National Project Construction Corporation Ltd. (NPCCL) is a Government Company entered into a contract with Coal India Ltd. for setting up a Housing Complex at Dankuni, West Bengal. In this regard, the NPCCL invited tender for construction of different building at Dankuni Coal Complex and after negotiation Raju Construction Limited (RCL), a firm made an offer, and agreement was executed between RCL and NPCCL. It was agreed that RCL should deposit advance to the extent of 5% of the value of the contract to NPCCL against production of Bank guarantee from a nationalised bank. In terms of the agreement, a Bank Guarantee was furnished on 24 May 2005 by the Bank of Baroda, Tollygunge Branch, to the sum of Rs. 3,50,000/- in favour of the NPCCL.

The relevant portion of the Bank guarantee is as follows:

“We the Bank of Baroda (Tollygunge Branch), do hereby guarantee the due recovery by the NPCCL of the said advance along with interest thereon as provided according to the terms and conditions of the Contract. If the said contractor fails to utilise the said advance for the purpose of the contract and/or the said advance together with interest thereon as aforesaid is not fully recovered by the NPCCL, we the Bank of Baroda (Tollygunge Branch, Calcutta), hereby unconditionally and irrevocably undertake to pay to the NPCCL on demand and without demur to the extent of the said sum of Rs. 3,50,000/- plus interest at the rate of 10% per annum and any claim made by the NPCCL on us for the loss or damage caused to or suffered by the NPCCL by reason of the NPCCL not being able to recover in full the said sum of Rs. 3,50,000/- as aforesaid”.

The construction work of the buildings under the work order had to be completed within a specified time and the RCL agreed to complete the said construction work within the time schedule as mentioned in the work order. The RCL failed to adhere to the work schedule as agreed, the NPCCL has no other alternative but to terminate the contract as, otherwise, the NPCCL stood the risk of being penalised by the Coal India Ltd. for having failed to complete the construction work within the scheduled time. The NPCCL sought to enforce the bank guarantee claiming a breach of the contract. The RCL argued that the Bank guarantee furnished by the Bank is a conditional one and not an absolute.

Parties are in dispute.