BANK GUARANTEES AND ENJOINING ORDERS: AN EXAMINATION OF THE BANKERS OBLIGATIONS

Parakrama Karunaratna *

INTRODUCTION

The term Bank Guarantee is loosely used to identify both guarantees given to a bank and guarantees given by a bank. However, these are two completely different types of guarantees and they differ both in form and obligations. These two types of guarantees are called contract of guarantee and performance guarantee. It is intended to examine these two guarantees, mainly the performance guarantee and the effect of enjoining a bank from discharging its legal obligations.

CONTRACT OF GUARANTEE

A guarantee is a promise to be liable for the debt or failure to perform some other legal obligation of another. In a contract of guarantee (called the guarantee bond) there are three parties. They are the creditor (bank), one who makes the promise (guarantor) and the person on whose behalf the promise is given (principal debtor).

This type of guarantee is usually obtained by a bank as security from a customer who has applied for loan, overdraft or such other facility. Thus, where a customer, whether an individual or a company, requests for a facility from a bank, the bank may require the customer to provide security by way of a guarantor or guarantors. Normally, if the customer is a company, the bank will require the directors of the company to execute a guarantee bond. The primary obligation in this type of guarantee remains with the customer who is the principal debtor. The secondary obligation is that of the guarantor. The undertaking of the guarantor is that if the principal debtor fails to honour the obligation, he will honour the obligation up to the limit he has undertaken.

However, the modern day guarantee bonds contain clauses which makes the obligation of the guarantor also primary. Also, these bonds contain clauses which have effectively taken away the rights which a guarantor may possess against the bank. An examination of some of these rights and the manner the banks have overcome the common law obstacles will be interesting.

It is a well known principal in law of contract that past consideration is not valid consideration. A standard clause in the present day guarantee bond is the terms “monies hereinafter mentioned” clause. This definition is very wide and includes money lent in the past, money that is now proposed to be given and any future loans that the bank may give to the principal debtor. The clause that is universally used now covers all conceivable aspects which will secure the whole of the debtor’s liability. It will not be a defense to state that the guarantee will cover only facilities given after the guarantor entered into the bond and not those that the bank has given earlier. Or, that apart from the initial loan the guarantor will not be liable for any other facility that the bank may give to the debtor. In fact, as long as the guarantee is valid the guarantor will be liable up to the sum guaranteed by him. [” It is usual for all indebtedness of the customer to the bank to be secured howsoever and whensoever incurred and on whichsoever account

* LLM (Warwick) – Deputy Solicitor General.

Nevertheless, the guarantor may specifically state that the liability should not exceed the amount guaranteed by him at the time of the execution of the bond. However, it must be noted that the modern contract of guarantee is a continuing security and the liability of the guarantor, unless determined, will continue.

The guarantee will provide a clause where by giving notice the guarantor can determine the guarantee. However, he will be liable for the amount outstanding at the time notice was received. The death of a guarantor will not normally determine the liability even if advances have been made on the security of the guarantee to the principal debtor after the death of the guarantor. However, this point appears to be unresolved. Nevertheless, if actual notice of the death of the guarantor is given then the amounts advanced after such notice cannot be recovered.

Where there is more than one guarantor and the liability of the guarantors are joint and several, the death of one guarantor will not absolve the others for the amounts advanced by the bank subsequent to the death of the guarantor.

The law relating to banking is the English law. However, the law relating to guarantees is the Roman-Dutch law. Thus, defenses available to a guarantor under the Roman-Dutch law can be availed of when sued by a creditor. These defenses generally are the right to request the creditor to proceed against the debtor first and if there is more than one guarantor to claim that the claim be divided pro rata among the guarantors. However, the guarantee bond now contains a clause which is known as the renunciation clause whereby the guarantor expressly waives his rights to these defenses.

Another important clause is the “conclusive evidence” clause or the “evidence of indebtedness” clause. Any statement, extract, writing or other document showing the amount due from the debtor to the bank and signed by the General Manager or the Chief Accountant of the bank or any other person specially appointed for that purpose by the bank “shall be and shall be deemed sufficient at

law and conclusive proof against me …..that the amounts set out therein due by the debtor to the

bank.”

The “conclusive evidence” clause is similar to section 90C of the Evidence Ordinance where a certified copy of a statement of accounts extracted from the books or ledgers of the bank is admitted as prima facie evidence. The provision contained in a guarantee bond goes beyond the provisions contained in section 90C. Whether such a clause is against the public policy was discussed in Bache & Co. v Banque Vernes (1973) 2 Lloyd’s 437. The Court held that the conclusive clause in a guarantee bond is not against the public policy as tending to oust the jurisdiction of the court.

