Contract Law Case: Bipin Hada vs. Nepal Rastra Bank et.al, NKP 2076 B.S, V. 12.
Case: Certiorari and mandamus
Petitioner: Himalayan Bank Limited, Kathmandu, through authorized Company Secretary Bipin Hada
Respondents: Nepal Rastra Bank, Central Office, Kathmandu, et al.
Decision No: 10398
This case is related to independence and autonomy of bank guarantees and counter-guarantees from the underlying contract, cartiorari .
Facts of the case:
The Melamchi Water Supply Development Committee entered into a Rs. 4.60 billion contract with China Railway to construct the Head Works/Diversion Tunnel within 1,596 days. China Railway was required to provide a performance bank guarantee. At its request, China Construction Bank, Henan Branch issued a USD 6,655,000 counter-guarantee to Himalayan Bank, on the basis of which Himalayan Bank issued a USD 6,625,010 performance guarantee to the Melamchi Committee on 11 February 2009, subject to URDG, ICC Publication No. 458. Thus, there were three separate contracts: the construction contract between Melamchi and China Railway, the counter-guarantee between China Construction Bank and Himalayan Bank, and the bank guarantee between Himalayan Bank and Melamchi.
On 12 September 2012, China Railway alleged breaches by Melamchi and gave notice of termination. On 25 September 2012, Melamchi also terminated the contract, alleging anticipatory breach by China Railway, and demanded payment from Himalayan Bank under the bank guarantee. China Railway then filed a case in a Chinese court, alleging that the guarantee had been fraudulently claimed, and the Chinese court ordered that payment be stopped. Himalayan Bank informed Nepal Rastra Bank about the situation.
Himalayan Bank subsequently filed a writ petition in the Supreme Court because Nepal Rastra Bank directed that the guarantee amount be deducted from Himalayan Bank’s account and paid to the Melamchi Committee. The bank argued that Nepal Rastra Bank had unlawfully interfered in the contractual dispute and that it should not be forced to pay while the Chinese court proceedings were pending. Therefore, Himalayan Bank sought a writ of certiorari to cancel Nepal Rastra Bank’s decision and related actions and a writ of mandamus to return any amount already deducted.
Petitioner’s Claim:
Petitioner argued that the dispute was mainly between the Melamchi Committee and China Railway under the underlying construction contract. China Railway had filed a case before a Chinese court, and the Chinese court had ordered that payment under the guarantee be stopped. Himalayan Bank informed Nepal Rastra Bank about this development, but Nepal Rastra Bank still directed that the required amount be deducted from Himalayan Bank’s account and paid to the Melamchi Committee. The bank argued that Nepal Rastra Bank had unlawfully interfered in a contractual dispute and that Himalayan Bank should not be compelled to pay the guarantee while the Chinese court proceedings were continuing. Therefore, Himalayan Bank approached the Supreme Court seeking a writ of certiorari to quash Nepal Rastra Bank’s decision, letter and related actions, and a writ of mandamus directing the respondents to return any amount already deducted from its account.
Respondents Arguments:
Nepal Rastra Bank: NRB argued that Himalayan Bank had voluntarily issued the bank guarantee after considering the risks involved and that the guarantee was an unconditional guarantee. The fact that the amount payable under the counter-guarantee had been stopped by a Chinese court did not release Himalayan Bank from its obligation towards the beneficiary. Himalayan Bank had itself indicated that it would make payment under the guarantee. Therefore, once the beneficiary demanded payment according to the terms of the guarantee, the bank was required to honour it. NRB further argued that failure to honour a bank guarantee could negatively affect public confidence in the banking system, and therefore it had the authority to take regulatory action against Himalayan Bank under its directives.
Melamchi Water Supply Development Committee: It argued that it had received an advance payment guarantee from Himalayan Bank and had fulfilled its obligations under the underlying contract, while China Railway had failed to fulfil its contractual obligations. Consequently, Melamchi terminated the contract and demanded payment under the bank guarantee. Melamchi further argued that Himalayan Bank had itself written that it would make payment under the guarantee therefore, the bank could not subsequently escape its contractual obligation to honour the guarantee.
Siddhartha Bank: Siddhartha Bank argued that it had merely acted as a banking intermediary and had deposited the amount into Melamchi’s account pursuant to the advice and direction of Nepal Rastra Bank. It maintained that its actions were carried out in accordance with the applicable law and regulatory directions of Nepal Rastra Bank. Therefore, Siddhartha Bank contended that the writ petition filed against the action should be dismissed.
Legal Issues:
- Can a bank refuse to honour an unconditional bank guarantee to its beneficiary because there is a dispute under the underlying contract or because a foreign court has ordered payment under the counter-guarantee to be stopped?
- Are the underlying contract, bank guarantee and counter-guarantee independent contractual relationships?
Decision of court :
Supreme Court: Supreme Court dismissed the writ petition, holding that a bank guarantee is an independent and unconditional contract and must be honoured according to its terms. Himalayan Bank could not refuse payment to Melamchi merely because the counter-guarantor in China had not paid or because of a Chinese court order concerning the underlying contract. The Court also held that Nepal Rastra Bank had legal authority under Section 79 of the Nepal Rastra Bank Act, 2058, to direct the payment, so its action was lawful.
Established Principles:
- Bank guarantee is an independent and separate contract: The original contract may be the basis of a bank guarantee, but once the bank issues the guarantee to the beneficiary, it becomes an independent and separate contract.
- Guarantee and counter-guarantee are independent: Even if a guarantee and counter-guarantee refer to each other, they remain separate and autonomous contracts. Each party must perform its obligation according to the terms of the guarantee it has issued.
- Foreign court order does not release the bank from its obligation: The issuing bank cannot escape its obligation to the beneficiary merely because the foreign contractor has obtained an order from a court in its own country stopping the payment.
