Bank Guarantee

Bank Guarantee

1. Absolute undertaking to pay an amount, whenever demanded by guarantee-holder.

   • Independent of underlying transaction.

2. Maharashtra SEB v. Official Liquidator, Ernakulam

   • A guarantee was submitted on behalf of a supplier who had deposited securities.
     • The only condition was a demand from the board, which was met.
       • Held that bank could not be stopped from paying, and then reimbursing itself from the securities.
         • If enforcement would depend on an inquiry, the purpose of a bank guarantee would be defeated.

3. Hindustan Steelworks Construction Ltd. v. Tarapore & Co.

   • A bank guarantee is an independent and distinct contract between the bank and the beneficiary.
     • Not qualified by the underlying transaction and primary contract.
   • In case of unconditional bank guarantee, liability of bank is absolute.
     • Not dependent on dispute or proceeding between beneficiary and the other party.
   • Commitments from banks need to be honoured without interference from the courts.
     • Courts interfere only in exceptional cases, where irretrievable injustice would be done if guarantee was encashed.
       • Example - Fraud
         • ex turpi causa non oritur actio
           • Fraud unravels all.

4. Itek Corporation v. First National Bank of Boston

   • In order to claim the exception because of fraud, evidence must be clear about the fraud, and the knowledge of the bank.
   • It must be impossible for the guarantor to reimburse himself.
   • Mere apprehension that the other party will not be able to pay is not enough.

5. Dai-Ichi Karkaria Ltd v. ONGC

   • Law cannot allow a guarantee to be claimed by unscrupulous methods.
   • Bank had used undue influence to make petitioner drop conditions from bank guarantee, the court did not allow enforcement.