Law related to Bank Guarantee

Ans: T. Nagappa vs Y.R. Muralidhar on 24 April, 2008 Bench: S.B. Sinha, Lokeshwar Singh Panta The honourable Supreme Court held that when a contention has been raised about the complainant has misused the cheque, even in a case where a presumption can be raised under Section 118(a ) or 139 of the said Act, an opportunity must be granted to the accused for adducing evidence in rebuttal thereof. As the law places the burden on the accused, he must be given an opportunity to discharge it. An accused has a right to fair trial. He has a right to defend himself as a part of his human as also fundamental right as enshrined under Article 21 of the Constitution of India. The right to defend oneself and for that purpose to adduce evidence is recognized by the parliament in terms of sub-section (2) of Section 243 of the Code of Criminal Procedure.

Ans:  Supreme Court of India M.S. Narayana Menon @ Mani vs State Of Kerala & Anr on 4 July, 2006 Bench: S.B. Sinha, P.P. Naolekar The honourable Supreme Court held that we in the facts and circumstances of this case need not go into the question as to whether even if the prosecution fails to prove that a large portion of the amount claimed to be a part of debt was not owing and due to the complainant by the accused and only because he has issued a cheque for a higher amount, he would be convicted if it is held that existence of debt in respect of large part of the said amount has not been proved. The Appellant clearly said that nothing is due and the cheque was issued by way of security. The said defence has been accepted as probable. If the defence is acceptable as probable the cheque therefore cannot be held to have been issued in discharge of the debt as, for instance, if a cheque is issued for security or for any other purpose the same would not come within the purview of S...

Ans:  Vijay vs Laxman & Anr on 7 February, 2013 Bench: T.S. Thakur, Gyan Sudha Misra The honourable Supreme Court held that we are of the view that although the cheque might have been duly obtained from its lawful owner i.e. the respondent-accused, it was used for unlawful reason as it appears to have been submitted for encashment on a date when it was not meant to be presented as in that event the respondent would have had no reason to ask for a loan from the complainant if he had the capacity to discharge the loan amount on the date when the cheque had been issued. In any event, it leaves the complainant’s case in the realm of grave doubt on which the case of conviction and sentence cannot be sustained. Thus an accused was acquitted due to cheque issued for illegal purpose.

Ans:   B. Krishna Reddy vs Syed Hafeez (Died) Per Lr. Smt. on 30 September, 2019. The honourable Supreme Court held that the offence alleged was that a cheque was given towards consideration for purchase of a property. Neither any document was produced on record nor there was any evidence that any conveyance was executed in favour of the appellant. Thus, the submission of the appellant that there was no existing debt or liability against which the cheque was given had to be accepted. In our view, the High Court was in error in accepting the appeal and upsetting the view taken by the Trial Court. We, therefore, allow this appeal, set-aside the decision of the High Court and restore the judgment and order of acquittal passed by the Trial Court.

Ans: Vinitec Electronics Private limited vs Hcl Infosystems Limited on 2 November, 2007. In the case of Vinitec Electronics Ltd. vs HCL Infosystem Ltd., the honourable Supreme court  clarified that the operative part of the contract will not be controlled by the preamble of the guarantee contract.  The honourable Supreme Court held that:  In our considered opinion such vague and indefinite allegations made do not satisfy the requirement in law constituting any fraud much less the fraud of an egregious nature as to vitiate the entire transaction. The case, therefore does not fall within the first exception. The recitals in the preamble in the deed of guarantee do not control the operative part of the deed. After careful analysis of the terms of the guarantee we find the guarantee to be an unconditional one. The appellant, therefore, cannot be allowed to raise any dispute and prevent the respondent from encashing the bank guarantee. Whether encashment of the bank guara...

 Ans:  Mahatma Gandhi Sahakra Sakkare vs National Heavy Engg. Coop. Ltd. on 11 July, 2007 The honourable Supreme Court said that on careful analysis of the terms and conditions of the guarantee, we find the guarantee to be an unconditional one. The respondent, therefore, cannot be permitted to raise any dispute and prevent the appellant from encashing the bank guarantee. For all the aforesaid reasons, the honourable Supreme Court hold that the respondent herein did not make out any case for grant of injunction restraining the appellant herein from encashing the bank guarantee. The honourable Supreme Court stated held the contract to be unconditional and refused to grant injunction. 

Ans:  Hindustan Construction Co. Ltd vs State Of Bihar And Ors on 8 October, 1999 In this case, the honourable Supreme Court held that the bank only pays the amount after certain conditions which might be enumerated in the guarantee contract, are fulfilled by the debtor. Conditions can be like- Proof of default, approval of a third party etc. To invoke the encashment of the bank guarantee, the conditions put forth in the contract have to be fulfilled. Injunction against encashment of conditional Bank guarantees can be granted by the courts in view of the facts of the case present and the beneficiary can’t have an unrestrained right to invoke the bank guarantees. Therefore, the invocation of the bank guarantee should be in strict conformity with the conditions on which the guarantee is issued. In the case of Hindustan Construction Co. Ltd. vs State of Bihar and othrs, the honourable supreme court held that  under conditional bank guarantees, the beneficiary does not have an unf...

