed and later reduced by agreement.
Bank of India issued several guarantees at Tarapore’s request in favour of Hindustan Steelworks.
The guarantees stated that:
the Bank would pay without demur;
Hindustan Steelworks would decide whether breach had occurred;
its assessment of loss would bind the Bank;
underlying disputes would not affect payment.
Hindustan Steelworks terminated the contract and invoked the guarantees.
Tarapore sought an injunction, arguing that:
disputes were pending before arbitrators;
breach and damages had not yet been adjudicated.
The High Court restrained encashment.

Whether an unconditional bank guarantee can be restrained because the underlying contractual dispute remains pending.
Whether the beneficiary must first establish breach and quantify damages before invocation.

A bank guarantee is an independent contract between the bank and the beneficiary.
An unconditional guarantee must ordinarily be honoured according to its terms, regardless of disputes under the underlying contract.
Courts interfere only in exceptional cases, principally:
egregious fraud of which the bank has notice; or
irretrievable injustice or equivalent exceptional circumstances.
Pending arbitration and disputed breach do not by themselves justify an injunction.

The operative clauses made the guarantees payable on demand and without demur.
Hindustan Steelworks was expressly made the judge of whether the contractor had committed breach and of the amount payable.
The Bank’s obligation did not depend on an arbitral award.
The High Court incorrectly merged:
the contractor’s liability under the works contract; and
the Bank’s independent obligation under the guarantees.
Tarapore could pursue its contractual claims in arbitration and later recover any amount wrongfully retained.
That did not permit it to stop immediate payment by the Bank.
No fraud in the guarantees was established.
Nor was there irretrievable injustice of the exceptional kind required.
The Supreme Court therefore restored the autonomy and commercial certainty of the guarantees.

The Supreme Court allowed Hindustan Steelworks’ appeal and removed the injunction.
The guarantees could be encashed immediately.
Use this case for: an unconditional bank guarantee is autonomous and cannot be restrained merely because breach or damages are disputed in arbitration.