As with any other contract, the guarantor`s consent should be free. This was established in section 142 or 143 of the ICA, 1872. The creditor should not receive any guarantee, either by misrepresentation or by concealment of material facts relating to the transaction. If the guarantee is obtained in this way, the guarantee is void. If a second bank issues a BG in exchange for a BG already issued, it is called an indirect BG. In such scenarios, if the second bank incurs losses when claiming collateral, the issuing bank ensures that all losses are recovered. In State Bank of India v. Premco Saw Mill, the bank announced repayment of the loan and also threatened the debtor with legal action. However, the debtor`s husband agreed to repay the loan by becoming guarantor and executing a promissory note in favour of the bank, and the bank withdrew its claim.
The court held that the bank`s patience and willingness not to initiate legal proceedings against the debtor was a good consideration for the guarantee. The 97th Legal Affairs Committee analysed suo moto anomalies under Article 28 of the Treaties Act, for which the extinguishment of a right was permitted but not the mere exclusion of an appeal. In order to prevent Article 28 from being a highly controversial provision and to alleviate the difficulties that consumers face when negotiating with large companies, the Committee on Legal Affairs has proposed an amendment. According to the report of the Legal Committee, article 28 of 1997 was amended (the 1997 amendment) by inserting subparagraph (b). The 1997 amendment blurred the distinction between “law” and “remedy” before the amendment and led to a number of disputes for banks, further reinforcing the contradiction in the existing position. As an appeal mechanism, on the recommendation of the Association of Indian Banks, the Banking (Amendment) Bill 2012 was enacted to “exclude bank guarantee agreements from the scope of section 28 of the Contracts Act in order to finalize the repayment of such guarantees”. Accordingly, the third exception has been inserted. A direct BG is a bank in which a bank is asked by its account holder to provide a guarantee in favour of the beneficiary. Direct BG does not rely on the existence, validity and enforceability of the principal obligation. Banks should refrain from providing collateral on behalf of customers who do not have credit facilities with them. In addition, when providing collateral, banks should warn beneficiaries that they must verify the authenticity of the collateral with the issuing bank. The prompt collection of bank guarantees is also of paramount importance.
Delays risk jeopardizing the sanctity of the bank guarantee. In the case of guarantees provided on behalf of government agencies, such delays can damage the image of the banking system, as it appears that the banks are acting in collusion with the parties. There should be an effective system of control of the guarantee activity, so that the persons on whose behalf guarantees are issued are obliged to fulfil their obligations. This gives the beneficiary a sense of security and, in turn, strengthens trade and commerce. [19] In this sense, the use of bank guarantees may cause irreparable harm or unjust enrichment to one of the parties. The principle of unjust enrichment derives from the maxim “Nemo Debet Locupetari ex aliena jactura”, that no human being should become rich through the losses of another. The paper examines the nature and scope of the bank guarantee scheme and letters of credit in India. This paper is a doctrinal study covering the law relating to bank guarantees, enshrined in particular by the Indian Treaty Act of 1872, highlighting the functions and economic benefits of banking and explaining the different types of guarantees issued by banks in India. This document also discusses the nature, scope, details, structure and problems of a letter of credit. It highlights the imbalance of rights and obligations of the parties in a letter of credit transaction by highlighting the shortcomings of the letter of credit system.
It examines how the risk of the innocent buyer has increased and very often the buyer pays for the goods for which he has not contracted, and also emphasizes the principle of independence and the doctrine of respect for documents. “A guarantee agreement is a tripartite agreement which takes into account the principal debtor, the creditor and the guarantor,” stated in 1836 in Swan v Bank of Scotland. In other countries, an injunction is issued against the issuance of bank guarantees due to war situations. In the case of Bhel vs Egyptian Electricity Transmission Company, part of the supplies could not be made due to the war situation in Egypt. The Delhi High Court ruled that this was a case of force majeure and that special actions would be present as the claimant cannot recover the secured amount. If the amount is redeemed, it will unfairly enrich the defendant. The situation was similar in Transrail Lighting Limited v. Public Electricity Corporation, where the court granted the plaintiff an injunction for disturbance in Yemen. In Hindustan Construction Co. Ltd. v.
State of Bihar and others. The Supreme Court ruled that in the case of conditional bank guarantees, the beneficiary does not have an absolute right to invoke the guarantee and demand immediate payment. The Court also held that the conditions set out in bank guarantee agreements must be fulfilled in order to be able to invoke the honour of the bank guarantee. If the BG has certain conditions that must be met in order for the beneficiary to fully benefit from the guarantee, these BGs are called conditional BGs.