NON –FUND BASED BUSINESS: BANK GUARANTEES.
Bank Guarantee is an
irrevocable commitment on the part of the Bank
to pay a specific amountto the beneficiary, in the event of the invocation of the B.G.
Thus in a Bank Guarantee theprimary obligation to pay is on the part of Banker
.thus the Bank Guarantee is an independenttransaction from the agreement between the applicant and the beneficiary. In this transaction the person, whose has applied for the Bank Guarantee is called Applicant,
The Banker is called theGuarantor
, the Person in whose name the guarantee is issued is called the Beneficiary. Thus in aBank Guarantee transaction there are Three parties.02.
Bank Guarantees are of Four types
: Guaranteeing the payment of a specific amount.Eg: EMD, Bid Bond Guarantee, Advance payment Guarantee
: In this type of guarantee the Bank guarantees the performance of theapplicant; however he restricts his liability to a specific amount.
Deferred Payment Guarantee
: In this type of guarantee, the Banker guarantees the payment of installments spread over a specific period of time. ( Normally high cost machinery purchased oncredit)
; these are the guarantees issued infavour of Courts, Customs, centralexcise, Sales Tax , Income Tax and other statutory authorities.03.
After the issue of the B.G, when a valid claim is made by the beneficiary, the Bank should honour the claim and pay the same provided the claim is in order, even if the applicant is going the torequest/ demand the Bank not to ho honour the claim ( What ever the reason might be )04.
Supreme Court has given guidelines to all the courts not to issue Injunction order against a Bank’shonouring a claim under the Bank Guarantee.05.
Courts are advised to issue Injunction order against the payment of a B.G/L.C claim only under thefollowing circumstances.
Fraud is evident in the transaction
Special equities in favour of the person on whose behalf the guarantee has been issued.
When the court opines the honouring the claim would cause irretrievable injustice to theapplicant.06
A Bank Guarantee is to be invoked well with in its validity period. However a claim can be madewithin its claim period. However as per the Sec 28 of Indian Contract act the claim period for B.Gsissued to Govt Departments/ Municipal bodies. is 30 years ( 3 years for others)07. The procedure for proper invocation of B.G
The invocation should be well with in the validity period of the B.G.
The invocation amount is not more than the guaranteed amount. In case it is more, then themaximum amount stipulated in the guarantee need be paid.
The person invoking the guarantee should have powers to do so. To avoid the complicationsthe B.G should be invoked by the designate in whose name the B.G has been issued.
01. The Bank Guarantee is invoked by the beneficiary. The applicant confirmed in writingthat he has completed the work undertaken properly and hence the Bank should not honour the claim of the Beneficiary. He also threatened , if the bank choose to honour the claim, he would not pay the amount. What should the Bank do?If the invocation of the bank Guarantee is proper the Bank should honour the claim,despite the objections put forth by the applicant( Provided there is no injunction order from acompetent court of Law02 A performance guarantee was issued for Rs500000. The said guarantee is invoked for Rs550000.Honour the claim for Rs 500000, if the claim isotherwise in order