The Delhi High Court has ruled that a bank guarantee is an independent contract, and its enforcement must be based solely on the terms contained in the guarantee — not on any side arrangements or underlying agreements. The Court rejected Kotak Mahindra Bank’s plea to avoid liability under five unconditional bank guarantees issued on behalf of a defaulting contractor.
📜 Case Background: Kotak Mahindra Bank v. Union of India
| Detail | Description |
|---|---|
| Plaintiff | Kotak Mahindra Bank |
| Defendant | Union Ministry of Road Transport and Highways (MoRTH) |
| Issue | Invocation of unconditional bank guarantees |
| Amount Claimed | ₹48.77 crore |
| Court | Delhi High Court |
| Judge | Justice Jyoti Singh |
| Verdict | Suit dismissed; BGs must be honoured |
Kotak argued that MoRTH violated an escrow arrangement by crediting payments to a different account without consent. The bank claimed this discharged its liability under Sections 133 and 139 of the Indian Contract Act, 1872.
🧑⚖️ Legal Reasoning: Bank Guarantee Is Independent of Side Agreements
“A Bank Guarantee is an independent contract… the Bank is bound to honour unconditional and irrevocable BGs irrespective of disputes between debtor and creditor.” — Justice Jyoti Singh
- The BGs did not mention escrow or NOC conditions
- The Court cited Himadri Chemicals v. Coal Tar Refining Co (2007)
- The court held Sections 133 and 139 of the Indian Contract Act to be inapplicable.
- The plea would have converted an unconditional BG into a conditional one, which is impermissible
🔍 Why Escrow Clauses Don’t Affect BG Enforcement
The Court clarified that side arrangements like escrow accounts are irrelevant unless explicitly stated in the guarantee. Since Kotak’s BGs were unconditional, MoRTH’s actions did not affect the bank’s obligation to honour them.
💬 Vakilify Insight
This ruling reinforces the principle that bank guarantees are standalone instruments. Financial institutions must explicitly write any critical conditions — like escrow routing — into the guarantee itself.Courts will not read external arrangements into a BG, especially when liberty to invoke is unconditional.
🔗 Related Reading and Links
- 👉 Outbound: India Code – Indian Contract Act, 1872
- 👉 Internal: Legal Notice Ban on WhatsApp – Supreme Court Ruling
