What Are The Basic Principles Relating To Bank Guarantees, Their Invocation & Interdiction? Delhi High Court Answers

The Delhi High Court has settled down the basic principles relating to bank guarantees, their invocation and the interdiction of such invocation. While observing that commercial contracts often contain clauses requiring the contractor to furnish bank guarantees, Justice C Hari Shankar said that such bank guarantees are either bank guarantees provided towards security for having been awarded the contract, or performance bank guarantees to guarantee performance of the contract, though, on occasion, other bank guarantees such as bank guarantees towards mobilization advance etc. may also be required to be provided. The Court added that the contract, in such cases, also provides for the circumstances in which the bank guarantees could be invoked, as well as the purpose for requiring the bank guarantees to be provided in the first place.The Court also set laid down the following principles:- No bank guarantees payment to anyone gratis. Every bank guarantee is of necessity issued by a bank on instructions. In case of a commercial contract, the instruction to the bank, to provide a bank guarantee, is given by the person to whom the contract is awarded. - The party to whom the contract is awarded, in other words, instructs the bank, in lieu of having been awarded the contract, to issue a bank guarantee in favour of the person awarding the contract.- Like all independent commercial contracts, every bank guarantee has to abide strictly by its terms. Honour and compliance of a bank guarantee, as per its terms, is, therefore, mandatory. In the case of bank guarantees, especially, the Supreme Court has stressed this aspect, as there is an overwhelming element of public interest involved in requiring banks to honor their commitments towards customers and clients. If a bank is to be interdicted, at the instance of a third party, who is a stranger to the bank guarantee between the bank and the beneficiary, from honouring the bank guarantee, the Supreme Court has held in United Commercial Bank v. Bank of India and Hindustan Steelworks Construction Ltd. v. Tarapore & Co, that it would erode the public faith in the banking institution of the country.- The bank is, therefore, concerned only with the terms of the bank guarantee. The elements of any dispute between the contractor and the beneficiary of the bank guarantee, or the conditions existing in the contract between the contract awardee and the beneficiary of the bank guarantee.- In order for the aspect of performance, or failure of performance, of the parent contract, by either party, to become relevant as a consideration for invocation of the bank guarantee, they have necessarily to be incorporated by express reference in the bank guarantee itself. In other words, if the bank guarantee were to stipulate that the bank would be required to make payment to the beneficiary only in the event of failure, on the part of the contract awardee, to abide by its obligations under the Contract, then the aspect of performance of the contract by the contract awardee would become a relevant consideration, while assessing the obligation of the bank to make payment to the beneficiary.- Similarly, oftentimes, a contract may stipulate the particular stage at which, or exigency in which, the bank guarantee could be invoked by the beneficiary. Such a stipulation in the contract would, however, become relevant for the bank, when called upon by the beneficiary to honour the bank guarantee, only if that stipulation figures expressly in the body of the bank guarantee itself.- Else, the bank is not expected, much less required, to advert to the covenants of the original contract between the contract awardee and the beneficiary, to which the bank is a stranger – just as the contract awardee is a stranger to the bank guarantee. Nor is it required to enter into the disputes between the contract awardee and the beneficiary of the bank guarantee, or into the aspect of performance, or non-performance, of the contract. Nor, for that matter, is the bank entitled to examine whether the stage at which the contract between the parties envisages invocation, or enforcement, of the bank guarantee, has, or has not, been reached. The bank, being a stranger to the contract between the contract awardee and the beneficiary of the bank guarantee, has no authority to probe into the said contract, unless the terms of the bank guarantee expressly require it to do so. The bank has necessarily to be concerned only with the terms of the bank guarantee, to which alone it is a party.- If the invocation of the bank guarantee by the beneficiary thereof is, therefore, in terms of the bank guarantee, the Court cannot interdict the bank from honouring the bank guarantee, by referring to the covenants in the contract between the contract awardee and the beneficiary of the bank guarantee. Any such attempt by the Court would amount to directing the bank to violate the contract, with the beneficiary of the bank guarantee, to which it...

What Are The Basic Principles Relating To Bank Guarantees, Their Invocation & Interdiction? Delhi High Court Answers

Nupur Thapliyal

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