Court referred to the case of Dobbs v National Bank of Australia Ltd. [1935] 53 CLR 643 where an identical clause as the one found in the present day guarantee bond was argued to be against the public policy and tending to oust the jurisdiction of the court. This argument was rejected by the Australian High Court which observed that:

“It is a mistake to suppose that the policy of the law exemplified in the rule against ousting the jurisdiction of the Court prevents parties giving a contractual conclusiveness to a third person’s certificate of some matter upon which the rights and obligations may depend. There are many familiar kinds of contracts containing provisions which make the certificate of some person or the issue of some document conclusive of some possible question.”

Where the bank has obtained more than one security, for example a guarantee bond as well as a mortgage, for the same transaction, can the guarantor plead that the bank should first proceed on the

mortgage (or other security) before proceeding against the guarantor? All guarantee bonds contain a clause to cover this particular problem and this question was decided in China South Sea Bank v Tan Soon Gin (1990) 1 AC 536.

In this case the creditor made an advance to the debtor and surety guaranteed payment of the principal sum and interest. As security for the loan a company mortgaged to the creditor shares allegedly worth twice the sum advanced. The debtor defaulted on the date of repayment, and although the shares were then still worth more than the loan the creditor did not exercise its power of sale under the mortgage. After the shares became worthless, the creditor demanded payment of the principal sum and interest from the surety and brought an action against him. Summary judgment was given in favour of the creditor but the Court of Appeal granted unconditional leave to defend holding that it was arguable that the surety’s liability was extinguished or greatly reduced by the creditor’s breach of duty owed to the surety to exercise the power of sale over the mortgaged shares.

The creditor appealed and the Privy Council held that the creditor owed no duty to the surety to exercise its power of sale over the mortgaged securities and could decide in its own interest whether to sell or when to do so. “The creditor did not act injurious to the surety, did no act inconsistent with the rights of the surety and the creditor did not omit any act which his duty enjoined him to do so. The creditor was not under a duty to exercise his power of sale over the mortgaged securities at any particular time. (pg. 545.)

In a contract of guarantee, as stated earlier, the obligation of the guarantor will arise only after the failure of the principal debtor to perform its obligations. In that situation the question will naturally arise as to whether the guarantor’s obligation will cease it the principal debtor’s obligation has ceased or extinguished. For example, if the debt of the principal debtor is prescribed can the bank claim the debt from the guarantor under the contract of guarantee?

The above question need to be examined in conjunction with an important clause that is found in the guarantee bond- the monetary limit and demand clause. Every guarantee bond contains a clause which limits the sum guaranteed by the guarantor and that the guarantor will pay the said sum or an amount not exceeding the agreed sum upon demand by the bank. Thus, the cause of action against the guarantor will arise only (a) if the debtor has failed to repay the money advanced by the bank and (b) upon the bank demanding satisfaction from the guarantor. If demand has not been made, the bank will not be able to institute action for want of a cause of action.

In Bradford Old bank v Sutcliffe (1918) 2 KB 833 it was held that a guarantee or a surety is a collateral promise or collateral debt and the cause of action accrues only from demand.

A demand is necessary for the purpose of prescription. As the cause of action accrues only after demand is made and the demand is not met, prescription will begin from the date demand was made.

Weeramantry in Law of Contracts Volume II at 874 states:

“Prescription begins to run, in cases where an obligation under the bond has to be performed within a definitive time, not from the date of the bond but from the the date of the breach of the condition contained therein. The question to be decided should be “is the action prescribed” and not “is the bond prescribed.” A bond for the performance of an agreement becomes prescribed ten years from the breach of its condition but not otherwise and prescription will not begin to run until a demand for the performance has been made and refused”

In Reeves v Bakker (1891) 2 QB 509 the following observation was made: “a cause of action accrues when all the facts exists which it is necessary to prove as a part of the case.”

Paget’s refers to an Australian case Caltex Oil (Aust) Pvt. Ltd. v Alderton (1964) 81 WN (Pt 1) NSW) 297 where it was held that if the limit provision is not completed in the guarantee bond, it will normally be interpreted as indicating that the guarantee is unlimited, not that the guarantee is void for incompleteness or uncertainty. It is doubtful that this reasoning will be accepted by our Courts.

