BANK GUARANTEE & THE JUDICIAL INJUNCTIONS

INTRODUCTION:

Section 126 of Indian Contract Act[1] reads that, a contract of Guarantee is a contract to perform the promise, or discharge the liability of a third person in case of his default. As descriptively stated by Supreme Court of India in STATE TRADING CORPORATION OF INDIA V. JAINSONS CLOTHING CORP. [2] that “The bank guarantee is a trilateral contract in which the bank has undertaken to unconditionally and unequivocally abide by the terms of the contract. It is an act of trust with full faith to facilitate free flow of trade and commerce, in Domestic or International Trade or Business. It creates an irrevocable obligation to perform the contract in terms thereof.”

Nevertheless, a bank-guarantee is a tri-party agreement among the banker, the beneficiary and the creditor wherein, “Bank” acts as surety for the transactions between the Debtor and Creditor. Henceforth, its’ a contract by a bank on part of a customer, that undertakes to discharge the liability of the debtor, in case of any default.

The Hon’ble Supreme Court of India in the case of ANSAL ENGINEERING PROJECTS V. TEHRI HYDRO CORPORATION, Bank-Guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the validity of the primary contract between the person at whose instance the bank guarantee was given and the beneficiary.

NATURE & SCOPE OF BANK GUARANTEE:

The concept of bank guarantee is basically introduced to reduce the transaction risks. Bank guarantee enabled various new firms to set-up efficiently, now firms can start-up with small sum of money also. The Entrepreneurs who are starting their business don’t have large sum for investment are benefited a lot as now they can raise their money in credit with the help bank as a Surety and the creditor also in the name bank can give loans without any risk as if the debtor can’t be able to pay then they can be reimbursed by the Bank. Bank guarantee is one of the reliable sources in trade and reduces the risk in business transactions. The Bank guarantee not only secures the seller rather it also secures the advances or the payment made by the buyer.[3]

1. Financial Bank Guarantee:

The bank shall guarantee that the buyer will repay the debts owed to the seller. Should the buyer fail to do so, the bank may absorb the financial burden, for a service charge, also known as a service fee[4]

• Performance-Based Guarantee:

The beneficiary shall seek reparations form the bank for non-performance of their part as laid out in the contract. Should the counterparty fail to deliver on the services as promised, the beneficiary will claim their resulting losses from non-performance to the guarantor– the bank.

• Foreign Bank Guarantee: A correspondent bank that operates in the Country of Domicile of the Beneficiary.

TYPES OF BANK-GUARANTEE AND THEIR ADVANTAGES:

• CONDITIONAL BANK-GUARANTEE:

Ina Conditional Bank-Guarantee there are certain conditions either on the part of beneficiary or the surety, upon whose fulfilment the guarantee can be enchased. Supreme-Court in the case of JACKSONS VEENERS AND PANELS PVT. LTD. V. STATE BANK OF TRAVENCORE AND ANR.[5] observed that the right to recovery of the amount on first demand without any right of objection is deemed fit to be called as a condition as for Bank-guarantee, the BG was issued, then a right would accrue to the beneficiary to claim recovery of the whole or part of the guarantee amount.

• UN-CONDITIONAL BANK-GUARANTEE:

In an Un-conditional Bank Guarantee the bank has to make the payment un-conditionally and absolutely, as the priority, on first call of Beneficiary. It was observed by Supreme Court in the case of M/S. S. SATYANARAYANA & CO. V. M/S. WEST QUAY MULTIPORT PVT. LTD.[6] that some of the bank guarantees make their beneficiaries the only decree holder with respect to the invocation of their liability to the absolute and unfettered discretion of their beneficiary.

 Advantages of Bank-Guarantee on part of the applicant:

• Small-scale companies can secure loans.
• Encourages business growth and Entrepreneurship.
• Low-fees charges for bank guarantees, 1% of the overall transaction.

 Advantages of Bank-Guarantee on part of the beneficiary:

• It can enter the contract knowing due diligence’s been done on their counterparty.
• Adds to Creditworthiness of both the applicant and the contract.
• Reduced Risk, due to the bank’s assurance that they will cover losses.
• Acts as a confidence booster.

JUDICIAL INTERVENTION & BANK GUARANTEE:

Judiciary being the system of courts that interprets, defends and applies the laws of the land wherein, the Judiciary is the legal aid to dispute-resolution. Nevertheless, when it comes to Bank Guarantee Supreme-court of India TARAPORE & COMPANY V. VO TRACTORS EXPORT[7] have interpreted that the contract laid down between the Creditor and the Bank is way different as compared to that of a Contract between buyer and seller. A bank’s undertaking to the creditor is irrevocable and unconditional, so there is no need of any interventions form courts as interventions from court may destroy the very essence of Bank guarantee. Bank guarantee enables the individuals to recover their debts by avoiding the long strands of legal proceedings and if there will always be any judicial intervention then it will defeat its very purpose.

