Why do we need bank guarantee

Usually a plain reading of the provisions of a standard unconditional bank guarantee reflects that the guarantor undertakes to pay without demur which makes the demand conclusive and binding. Federation Ltd. Singh Consultants and Engineers P Ltd.

The Hon'ble Court further held that in such a case, the party on whose behalf the guarantee was given was not entitled to an injunction restraining the bank in performance of its guarantee. Supra , wherein an act that constituted as fraud was dealt with. In the matter of Sztejn v. Henry Schroder Banking Corp, which was a case wherein the facts were as follows:. Although the documents tendered appeared to conform to the credit, they contained material false representations of facts;.

The New York Supreme Court held that there was a fraud pertaining to the documents tendered for invocation which disclosed a cause of action which entitled the party to an injunction to stop payment. In light of such stringent law, there are only two narrow exceptions where injunction on invocation of unconditional bank guarantee can be granted viz:.

Fraud of an egregious nature as to vitiate the entire underlying transaction, of which the bank has notice, and. Cosmos Enterprises, 6 held that commission of fraud would include any act committed by a party to deceive another party or his agent or to induce him to enter into a contract. And the burden of proving such fraud lies upon the party making such allegation. Nature of Fraud — In the matter of U. State Sugar Corporation v. Sumac International Ltd. The Hon'ble Supreme Court held that since the bank pledges its own credit involving its reputation, it had no defense for declining the payment except in case of fraud.

Even in the matter of Hindustan Steelworks Construction Ltd. Supra , the Hon'ble Supreme Court held that the exception of fraud needs to have the effect of vitiating the entire underlying transaction. The Supreme Court further held that the fraud, whether at the time of execution of the contract or on account of circumstances or events subsequent thereto, the fraud must be of an egregious nature so as to vitiate the entire underlying transaction or such that would vitiate the very foundation of such a bank guarantee.

The second exception relates to the cases where in allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. The harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature that it would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country would be severe.

If bank guarantee is conditional, the beneficiary cannot have unfettered right to invoke the guarantee and the court can issue an injunction against invocation of the guarantee in view of the facts of the case. Where a bank guarantee is a conditional one, the invocation thereof would have to be in strict conformity with the conditions on which the guarantee is issued. In the matter of Hindustan Construction Co. State of Bihar and Ors. But the said expression was immediately qualified by a condition which referred to the original contract between the parties.

The condition stipulated that if certain obligations under the contract are not fulfilled by the party on whose behalf the BG was issued, then a right would accrue to the beneficiary to claim recovery of the whole or part of the guarantee amount. The project or policy must have a clear and defined development impact. It must promote broad-based economic growth, contribute to social and environmental sustainability, enhance the effectiveness of the public or private sector, or otherwise contribute to the development of member states.

There must be a need to mobilize private investment equity or debt or mitigate government payment risk. The project, whether it is public or private, must be of strong interest to, and have the express commitment of, the host Government. The project must be technically and financially viable and sustainable in the short, medium and long-term. The project can be public or private. If it is a private project, it might be eligible for a World Bank Guarantee if it is the direct beneficiary of an obligation from the Government, a political sub-division of Government, or a Sovereign Owned Entity, which can be guaranteed by the World Bank.

In the case of Loan Guarantees, the debt must be extended by commercial entities. World Bank Guarantees are not available to support bilateral debt or debt extended by publicly owned entities that operate under public law for public policy purposes e. The project must be capable of meeting the World Bank Group environmental, social, and anti-corruption guidelines. In the case of Policy-based Guarantees, the member country must have an adequate macroeconomic policy framework and must also commit to a specific reform program, including sector or macroeconomic policies and country systems.

The following table summarizes the pricing structure and fee levels for World Bank Guarantees. World Bank Guarantee Pricing. Modernizing the Bank's Operational Policy on guarantees. Contact Us. Cancel No Thanks Yes, I'll provide feedback. What was the purpose of your visit to worldbank. Did the layout and navigation of the new site help you locate what you were looking for?

Your Money. Personal Finance. Your Practice. Popular Courses. Personal Finance Banking. What Is a Bank Guarantee? Key Takeaways A bank guarantee is when a lending institution promises to cover a loss if a borrower defaults on a loan.

Parties to a loan choose direct guarantees for international and cross-border transactions. The guarantee provides additional risk to the lender, so loans with such a guarantee will come with greater costs or interest rates. A financial guarantee is a non-cancellable promise backed by a third party to guarantee investors that principal and interest payments will be made. What Is a Home Lien? A home lien is a legal claim placed on a home.

What You Should Know About Insurance Underwriters An insurance underwriter is a professional who evaluates the risks involved when insuring people or assets and establishes the pricing. What Is a Recourse Loan? The bank essentially cosigns the purchase contract with the vendor. If Xyz company defaults in payment, the vendor can recover it from the bank. Similarly, a large manufacturer of furniture wishes to enter into a contract with a small woodshop vendor.

The large manufacturer will require the small vendor to provide a bank guarantee before entering into a contract for Rs. In this case, the large manufacturer is the beneficiary who requires a guarantee before entering into a contract.

If the small vendor is unable to deliver the wood material, the large manufacturer of furniture can claim the losses from the bank. The risk involved in providing such a guarantee must be analysed thoroughly by the bank. These guarantees are generally issued in lieu of security deposits. Some contracts may require a financial commitment from the buyer such as a security deposit. In such cases, instead of depositing the money, the buyer can provide the seller with a financial bank guarantee using which the seller can be compensated in case of any loss.

These guarantees are issued for the performance of a contract or an obligation. For example, A enters into a contract with B for completion of a certain project and the contract is supported by a bank guarantee. If A does not complete the project on time and does not compensate B for the loss, B can claim the loss from the bank with the bank guarantee provided.

Any person who has a good financial record is eligible to apply for BG. BG can be applied by a business in his bank or any other bank offering such services.