Bank Guarantees Must Be Honored Free From Interference by Courts: Delhi High Court

In a significant ruling, the Delhi High Court, comprising the Acting Chief Justice and Hon'ble Ms. Justice Mini Pushkarna, has underscored the sanctity of bank guarantees in commercial dealings. The Court made this observation while deciding the appeal in FAO(OS) (COMM) 296/2022, involving OFB Tech Private Limited and M/S KKSPUN India Ltd. and Ors.

The appellant, OFB Tech Private Limited, had challenged the earlier judgment of a Single Judge, which restrained them from invoking and encashing bank guarantees provided by the respondent, KKSPUN India Ltd. The case revolved around disputes arising from the performance of various contracts related to the manufacture and supply of different products.

In its detailed judgment, the Court clarified the legal position on bank guarantees, stating, "Commitments of banks must be honoured free from interference by the courts. Otherwise, trust in commerce internal and international would be irreparably damaged." This observation emphasizes the autonomy and independence of bank guarantees in commercial transactions.

The Court further noted, "In order to restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or of bank guarantee, there should be serious dispute and there should be good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties."

Addressing the specific contentions of the case, the Bench held that no prima facie case of fraud or irretrievable injustice was established by the respondent, thereby warranting no restraint on the invocation of the bank guarantees. The Court allowed the appeal, stating that the banks are bound to honor the guarantees as per their terms, as they are unconditional and unequivocal.

Date of Decision: 01 February, 2024

OFB TECH PRIVATE LIMITED VS M/S KKSPUN INDIA LTD AND ORS.