Mere existence of dispute between parties to contract not sufficient to restrain enforcement of Bank Guarantees

Bank guarantee is absolute and unequivocal. There are only two exceptions to this rule. First, when there is a clear fraud of an egregious nature about which bank has notice. Second, is irretrievable injury which, has to be clearly proved. Mere apprehension that the other party will not be able to pay, is not enough.

Delhi High Court in the present petition dealt with the issue of enforcement of bank guarantee and grant of injunction in respect of invocation thereof. While adjudicating the aforesaid issue, following essentials highlighted as settled position of law:

• To restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or of Bank Guarantee, there should be a serious dispute and there should be a good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties.

• Commitments of banks must be honoured free from interference by the Courts unless there are exceptional cases of fraud or irretrievable injustice.

• 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.

• Courts should be slow in granting an injunction to restrain the realization of such a Bank Guarantee.

• Mere allegations and counter-allegations between the parties as to breach of contract, non-payment of advances or non-supply of machinery did not amount to fraud.

To conclude it can be stated that a bank guarantee is absolute and unequivocal. There are only two exceptions to this rule. First, when there is a clear fraud of an egregious nature about which bank has notice. It must be proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. Second, is irretrievable injury which, has to be clearly proved. Mere apprehension that the other party will not be able to pay, is not enough.

[United Telecoms Ltd. vs. IDBI Bank Ltd.]
(Delhi HC, 01.07.2014)