The principal debtor’s liability can be extinguished by two means only. One, by the payment of the sum due to the bank. In fact, by discharging his liability and this will discharge the guarantor from the guarantee. Secondly, by operation of law. The most common operation of the law situation is where the debt of the principal debtor is prescribed. In the latter situation it is argued that where a default is made by the debtor, the debt becomes the debt of the guarantor. Further, the guarantee is an independent contract and is not extinguished due to the action against the debtor becoming prescribed. This is an arguable point. However, where the demand is made from the guarantor after the period of limitation against the debtor, it stands to reason the bank should not be permitted to proceed against the guarantor.

PERFORMANCE BONDS

Performance Bonds or Bank Guarantees or Demand Guarantees or Performance Guarantees are different from the contract of guarantee. All these contracts which have similar features will generally be referred to as performance bonds. In performance bonds the principal is the customer who requests the bank (Guarantor) to issue the performance bond in favour of a third party (beneficiary).

Article 2 (a) of the ICC publication 458 on Uniform Rules for Demand Guarantees defines a performance bond or a demand guarantee as follows:

“For the purpose of these Rules, a demand guarantee (hereinafter referred to as Guarantee) means any guarantee, bond or other payment undertaking, however named or described, by a bank, insurance company or other body or person (hereinafter called the Guarantor) given in writing for the payment of money on presentation in conformity with the terms of the undertaking of a written demand for payment and such other document (s) (for example, a certificate by an architect or engineer, a judgment or an arbitral award) as may be specified in the Guarantee, such undertaking being given

(i). At the request or on the instructions and under the liability of a party (hereinafter called the Principal)

(ii) At the request or on the instructions and under liability of a bank, insurance company or any other body or person (hereinafter the Instructing Party) acting on the instructions of the principal to another party (hereinafter the Beneficiary)”

A performance bond will contain the clause that payment will be made upon the first written demand by the beneficiary without proof or demur. The basic difference between a contract of guarantee and a performance bond is that in a contract of guarantee, the liability of the guarantor will arise only after default by the principal debtor (which default must be proved if not admitted) and demand for payment has been made under the terms of the guarantee. In a performance bond, the bank will be liable to pay upon the first written demand and the question of default will not arise.

Performance bonds are new creatures in the trade and have been treated as similar to a letter of credit. Certain passages from an Indian judgment will be useful to be quoted here.

In Pesticides India v State Chemical & Pharmaceutical Corporation of India (1982) AIR Delhi 78 the court observed:

“This guarantee is a new creature in our law. It is a new business transaction in the world of commerce. This transaction is called the performance guarantee or performance bond. The merchants find it useful in their business both inland and overseas. The seller of goods asks the buyer to furnish a performance bond so that he can realize the money from the bank in the event of buyer’s default. Its purpose is to provide security to the seller for the fulfillment by the buyer of his obligation under the contract. These performance bonds are the life blood of international commerce. They are a creation of mercantile genius of the commercial community. What was in vogue in international banking has now been extended to our inland commerce. Except in clear cases of fraud of which the banks have notice, the Courts will leave the merchants to settle their disputes under the contracts by litigation and arbitration.

This performance guarantee, as it is called, is very much like a confirmed letter of credit. It stands on the same footing as an irrevocable documentary credit. It has many similarities to a letter of credit. It has been long established that when a letter of credit is issued and confirmed by a bank, the bank must pay if the documents are in order and the terms of the credit are satisfied. As in the case of irrevocable letter of credit the bank is not concerned to see the whether one party has committed the breach or the other, so in the case of these performance guarantees the bank agrees to pay the amount on the happening of a specified event.

A performance guarantee is an autonomous and independent contract and it is irrevocable in character and the obligations arising under a bank guarantee are independent of the obligations arising out of the contract between the parties. The performance guarantee imposes an absolute obligation on the bankers to pay irrespective of any dispute which may arise between the parties on the question whether a party has fulfilled his part of the contract or not. It is independent of the primary contract of sale between the buyer and the seller.”

