Introduction

• This is an important case on the topic of leave to defend in summary suits.

Facts

• • ONGC (the appellant) contracted with a consortium comprising M/s. Saipem SPA/Snamprogetti of Italy to construct a network of undersea pipelines, known as the Gas Lift Pipelines.
  • Time was of the essence in the contract, requiring completion by 30th April 1991.
  • The contract included provisions for liquidated damages if the contractor failed to complete the works by the scheduled dates, amounting to 3% of the total contract price for each month's delay, capped at 10% of the contract price.
  • The contractor was obligated to provide a bank guarantee covering liquidated damages, equivalent to 10% of the contract price, four months before the scheduled completion date.
    • However, it was mentioned that if the project's completion date slips beyond the scheduled completion date, the contractor shall have the validity of the said guarantee suitably extended.
    • The contract also mentioned that, in case the contractor fails to provide the guarantee for liquidated damages within the stipulated time, the appellants shall be entitled to encash the performance guarantee.
    • In compliance, the contractor furnished a bank guarantee from the State Bank of India, Overseas Branch (the respondent), to cover liquidated damages.
  • On 17^th March 1993, after a total delay of 306 days, the appellant assessed liquidated damages and requested the contractor to extend the bank guarantee for six more months.
  • The appellant also requested the respondent bank to renew the guarantee, indicating that failure to do so by a specified date would lead to encashment of the guarantee.
  • The respondent bank refused, citing dependence on an Italian bank's counter guarantee and pending realization of funds.
  • The appellant, aggrieved by the refusal, filed a summary suit under Order XXXVII of the Code of Civil Procedure, 1908 (CPC) before the High Court of Judicature at Mumbai.
  • The High Court, in its order dated 27^th April 1998, granted unconditional leave to defend the suit, highlighting the following concerns:
    • The lack of specification of liquidated damages in the letter dated 27^th September 1993, when invoking the bank guarantee.
    • The requirement for clear notice of demand for liquidated damages as per the bank guarantee.
    • The inadequacy of the notice dated 27^th September 1993, to fulfill legal requirements for communicating liquidated damages.
    • The pending arbitration proceedings and the jurisdiction of the Italian Court over the matter.
  • Hence, appellant preferred an appeal before Supreme Court.

Issue Involved

• Whether a confirmed bank guarantee can be interfered with by the court?
• Whether encashment of unconditional bank guarantee depends on adjudication of disputes?
• What effect will the counter guarantee have in this case?

Observations

• SC said that respondent Bank's sole basis for seeking and securing the injunction rests upon the contingency that if the counter guarantee becomes unenforceable due to the injunction issued by the Italian court, the respondent Bank should be afforded similar protection.
• However, a thorough examination of the Foreign Exchange Manual reveals that none of the assertions would obstruct the fulfillment of payment under the Bank Guarantee in question.
• The High Court committed a clear error in granting unconditional leave to defend.

Conclusion

• The Supreme Court annulled the High Court's order and rejected the respondent Bank's application for leave to defend. The Supreme Court upheld the appeal.