Applicability of bank guarantee in times of COVID-19

By Akshay Sharma

Manipal University, Jaipur

Abstract:

Applicability of Bank guarantee is the most realistic and promptly asked question in the times of Corona pandemic. In today’s situation where world health organization has declared COVID-19 as a pandemic. This pandemic has effected the development of India and caused a huge loss to various industries. But most of all, bank industry got in a trap, suffering huge troubles.

Thus, to protect that we have various laws. There are various laws which safeguards people in such situations and such laws are the blessings to general public in the situation of emergency. One of which is Force majeure clause which provides safeguard for non-fulfillment of the contract. But due to this Corona pandemic and lockdown situation the applicability of Bank guarantee is in question.


Introduction:

Bank guarantee refers to a lending organization which ensures that the liabilities of a debtor is met in time. A bank guarantee enables the client, or debtor, to acquire goods, buy equipment on credit. In current scenario our country is facing too many problems due to the pandemic. Usually judiciary does not interfere in the workings of banks but in such situations of crisis Judiciary has to have take some accountability. In recent times on account of the Covid-19 pandemic, the decision of the New Delhi High Court on April 20, 2020 in Halliburton Offshore Services Limited vs. Vedanta Limited and Another comes as a welcome breather in an area. The decision of the court is probably the first order in India wherein grant of injunction against invocation and encashment of bank guarantee and presentation of contract have been evaluated by the court keeping in mind the Covid-19 pandemic. High Court has granted an interim injunction against bank guarantees and it was also held that non-performance of the contract by the petitioner was on account of the lockdown caused by the pandemic, which was prima facie means on first view in the nature of a force majeure episode.


Perspective under Indian or International scenario:

Due to Covid-19, whole world is in the middle of a medical disaster. Corona virus is spreading at huge rate globally and due to this World Health Organization(WHO) has declared this disease “a pandemic”. Corona virus already caused 13,000+ casualties and has infected over 30,00,000+ people globally. The Corona pandemic and consequential lockdown is an exceptional circumstance which has had far reaching effects across the globe, India and almost all other countries are facing financial crisis. Even many developed countries are facing recessionary period. Applicability of Bank guarantee is again a big question. In India, Judiciary interfered and passed injunction on the applicability of Bank guarantees due to the corona Pandemic while in many other countries government launched various programmes so that more and more small and medium sector industries can be started. To promote these industries government is contracting with banks to be flexible from their rigid criteria to grant loan and this seems to be a very good step because many people couldn’t start their business due to lack of capital and other resources.


Summary of leading cases with important issue:

Judiciary is an independent body and never interfered with the banking sector. But in the corona pandemic Judiciary interfered in certain cases to protect citizens in the time of economic crisis. Some important case laws are:


In case of Standard Chartered Bank Limited vs. Heavy Engineering Corporation Limited, the Hon'ble Supreme Court extended to three exceptions where the court can order injunction of bank guarantee. The notion of special equities has been usually connected to irreparable unfairness. The criteria was satisfied where the court is satisfied that the party seeking refuge under a special equity is likely to suffer losses, which cannot be recovered if the issue is lastly adjudicated in favor of the said party seeking the interim injunction relief. The SC in the said case however practiced comprehensive scope of avenue presented to a petitioner by visualizing irretrievable injustice and special equities as distinct circumstances. In case of Bolivinter Oil SA v. Chase Manhattan Bank, the court has done completely outstanding job where an injunction was to be decided where it is proved that the bank knows any claim for payment already made or any payment will be made thereafter will clearly be deceitful. But the evidence must be clear both as to the fact of deceit and as to the bank's knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank's credit in the quite brief time which must pass between the granting of such an injunction and an application by the bank to have it charged. The Supreme Court set aside an injunction granted by the High Court to restrain the realization of the bank guarantee.


Conclusion:

As it is well versed for each of us that COVID-19 is a pandemic which is causing various harms globally. The governments of various states states and corona warriors are working hard so that we can come out of such dangerous situation. In such type of situation it is expected from the big industries such as banking industry to come up with some alternatives which would lessen the burden of general public.


No doubt, Administrative, Judiciary and Executive authorities of India, all together is working immensely to protect and safeguard the general public.


Due to less incomes and resources people are not able to repay their credit installments and in order to adjust with that the banks have came up with the policy that people can repay the loan amount or installments later. However, banks might charge minimal interest for that, but then it is a kind of relief.


Therefore, In such difficult situations, amidst lockdown, bank guarantee should not be rigid. It must be flexible enough that people of the country feel safe and remain calm. Injunctions shall be granted in cases of emergency.


References:

· https://www.google.com/search?sxsrf=ALeKk03nTPjgPGExZYGXcPw_gfzUXjkBNQ%3A1591036737895&ei=QUvVXvKfNsaI4-EP54G-mAo&q=COVID-19%3A+recession+or+depressionlets+be+prepared+19+March+2020&oq=COVID-19%3A+recession+or+depressionlets+be+prepared+19+March+2020&gs_lcp=CgZwc3ktYWIQAzoHCCMQ6gIQJ1Db5wFY2-cBYLPxAWgBcAB4AIAB_AOIAfwDkgEDNS0xmAEAoAEBoAECqgEHZ3dzLXdperABCg&sclient=psy-ab&ved=0ahUKEwiyxNjcoeHpAhVGxDgGHeeAD6MQ4dUDCAw&uact=5

· https://www.barandbench.com/columns/resolving-the-legal-quagmire-with-respect-to-bank-guarantee-enforcements-during-the-covid-19-pamdemic

· https://www.bis.org/fsi/fsibriefs5.htm

· https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11820&Mode=0

· https://economictimes.indiatimes.com/topic/bank-guarantee




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