The Indian judge was quoting in verbatim what Lord Denning said five years earlier in the famous case of Edward Owen Ltd v Barclays Bank (1978) 1 QB 159. Facts of this case are:

The plaintiffs, English suppliers, contracted with Libyan customers to erect greenhouses in Libya and agreed that a performance guarantee for 10% of the contract price should be issued by the defendant English Bank and lodged with a Libyan Bank. The contract, which was governed by Libyan law, provided that an irrevocable confirmed or confirmable letter of credit payable at the English Bank was to be opened in favour of the plaintiff. After the plaintiffs had given a counter guarantee to the English Bank, the latter on their own responsibility and on the plaintiffs’ behalf gave a performance bond for 50, 203 sterling pounds to the Libyan Bank and confirmed their guarantee was payable “on demand without proof or conditions.” The Libyan Bank then issued a guarantee bond for the plaintiffs for the same sum in favour of the Libyan customers. No letter of credit which complied with the terms of the contract was opened by the customers and the plaintiffs, after telling them that the guarantee given by them had no effect accepted their conduct as a repudiation of the contract. At the customers request the Libyan Bank then claimed 50,203 sterling pounds under the guarantee from the English Bank. Plaintiffs obtained an interim injunction on their ex party application restraining the English Bank from paying the Libyan Bank. The injunction was later discharged and the plaintiffs appealed against this.

The Court of Appeal dismissed the appeal holding that a performance bond stood on a similar footing to a letter of credit and a bank giving such a guarantee must honour it according to its terms unless it had notice of a clear fraud. It was impossible to say that fraud on the part of either the Libyan customers or the bank has been established.

Lord Denning said that a performance bond is a new creature having similarities to a letter of credit. He examined several judgments relating obligations of the banks under a letter of credit. If the documents are in order, the banks must honour the credit and the banks are not concerned with the disputes between the merchants which must be settled by themselves. Citing the American case Sztejn v J. Henry Schroder Banking Corporation (1941) 31 NYS 2d 631 he stated that the only exception to the general rule is established or obvious fraud to the knowledge of the bank.

“All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer

Browne LJ in the same case quoting Roskill LJ in Howe Richardson Scale Co. Ltd. y Polimex-Cekop and National Westminster Bank (1978) 1 Lloyd’s Law Reports 161 said “the bank, in principle, is in a position not identical with but very similar to the position of a bank which has opened a confirmed irrevocable letter of credit. Whether the obligation arises under a letter of credit or under a guarantee, the obligation of the bank is to perform that which it is required to perform by that particular contract, and that obligation does not in the ordinary way depend on the contractual resolution of a dispute as to the sufficiency of performance by the seller to the buyer or by the buyer to the seller as the case may be under the sale and purchase contact

In R.D. Harbottle (Mercantile) Ltd. v National Westminster Bank Ltd. (1978) 1 QB 146 the plaintiffs entered in to three contracts of sale with Egyptian buyers and each contract provided that the plaintiffs would establish a guarantee confirmed by a bank in favour of the buyers. The terms of the guarantee were very wide and the amounts secured were payable on the buyers’ demand. They were established with the Egyptian bank at which the plaintiffs had an account. The buyers demanded payment under the guarantees. The plaintiffs, who contended that the buyers had no justification for demanding payment, brought three actions against the bank and in each action the other defendants were the relevant Egyptian bank and the buyers. They sought a declaration that the buyers had no right to draw on the guarantees and injunctions restraining all the defendant banks from making and all the buyers from demanding payment under the guarantees. The ex parte application for injunctions by the plaintiffs were granted. The Bank applied to have the injunctions against them discharged and the court held:

i. that even on the assumption that the courts would entertain an action against the bank and the Egyptian banks for a declaration that the buyers were not entitled for payment under the guarantees and that the court had rightfully granted the injunctions on the ex parte applications, in circumstances where it was now obvious that the actions were a contrivance to obtain relief against the bank and the Egyptian defendants and to bring the latter within the jurisdiction of the court. The plaintiffs would only have a cause of action against the bank if the bank debited their account in breach of contract, and since the plaintiffs have an adequate remedy in

damages and the damage incurred by the bank if it failed to honour its international obligations far outweighed any damage likely to be incurred by the plaintiffs, the court would discharge the injunctions granted against the banks

ii. the court hid an inherent jurisdiction to discharge or refuse to continue an injunction and since it was doubtful whether the injunctions should have been granted, there were no grounds for continuing them.

Kerry J. in his judgment stated that “it is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by the banks. They are the life blood of international commerce. Such obligations are regarded as collateral to underlying rights and obligations between the merchants at either end of the banking chain. Except possibly in clear cases of fraud of which the banks have notice, the courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration as available to them or stipulated in their contracts. The courts are not concerned with their difficulties to enforce such claims

This passage has very often been quoted by judges who have been called upon to decide such issues. The large number of judgments both in England and India had clearly established that the only commercial purpose of a performance bond was to provide a security which is readily, promptly and assuredly realizable when a prescribed event occurs. The bank as the guarantor is not concerned with the rights and wrongs of the parties to the underlying contract. The obligations of the banks in performance bonds are absolute, (see Spiroex v Banque indosuez 1986 (2) Lloyd’s 147) The bank must honour the demand made by the beneficiary unless there is clear fraud to the knowledge of the bank.

