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Bank Guarantees - International Law Office

International Law Office

Construction - India

Bank Guarantees

March 09 2000

In a recent case in Delhi High Court, the issue of invocation of bank guarantee arose.

The defendant, Indian Oil Corporation Ltd (a government company) had set up a refinery at Mathura. It wanted to install Horton spheres at the refinery and issued a tender, inviting offers. The plaintiff, Lloyds Steel Industries Ltd, was awarded the tender. The plaintiff provided two bank guarantees.

The defendant subsequently informed the plaintiff that it wanted to rescind the contract by substituting the original contract with a fresh contract, which would involve the installation of only three propylene spheres (in place of the original five). The reason for the reduction from five to three was given as a delay on the part of the plaintiff to complete the work by February 6 1996. The defendant threatened to terminate the contract and award it to another contractor.

The plaintiff explained that reducing the scope of work would have serious financial implications for it. However, the plaintiff accepted the defendant's offer for the novated contract on January 9 1997.

During the term of the contract the plaintiff failed to carry out the work and by December 1997, it became clear to the defendant that the plaintiff was not in a position to construct the spheres at the site. The defendant had no option but to demand the return of the advance payments it had made, and have the work performed by someone else.

It was discovered that the plaintiff had already sold or otherwise used all the steel plates that were acquired for work, and was thus no longer in a position to undertake work.

The defendant invoked the two bank guarantees and the plaintiff filed an application in the High Court for an injunction against invocation.

The court held that the plaintiff had not pleaded fraud and failed to show a case of irretrievable injury. The court further held that the plaintiff had failed to perform the contract as it had not installed a single sphere. Thus, the court dismissed the application for an injunction and allowed the cashing of the bank guarantees.

For further information on this topic please contact Hiroo Advani or Shubhada Bhave at Advani & Co by telephone (+91 22 281 8380) or by fax (+91 22 286 5040) or by e-mail (advani.co@bol.net.in).

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