The Karnataka High Court has imposed a penalty of ₹5 lakh on Union Bank of India (UBI) for acting in a “dishonest manner” in handling bank guarantees. The court ruled that the bank failed to fulfill its obligations and unfairly refused to honour the guarantees.
Justice Suraj Govindaraj, in his judgment, directed the bank to deposit the penalty amount with the Karnataka State Legal Services Authority (KSLSA) within 15 days. If UBI fails to comply, legal proceedings will be initiated to recover the amount.
Background of the Case
The case involves a dispute between NHDPL South Private Limited (formerly Nitesh Housing Developers Private Limited) and Al Fara’a Infra Projects Private Limited over the Nitesh Melbourne Park project in Bengaluru. As part of the agreement, two bank guarantees worth ₹8.4 crore were issued by UBI in favor of NHDPL South. One guarantee was valid until March 31, 2019, and the other until April 30, 2019.
On March 29 and April 26, 2019, NHDPL South requested UBI to either renew or invoke the bank guarantees. However, the bank refused, stating that it received the physical request copies only on April 1 and May 2, respectively—after the guarantees had expired. The banking ombudsman in Mumbai dismissed NHDPL South’s complaint in December 2020, ruling that there was no service deficiency by the bank. Dissatisfied with the decision, NHDPL South approached the high court.
Court’s Verdict
After reviewing the case, Justice Govindaraj ruled that the petitioner’s request for invoking the bank guarantees was valid. He criticized UBI for failing to fulfill its obligation and noted that the bank’s refusal to honour the guarantees was motivated by its fear of not recovering the money from the borrower.
“The bank’s conduct is completely dishonest. Its refusal to honour the bank guarantees was not due to improper invocation but out of concern that it might not recover the funds from the borrower,” the judge stated.
He further remarked that a bank guarantee is a commercial service that requires banks to act fairly and fulfill their commitments. The judge also criticized the banking ombudsman for dismissing the complaint without giving the petitioner a fair opportunity to present its case.
Bank Ordered to Pay with Interest
The court overturned the ombudsman’s order and directed UBI to pay the amounts covered under the two bank guarantees along with 18% interest, starting from the dates of requisition in March-April 2019. Additionally, the court dismissed UBI’s argument that it could not verify the request due to a lack of the petitioner’s email ID, calling it “an afterthought and completely dishonest.”
-
-
-
-
-
-
