Bank Guarantee

Since a guarantee is, for the purposes of the Contract Act, 1872 a contract under the law, the parties to the guarantee are deemed to be regulated by the terms of the guarantee which they have mutually agreed upon keeping in view the legal principle of consensus ad idem (meeting of the minds) when it comes to construction of contracts

Once a guarantee is executed between the parties (i.e. between a guarantor/surety and a creditor), they would be bound by the terms and conditions of the guarantee irrespective of any independent obligation of the principal debtor towards the creditor

Once a bank issues a guarantee, it is duty-bound to pay the beneficiary of a guarantee in terms of the guarantee itself.

Bank Guarantee furnished by the Bank contained undertaking and had imposed absolute obligations on the Bank to pay the amount, irrespective of any dispute between the parties to the principle contract

Absolute obligation existed upon the Banker to comply with terms as enumerated in Bank Guarantee and to pay amount stipulated therein

Bank could not be prevented by the party at whose instance Guarantee was issued, from honoring the credit guaranteed

Respondent Authority vide a letter conveyed to the Bank about intentional failure/alleged violation of appellant/bidder, as per tender-document clauses during validity of bid with the request to en-cash Bank Guarantee

Bank issuing Guarantee was not concerned with underlying contract between the parties as obligations arising under the Bank Guarantee were independent of the obligations arising out of specific contract between parties

Division Bench of High Court declined to interfere in the matter

Intra Court Appeal was dismissed in circumstances.

Bank Guarantee furnished by the Bank contained undertaking and had imposed absolute obligations on the Bank to pay the amount, irrespective of any dispute between the parties to the principle contract

Absolute obligation existed upon the Banker to comply with terms as enumerated in Bank Guarantee and to pay amount stipulated therein

Bank could not be prevented by the party at whose instance Guarantee was issued, from honouring the credit guaranteed

Respondent Authority vide a letter conveyed to the Bank about intentional failure/alleged violation of appellant/bidder, as per tender-document clauses during validity of bid with the request to en-cash Bank Guarantee

Bank issuing Guarantee was not concerned with underlying contract between the parties as obligations arising under the Bank Guarantee were independent of the obligations arising out of specific contract between parties

Division Bench of High Court declined to interfere in the matter

Intra Court Appeal was dismissed, in circumstances.

Only two exceptions were available to the Court where it may consider granting an injunction to restrain the encashment of a Bank guarantee: (i) where fraud by the beneficiary is proved to the satisfaction of the Court and (ii) where a case of irretrievable injustice is made out by the party which furnished the Bank guarantee

Irretrievable injustice meant a situation where, after the Bank guarantee was allowed to be encashed, it would be impossible for the principal debtor to recover from the beneficiary the amount under the guarantee if it was finally held that the beneficiary was not entitled to the amount

Court could restrain the encashment of irrevocable/unconditional Bank guarantee in cases where fraud of an egregious nature had been played on the principal debtor of which the guarantor Bank had prior notice

Fraud was required to be pleaded and established when it was put forth as a ground for seeking a restraint order against the encashment of a Bank guarantee.

Interim injunction could not be granted to interfere with the Bank's obligation to make payment to a beneficiary who made a demand for the encashment of an irrevocable and unconditional Bank guarantee.

Commercial transactions must go on the solemn Bank guarantee irrespective of any dispute between contracting parties regarding whether or not the work carried out at a construction site was up to the contractual standard

Banks could not be absolved of their responsibility to meet such obligations

Employer/developer extended facility of Mobilization Advance to a contractor against a Bank guarantee under the assurance that nothing would prevent it from getting it back if contractor committed default in fulfilling its obligations arising out of a contract

Bank guarantee, therefore, constituted an agreement between a Bank and a developer/employer under which there was an absolute obligation on the Bank to make the payment to the employer merely on demand

Banks were prohibited under a Bank guarantee from raising any objections to such payment

Only exceptions were cases where there was established fraud (based on material events and not on bald pleadings in the application for stay) of egregious nature of which Bank had knowledge and where allowing encashment would result in irretrievable injustice to one of the parties concerned, and in such cases Court may interdict encashment of a bank guarantee.

Bank guarantee being an independent contract between the party in whose favour the same was issued and the Bank which issued the same, its encashment could not be stopped or restrained by an injuctive order

Obligations emanating from Bank guarantee were independent of obligations bearing out of the contract entered upon by the parties.

Signatures of guarantors of borrower would not be required on counter guarantees.

Contract of guarantee was an independent contract of the principal contract.

Nature of such guarantee explained.

Effect.

