In the era of mega development projects taking place in Bangladesh, the Bank guarantee process in Bangladesh or performance guarantees are very popular and important. Therefore, this article will provide an extensive guideline on the concept of bank guarantees and the legal rules related to bank guarantees in Bangladesh.
What is the Bank Guarantee Process in Bangladesh?
A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”: the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. Likewise, when a bank furnishes any security, the said security is understood as the bank guarantee.
A Bank guarantee means that the bank will ensure that the liabilities of the third party will be met. In other words, if the third party fails to carry out its obligations, the bank will cover it. In short, a bank guarantee can be defined in the above-mentioned way; however, the meaning of a bank guarantee is much wider than this.
In Bangladesh, there are a huge number of case laws that have defined the terminology ‘bank guarantee’. Nevertheless, in the most recent case ABB India Limited Vs. Power Grid Company of Bangladesh Limited and others of 2020 have given clear guidelines on bank guarantee issues. Therefore, our article will be based on the interpretations of this case along with references to other recent cases on bank guarantees.
In Bangladesh, there are a huge number of case laws that have defined the terminology ‘bank guarantee’. Nevertheless, in the most recent case ABB India Limited Vs. Power Grid Company of Bangladesh Limited and others of 2020 have given clear guidelines on bank guarantee issues. Therefore, our article will be based on the interpretations of this case along with references to other recent cases on bank guarantees.
How a Bank Guarantee is formed?
The steps of forming a bank guarantee are briefly mentioned below.
(i). The applicant requests the bank to be the guarantor of their performance (ii). Then the bank agrees with the beneficiary at the instance of the applicant.
(iii). In the deed of bank guarantee the bank guarantees to pay a fixed amount as mentioned in the deed of bank guarantee on demand by the beneficiary in case the applicant fails to perform as per the contract.
Things to consider before entering into a Bank Guarantee Agreement
When a beneficiary enters into a bank guarantee agreement the following factors must be properly considered especially in the case of foreign entities getting bank guarantees from banks outside their home country. The significant points to consider are stated below:
(i). Terms and conditions of the bank guarantee agreement
(ii). Terms and conditions related to the extension of bank guarantee i.e. the process for extension of the guarantee period, how many times it can be extended etc (
iv). What documents are required for bank guarantee
(v). The period that will be required for encashment of bank guarantee.
(vi). Whether there is any arbitration clause in the bank guarantee agreement. This clause helps to resolve any dispute in a very short period of time.
(vii). It is also very important to check the authenticity and reliability of the bank that is going to become the guarantor for the beneficiary.
Laws Related to Bank Guarantee
As per the case laws in Bangladesh, the most important point to remember regarding the bank guarantee is that a bank guarantee is an independent deed of the contract between the bank and the beneficiary albeit the bank enters into the said contract at the instance of a third party (applicant). The few key points to keep in mind regarding bank guarantees from the recent case ABB India Limited Vs. Power Grid Company of Bangladesh Limited and others of 2020 are listed below:
(i). A bank guarantee is a contract between the bank and the beneficiary
(ii). The applicant / Third party is not a party to the bank guarantee agreement
(iii). The bank guarantee agreement is independent and separate from the agreement between the beneficiary and the applicant (iv). A Bank guarantee is an irrevocable undertaking given by a bank to pay an amount in favor of its beneficiary as and when the demand is made by the beneficiary without reference to any dispute between the applicant and the beneficiary to the underlying contract.
(v). Whenever the beneficiary makes a demand to encash the bank guarantee, the bank is mandatorily duty-bound to instantaneously pay the money.
(vi). The undertaking of a guarantor to pay under the guarantee is not subject to claims or defences arising from any relationship or contract between the third party and the beneficiary.
(vii). As such there is no scope to stop its encashment by the bank let alone by the third party. This is because the third party/ applicant is not a party to the bank guarantee agreement.
(viii). Encashment of bank guarantee cannot be restrained on the grounds of financial loss or business reputation because financial claims can always be resolved in arbitration.
(ix). There are various cases where the court has extended the bank guarantee period even after it has expired while the court proceedings were ongoing. In the case, Loyal Shipping (Pvt.) Ltd. represented by Siraj-Ud-Dowlah and another Vs. M.V. Anangel Wisdom and others, the court directed extension of the bank guarantee even though prayer for extension of the validity of the bank guarantee or for fresh bank guarantee was made after the expiry of the bank guarantee earlier furnished.
Exceptions to the Law of Bank Guarantee
Encashment of Bank guarantee can only be stopped by the bank if any dispute is raised with the bank. Only the bank is competent to raise a valid and bonafide dispute on the encashment of a bank guarantee if-
(i). a wrong person invokes the encashment of the bank guarantee or, (ii). The bank finds any other discrepancy in the bank guarantee.
Judicially Sanctioned Exception to Stop Bank Guarantee
The general rule is that no injunction can be granted to stop the encashment of a bank guarantee. As per ABB India Ltd Vs Power Grid Company of Bangladesh Ltd and others (2020), the court is permitted to stop encashment of bank guarantee only when-
(i). Clear case of fraud in the preparation of the bank guarantee (Himadri Chemicals Industries Limited Vs Coal Tar Refining Company (2007) 8 SCC 110) and
(ii). The encashment shall lead to irretrievable damage which cannot be reimbursed or recovered if ultimately succeeds (U.P. Coop, Federation Ltd Vs
Singh Consultants and Engineers (P) Ltd (1988) 1 SCC 174)
The courts of our country unhesitatingly grant injunctions over any civil dispute such as a bank guarantee, if the applicant can satisfy the court that there is an arguable case for the applicant and the loss cannot be recovered or reimbursed. Read the Bank guarantee reference.
Legal Service regarding Bank Guarantee by CLP: The Barristers, Advocates, and lawyers at CLP in Gulshan, Dhaka, Bangladesh are highly experienced in assisting clients through the entire process and legal provisions relating to Bank Guarantee in Bangladesh. Need any service help? Contact us for legal help.
