KOTAK MAHINDRA BANK LIMITED (Plaintiff) v. UNION OF INDIA & ORS. (Defendants), 2025
CS(COMM) 497/2019
(Delivered by JYOTI SINGH, J )
The case was initiated as a commercial suit filed by Kotak Mahindra Bank Ltd. (Plaintiff) in the Delhi High Court against the Union of India (Defendant), represented by the Ministry of Road Transport and Highways (MoRTH), primarily related to five Bank Guarantees made by the Plaintiff in favour of MoRTH. The Plaintiff prayed for a declaration that it was discharged from its obligation under the BGs and that invocation of such guarantees by MoRTH by way of letters dated 05.01.2019, 15.01.2019, and 29.01.2019 was illegal, void, and unenforceable. In addition, the Plaintiff prayed for a money decree of ₹48.77 crores, being the sum encashed by MoRTH under the said BGs along with interest.
The subject of the case is a highway infrastructure project in Bihar, viz., rehabilitation and upgradation of NH-104 (Sitamarhi–Jaynagar–Narahai Section) under Phase I of the National Highways Inter-Connectivity Improvement Project. MoRTH had assigned the task to the Government of Bihar and called for bids for two independent project lots. Defendant No.3 (a private limited company) and RCM Infrastructure Ltd. both entered into joint bidding arrangements to constitute a joint venture, which successfully bid for both lots. MoRTH accepted their bid of ₹154.62 crores and sent Letters of Acceptance on 15.10.2015. Subsequently, the initial joint venture agreement was replaced, and Defendant No.3 was assigned complete responsibility for execution, including the provision of performance and advance BGs.
On 18.02.2016, EPC contracts were signed between MoRTH and the Joint Venture for mobilisation advances against irrevocable BGs. According to this, Defendant No.3 requested Kotak Mahindra Bank to issue the bank guarantees. As a prerequisite for granting these guarantees, the Plaintiff insisted that an Escrow Account be set up, through which all payments and advances related to the project were to be made. This structure was duly recognized and agreed to by Defendant No.3 and MoRTH through a June 2016 correspondence. Following this provision, the Plaintiff released six irrevocable and unconditional BGs totalling 110% of the mobilisation advances.
The Plaintiff alleged that it subsequently found that the payment mechanism was breached by MoRTH and Defendant No.3, since the project funds and advances were no longer being channeled through the Escrow Account. This violation was raised through several communications made by the bank, more so in May and August 2018, where the Plaintiff insisted that MoRTH recall the agreed mode of payment. These letters remained unanswered. The Plaintiff complained that circumventing the Escrow process circumvented the risk controls and financial protections it had implemented and left it vulnerable to monetary losses.
When these events were taking place, insolvency proceedings were commenced against Defendant No.3 in terms of Section 7 of the Insolvency and Bankruptcy Code, 2016, before the NCLT, Mumbai. On 07.09.2018, CIRP was accepted against Defendant No.3. According to the EPC agreement, the Joint Venture was to refund the mobilisation advances within a timeline, and in case of default, MoRTH was entitled to encash the BGs. On 10.10.2018, the Joint Venture communicated to MoRTH that it was not in a position to refund the outstanding mobilisation advance due to a lack of funds and asked for deferral. Later, on 16.10.2018, MoRTH decided to realise the BGs. Interestingly enough, the sixth BG was refunded by MoRTH to the Plaintiff on 16.10.2018 as the matching advance had been returned. The rest of the BGs were called between January 5 and 29, 2019.
In its lawsuit, the Plaintiff contended that MoRTH’s actions in calling for the BGs were illegal by violating the fundamental payment structure agreed to, namely, the Escrow mechanism. As MoRTH had specifically agreed to this arrangement and subsequently breached the same by making payments outside the Escrow Account without a No Objection Certificate (NOC) of the Plaintiff, the Plaintiff asserted that such an act rendered the grounds on which the BGs were issued invalid. Accordingly, the Plaintiff requested a decree that it be released from liability under the BGs, the presentation was void ab initio, and it was entitled to recover amounts paid by MoRTH through the encashment, along with interest.
The case involves significant legal issues around the enforceability of escrow-based financial arrangements in public infrastructure projects, the obligation of government agencies when tied by agreed financial conditions, and the entitlement of financial institutions providing BGs when contractual protection is breached. It also involves crossover with insolvency law, with the intricate relationships between creditors, corporate debtors, and third-party contractual obligations.
The Court dismissed the suit filed by Kotak Mahindra Bank. It held that the Bank was not discharged from its obligations under the unconditional and irrevocable bank guarantees, despite its arguments about breach of an escrow arrangement. The Court reaffirmed that a bank guarantee is an independent contract, enforceable solely by its written terms, and separate from any underlying agreements or side arrangements. The ruling is important as it reaffirms that a bank guarantee stands on its own. Unless a pre-condition or limitation is expressly included in the guarantee, internal or external arrangements (like escrow mechanisms) cannot prevent its invocation, even if underlying agreements have been compromised.