Once such guarantee put for encashment cannot be stayed and has to be encashed and aggrieved person may challenge the encashment in the ordinary course of law or avail the remedy of arbitration as provided under the contract.

Words of guarantee made it clear that the very first written demand constituted the notice of default, meaning thereby that the "notice of default" and "on such written demand" had been amalgamated into one and there was no need to serve notice separately

Guarantee must follow its terms and conditions

Guarantee was an independent and self-governing document and only words of the same could be considered for its decision without considering agreement or contract for making any decision on it

Principles.

Once guarantee placed for encashment cannot be stayed and Bank is bound to encash it and courts are refrained to interfere in such like matters.

Words of guarantee made it clear that the very first written demand constituted the notice of default, meaning thereby that the "notice of default" and "on such written demand" had been amalgamated into one and there was no need to serve notice separately

Guarantee must follow its terms and conditions

Guarantee was an independent and self governing document and only words of the same could be considered for its decision without considering agreement or contract for making any decision on it

Principles.

Effect.

Once guarantee placed for encashment cannot be stayed and Bank is bound to encash it and courts are refrained to interfere in such like matters.

Once such guarantee put for encashment cannot be stayed and has to be encashed and aggrieved person may challenge the encashment in the ordinary course of law or avail the remedy of arbitration as provided under the contract.

Bank Guarantee would be payable on demand to a person in whose favour same had been issued for its encashment.

No injunction should normally be granted to restrain encashment of such guarantee.

No injunction should normally be granted to restrain encashment of such guarantee.

Bank guarantee, generally contains in its contents whereby guarantor undertakes to agree irrevocably and unconditionally to payment to beneficiary

Amount mentioned in bank guarantee and demand of beneficiary is deemed to be conclusive evidence and beneficiary is considered as sole judge to do so regarding failure of principal to have not complied with or fulfilled requirements of brief/agreement

There are certain guarantees, which in their contents without mentioning the demand as conclusive evidence or beneficiary to be the sole judge, prescribe certain eventualities on happening whereof beneficiary is entitled to demand encashment of guarantee.

Scope-Bank guarantee, generally contain in its contents whereby guarantor undertakes to agree irrevocably and unconditionally to the payment to beneficiary-Amount mentioned in bank guarantee and demand of beneficiary is deemed to. be conclusive evidence and beneficiary is considered as sole judge to do so regarding failure of principal to have not complied with or fulfilled requirements of brief/ agreement

There are certain guarantees, which in their contents without mentioning the demand as conclusive evidence or beneficiary to be the sole judge, prescribe certain eventualities on happening whereof beneficiary is entitled to demand encashment of guarantee.

Company, in the present case, had applied to the State Bank of Pakistan for cover of foreign exchange risk on the amount payable to a foreign company in foreign currency which was granted

Dispute arose between the Company and the State Bank regarding the rate of foreign exchange for covering the risk

Dispute eventually landed in Supreme Court in which leave was granted and appeal was decided wherein State Bank was directed to calculate the amount payable by the Company and to recover the same from the bank guarantee furnished by the Company

Bank guarantee showed that interest mentioned therein related to the interest that was payable by the Company to the credit supplier on the principal amount and ,not on the facility provided by the State Bank of Pakistan

Second guarantee, which had revalidated the earlier one on the orders of the Supreme Court, did not mention the payment of any interest/mark-up

Order of the Supreme Court in compliance with which Bank guarantee was furnished, was silent regarding payment of interest/mark-up

Interest, payment of-Company, in the present case, had applied to the State Bank of Pakistan for cover of foreign exchange risk on the amount payable to a foreign company in foreign currency which was granted

Dispute arose between the Company and the State Bank regarding the rate of foreign exchange for covering the risk

Dispute eventually landed in Supreme Court in which leave was granted and appeal was decided wherein State Bank was directed to calculate the amount payable by the Company and to recover the same from the bank guarantee furnished by the Company

Bank guarantee showed that interest mentioned therein related to the interest that was payable by the Company to the credit supplier on the principal amount and not on the facility provided by the State Bank of Pakistan

Second guarantee, which had revalidated the earlier one on the orders of the Supreme Court, did not mention the payment of any interest/mark-up

Order of the Supreme Court in compliance with which Bank guarantee was furnished, was silent regarding payment of interest/mark-up

State Bank of Pakistan, in circumstances, was not entitled to debit to the Bank amount of interest in respect of a guarantee furnished by the Bank on behalf of the Company to cover the differential amount regarding which the dispute had arisen between the State Bank and the Company.

Principles.

Object of taking of Bank guarantee.