Injunction On Invocation Of Bank Guarantee : Case Laws & Principles

Introduction The present situation because of the lockdown due to the emergence of Covid-19 can lead to various parties being unable to comply with their obligations under the contract, empowering the beneficiary/creditor to invoke bank guarantee(s) submitted on behalf of the principal debtor. This is an opportune time to ascertain the meaning of a Bank Guarantee and the circumstances under which the Court can grant an injunction on the invocation of a bank guarantee. This assumes importance in view of the recent Order passed by the Delhi High Court in the case of M/s. Halliburton OffshoreServices vs. Vedanta Limited[2] granting an ad-interim stay on invocation and encashment of bank guarantee relying upon the exception of 'special equities' in view of force majeure due to lockdown adversely affecting the ability of the applicant to perform the contract. On the other hand, the Bombay High Court refused to grant an injunction on the invocation of Bank Guarantee in the case of Standard Retail Pvt. Ltd. vs. M/s. G. S. Global Corp.[3] where the lockdown did not amount to force majeure, as distribution of steel was declared as an essential service and there was no restriction on its movement. This article summarizes the basic principles concerning 'invocation of bank guarantee' and injunction on the same. Evolution of Letter of Credits and Bank Guarantees It is important to understand the background and evolution of Letters of Credit/Bank Guarantee to understand the law relating to invocation of Letters of Credit/Bank Guarantee and injunction on the same. Letters of Credit have been developed over hundreds of years of international trade. It was most commonly used in conjunction with the sale of goods between geographically distant parties. It was intended to facilitate the transfer of goods between distant and unfamiliar buyer and seller. It was found difficult for the seller to rely upon the credit of an unknown customer. It was also found difficult for a buyer to pay for goods before their delivery. The bank's Letters of Credit came into existence to bridge this gap. Similarly, the practice of issuing Bank Guarantee grew. A 'contract of guarantee' is a contract to perform the promise, or discharge the liability, of a third person in case of his default[4]. The person who gives the guarantee is called the 'surety'.The person in respect of whose default the guarantee is given is called the 'principal debtor'. The person to whom the guarantee is given is called the 'creditor' or 'beneficiary'. A bank guarantee is a contract where a written assurance is given by a bank/surety on behalf of its customer/principal debtor that on compliance of the conditions therein, the bank/surety shall pay a stipulated amount to the creditor/principal debtor. By issuing this guarantee, a bank/surety takes responsibility for payment of a sum of money, in case it is not paid by the principal debtor in performance of its contractual obligations. In such transactions, the creditor/beneficiary receives payment from the issuing bank/surety when he presents a demand as per terms of the contract. The bank/surety must pay if the documents are in order and the terms of credit are satisfied. The contract of guarantee is a separate contract and the bank is not concerned with any dispute between the principal debtor and the creditor/beneficiary. Such disputes must be settled and decided between the principal debtor and the creditor/beneficiary. The rationale being that parties have the autonomy to enter into contracts and decide their respective rights and liabilities. Bank Guarantee are of two broad types – Unconditional or absolute guarantees and Conditional Guarantees. In an Unconditional Guarantee, the bank is bound to pay immediately upon the principal debtor failing to perform the contract. In a Conditional Guarantee, before invocation, the creditor/beneficiary is required to comply with certain conditions, which may be mentioned in the Bank Guarantee or in the main contract itself. The type of Bank Guarantee is determined on close scrutiny of the terms of the Bank Guarantee itself. It is very important that the conditions in the Bank Guarantee should be complied and the Bank Guarantee must be invoked in the mode and manner provided in the contract.Refer to Section 126 of the Indian Contract Act, 1872 for further details. Generally, when in the course of commercial dealings an unconditional Bank Guarantee is given or accepted, the creditor/beneficiary is entitled to realize such a Letters of Credit/Bank Guarantee in terms thereof, irrespective of any pending disputes and the bank will not refuse to honour a Letters of Credit/Bank Guarantee. The reason behind this principle is that commercial trading must continue on the solemn guarantee either by the Letters of Credit or by Bank Guarantee and irrespective of any dispute between contracting parties,...

Injunction On Invocation Of Bank Guarantee : Case Laws & Principles

Darshit Jain

Tags