The Company executed 3 documents (promissory note, hypothecation and a letter) in favour of its creditor, the bank; On the same day, the Managing Agent of the company executed an agreement of guarantee with the Bank; Issue: Is this an issue of guarantee or indemnity? Whether the suit filed was premature? Held: As all documents were executed on the same day, it can be inferred from the conduct and intention of the parties that the agent enetered into an agreement of guarantee.
The bank was entitled to claim at any time the money due from PD as well as from G under the promissory note and the bond. The suit could not therefore be said to be premature. Also, the binding obligation created under the composition ‘ between the company and its creditors does not affect the liability of the surety unless the contract of surety-ship otherwise provides. G is liable for “ ultimate balance” which should be determined) (the nature of the bond of guarantee would be that of a continuing guarantee) . S.
126 – Ramchandra B. Loyalka v Shapurji N. Bhownagree (Guarantee) (D, a broker, forms a contract with P, to be a sub-broker reponsible for certain constituencies; Said constituencies default and owe D 16, 000. P and D enter into a second agreement whereby P will be liable for the above amount; Note: Sub-broker is suing broker for his commission Issue: Was the agreement whereby P will be responsible for the constituencies a contract of guarantee or indemnity?
Held: For a contract of guarantee to subsist, there must be three parties to the contract (PD-C, G-C and PD-G (this last contract can be implied (S 145) or express, and is a contract of indemnity between PD and G); (i) Here, the last contract was absent, with the constituencies being unaware of the offer of P (the sub-broker); (ii) P (sub-broker) has an interest in the transaction (which happens in contracts of indemnity and not guarantee). Thus, contract was of indemnity; Also, the fact that D sued the lients for the price and then compromised without the consent of P is immaterial as P is not a party to the contract (i.
e. , not guarantor)) 7. S. 126 – U. P.
State Sugar Corporation v Sumac International Limited (Bank Guarantee) (Sumac entered into a contract with Sugar Corporation wherein Sumacwould have to deliver a new wing of Sugar mills to the corporation by a certain date; Sumac had to execute five unconditional bank guarantees in favour of P(plaintiff) for delivery, advance payments, etc.
U. P. Government informed P that it was to be converted into a joint venture and hence should stop expansion of mills; P cancelled agreement with D, and sought to enforce the bank guarantees. D applied for arbitration and an interim injuction against encashing the bank guarantees.
Issue: When can injuctions be granted on unconditional bank guarantees. Held: Injuctions are not easily granted as this would affect commercial transactions.
Two exceptions: (i) Fraud: must be of an egregious nature such as to vitiate the entire underlying transaction; must be that of the beneficiary, and not the fraud of anyone else. (ii) Irretrievable harm/injury caused to either party on encashing guarantee: exceptional circumstances that make it impossible for the guarantor to reimburse himself if he ultimately succeeds, will have to be decisively established; existence of any dispute between the parties to the contract is not a ground for issuing an injunction to restrain the enforcement of bank guarantees. Hence, no injuction was granted) 8.
S. 26 – National Highway Authority of India v Ganga Enterprises and Another (Bank Guarantee) (P invited bids for collection of toll on a highway; D had to provide Rs 50 lakhs as bid security on issuing a bid, in case of withdrawal of bid before 120 days, and Rs 2 Cr on acceptance of the bid, as performance security; The bank guarantee was to be paid by the bank without demur on a written demand merely stating that one of those conditions has been fulfilled, D removes his bid before 120 days, and his bid is found to be the highest and is accepted, but after withdrawal of offer; Thus, no contract formed; Issue: Whether P can enforce the bank guarantee of bid security without the breach/formation of a contract?
Held: The bank guarantee was an “ on demand guarantee” to be granted without demur; By invoking the bank guarantee and/or enforcing the bid security, there is no statutory right, exercise of which was being fettered. Withdrawal of a bid and forfeiture of security are two different things. Forfeiture of such earnest/security, in no way, affects any statutory right under the Indian Contract. Thus guarantee was enforceable, and to enforce the back guarantee the creditor doesn’t have to show any evidence to show a breach.
The bid security was given to meet specific contingency i. e. withdrawal of the offer within 120 days. The contingency having arisen, Appellants are entitled to forfeit.
The existence and non-existence of an underlying contract become irrelevant when the invocation is in terms of the bank guarantee.
9. S. 126 – Mahatma Gandhi Sahakra Sakkare Karkhane v National Heavy Engineering Co-Operative Limited and Another (Bank Guarantee) 10. S. 126 – Hindustan Construction Co.
Ltd v State of Bihar ; Others (Bank Guarantee) (HCCL contracted with the government to contruct a dam; had to execute two bank guarantees in favour of the governement (performance and mobilisation advancement); Governement applied to encash said guarantees claiming non-performance by HCCL, who then files for interim injunctions; Issue: Whether the bank guarantee is conditional or unconditional.
Held: Bank Guarantee was conditional (terms are of material importance); Advancement guarantee can be enforced only if obligations of HCCL are not discharged or there is misappropriation (neither of which can be proved) Performance guarantee can be given only to the “ chief engineer” who was not the one who applied for it; Thus, injuction granted) 11. S. 128 – Greer v Kettle (Guarantee) (An agreement was made whereby Austin Friars ( A) were to be given a loan from Mercantile Marines(MC). A was to provide MC collaterals by way of shares of Iron Industrial Company to make the transaction a secured one. The Paren’t Trust company (P) agreed to guarantee the secured debt , thereby becoming the surety.
However, it was later found out that A had not issued any shares, and A went on to default on the loan.