The Supreme Court has held that banks, particularly nationalised banks, should not dishonour commitments or else the entire commercial and business transactions would come to a grinding halt.
Banks should know that their conduct would adversely affect the faith of the public in banking institutions, a bench comprising Justices Tarun Chatterjee and Dalveer Bhandari while dismissing Bank of India's appeal against a construction company observed.
"It is unfortunate that a nationalised bank (BoI) is finding excuses for refusing to make the payment on totally untenable and frivolous grounds," it said in a case relating to BoI's refusal to honour a bank guarantee issued to a construction company.
While saying that the Delhi high court was fully justified in making observations regarding BoI's conduct, it said: "The entire trust, faith and confidence of people depend on the conduct and credibility of the nationalised bank. In the present day world, the national and international commercial transactions largely depend on bank guarantees."
In the present appeal, a beneficiary of the bank guarantee had moved the court seeking a direction to BoI to extend the bank guarantee till the disputes were finally adjudicated upon by arbitration between the parties.
However, BoI had refused to renew the bank guarantee and pay the amount guaranteed by it on the ground that the charges for renewal of the bank guarantees were not paid.
While imposing costs on BoI in a matter of Nangia Constructions & Others, the court said that the bank guarantee had been invoked during the validity period of the demand bank guarantee and BOI was bound to honour its commitment and pay the amount of guarantee.
Reiterating the principle which the court had been adopting in a large number of cases, the judges said that "in case the banks were permitted to dishonour their commitments by adopting such subterfuges, the entire commercial and business transactions will come to a grinding halt."
The Delhi high court, while passing strictures against BOI, had observed: "It is surprising that a nationalised bank (BoI), 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 the nationalised bank wants to use delays of law in order not to comply with its unconditional obligations under a bank guarantee.
"The nationalised 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."
