What is a Bank Guarantee? Nature of of a Bank Guarantee. How to stop the invocation of Bank Guarantee?

WHAT IS A BANK GUARANTEE  ?

A Bank Guarantee is “the common mode, of securing payment of money in commercial dealings as the beneficiary, under the Guarantee, is entitled to realise the whole of the amount under that Guarantee in terms thereof irrespective of any pending dispute between the person on whose behalf the Guarantee was given and the beneficiary. 

In contracts awarded to private individuals by the Government, which involve huge expenditure, as, for example, construction contracts, Bank Guarantees are usually required to be furnished in favour of the Government to secure payments made to the contractor as "Advance" from time to time during the course of the contract as also to secure 'performance' of the work entrusted under the contract. 

Such Guarantees are executable in terms thereof on the lapse of the contractor either in the performance of the work or in paying back to the "Government Advance", the Guarantee is invoked and the amount is recovered from the Bank.”

Understanding Bank Guarantee.
Nature of Bank Bank Guarantee.
How to stop the invocation of Bank Guarantee?
picart: iamashar.

Nature of of a Bank Guarantee 

In Hindustan Construction Co. Ltd.—v—State of Bihar and Others: AIR 1999 SC 3710. 

Nature of of a Bank Guarantee was explained in some detail by the Hon'ble Supreme Court when quoting from foreign judgments. The Hon'ble Supreme Court went on to quote with approval the following passages from the cases indicated against each of them:- "The Court of Appeal emphasised that an elaborate commercial system had been built up on the footing that a confirmed letter of credit constituted a bargain between the banker and the vendor of the goods, which imposed upon the banker an absolute obligation to pay, irrespective of any dispute there might be between the parties whether or not the goods were up to contract.

The principle was that commercial trading must go on the solemn guarantee either by the letter of credit or by bank guarantee or irrespective of any dispute between contracting parties whether or not the goods were upto contract. The banks cannot be absolved of their responsibility to meet the obligations.

Lord Jenkins L.J. observed that a vendor of goods selling against a confirmed letter of credit was selling under the assurance that nothing would prevent it from receiving the price. That was of no mean advantage when goods manufactured in one country were sold in another. Though, in this case no international trade was involved, bank guarantee was irrevocable and on that assurance parties have bargained.

As had been held by the Court of Appeals in the case of:

Hamzeh Melas & Sons—v—British Imex Industries Ltd. reported in [1958] 2 Queens’ Bench Division 127. 

 “a performance guarantee was similar to a confirmed letter of credit. Where, therefore, a bank had given a performance guarantee it was required to honour the guarantee according to its terms and was not concerned whether either party to the contract which underlay the guarantee was in default. 

The only exception to that rule was where fraud by one of the parties to the underlying contract had been established and the bank had notice of the fraud. Accordingly, as the defendants' guarantee provided for payment on demand without proof or conditions, and was in the nature of a promissory note payable on demand, and the plaintiffs had not established fraud on the part of the buyers, the defendants were required to honour their guarantee on the demand made by the Libyan Bank” 

as was held by a Bench consisting of Lord Denning M.R., Browne and Geoffrey Lane, LJ in the case of Edward Owen Engineering Ltd.—v—Barclays Bank International Ltd reported in [1978] 1 All England Land Reports 1976.

How to stop the invocation of Bank Guarantee? When can a Bank Guarantee be stopped from being invoked? How to stop Bank Guarantee from being honoured?

In India in the matter of U.P. Cooperative Federation Ltd—v—Singh Consultants and Engineers (P) Ltd. (1988) 1 SCC 174 

It was held that on the basis of judgments from other jurisdictions, is itself such that makes it impossible to stop its invocation or stop it from being honoured by an injunction unless either of the two circumstances exist:

(1) Fraud

(2) Irretrievable Injustice 

 “a maltreated man in such circumstances is not remediless. The respondent was not to suffer any injustice which was irretrievable. The respondent can sue the appellant for damages. In this case, there cannot be any basis for apprehension that irretrievable damages would be caused if any. I am of the opinion that this is not a case in which injunction should be granted. 

An irrevocable commitment either in the form of confirmed bank guarantee or irrevocable letter of credit cannot be interfered with except in case of fraud or in case of question of apprehension of irretrievable injustice has been made out. This is the well-settled principle of the law in England. This is also a well-settled principle of law in India” and further “In order to restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or of bank guarantee, there should be serious dispute and there should be good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Otherwise the very purpose of bank guarantees would be negatived and the fabric of trading operation will get jeopardised.” 

What constitutes a conditional bank guarantee?

In Daewoo Motors India Ltd—v—Union of India and Others: AIR 2003 SC 1786. 

What constitutes a conditional bank guarantee depends upon the exact clauses of the Bank Guarantee. “It is worth noticing that the clause in the bank guarantee specifically provides that the demand made by the President of India shall be conclusive as regards the amount due and payable by the bank under this guarantee and the liability under the guarantee is absolute and unequivocal. In the face of the clear averments, it is trite to contend that the bank guarantee is a conditional bank guarantee. Therefore, the bank has no case to resist the encashment of the bank guarantee.”

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