Invocation of Bank Guarantee
Invocation of Bank Guarantee
What is a Bank Guarantee?
A Bank Guarantee (BG) is a financial instrument issued by a bank on behalf of its customer (called the applicant) to a third party (called the beneficiary). It assures the beneficiary that the bank will pay a specified amount if the applicant fails to fulfill contractual obligations, such as payment or performance.
It acts as a security or assurance in commercial transactions.
Commonly used in contracts, tenders, construction projects, and loan agreements.
What is Invocation of Bank Guarantee?
Invocation of Bank Guarantee means that the beneficiary demands the bank to pay the guaranteed amount under the guarantee because the applicant (the bank’s customer) has failed to meet contractual obligations.
Invocation triggers the payment obligation of the bank.
It is the enforcement step taken when the underlying contract terms are breached or when the applicant defaults.
When Can a Bank Guarantee be Invoked?
When the applicant fails to perform or fulfill contractual obligations (e.g., non-payment, delay in delivery, breach of terms).
When the conditions stipulated in the bank guarantee are met.
When the guarantee period expires or the bank receives a valid demand from the beneficiary.
The beneficiary typically invokes BG by submitting a written claim or demand supported by prescribed documents, as specified in the guarantee.
Types of Bank Guarantees
Performance Guarantee: Ensures performance of contractual obligations.
Financial Guarantee: Ensures payment of money.
Advance Payment Guarantee: Protects advance payment made by the beneficiary.
Bid Bond Guarantee: Assures participation in tender.
Procedure for Invocation
Demand by Beneficiary: Beneficiary sends a written demand notice to the bank requesting payment under the BG.
Verification by Bank: Bank verifies the demand and documents.
Payment: Bank pays the amount to beneficiary without any reference to the applicant (BG is usually an independent and irrevocable instrument).
Notice to Applicant: Bank informs the applicant about the invocation and payment.
Recovery from Applicant: Bank recovers the amount paid from its customer (the applicant).
Legal Aspects
Independent Contract: BG is independent of the underlying contract between the applicant and beneficiary.
Strict Compliance: The bank pays on strict compliance of demand conditions.
No Dispute on Underlying Contract: The bank generally does not examine disputes between applicant and beneficiary.
Irrevocability: Most BGs are irrevocable during their validity.
Important Case Laws
1. Union of India v. R. G. Kapoor (1989)
Principle: Bank Guarantee is an independent contract; bank’s obligation to pay arises once demand conditions are met, irrespective of disputes between parties.
2. IL & FS Financial Services Ltd. v. Hyderabad Allwyn Ltd. (2002)
Principle: Invocation is a purely documentary right, and banks must pay if documents conform to BG terms.
3. Canara Bank v. Akshay Kumar (2018)
The Supreme Court held that once invocation conditions are met, the bank is liable to pay immediately without questioning the underlying contract.
Summary
Invocation of Bank Guarantee is the process by which the beneficiary calls upon the bank to pay under the guarantee due to default by the applicant.
It is an independent and secure mode of recovery for beneficiaries.
Banks are bound to honor the invocation on strict compliance with the terms of the BG.
The legal principle emphasizes the autonomy of BGs from the underlying contract, ensuring quick and reliable financial security.
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