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                                             REPORTABLE

           IN THE SUPREME COURT OF INDIA

               CIVIL APPEALLTE JURISDICTION

               CIVIL APPEAL NO.1315 OF 2001

Bank of India                                 .. Appellant

                Versus

Nangia Constructions (I) Pvt. Ltd. & Others   .. Respondents

                           WITH

            CIVIL APPEAL NO. ......... OF 2008

       (Arising out of SLP (CIVIL) No.3644 OF 2007)

                      JUDGMENT

Dalveer Bhandari, J.

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1.   This appeal is directed against the judgment and order

dated 26.10.1999 of the High Court of Delhi at New Delhi in

FAO (OS) No.81 of 1999.

2.   The learned Single Judge of the High Court has taken

the view that the invocation of bank guarantee was within the

validity period of the bank guarantee and the bank cannot

decline to make the payment.      The Division Bench in the

impugned judgment while dismissing the appeal has clearly

observed that the bank guarantee was invoked on 19th May,

1989 within the validity period of the guarantee.    The bank

guarantee was merely renewed under orders of the court as

there was a stay order against encashment of the bank

guarantee.   Once the stay order was vacated there was no

question of any invocation of the bank guarantee.       In the

instant case, the invocation had already taken place within

the validity period. Thereafter, all that was to be done was to

intimate the Bank that the stay has been vacated and that

now payment had to be made under the bank guarantee.

3.   The Division Bench in great anguish has observed thus:

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    "It is surprising that a nationalized bank, which      has given an unconditional on demand bank      guarantee takes up such a contention. No ground      to refuse payment was shown to the Lower Court or      to us. It is surprising that Nationalized Bank wants      to use delays of law in order not to comply with its      unconditional obligations under a bank guarantee.      The nationalized bank should know that it is such      conduct which is adversely affecting the faith of the      public in banking institutions and in transaction of      bank guarantee."

The Court dismissed the appeal with costs.

4.   The nationalized bank despite the concurrent findings of

both the courts and such a strong observation of the Division

Bench of the High Court has still chosen to file this appeal

before this Court. Even before this Court, this is not disputed

that the bank guarantee was invoked within the validity period

of the bank guarantee.

5.   Mr. K.N. Bhat, the learned senior counsel appearing for

the appellant bank submitted that there was a substituted

agreement of contract, therefore, the invocation of the bank

guarantee by respondent no.2 on 19th May, 1989 was of no

consequence.

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6.   It may be relevant to mention here that after the bank

guarantee was invoked, an application was filed in the court

for stay of payment under the bank guarantee.          To that

application, the bank was not a party. Initially, an injunction

was granted by the High Court on 29th May, 1989. This was

on a condition that the bank guarantee should be kept alive.

This injunction was confirmed on 23rd April, 1990 again on the

condition that the bank guarantee should be kept renewed.

The constituent who had obtained injunction and who was to

keep the bank guarantee alive, did not pay the charges of the

Bank in respect of renewals of the bank guarantees.

Consequently, the appellant bank refused to renew the bank

guarantee after 26.5.1996. Thus, the beneficiary of the bank

guarantee took out an application wherein the following

prayer was made:

    "In the circumstances it is, therefore, most humbly      and respectfully prayed that the petitioner be      directed to extend the bank guarantee for an initial      period of one year and the petitioner be directed to      continue to extend the bank guarantees and      furnish the same to the respondent at least fifteen      days before the expiry till the disputes are finally      adjudicated upon by arbitration and on the failure      of the petitioner to renew the bank guarantees as      aforesaid the respondent may be permitted to      encash the above bank guarantee."

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7.   As the question was whether the bank guarantee was to

be renewed, notice was issued to the appellant bank to remain

present in the court. This was in order to find out whether

they would be willing to renew the bank guarantee. The

appellant bank appeared and made it clear to the court that

they were not ready to renew the bank guarantee as according

to them the charges are not being paid.

8.   The appellant bank has reiterated the same argument

before this court that since the bank guarantee has not been

renewed, therefore, the bank is under no obligation to pay the

amount under the bank guarantee.

9.   Learned counsel for the appellant has placed reliance on

two judgments of this court, on The Union of India v.

Kishorilal Gupta & Brothers 1960 (1) SCR 493 and

Makharia Brothers v. State of Nagaland & Others (2000)

10 SCC 503.

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10.   In Kishorilal Gupta (supra), this court has held that it

was well settled that the parties to an original contract could

by mutual agreement enter into a new contract in substitution

of the old one.

11.   There is no quarrel with this proposition. The parties are

always at liberty to enter into afresh contract but this case has

no application to the facts of the present case.

12.   In Makharia Brothers (supra), the question was : what

was the State’s remedy against the contractor when the

contractor failed to furnish the security deposit in cash or, in

lieu thereof, by a bank guarantee. The State could not have

filed a suit requiring the contractor to do these things for it

would have tantamount to asking for a decree of specific

performance, a decree which would have been incapable of

enforcement if the contractor was unable or unwilling to pay

out money or put a bank in funds to provide a bank

guarantee. When the contractor declined to extend the terms

of the bank guarantee, the proper course for the State was to

terminate the contract on the ground of breach of the terms

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thereof, make a claim for damages and recover on the bank

guarantee, if necessary by filing a suit.

13.   We are afraid that even this case is of no help to the

appellant because the facts of the instant case are quite

different. Admittedly, the bank guarantee has been invoked

during the validity period of the bank guarantee. The bank

guarantee was unconditional on demand bank guarantee.

The bank was bound to honour its commitment and pay the

amount of guarantee.

14.   It is unfortunate that a nationalized bank is finding

excuses for refusing to make the payment on totally untenable

and frivolous grounds. The Division Bench was fully justified

in    making   observations   regarding     the    conduct      of   the

nationalized bank. The entire trust, faith and confidence of

people   depend    on   the   conduct   and       credibility   of   the

nationalized bank. In the present day world, the national and

international commercial transactions largely depend on bank

guarantees.    In case the banks are permitted to dishonour

their commitments by adopting such subterfuges, the entire

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commercial and business transactions will come to a grinding

halt.     This principle has been reiterated in large number of

cases by this court. We do not deem it appropriate to burden

this judgment by reiterating all those judgments.

15.     This appeal being devoid of any merit is accordingly

dismissed with costs to be paid to respondent nos. 1 & 2.

CIVIL APPEAL NO. ......... OF 2008 (Arising out of SLP (CIVIL) No.3644 OF 2007)

16.     Leave granted.

17.     In view of our aforesaid decision, this appeal is also

dismissed with costs.

                                      ........................................J.                                         (Tarun Chatterjee)

                                      .......................................J.                                        (Dalveer Bhandari) New Delhi; May 15, 2008.

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