The application of the above principles by the Sri Lanka Courts, at least by the Appellate Courts has been consistent. The Court of Appeal reiterated the law as pronounced by the English Courts at least in three judgments. In Indica Trades (Pvt.) Ltd v Seoul Lanka Construction (Pvt) Ltd. (1994) 3 SLR 387 the Court of Appeal considered the Edward Owen’s case and Bolivinter Oil S.A. v Chase Manhattan Bank (1984) All ER 351. The then president of the Court of Appeal Justice Sarath N. Silva stated that “the law on this aspect was laid settled in the brief and cogent judgment of Sir John Donaldson MR in the Bolivinter Oil SA v Chase Manhattan Bank and others. The proper approach of a court to a consideration of an ex party application for an interim injunction restraining a bank from paying under an irrevocable letter of credit, a performance bond or guarantee was stated as follows:” His Lordship then quoted in verbatim the passages from the judgment of Donaldson MR which is quoted elsewhere in this article.

The other two Sri Lankan judgments which followed these principles are: Hyderbad Industries Ltd. v IADC Trading (Pvt.) Ltd. (1995) 2 SLR 304 and Hemas Marketing (Pvt.) Ltd. v P.M. Chandrasiri (1994) 2 SLR 181.

PERFORMANCE BONDS AND ENJOINING ORDERS

The decisions of the Court of Appeal firmly reiterating the principles applicable in Sri Lanka are most welcome. However, it is a matter of concern that despite these judgments and the well reasoned judgments of English and Indian Courts, the District Courts still continue to grant enjoining orders

and interim injunctions in cases concerning performance bonds. In some instances interim relieves have been given even without an allegation or reference to fraud being made in the plaint. The situation is such that the banks and the merchants may well have to decide whether obtaining a performance bond is necessary.

The constant enjoining of banks obligations is a matter of serious concern. Courts have now begun to issue enjoining orders in favour of plaintiffs who fail or deliberately exclude the beneficiary from the case. The reason trend is simply to make the bank the only party defendant and obtain an enjoining order against the bank from making payment. This is not only unsatisfactory but will lead to a virtual shut down of commerce in this country. No international contractor or a bank will consider a guarantee given by a Sri Lankan merchant or a bank. The life-blood of commerce referred to by Kerr J. is slowly drained out by unwarranted interference in the affairs of commerce without any cogent reason. It is indeed strange to note that the decisions of the Court of Appeal are not followed in the original court or that the pronouncements of the appellate courts are ignored even after the Court of Appeal has stated that the law on this matter has now been settled. The passages cited by Justice Silva from Bolivinter case and the dicta in Power Curber v Bank of Kuwait (1981) 2 All ER 607 need to be mentioned here.

In the Bolivinter case Donaldson MR stated thus:

“The unique value of such a letter, bond or guarantee is that the beneficiary can be completely satisfied that, whatever disputes may thereafter arise between him and the bank’s customer in relation to the performance or indeed existence of the underlying contract, the bank is personally undertaking to pay him provided that the specified conditions are met. In requesting his bank to issue such a letter, bond or guarantee, the customer is seeking to take advantage of this unique characteristic. If, save in the most exceptional cases, he is to be allowed to derogate from the bank’s personal and irrevocable undertaking, given be it again noted at his request, by that undertaking, he will undermine what is (he bank’s greatest asset, however large and rich it may be, namely its reputation for financial and contractual probity. Furthermore, if this happens all too frequently, the value of all irrevocable letters and performance bonds and guarantees will be undermined.

Judges who are asked, often at short notice and ex party, to issue an injunction restraining payment by a bank under an irrevocable letter of credit or performance bond or guarantee should ask whether there is any challenge to the validity of the letter, bond or guarantee itself. If there is not or if the challenge is not substantial, prima facie no injunction should be granted and the bank should be left free to honour its contractual obligation although restrictions may well be imposed on the freedom of the beneficiary to deal with the money after he has received it. The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter by made will clearly be fraudulent. But the evidence must be clean both as to the fact of fraud and as to the bank’s knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank’s credit in the relatively brief time which must elapse between the granting of such an injunction and application by the bank to have it discharged,” ( highlighting and underlining added).

