Bank Guarantees-principles

Cases involving attempts to restrain Banks which have given unconditional guarantees at the request of their customers from paying thereunder to the beneficiaries have once again highlighted their independent status and the hesitation of Courts to interfere, save in case of fraud of an egregious nature or special equities in the form of preventing irretrievable injustice.

Similarly underlined is the need to take proper legal advice, understand the commercial scenario for which the bank’s indemnity is taken and concentrate on properly drafting the guarantee – the alternative is to find that the guarantee is wrongly encashed, compelling the concerned party to litigate and take a credit risk on the beneficiary’s ability to repay the amount, as and when the Court concludes that the encashment was unjustified.

This paper seeks to highlight these cases, five of which merit special attention

S S Sattar and others versus Mrs. Kuruvilla and Others, [1998] 93 Company Cases 556 (Kerala)

The Court held in this case that, on an application for encashment of an unconditional bank guarantee, the bank is bound to pay and cannot plead that the guarantee was not supported by consideration. The court stated that in the course of commercial dealings, if such a guarantee is given or accepted, the beneficiary is entitled to realize it in terms thereof, irrespective of any pending dispute, except where allegation of fraud is specifically pleaded and proved by the person who seeks to impeach the validity of any transaction. The bank has no legal right to go into the question as to whether the beneficiaries have complied with their part of the underlying contract

Lucky Exports versus Access Maritime Corporation and Another, [1999] 95 Company Cases 869 (Delhi)

On an application to injunct encashment of a bank guarantee, the Court held in this case that a bank guarantee being an independent contract, it creates an irrevocable obligation on the bank to pay its liability under the contract of guarantee, the only exception being a case of fraud of egregious nature of which the bank had knowledge or when allowing an encashment would result in irretrievable harm to the party concerned, which may left interdiction by the court

Dodsal Limited versus Krishak Bharati Cooperative Limited, [1999] 96 Company Cases 165 (Bombay)

Here again, the Court held that an injunction is not normally to be issued against the encashment of a bank guarantee. The bank, having undertaken to indemnify without demur, cannot be restrained from performing its undertaking to indemnify on the ground that there is some dispute between the parties as to the actual amount payable. In the court’s view, this is because a bank guarantee is a contract quite distinct and independent of the underlying contract, the performance of which it seeks to secure. To that extent, it gives rise to a cause of action separate from that of the underlying contract. The bank has to honour the guarantee according to its terms, without being concerned whether either party to the underlying contract was in default. The exceptions of fraud and irretrievable injustice were repeated

Coronation Construction (Private) Limited versus Indian Oil Corporation Limited and Others, [1999] 96 Company Cases 298 (Delhi)

Looking from the viewpoint of the party praying for an injunction, the Court held in this case that to restrain encashment of an irrevocable bank guarantee or letter of credit, the petitioner must establish a strong prima facie case of fraud of egregious nature committed in the execution of the contract. To bring the case within the ambit of special equities in the form of preventing irretrievable injustice, it must be proved to the satisfaction of the Court that there would be no possibility whatsoever of the recovery of the amount from the beneficiary by way of restitution

International Engineers and Projects versus Asea Brown Boveri Limited, [1999] 96 Company Cases 548 (Delhi)

On an application by the Principal to encash a bank guarantee provided to it by its Contractor and a prayer by the latter to restrain it, the Court held that –

being independent of the main contract, the guarantee could be enforced without reference to any claim or counterclaim between the parties arising out of the underlying contract

the Contractor could not allege that the requirement under the underlying contract to furnish a bank guarantee to secure a mobilization advance of 10% of the contract value, was a case of coercion

disputes as to who delayed the underlying contract, provisions of resolving disputes through arbitration, and the Contractor’s claim to have performed his part of the underlying contract did not constitute special equities lefting restraint