XYZ Bank Branch had issued a Bank Guarantee of ₹50 lakh on behalf of a Construction Company in favour of Oil Authority of India. The period of bank guarantee was 3 years with an additional provision that the beneficiary

Banks grant loans and advances (fund based) and provide other credit facilities (non-fund based) such as, bank guarantee and letters of credit. Non-fund-based limits are granted by banks to facilitate the customers to carry on with the trading and business activities more comfortably. Bankers can earn front end fees and these non-fund based items become contingent liabilities for banks. A contract of guarantee is covered under the Indian Contract Act, 1872. Section 126 of the Contract Act 1872 defines a guarantee as contract to perform the promise or discharge a liability of a third person in case of his default. The contract of guarantee may be oral or in writing. Banks, however insist on written guarantees. There are 3 parties to the contract of guarantee i.e. the Surety, Principal Debtor and the Creditor. These parties are also called as the guarantor, borrower and the beneficiary. In this Case: Bank guarantee is a commercial document and it should be handled as per the terms and conditions. As per the bank guarantee, bank undertakes to make the payment on demand without demur on invocation i.e., when demanded by beneficiary. As such bank has no option but to make the payment. As Bank guarantee is a commercial document and have the characteristics similar to those of promissory notes and they should be payable on demand. As such, courts do not give stay orders restraining the banks from making payments, unless there are convincing cases of fraud.