Banerjee Power Transmission Limited (BPTL) entered a contract with Hindustan Steel Works Construction (HSWC) for construction work in the Farakka Superpower Thermal Project at Farakka, West Bengal. On behalf of BPTL, Bank of India (BOI) furnished a Bank Guarantee totalling Rs. 11,50,000 to HSWC as a security deposit for the construction work. The essential terms necessary for enforcing the Bank guarantee is as follows:

Bank Guarantee

1) The Bank undertakes to indemnify Hindustan Steel Works Construction to the extent of the amount specified in the guarantee against any loss or damage caused to or suffered by the Hindustan Steel Works Construction by reason of any breach of the terms and conditions of the contract between the Banerjee Power Transmission Limited and Hindustan Steel Works Construction.

2) The Banks further agree that the Hindustan Steel Works Construction shall be the sole Judge as to whether Banerjee Power Transmission Limited has committed any breach or breaches of the terms and conditions of the said contract and the extent of loss, damage, costs, charges and expenses caused to or suffered by or that may be caused to or suffered by the Hindustan Steel Works Construction on account thereof and the decision of the Hindustan Steel Works Construction on this point will be final and binding on the Banks.

3) Irrespective what is stated in clauses above, liability to invoke the performance guarantee/bond under this agreement arises only if breach is established.  

HSWC sought to enforce the bank guarantee claiming a breach of the contract. BPTL argued that Bank Guarantee were conditional requiring HSWC to specify and quantify the damages caused by alleged breach of contract in their demand for payment.

Parties are in dispute on the nature of instrument.