Bank Guarantee

Bank Guarantee

Absolute undertaking to pay an amount, whenever demanded by guarantee-holder.
1. Independent of underlying transaction.
Maharashtra SEB v. Official Liquidator, Ernakulam
1. A guarantee was submitted on behalf of a supplier who had deposited securities.
  1. The only condition was a demand from the board, which was met.
    1. Held that bank could not be stopped from paying, and then reimbursing itself from the securities.
      1. If enforcement would depend on an inquiry, the purpose of a bank guarantee would be defeated.
Hindustan Steelworks Construction Ltd. v. Tarapore & Co.
1. A bank guarantee is an independent and distinct contract between the bank and the beneficiary.
  1. Not qualified by the underlying transaction and primary contract.
2. In case of unconditional bank guarantee, liability of bank is absolute.
  1. Not dependent on dispute or proceeding between beneficiary and the other party.
3. Commitments from banks need to be honoured without interference from the courts.
  1. Courts interfere only in exceptional cases, where irretrievable injustice would be done if guarantee was encashed.
    1. Example - Fraud
      1. ex turpi causa non oritur actio
        Fraud unravels all.
Itek Corporation v. First National Bank of Boston
1. In order to claim the exception because of fraud, evidence must be clear about the fraud, and the knowledge of the bank.
2. It must be impossible for the guarantor to reimburse himself.
3. Mere apprehension that the other party will not be able to pay is not enough.
Dai-Ichi Karkaria Ltd v. ONGC
1. Law cannot allow a guarantee to be claimed by unscrupulous methods.
2. Bank had used undue influence to make petitioner drop conditions from bank guarantee, the court did not allow enforcement.

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