Ans:  M/S. National Telecom Of India vs Union Of India And Another on 5 February, 2001. In National Telecom of India Ltd. vs Union of India, there was a bank guarantee in favour of the government in respect of supplies to be made by the contractor as per the purchase order. As per the agreement, the amount was payable without on demand. The following two conditions were put up to be fulfilled for the bank guarantee : 1. There should be a failure on the part of contractor to perform his obligations, 2. The amount claimed was by way of loss and damage to the government due to breach of contract like failure of supplying the goods beyond deadline etc. The delhi high court held that the bank guarantee is invoked with the fulfilment of the above two condition.

Ans:   The jurisprudential disposition has carved out three exceptions when an injunction can be granted to restraint invocation of bank guarantee: Fraud of an egregious nature, which goes to the root of the bank guarantee (and not the underlying contract): A clear evidence, both as to the fact of fraud and as to the bank’s knowledge of such fraud, which would vitiate the very foundation of such a bank guarantee can go a long way in restraining invocation of a bank guarantee; or Irretrievable injury/harm or injustice: If the harm or injustice is of such an exceptional and irretrievable nature as would override the terms of the guarantee and cause adverse effect of such an injunction on commercial dealings in the country, the courts can treat such situations as exceptional and accordingly grant an injunction; or Special equities: Relief on account of injuries caused due to exceptional circumstances.

Ans: In U.P. STATE SUGAR CORPN. VERSUS SUMAC INTERNATIONAL LTD. [1996 (12) TMI 294  The honourable Supreme Court held that the bank giving a guarantee is bound to honor it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and ...

Ans:  Himadri Chemicals Industries Ltd vs Coal Tar Refining Company on 7 August, 2007 The Supreme Court in HIMADRI CHEMICALS INDUSTRIES LTD VERSUS COAL TAR REFINING COMPANY [2007 (8) TMI 704 - SUPREME COURT] lays down the following principles in the matter of injunction to restrain the encashment of bank guarantee as below:  While dealing with an application for injunction in the course of commercial dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the beneficiary is entitled to realize such a bank guarantee or a letter of credit in terms thereof irrespective of any pending disputes relating to the terms of the contract. The bank giving such guarantee is bound to honor it as per its terms irrespective of any dispute raised by its customer. The courts should be slow in granting an order of injunction to restrain the realization of a bank guarantee or a letter of credit.  Since a bank guarantee or letter of credit is an independen...

Ans: United Commercial Bank vs Bank Of India And Others on 26 March, 1981 The honourable Supreme Court held that courts should refrain from granting injunctions restraining performance of contractual obligations arising out of a letter of credit or a bank guarantee between one bank and another. In that case, the order passed by the High Court granting a temporary injunction restraining the appellant-bank from recalling a payment made 'under reserve' from respondent No. 1, was set aside on a finding that it was difficult to say on the material on record that the plaintiffs had a prima facie case and that the plaintiffs had failed to establish that they would be put to irreparable loss unless an interim injunction was granted and that the balance of convenience clearly lay in permitting the normal banking transaction to go forward.

Rachita Builders And Financiers vs Chetak Construction Ltd. And Anr. on 4 May, 1990 The Madhya Pradesh High Court held that the courts will not interfere with the enforcement of bank guarantees or letters of credit unless a case of fraud or a case of apprehension of irretrievable justice has been made out so that either there should be good prima facie case of fraud or of special equities in the form of preventing irretrievable injustice between the parties. 

Ans:  After the expiry of bank guarantee,  the same is to be returned for cancellation. Otherwise the bank will send a registered notice to the beneficiary of the guarantee with direction to return the bank guarantee immediately. If the beneficiary does not give any reply to the said notice or the original guarantee is not surrendered for cancellation,  the bank can cancel the bank guarantee after waiting for a reasonable time.

Ans: The beneficiary requires to invoke the bank guarantee on or before the expiry date of the guarantee . If bank does  not receive any claim on or before the validity period mentioned,  the bank is discharged from its liability.  A bank is obliged to honour any legitimate claim within the validity period of the guarantee. If the invocation is in the order and there is no court prohibiting the payment, the bank is required to honour payment to the beneficiary.  Before making the payment to beneficiary, bank informs the  applicant about the invocation of the bank guarantee and asks him to arrange funds for payment of claim amount. If applicant does not arrange the funds for payment of claim amount, the bank will honour the bank guarantee and transfer the fund to beneficiary. 