In addition to this Supreme-Court, in the case of UNITED COMMERCIAL BANK V BANK OF INDIA[8] the courts ought not to intervene in the of Bank Guarantee as more intervention may lead to delays and can impact the sanctity of the transaction. Nevertheless, some of the bank guarantees make their beneficiaries the only decree holder with respect to the invocation of their liability. Also, in the case of HINDUSTAN STEEL WORKERS CONSTRUCTION LIMITED V. G.S. ATWAL AND COMPANY PVT. LTD.[9] It was observed by the Apex-Court that there is no prudent reason to impose injunction for restricting the payment, as the guarantee undertaken by the bank has a wider scope than that agreed upon by the bank and the Debtor.

DENIAL FOR EXECUTION OF BANK GUARANTEE:

• FRAUD:

The banks may refuse to execute the Guarantee is there is probability of fraud on part of the Beneficiary or the documents are not in accordance to their laws as prescribed by their memorandum or the documents were tempered with. It was made clear in the case of NATIONAL BUILDING CONSTRUCTION CORPORATION V. STATE BANK PF PATIALA.[10] That the fraud must be of an egregious nature as to undermine the sanctity and to deprave the entire transaction. Henceforth, the fraud committed by the beneficiary shall only be taken into consideration, not which has been committed by the third party in regard to the transactions. Nevertheless, the Prima-facie reason in case of Fraudulent activity is to safeguard the basic essential of the Credit system, with regard to Bank-Guarantee. “In the case of RIGOSS EXPORTS INTERNATIONAL (P) LTD. V TARTAN INFOMARK LTD (AIR 2001 DELHI 285) it was held that the since the bank guarantee is obtained by the fraud therefore, they were vitiated and the beneficiary is not entitled to get claim the amount. Further it was also held that in such circumstances, the court can intervene, and prevent encashment of bank guarantee.”[11]

• IRRETRIEVABLE INJURY:

Under exceptional circumstances that makes it impossible for the debtor to reimburse the creditor if he ultimately succeeds, shall be decisively established.[12] Mere apprehension that the Debtor would not be able to pay, is not enough.[13] The abovementioned were very well observed by the Hon’ble Supreme Court in order to law down the apt guidelines and order to test the irretrievable harm or injury or loss that can so, be caused which have been laid down in U.P STATE SUGAR CORPORATION V. SUNMAC INTERNATIONAL  by the Apex court. It was observed by Delhi High Court in ZILLION INFRA PROJECTS PRIVATE LIMITED V. FAB-TECH WORKS AND CONSTRUCTION PRIVATE LIMITED[14] that the invocation of a bank guarantee cannot be restrained until and unless the element of Fraud, Irretrievable injury, equity or loss is proved alongside mens-rea of the party.

CONCLUSION:

Bank guarantee is an undertaking, on the part of bank, that in case there occurs a failure on the part of debtor or creditor, bank will indemnify the party who has suffered the loss. There are certain advantages with respect to the context of Bank-guarantee as mentioned in the note, whereas, there can only be judicial restraint or interference, in case, there have been an Erogenous Fraud or Irretrievable Injury is decisively established, in addition to this, the courts have also opted not to interfere in the Contracts of bank guarantee as they ought to have been different from that of a normal contract. The banking system, since it’s nationalization and privatization have been the backbone of Indian Economy. In order to avoid the lapse of sanctity of bank-guarantee and its encashment, there shall not be any judicial restraint and interference.

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[1] 1872

[2] AIR 1994 SCC 2778

[3] http://docs.manupatra.in/newsline/articles/Upload/1A60C2E6-874F-4655-8821-CA4915F9D4F6.-%20banking.pdf

 

[5] 2009 SCC ONLINE KER 4210

[6] 2015 SCC ONLINE BOM 3352

[7] AIR 1970 SC 891

[8] AIR 1981 SC 1426

[9] AIR 1996 SC 131

[10] AIR 1993 DEL 89

[11] BANK GUARANTEE AND JUDICIAL INTERVENTION BY AKSHAY ANURAG*

[12] SVENSKA HANDELSBAKEN V. INDIAN CHARGE CHROME (1994)

[13] U.P STATE SUGAR CORPORATION V. SUNMAC INTERNATIONAL (1997)

[14] 2015 SCC ONLINE DEL 13163