"In case the banks are permitted to dishonour their commitments by adopting such subterfuges, the entire commercial and business transactions will come to a grinding halt," a bench of Tarun Chatterjee and Dalveer observed.
The apex court passed the observation while dismissing the appeal filed by the Bank of India (BoI) challenging the directions of the Delhi High Court directing it to pay the bank guarantee to a construction company, which invoked it after its client had defaulted in a contractual dispute.
The bank had provided bank guarantee to the company on behalf of the other party. It was the argument of the construction company that though it had sought to invoke the bank guarantee clause after the other party had defaulted, BoI had refused to pay the guarantee amount.
The bank had claimed that it was not obliged to honour the guarantee as the two parties to the dispute had substitute their original contract, thus negating the original agreement with it.
But the bank's view was rejected by a single judge of the High Court who directed it honour the guarantee, upon which it appealed before a division bench.
The Division Bench concurred with the view and also made some strong observations against the bank for its delaying tactics.
"It is surprising that a nationalised bank wants to use delays of law in order not to comply with its unconditional obligations under a bank guarantee," the High Court had observed, while asking BoI to honour its commitment, following which it appealed in the apex court.
The apex court said BoI was under an obligation to pay the money as the bank guarantee had been invoked by the company within the specified time limit.
"It is unfortunate that a nationalised bank is finding excuses for refusing to make the payment on totally untenable and frivolous grounds," the apex court said.
The apex court said the division bench was fully justified in making observations regarding the conduct of the nationalised bank.
"The entire trust, faith and confidence of people depend on the conduct and credibility of the nationalised bank," the bench said while dismissing the bank's appeal.
