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IMPORTANCE OF BANK GUARANTEE AND ITS INVOCATION

IMPORTANCE OF BANK GUARANTEE AND ITS INVOCATION

In the case of Hindustan Construction co. ltd. Vs. state of Bihar and ors an important issue was confronted in front of the Supreme Court and that is the difference between conditional and unconditional guarantee.  Since, a Bank Guarantee is the common mode, of securing payment of money in commercial dealings as the beneficiary, under the Guarantee, is entitled to realize the whole of the amount under that Guarantee in terms thereof irrespective of any pending dispute between the person on whose behalf the Guarantee was given and the beneficiary. To invoke the guarantees and recover the amount from banks, the first and foremost step is to identify if the guarantee is conditional or unconditional, which is an issue of interpretation. The terms of the Bank Guarantee are, therefore, extremely material. Since the Bank Guarantee represents an independent contract between the Bank and the beneficiary, both the parties would be bound by the terms thereof. The invocation, therefore, will have to be in accordance with the terms of the Bank Guarantee; or else, the invocation itself would be bad.

In the case, even though “unconditionally” was used in reference to the guarantee initially, but it was read to clarify that “giving right of claim of recovery to the employer” was mentioned too. The guarantee here is conditional.

 A conditional guarantee is where the liability of guarantor arises when proof of breach of terms is given. In unconditional no, such proof is required. It attaches the moment the demand is made. Court often interprets contracts to determine what kind of Guarantee is required, since nomenclature may not be exclusive. 
Invoking unconditional guarantees does not require any process and is automatically liable and the Bank guarantee is an independent contract. 
It is important to have these points while executing any bank guarantee in the resolution process under Insolvency and Bankruptcy code, 2016 as well, since the same principles are followed for its execution for recovery. 


 

 

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