The Delhi High Court has ruled that a bank issuing an unconditional and irrevocable bank guarantee (BG) cannot refuse to honour it based on a side arrangement not reflected in the guarantee itself [Kotak Mahindra Bank Vs Union of India]..A Bench comprising Justice Jyoti Singh explained that a bank guarantee is an independent contract, and its enforcement is determined only by the terms contained in the guarantee. "A Bank Guarantee is an independent contract from underlying Agreements and therefore to test the validity of invocation of a BG, one can only look at the terms of the BG and not the underlying contract or even the main contract and it is trite that the Bank is bound to honour the unconditional and irrevocable BGs irrespective of and de hors the dispute between the principal debtor and the beneficiary/creditor," the Court held. The ruling came in a suit filed by Kotak Mahindra Bank Limited against the the Union Ministry of Road Transport and Highways (MoRTH), seeking the recovery of ₹48.77 crore paid out by the bank under bank guarantees issued on behalf of a contractor that later defaulted.Kotak claimed that there was a breach of certain conditions in underlying agreements, which would discharge the bank of its liability as a guarantor. The Court, however, rejected this argument and dismissed the suit, holding,“If the plea of the Plaintiff (bank) was accepted, virtually, an unconditional BG will be converted into a conditional BG, which is impermissible in law.”.The dispute arose from Engineering, Procurement, and Construction (EPC) contracts awarded by MoRTH for highway work in Bihar. The contractor, Sunil Hitech Engineers Ltd (Defendant No. 3), arranged five bank guarantees through Kotak Bank to secure mobilization advances from the ministry. Kotak claimed it had issued the bank guarantees on the condition that all project payments would be routed through an escrow account maintained with the bank, and that the payment methodology could not be altered without its consent.Although MoRTH initially routed payments through the escrow account, it later began crediting another account at the contractor’s request—without obtaining Kotak’s no-objection certificate (NOC). The contractor subsequently defaulted, and MoRTH invoked the BGs. Kotak claimed since the agreed escrow arrangement was not following, it stood discharged of any liability as a guarantor. In this regard, it cited Sections 133 and 139 of the Indian Contract Act, 1872..The Court rejected Kotak’s arguments, noting that the bank guarantees were explicitly unconditional and did not refer to any escrow requirement or NOC condition.“Clearly and admittedly, opening of the Escrow Account with the Plaintiff Bank and/or issuance of NOC by the Bank before the receivables/payments were paid into another account of Defendant No.3, was not a term of the BGs.”Justice Singh cited the Supreme Court’s decision in Himadri Chemicals v. Coal Tar Refining Co (2007) to reaffirm that courts should only interfere with invocation of unconditional bank guarantees in limited cases of egregious fraud or irretrievable injustice, neither of which was alleged here.On Kotak’s reliance on Sections 133 and 139 of the Contract Act (which deal with discharge of a surety when terms are varied without consent), the Court held,“Once the contract between the Plaintiff and MoRTH did not incorporate any term of Escrow Account, the question of variation under Section 133… does not arise.”.Although it refused to order a refund, the Court granted Kotak liberty to pursue its claims in the liquidation proceedings of the contractor:“Liberty is, however, reserved to the Plaintiff to pursue its claims before the Liquidator… and/or to take recourse to such legal remedies as may be available to it against Defendant No.3.”.Kotak Mahindra Bank was represented by Senior Advocate Sandeep Sethi with Advocates Aman Raj Gandhi, Parthasarthy Bose and Lakshay Kumar,.The Union of India was represented by Senior Advocate Ravi Prakash with Advocates Varun Agarwal and Syed Husain Adil Taqvi..[Read Judgment]
