1. PRESENTATION FOR THE WORKSHOP AT NATIONAL JUDICIAL ACADEMY TO
THE JUSTICES OF COMMERCIAL BENCH – APPELLATE COOURT
April 23, 2016
SAROJ K GHIMIRE
Advocate- Supreme Court of Nepal
Asst. Prof. of Law- Tribhuvan University
Partner
CONTRACT OF BANK GURANTEE :
JUDICIAL INTERVENTION PERSPECTIVE

2. LORD DENNING ON had to say;
• “A bank must honor the guarantee according to its
terms. It is not concerned in the least with the
relations between the debtor and the beneficiary; nor
with question whether the debtor has performed his
contracted obligation or not; nor with the question
whether debtor is in default of not. The bank must
pay according to its guarantee, on demand if so
stipulated, without proof or condition.”
Edward Owen, [1978] 1 Q.B. at 169.

3. Judicial reluctances to issue order
• Contract Act 2000 (CA), empower courts to grant
appropriate order to prohibit immediate act. [CA § 87]
• Courts recognizes that, contract of guarantee:
• it’s a contract- Party autonomy
• Is tripartite contract but they are independent
• Unconditional and irrevocable- No condition precedent
• Ordinary risk which the debtor/account party has accepted
by agreeing to the first demand guarantee.
• Stopping payment orders damages banking reputation.
Judicial intervention may imperil the commercial viability
of guarantees

4. Contract of Bank guarantee
• There is no specific law governing the matters
relating to Bank Guarantees. Governed under the
general contract law, i.e., CA 2000
• A contract of guarantee provides that in the event a
person who is responsible for fulfillment of an
obligation fails to do so, a third person who
undertakes a guarantee for such obligation shall be
obligated to fulfill such obligations on behalf of the
defaulting party. Contract Act, §15(1), (2).
• A contract relating to guarantee must have been
concluded in writing. Id., §15(3).

5. Scope of Courts intervention
• The Court has recognizes contract of guarantee as independent
contract between the guarantor and beneficiary.
• 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. Vinitec Electronics Private Ltd. vs. HCL Infosystems
Ltd., (2008) 1 SCC 544 (India)
• Under the settled principles laid down by the Supreme Court of
Nepal, a Bank Guarantee issued by a Bank in favor of a party by
its nature is treated as an independent contract between the
issuing Bank and the beneficiary which is not contingent upon
performance and/or non-performance of contractual obligations
between the beneficiary and the applicant.

6. Unconditional and Irrevocable
• The terms "unconditional" and
"irrevocable" most often used in Bank
Guarantee bear the meaning that in the
event the beneficiary of the Bank
Guarantee demands the payment to the
Bank under the Bank Guarantee, the Bank
is under an obligation to honor such
demand except for conditions explicitly
stated in the Bank Guarantee.

7. Nepal Orind Magnesite Pvt. Ltd.
v
Debt Recovery Appellate Tribunal
• “Since a Bank Guarantee is issued for the
performance of contractual obligations by the
principal debtor, except otherwise stated in the
Bank Guarantee or except wherein the Bank
Guarantee has expired, where the payment of Bank
Guarantee is demanded, the issuing Bank neither
has the right to invoke any further dispute nor give
a decision by collecting evidences thereupon. The
Bank is under the obligation to release the payment
of amount of Bank Guarantee as per the demand.”
(NKP 2068, Vol. 4, Decision No. 8605)

8. Nepal Electricity Authority
v.
Appellate Court Patan Lalitpur
• A Bank Guarantee is a distinct and independent
contract which is not affected by a dispute concerning the
main contract.
• Even though the contract relating to Bank Guarantee is
related to the main contract, it is by its nature a different
and independent contract.
Writ No. 2460 of the year 2053, Decision Date: March 9, 1999

9. Karishma Impex Kathmandu
v .
National Trading Limited
• Except in serious circumstances or circumstances which is likely to
cause utmost injustice, the judicial authority must not undermine the
universal faith in international trade in the matters relating to
performance bond issued by a Bank or irrevocable letter of credit
opened with a Bank.
Nepal Law Journal, 2048, Part 23, Decision No. 4444
• The Supreme Court of Nepal has laid down similar
precedent in other cases. Under the settled precedents of
the Supreme Court, an issuing Bank does not have any
right to take a decision in the matter of Bank Guarantees
and the amount of Bank Guarantees must be paid as
demanded by the beneficiary.

