BANK GUARANTEE Questions

BANK GUARANTEE Questions Often Questioned

Q: What does the term ‘bank guarantee’ mean?

A bank guarantee is a commercial instrument in the nature of a contract, intended between two parties, to secure compliance with the contract. It is an off-shoot of the main contract between two parties.

A bank guarantee is a guarantee made by a bank on behalf of a consumer (usually an established corporate consumer) should it fail to deliver the payment, essentially making the bank a co-signer for one of its consumer’s buys.

Q: How do bank guarantees help in commercial contracts?

Guarantees are vital instruments used to minimize the risks that are caught up in commercial contracts. For the enforcement of ordinary guarantees, as construed dependence of the guarantee on the main contract may lead to unnecessary disputes and legal action, arising from the main contract. These disputes may have a material effect on the guarantee, thereby blocking funds in legal action. Hence, there was a need for an innovative instrument which would make doable the guarantee to serve its first purpose; namely, providing a form of wellbeing.

The bank guarantee is one such innovative fiscal instrument whereby, if the beneficiary perceives that there has been a breach of contract by the other party, he can encash the guarantee and avail of the amount at once, lacking having to undergo the hassles of legal action. Thus, the relevance of a bank guarantee achieves relevance.

Q: How can a beneficiary restrain the invocation of a bank guarantee?

The invocation of a bank guarantee by the beneficiary can be restrained by an injunction under the Civil Procedure Code, 1908, or the Specific Relief Act, 1963. But, the normal considerations, which apply in giving way an injunction, will not apply in cases of a bank guarantee.

Courts are usually reluctant to grant an injunction against a bank guarantee. If a bank guarantee has to be restrained, it has to fit the following conditions:

Fraud;
Irretrievable injustice or injury                   

Q: Can the invocation of a bank guarantee be prevented by initiating arbitration proceedings?

If the bank guarantee is unconditional, arbitration proceedings would in no way affect the enforcement of the guarantee. This is because an unconditional bank guarantee is self-determining of the main contract which refers disputes to arbitration.

But, if the bank guarantee includes a clause to the effect that it could not be invoked prior to the choice of the arbitrators, such a bank guarantee, which is conditional, cannot be invoked and an injunction can be granted.

Q: What is the variation between a bank guarantee and a usual guarantee?

Following are some points of variation between a bank guarantee and a usual guarantee:

1. A usual guarantee is governed by Sec. 126 of the Indian Contract Act, 1872. A bank guarantee is not frankly governed by Sec. 126.
2. An ordinary guarantee is a 3 parties contract relating the deposit, the debtor and the creditor. But a bank guarantee is a contract relating two parties i.e. the bank and the beneficiary.
3. In an ordinary guarantee, the contract between the deposit and the creditor arises as a subsidiary to the contract between the creditor and the principal debtor. The bank guarantee is self-determining of the main contract.
4. In an ordinary guarantee, the inter se disputes between the debtor and the creditor have a material effect upon the deposit’s liability. But, the bank guarantee is self-determining of the disputes, arising out of the contract.
5. An ordinary guarantee does not have any time limit before which the debt has to be claimed. Bank guarantees generally have a specific time surrounded by which they are functional.

BG, BANK GUARANTEE, STAND BY LETTER OF CREDIT, SBLC