Performance bank guarantee invoking

An unconditional bank guarantee is normally to be paid to the holder as and when a demand arises, court's are pretty reluctant in granting stays on bank guarantees. The Courts believe that if in all mercantile matters when a person proceeds on the guarantee of an unconditional bank guarantee - staying would make the business work come to a standstill. Only in exceptional cases of fraud/irretrivable injustice/special equities do the courts stay the encashing of bank guarantees. It is your task to make out a special case for stay. There are various judgments on this issue. My attention has been drawn on the observations of B.N.Kirpal, J. (as the learned Chief Justice then was) in Dwarikesh Sugar Industries Lt.d. Versus Prem Heavy Engineering Works (P) Ltd. (1997) 6 Supreme Court Cases 450, and the terse deprecation contained therein to the Courts' interdicting the normal operation of Bank Guarantees and Letters of Credit. 21. Numerous decisions of this Court rendered over a span of nearly two decades have laid down and reiterated the principles which the courts must apply while considering the question whether to grant an injunction which has the effect of restraining the encashment of a bank guarantee. We do not think it necessary to burden this judgment by referring to all of them. Some of the more recent pronouncements on this point where the earlier decisions have been considered and reiterated are Svenska Handelsbanken v. Indian Charge Chrome, Larsen & Toubro Ltd. v. Maharashtra SEB, Hindustan Steel Workers Construction Ltd. v. G.S. Atwal & Co. (Engineers) (P) Ltd. and U.P. State Sugar Corpn. v. Sumac International Ltd. The general principle which has been laid down by this Court has been summarised in the case of U.P. State Sugar Corpn. As follows: (SCC p.574, para 12) "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 the 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." Dealing with the question of fraud it has been held that fraud has to be an established fraud. The following observations of Sir John Donaldson, M.R. In Bolivinter Oil SA v. Chase Manhattan Bank are apposite: "... The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear, both as to the fact of fraud and as to the bank's knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank's credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the bank to have it discharged." The aforesaid passage was approved and followed by this Court in U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. 22. The second exception to the rule of granting injunction, i.e., the resulting of irretrievable injury, has to be such a circumstance which would make it impossible for the guarantor to reimburse himself, if he ultimately succeeds. This will have to be decisively established and it must be proved to the satisfaction of the court that there would be no possibility whatsoever of the recovery of the amount from the beneficiary, by way of restitution." Hope this helps ! Regards, Advocate Bharat Chugh

In performance bank guarantee, the bank will be under obligation to honor the invocation without demur or looking into the underlying contract based on which the PBG is  issued. This is settled law as it stands as on today. Bank has no business to go to court and obtain stay or injunction against the beneficiary and invite litigation to answer for damages. I fully concurr with the views of  Mr. Bharat Chugh advocate who has given elaborate account on the query.