INVOKING OF GUARANTEES AND REVOKING OF GUARANTEES

MEANING OF INVOKING OF GAURANTEES:

A bank is obliged to honor any legitimate claim within the validity period of the guarantee. If the invocation is in order and there is no court prohibiting the payment, the bank is required to honor payment to the beneficiary.

Before making the payment to the beneficiary, bank informs the applicant about the invocation of the guarantee and asks him to arrange for funds for payment of claim amount.

FACTS:-

It is a settled position that invocation of unconditional bank guarantee cannot be stayed by the courts except

In case of fraud which would destroy the very purpose for which such bank guarantee was issued

In a case where encashment of the bank guarantee would result in irreparable harm or injustice to one of the parties concerned. In view of the aforesaid settled position, a party seeking stay against invocation of the bank guarantee used to find it very difficult, nay impossible, to obtain favourable order.

ILLUSTRATION:-

In the case of Syndicate Bank v. Vijay Kumar 2 the Court was required to enforce the bank guarantee simplifiers without probing into the nature of the transactions between the Bank and the customer that led to the furnishing of the bank guarantee.

CASE:-

Road Machines India (p) Ltd v. Projects & Equipment Corporation India

In the case of Road Machines India (p) Ltd v. Projects & Equipment Corporation India 3 it was observed that the invocation of a bank guarantee does not necessarily have to be initiated by setting out the entire case in the form of a plaint with a specific cause of action, and that it was a commercial document and not a statutory notice or a pleading. It was further stated that if the bank concerned understood that the beneficiary in terms of the guarantee was invoking the guarantee, the bank guarantee may be invoked. It is sufficient if there is substantial compliance in terms of the guarantee in the notice that may be issued. However, banks may even delay giving a response to the demand for notice in the hope that the specified claim period expires.

UP State Sugar Corporation V. Suman International Ltd

In UP State Sugar Corporation v. Sumac International Ltd 1 it was held as, above, that when an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such bank guarantee irrespective of pending disputes and that a bank guarantee constituted a bargain between the two parties, by which the banker creditor was unconditionally required to pay the amount in question.

MEANING OF REVOKING OF GAURANTEE:-

So far as a guarantee given for an existing debt is concerned, it cannot be revoked, as once an offer is accepted it becomes final.

However, a guarantee for a future debt or continuing guarantee can be revoked for future transactions.

In that case, the surety shall be liable for those transactions which have already taken place.

FACTS:-

A continuing guarantee is revoked for all the future transactions due to the absence of a contract. However, his legal representatives will continue to be liable for transactions entered into before his death.