10. Common issues relating to Bank Guarantee
• Insufficiency of collateral for the bank from debtor;
• Lack of expert lawyers to review guarantee documents;
• Some lawyers representing bank has pleading dishonesty and
states about difficulty in recovery the guarantee amount.
• Banks has fear of recovering from collateral or because of
chances of debtors insolvency/bankruptsy;
• Judicial sentiments to the petitioner for immediate relief;
• Courts keeps doubt if the beneficiary escapes/leaves the
country with guarantee amount leaving the debtor in
detriment before final settlement.
• Banks reluctance in honoring courts order and courts order
some time ambiguous and need further clarification

11. Scope of Courts Intervention for
Appropriate Order
• Validity of contract issues:
Unfair terms of contract

12. • Interpretation of the language written in the
Bank guarantee:

13. Conformity of privity and autonomy
• Uniform Rules for Demand Gurantees, ICC
Publication No.758 “The undertaking of a
guarantor to pay under the guarantee is not
subject to claims or defences arising from any
relationship other than a relationship between
the guarantor and the beneficiary” [URDG § 5a]

14. • Appropriate Rules of Interpretation:
• "irrevocably guarantees payment upon first written
demand and the bank hereby waives any and all
objections or oppositions of any kind whatsoever
and will not investigate the reasons or grounds"
• “we ___________ Bank Nepal hereby irrevocably
undertake to pay you any sum ….. upon receipt by
us of your first demand in writing accompanied by
a written statement stating that the Contractor is in
breach of its obligation under the Contract, without
your needing to prove or to show grounds for your
demand or the sum specified therein”

15. • Strict rules of interpretation is applied.
• In case of ambiguities in terms of
wording, bank guarantees are to be
interpreted according to business
customs
• benefit of interpretation are also given to
the beneficiary.
• Court must ensure when it interprets, let
it not invalidate the security intended by
use of a bank guarantee contract.

16. Good prima facie acts of fraud must be
convinced.
• Lord Denning continues, “The bank must pay according
to its guarantee, on demand if so stipulated, without proof
or condition. The only exception is when there is a clear fraud
of which the bank has notice.”
• The contract of guarantee like any other contract, is
subject to the percept of good faith, which forbids
the creditor(beneficiary) to use this formal rights
against his debtor (bank).
• Thus frauds constitute a defense for the bank and
justifies refusal to pay and court considers fraud as
matter of intervention.

17. • Beneficiaries' malafide termination of contract or
termination on force majure by debtor.
• Termination of contract by beneficiary and a
subsequent call on the guarantee could be
fraudulent if the account party establishes that the
termination amounts to material breach of contract
and that he has given the beneficiary to cause to
cancel the contract.
• If the secured contract was terminated upon mutual
consent and if such termination entails release of
the account party’s liability to the beneficiary, a
subsequent call on the guarantee is obviously
fraudulant.

18. • However no clarity exists as to what precise kind of
conduct on the part of the beneficiary and or/what
specific facts relating to underlying
relationship, render a call fraudulent.
• Examples could be: claim without
grounds, justification or in violation of the principal
contract however the proof of the fact which
considers fraud must be clear, evident, beyond
doubt and immediately available . The burden of
proof rest on account party or the bank.
• Knowledge of irregularity: if the beneficiary knows
and court is convinced

19. Freezing injunction (Mareva)
• The Mareva injunction is an ex parte, interlocutory measure
intended to freeze a defendant's assets prior to
judgment in order to prevent the removal of those
assets from the jurisdiction of the court.
• Nippon Yusen Kaisha v. Karageorgi [1975] 1
W.L.R. 1093
• Charter of three ships by the plaintiff Japanese
shipowners to the defendant Greek charterers. The
Greek charterers failed to pay the charterparty hire.
However, the plaintiffs discovered that the
defendants had funds on deposit at London banks
and sought an injunction to restrain their removal.

20. • Denning, M.R., stated that, “There is no reason why the High Court
or this court should not make an order such as is asked for here. It is
warranted by section 45 of the Supreme Court of Judicature
(Consolidation) Act 1925 which says that the High Court may grant a
mandamus or injunction or appoint a receiver by an interlocutory order in
all cases in which it appears to the court to be just or convenient so to do. It
seems to me that this is just such a case. There is a strong prima facie case
that the hire is owing and unpaid. If an injunction is not granted, these
moneys may be removed out of the jurisdiction and the ship owners will
have the greatest difficulty in recovering anything.”
• Denning MR on Mareva Compania Naviera S.A., [1975] 2
Lloyd's L.R. 509. had to say, “ If it appears that the debt is due
and owing-and there is a danger that the debtor may dispose of
his assets so as to defeat it before judgment-the Court has
jurisdiction in a proper case to grant an interlocutory judgment
so as to prevent him disposing of those assets.”

21. Hence, Courts Appropriate Order should
ensure that:
• Party’s autonomy is not interfered along with the principle of
irrevocability.
• Court requires preventing irretrievable injustice subject to the satisfaction
of exception otherwise the very purpose of bank guarantees would be
negatived and the fabric of trading operation will get jeopardised
• Court’s order should not obstruct banking and commercial
norms, customs and confidence.
• Court must ensure that the benefit of guarantee goes to the beneficiary
and rules of strict interpretation must not be overlooked by the courts.
• Section 87 of Contract Act empowers to issue appropriate orders in case
of bank guarantee, however, its order shall not be prejudice to damage
banking credibility and courts must make sure that their orders are clearly
written and reasoned so that no hardship to the beneficiary is added or
beneficiary must not be unjustly enriched by its fraudulent claims.

22. THANK YOU