Section 126 of the Indian Contract Act, 18721, states that guarantee means a contract to perform the promise or discharge the liability of a third person, in case of their default. Bank Guarantee is therefore a guarantee provide by a lending institution, wherein the debt by a debtor is covered by a Bank. In the case of UP State Sugar Corporation v. Sumac International Limited2, the Supreme Court held that when an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such bank guarantee irrespective of pending disputes. Additionally, in the case of Syndicate Bank v. Vijay Kumar3, the court was required to enforce the bank guarantee simplifiers without probing into the nature of the transaction between the Bank and the customer that led to the furnishing of the bank guarantee.
On the 2nd of June 2021, the Delhi High Court, issued Practice Directions to plug loopholes pertaining to the matter of renewal of Bank Guarantees, released by parties during pendency of proceedings.4 Hon’ble Justice Vipin Sanghi and Justice Jasmeet Singh, ordered that the applications filed by the appellant do not survive since the respondents had punctually renewed the Bank Guarantees with information to this Court and the applications were filed only since the appellant had not been put to notice of the said renewals. As a rule, Bank Guarantee is released by parties during pendency of proceedings, in the following manner, which was enumerated by the Delhi High Court in its Practice Directions5
- In appeals against money decrees, keeping in view the legal position insinuated in Order XLI Rule 5 of the Code of Civil Procedure, 1908, the Court permits appellant to deposit the money under degree, that can be withdrawn by the respondent by furnishing of solvent security. Commonly, the Bank Guarantee is then verified before the Registrar by producing competent officer of the Bank. The statement of the Officer is then recorded to that effect, in order to cross check if the Bank Guarantee has actually been furnished by the Bank at the instance of the Respondent, in order to ensure that the Bank would actually honor such a guarantee in its terms, if it is ever revoked.
- Guarantees, furnished by banks are usually not open-ended and have a fixed period during which they remain valid. Because of heavy pendency, the appeal in which the Bank Guarantee has been furnished may extinguish prior to the date of expiry of the Bank Guarantee, making it necessary for the respondent to cause the renewal of the Bank Guarantee till the matter is finally heard by the Court. The obligation for renewal of bank guarantee within stipulated time falls on the respondent, in order to secure the amount received, upon furnishing and verification of the initial guarantee.
- The Registry is expected to ensure listing of the matter before the Registrar two or four weeks prior to the expiry of the Bank Guarantee, so that, if in an event, the respondent is unable to renew the Bank Guarantee on time, the same is invoked to protect the interest of the beneficiary under the Bank Guarantee.
- It falls upon the Court to ensure that during the pendency of the appeal proceedings, the interest of the appellant is adequately protected and that the Bank Guarantee does not lapse due to any omission on part of the Registry in listing the matter before the expiry of the Bank Guarantee. It should not be that on default of the Registry, the appellant is exposed to a situation where money has been withdrawn by the respondent against the Bank Guarantee which has lapsed and upon renewal of the restitute amount, the respondent does not comply with directions, due to procedural discrepancies. There can be instances where the respondent is deliberately unable to renew the Bank Guarantee due to its financial conditions, which also in turn puts the appellant in serious financial prejudice.
As the amount is released to the respondent against furnishing of the Bank Guarantee, the onus of renewal within the time frame that the matter is finally disposed off, falls on the respondent.
Therefore, keeping in mind the delay in justice of renewal of Bank Guarantee, on improper enlisting on the Registry’s part, the Delhi High Court ordered that whenever Bank Guarantees are furnished by a party for release of the amounts deposited in Court, Bank Guarantees should also contain a term to the effect, that in case the Bank Guarantee is not renewed, at least ten days before the expiry of the Bank Guarantee, by the party at whose instance the Bank Guarantee has been furnished, the Bank shall, without any further demand by the beneficiary or reference to the party, at whose instance the Bank Guarantee has been furnished, proceed to encash the said amount and remit the same to the beneficiary. The purpose behind incorporation of such a clause in the Bank Guarantee furnished is to eliminate possible failure of part of the Registry to enlist the matter before the Registrar, weeks before the expiry of the Bank Guarantee, as directed. The said approach will allow appellants to have sufficient time to release the Bank Guarantee, during the pendency of proceedings. The court noted that due to the Covid-19 situation, the Bank Guarantees are being furnished to the Court have been verified through video-conferencing mode. It was suggested that the same mode of verification should be adopted during normal circumstances as well, both at the time when the guarantee is initially furnished as well as even at the time of their renewal, so as to save time and inconvenience of costs to the parties. Unless one or the other party for good and valid reasons, insists on production of the authorized officer from the Bank before the Court for the purposes of verification, videoconference can be used. In such a circumstance, the party which is making the reservations against verification of the Bank Guarantee, should satisfy the Court on the reasonable-ness of its reservation by disclosing the reasons for why physical production of the competent/authorized officer of the Bank was necessary.
Thus, the Delhi High Court, directed the Registry to incorporate the terms of this order, in its ‘Practice Directions and said that the same should be made aware to all the Registrars dealing with cases of acceptance of Bank Guarantee and renewal thereof.
1 Section 126, Indian Contract Act, 1872
2 UP State Sugar Corporation v. Sumac International Limited, (1997) 1 SCC 568
3 Syndicate Bank v. Vijay Kumar, AIR 1992 SCC 1066
4 Ircon International v. Hindustan Construction Co. Ltd, [C.M. Nos. 17708/2021 & 17824/2021], [http://delhihighcourt.nic.in/writereaddata/upload/Notification/NotificationFile_HB9LLGFDQ4U.PDF ]