State in brief the precautions to be taken by the banks – (i) while issuing a bank guarantee; and (ii) before making payment under the bank guarantee.

Precautions to be taken by banks - (i) While issuing a bank guarantee - It has to be ensured that the amount guaranteed and the period of the guarantee is specially mentioned in the guarantee. These two are important factors to be clearly mentioned in the guarantee issued by the banker, otherwise the bank's liability could be unlimited. The bank should obtain a counter guarantee from the customer on whose behalf guarantee is issued, because this helps in claiming the guarantee from the beneficiary who is originally liable for it. This is to doubly insure the fund parted with by the bank and it also provides a legal tool to claim it, if not paid. At the time of issuing the guarantee, the amount to be paid under the guarantee should clearly state whether the amount is inclusive of all interest charges, taxes and other levies to avoid disputes regarding the liability of the bank. On invocation (claim made by the beneficiary), the bank is liable to pay the entire amount of the guarantee except in case of a fraud. The bank should specifically indicate the period for which the guarantee is valid. The guarantee should also indicate the claim period, usually beyond the validity period of the guarantee. (ii) Before making payment under the bank guarantee - The bank while making the payment under a guarantee has to ensure that the invocation is proper and that the person invoking the guarantee has the authority to invoke the guarantee. This should be clarified in the contract-agreement.