Bank Guarantee and Principles of Injunction : Law and Principles

 Bank Guarantee and Principles of Injunction : Law and Principles

"The bank guarantee is an independent and separate contract and the existence of any dispute between the parties to the contract cannot be a ground for issuance of order of injunction to restrain enforcement of the same."

In New Era Industries v. Star Alubuild Pvt. Ltd [2014] GCtR 4577 (Delhi) the principles were explained by then Hon'ble J. Sistani. 

The law relating to invocation of bank guarantees is well settled. By a catena of decisions the Supreme Court of India has repeatedly held that Courts should be slow in granting injunctions to restrain the invocation of a bank guarantee, except in cases of fraud of an egregious nature which would vitiate the entire transaction and in those cases where special equity is in favour of grant of injunction or cases of irretrievable injury or irretrievable injustice would occur if such an injunction was not granted. It is equally well settled that a dispute between the beneficiary and the party at whose instance the bank guarantee has been given is immaterial and of no consequences.

It was held that "where fraud has been alleged, the plaintiff must prima facie make out a case of clear fraud and the fraud alleged must be of an egregious nature which would vitiate the very foundation of the bank guarantee."

The law laid down by Hon'ble Supreme Court was reiterated that "the law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are not necessarily connected, though both may co-exist in some cases."

Written by 

Vishal

Delhi

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