A passage from the Power Curber case must be a constant reminder to the judges of the first instance who are frequently called upon to issue ex party enjoining orders. Lord Denning had this to say with regard to interference by courts on the obligations of the banks:

“If” the court of any country should interfere with the obligation of one of its banks (by ordering it not to pay under a letter of credit), it would strike at the very heart of that country’s international trade. No foreign seller would supply goods to that country on letters of credit because he could no longer be confident of being paid. No trader would accept a letter of credit issued by a bank of that country if it might be ordered by its courts not to pay. So it is a part of the law of international trade that letters of credit should be honoured and not nullified by an attachment order at the suit of the buyers.” (italics added). Thus, it is respectfully submitted that the courts which are vested with power to issue interim relief should consider that this issue is now settled and any deviation would cause irreparable damage to the trade and also to the international standing of the country. It is further submitted that any application for an interim relief without the necessary parties, specially the beneficiary under a guarantee or the bank, as the case may be, should be in limine rejected. Another matter of concern is the attitude of the local banks. It is the experience of the writer that when a demand is made under a performance bond, the banks without promptly making payment informs the customer of the demand. By this action the bank effectively encourages the customer to obtain a restraining order against the bank or the beneficiary or both. This action of the bank is not only against the accepted principles but also can be termed as mala fide. The beneficiary may well be entitled to sue the bank for this conduct. Additionally, the local banks, in actions of this nature have tended to permit the court to decide on the issue and not object to the application of the plaintiff. This, it is submitted, is completely contrary not only to its own interest but also to the accepted banking practice. It is the duty of the bank to oppose the action to safeguard its reputation and trade. The dicta in Bolivinter and Power Curber cases are equally applicable to the banks and the banks may well be advised to follow them. CONCLUSION A guarantor in a contract of guarantee has little option other than to pay the bank on demand the liability of the principal debtor he has guaranteed. Guarantee is a contract entered in to by the guarantor undertaking to make good up to a particular limit the liability of the principal debtor. Unless a demand has been made a liability will not exist and the period of limitation is ten years from the date of demand or refusal to satisfy the demand.

However, it is the view of this writer that certain aspects of the contract of guarantee should be reviewed by Sri Lankan Courts irrespective of the decisions of the English Courts. For example:

i. Where a guarantor has executed a guarantee bond and the debtor fails to honour his obligations to the bank, should not the bank at the earliest stage of default inform the guarantor of the default? It has been found that the local banks in almost all the cases have not informed the guarantor of the default of the debtor for several years. Should the guarantor be liable for the negligence of the banker?

ii. Where a guarantor has executed a guarantee for a particular amount in the belief that that amount can be repaid by the debtor, should the guarantor be liable if the bank has given further sums without security and the debtor is unable to settle the debts? This is on the basis that the guarantor may be aware of the capacity of repayment by the debtor when he executes the guarantee or the ability of the debtor to pay a particular sum. The guarantor may not enter in to the contract of guarantee if he is informed that further facilities will be given exceeding the capacity, to the knowledge of the guarantor, of the debtor to repay

iii. where the bank has obtained security from the debtor in addition to the guarantee, should not the bank first realize the debtor’s security and only sue on the guarantee if there is still any money to be recovered? In this context, it would be necessary to depart from China South Sea Bank case, which however, it is submitted did not consider the negligence of the bank in not realizing the shares pledged to it when the market was high

iv. in the absence of a duty of care towards the guarantor should not the bank act in manner that is not prejudicial to the guarantor? After all, guarantor is the person who helps the bank to make a profit by allowing it to lend money on security!

A performance bond is similar to a letter of credit. Both these documents have an applicant, a beneficiary and a banker. The liability of the banker under a performance bond is strict and he must pay according to the terms of the bond when demand is made. Banks are not concerned with the disputes between the parties and the courts should permit the banker to honour its obligations However, it is in the interest of the banks that they should resist any interim orders restraining them from carrying out their obligations.

Enjoining orders and interim relieves should not be granted for the mere asking. Court should satisfy itself that the applicant warrants immediate relief keeping in mind the principles of law which the Court of Appeal has held, and rightly so, as settled law Courts must necessarily ask the question where an applicant has failed to make either the beneficiary or the banker a party the reason for the omission and consider such omission as fatal to the application. Unless there is clear fraud to the knowledge of the bank, courts must not interfere with the rights of the banks or the merchants. Any action to the contrary will result in the international trade, which is very important to any country, being seriously affected. It is for the Appellate Courts to check the indiscriminate issue of enjoining orders by the District Courts and the delay in discharging such orders even after sufficient material is placed before court.