Ans: A contract of bank guarantee involves the following important features: 1. Underlying contract between the applicant (i.e., debtor) and the beneficiary i.e., the creditor. 2. Maximum amount can be claimed under the Bank Guarantee. 3. Period of validity of bank guarantee. 4. Period within which the claim must be made by the beneficiary. x

Ans: KSE Electricals Pvt. Ltd. Vs Project Director, Bangladesh Rural Electrification Board And Anr (Calcutta High Court), 2021. The  Calcutta High Court held that the petitioner was awarded a contract for supply of conductor and related accessories to the respondent No. 1 pursuant to a global tender floated by the latter. The contract dated 15.11.2-15 was a Carriage and Insurance Paid contract for a price of USD 830,290 + BDT 371,000. The petitioner was required to furnish a performance security for an amount of USD 83,505 for a period of 24 months under the relevant clause of the General Conditions of Contract. By an order dated 10.05.2021 a learned Single Judge restrained the respondent No. 2 from making any payment under a bank guarantee invoked by the respondent No. 1. The said order was modified on 18.05.2021 by another Learned Judge confirming the interim order of injunction and further restraining the respondent No. 1 from encashing the bank guarantee. The High Court observe...

Ans: Recently, in Andhra Pradesh Pollution Control Board Vs. CCL Products India Ltd, 2019, the honourable Supreme Court held that in absence of fraud, the court should not interfere with the invocation or encashment of  a bank guarantee so long as the invocation was in terms of bank guarantee. The  Supreme Court held that unless fraud or special equity exists, is pleaded and prima facie established by strong evidence as a triable issue, the beneficiary cannot be restrained from encashing the bank guarantee even if dispute between the beneficiary and the person at whose instance the bank guarantee was given by the bank, had arisen in performance of the contract or execution of the works undertaken in furtherance thereof.

Ans: U.P. Co-Operative Federation Ltd vs Singh Consultants & Engineers (P) on 19 November, 1987 The honourable Supreme Court held that guarantee must be honoured free from interference by courts, otherwise, trust in commerce and international trade would be irreparably damaged. It is only in exceptional cases that is to say in case of fraud or in case of irretrievable injustice be done, the Court should interfere.

Ans: Performance bank guarantee was given against defects, unfinished and unsupplied items. In case of non performance by the contractor,  performance bank guarantee is invoked. A performance guarantee provides an assurance of compensation in the event of inadequate or delayed performance on a contract.

Ans: Advanced payment guarantee is a guarantee that was given by company in advance to the government agency or any other agency that outsources the project.   For instance: The company would like to purchase some equipments worth Rs 1 crore and for that the company demands the agency Rs 1 crore from agency. The agency provides company an amount of Rs 1 crore and the company provides bank guarantee in consideration of Rs 1 crore. In case contract is not fulfilled,  the advance payment guarantee will be invoked. x

Ans: A bid bond provides a guarantee that a winning bidder will take up the contract as per the terms at which they bid. A bid bond ensures compensation to the bond owner if the bidder fails to begin a project. Bid bonds are often used in construction jobs or other projects that follow a similar bid-based selection process. For instance, for a Rs 500,000 bid, the contractor will have to secure a bid bond for Rs 50,000. That Rs 50,000 serves as a guarantee that the contractor will complete the project for the Rs 500,000 bid value. If the contractor denies to complete the project, the owner can file a claim against  Rs 50,000 bond. It means if the successful bidder backs out from the contract, bid bond will be invoked. Bid Bond is also called EMD i.e., Earnest Money Deposit. x

Ans: The payment guarantee is a written document provided for the contract amount of the deferred payment or forward payment and the interest resulting from the deferred payment. If buyer says that he will make payment after 6 months, 1 year, etc, the bank will also provide such type of guarantee. x

Ans: A foreign bank guarantee is provided by a bank on behalf of a borrower. This will be offered on behalf of the foreign beneficiary or creditor.  If the business is concerned with an export and import, the bank guarantee will be foreign bank guarantee. x

Ans: A financial guarantee is an agreement that guarantees a debt that will be repaid to a lender by another party if the borrower defaults. Essentially, a third party acting as a guarantor promises to assume responsibility for a debt.    If it is concerned with trading,  it is financial  guarantee of bank. x

Ans: Let us suppose that the buyer would like to buy the computer equipments of Rs 1 crore and seller would like to sell the computer equipments of Rs 1 crore but the buyer has not the amount of Rs one crore to pay immediately and will get his payment after one month. Sellers tells buyer to give bank guarantee to get the computer equipments on credit. Bank will pay to the seller in a particular period of time if buyer does not pay. So bank guarantee is a type of promissory note given by bank to seller. When buyer completes his payment of Rs 1 crore, the the bank guarantee will automatically become null and void.  In banking terminology, the buyer will be the borrower or applicant whereas the seller would be the beneficiary or creditor. So, to resolve the problem of trust and credit, the bank guarantee will be required. x