Bank Guarantee Process in Bangladesh 2024.
In the period of massive development projects in Bangladesh, the bank guarantee method, also known as performance guarantees, is very popular and crucial. As a result, this essay will provide a comprehensive overview of the concept of bank guarantee as well as the legislative provisions governing bank guarantees in Bangladesh.
What is the Bank Guarantee Process in Bangladesh?
A “contract of guarantee” is a contract to perform a third party’s promise or discharge their liability in the event of their default. The “surety” is the person who provides the guarantee; the “principal debtor” is the person whose default is covered by the guarantee; and the “creditor” is the person to whom the guarantee is given. Similarly, when a bank provides any security, the security is known as the bank guarantee.
A bank guarantee ensures that the third party’s liabilities are met. In other words, if the third party fails to meet its responsibilities, the bank will cover it. In summary, a bank guarantee can be defined in the manner described above; nevertheless, the definition of a bank guarantee is considerably broader than that.
In Bangladesh, there are numerous case laws that have defined the term ‘bank guarantee’. Nonetheless, the most recent case, ABB India Limited vs. Power Grid Company of Bangladesh Limited and others in 2020, established clear principles on bank guarantee difficulties. As a result, our paper will be based on interpretations of this case, as well as references to other recent cases involving bank guarantees.
In Bangladesh, there are numerous case laws that have defined the term ‘bank guarantee’. Nonetheless, the most recent case, ABB India Limited vs. Power Grid Company of Bangladesh Limited and others in 2020, established clear principles on bank guarantee difficulties. As a result, our paper will be based on interpretations of this case, as well as references to other recent cases involving bank guarantees.
How is a Bank Guarantee formed?
The steps for forming a bank guarantee are briefly described here.
(i) The applicant requests that the bank guarantee their performance (ii). The bank then enters into an agreement with the beneficiary at the request of the applicant.
(iii) In the deed of bank guarantee, the bank guarantees to pay a specific amount as specified in the deed of bank guarantee upon demand by the beneficiary if the applicant fails to execute as per the contract.
Things to consider before signing a Bank Guarantee Agreement
When a beneficiary enters into a bank guarantee arrangement, it is critical that the following factors are taken into account, particularly when foreign entities obtain bank guarantees from banks outside of their native country. The key items to consider are listed below:
(i) Terms and Conditions of the Bank Guarantee Agreement
(ii). Terms and conditions linked to the extension of bank guarantees, such as the method for extending the guarantee period, the number of times it can be extended, and so on.
iv) What documents are necessary for the bank guarantee?
(v) The time period required to encash the bank guarantee.
(vi). Determine whether the bank guarantee agreement contains an arbitration clause. This section expedites the resolution of any dispute.
(vii). It is also critical to verify the validity and credibility of the bank that will serve as the beneficiary’s guarantee.
Laws governing bank guarantees
According to Bangladeshi case law, the most important thing to note about a bank guarantee is that it is an independent deed of the contract between the bank and the beneficiary, even if the bank engages into the contract on behalf of a third person (application). The following are a few crucial aspects to remember about bank guarantees from the recent case of ABB India Limited vs. Power Grid Company of Bangladesh Limited and others in 2020:
(i) A bank guarantee is an agreement between the bank and the recipient.
(ii). The applicant or third party is not a party to the bank guarantee agreement.
(iii) The bank guarantee agreement is independent of the agreement between the beneficiary and the applicant (iv). A bank guarantee is an irrevocable pledge granted by a bank to pay an amount in behalf of its beneficiary as and when the beneficiary makes a demand, regardless of any dispute between the applicant and the beneficiary on the underlying contract.
(v) Whenever the beneficiary makes a demand to encash the bank guarantee, the bank is obligated to pay the money immediately.
(vi) A guarantor’s obligation to pay under the guarantee is not subject to claims or defenses based on any relationship or contract between the third party and the beneficiary.
(vii). As a result, there is no way to prevent its encashment by the bank, much alone a third party. This is because the third party/applicant is not a party to the bank guarantee arrangement.
(viii) The encashment of a bank guarantee cannot be prevented on the basis of financial loss or corporate reputation because financial disputes can always be settled in arbitration.
(ix) In certain circumstances, the court has prolonged the bank guarantee period even after it expired while the court procedures were underway. In the case of Loyal Shipping (Pvt.) Ltd., represented by Siraj-Ud-Dowlah and others, vs. M.V. Anangel Wisdom and others, the court ordered an extension of the bank guarantee despite the fact that the request for an extension of the validity of the bank guarantee or a new bank guarantee was made after the bank guarantee had expired.
exceptions to the law of bank guarantees
The bank can only stop the encashment of a bank guarantee if it receives a dispute. Only the bank has the authority to file a legal and genuine dispute about the encashment of a bank guarantee if—
(i) The wrong individual invokes the encashment of the bank guarantee, or (ii). The bank discovers any other discrepancies in the bank guarantee.
Judicially sanctioned exception to stop bank guarantee.
In general, no injunction can prevent a bank guarantee from being encashed. According to ABB India Ltd vs Power Grid Company of Bangladesh Ltd and others (2020), the court is authorized to prohibit the encashment of bank guarantees only when—
(i) A clear case of fraud in the establishment of the bank guarantee (Himadri Chemicals Industries Limited vs Coal Tar Refining Company (2007) 8 SCC 110). and
(ii) The encashment shall cause irreversible loss that cannot be compensated or restored if eventually succeeds (U.P. Coop, Federation Ltd vs Singh Consultants and Engineers (P) Ltd (1988) 1 SCC 174).
Our country’s courts will give injunctions in any legal dispute, such as a bank guarantee, if the petitioner can demonstrate that there is an arguable case for the applicant and the loss cannot be recovered or repaid. Read the Bank Guarantee Reference.
TRW provides legal services relating bank guarantees. TRW’s Barristers, Advocates, and Lawyers in Mohakhali DOHS, Dhaka, Bangladesh have extensive experience guiding clients through the whole process and legal regulations governing Bank Guarantees in Bangladesh. Do you require assistance with any services? Contact us for legal assistance.
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