Lesson No. 10 – Understanding Bank Guarantee

So they approach BM Ms Mona, she calls our friend Sandeep. Sandeep requests the Co. to give the deposit of Rs21lacs. Manager heartily smiles and says, " My young friend, we will be happy to furnish it but we have projects for over Rs30 Crores and if we give such deposits our Working funds will be locked and hence I am here."
BM explained to Sandeep, for this contract the Co. has to deposit cash with PMC ie Co.is liable to pay Rs.21 lacs and we will through a letter accept Co's liability.
This acceptance of liability of third party(ie ,Company) is called "Bank Guarantee" (BG).
Madam then defined
"BG- It is a Contract to perform the promise or to discharge the liability of the third party in case of his default."
BG is an Independent Contract between the Bank and the Beneficiary and is defined under Section 126 of Indian Contract Act.
We have seen the second part of the def.
Thus there are always 3 parties to a BG contact,
1 The Principal Debtor (borrower Pandit C. L.).
2 The Beneficiary (PMC) and
3. The Surety (the Bank).
There are also 3 independent contracts.
So a Letter was issued by Br. called as Bank Guarantee which replaced the financial liability( to deposit Rs21 lac) of PCL. We will come back on the issue.
The Company again approached BM . Now PMC wanted an assurance from PCL that the the said contract must be completed within 30 months.Company agreed for this and was ready to give such an undertaking. But PMC wanted the word from a banker. So Manager of PCL requested for such a letter/undertaking from bank. Now BM issued such a letter which undertook that PCL will complete the job within 30 months ie performance of P C L was accepted by the Bank. This letter is also a BG which covers the first part of def.
Thus we have seen two types of BGs 1st accepted the Financial Liabilities(ie Deposit of cash)of the client and hence is referred as "Financial Guarantee."
Under 2nd one bank accepts the Performance of the client(ie Completing the job in a specific period/time) and hence is called as "Performance Guarantee".
Let us close here with an assurance to discuss further tomorrow.

PLEASE LET Me know whether u liked this conversion style. I will continue only if feed back is received.
Good bye.

Waman Gokhale