What is Guarantee Law?

It is the promise to pay another's debt or fulfill contract obligations if that

party fails to pay or perform

1. ONGC V. SBI OVERSEAS BRANCH, BOMBAY

FACTS
ONGChad awarded a large gas pipeline contract to an Italian consortium (S) at a
certaincontract price (CP). The work was to be executed within a given date
else Italian consortium was liable to pay certain percentage of C.P. Italian
consortium was also obliged to furnish a bank guarantee (BG) not later than 4
months prior to the scheduled completion date. Failure in this regard entitled
ONGC to encash the performance guarantee. In case of delay, Italian consortium
was to get validity of BG extended. In any dispute the jurisdiction was that of
India. Italian consortium furnished BG from the respondent Bank (SBI). Project got
delayed and dispute arose regarding the extension of validity. ONGC invoked BG
but B refused payment on these grounds:
1. B had issued BG in favor of ONGC against the counter guarantee of an Italian
Bank (I)and S had obtained an order of injunction from Italian Bank from
making any payment to B under the counter guarantee.
2. Rupee payment under BG can be made only on receipt of re-imbursement from
I in an approved manner.

SUPREME COURT
Arrangement of counter guarantee was between the B and I and nonpayment by I in no way affected the rights of the beneficiary ONGC to obtain
money under the guarantee issued by the Bank. A bank cannot decline
payment under a bank guarantee on the ground that the counter guarantee
was restrained by a foreign court, when there was no other impediment to
payment under exchange control regulations.

Ansal Engg. Project Ltd. (A) Vs. Tehri Hydro

Development Corp. Ltd. (R)
FACTS:
The petitioner/appellant (A-Ansal Engg. Project Ltd. ) had undertaken to do some
construction for the defendant/respondent(R- Tehri Hydro Development Corp. Ltd.) and as
per the terms of the contract had furnished a bank guarantee (BG) for faithful
performance and for getting mobilization advance against the construction contract. The
constructions were to be done within a given time but A failed to do so. R sought to encash
the Bank Guarantee. A resorted to arbitrationand while it was pending prayed in High
Arguments(Appellant):
Court that BG should not be invoked.
Since the amount due and payable by A was not determined in the suit,
BG could not be invoked.
R had played fraud on A in entering into the contract and seeking
extension of the time. After the promise, to extendtimefor construction and
extension of BG, the contract was terminated.

SUPREME COURT
(w.r.t 2ndargument of A)
It is not a case of fraud but one of acting in terms of contract.
(w.r.t 1st Argument of A)
The Bank unconditionally promised to pay, on demand, the amount of
liability undertaken in the guarantee without any dispute in terms of the
bank guarantee.
Final judgement is not a pre-condition to invoke the bank guarantee and that
is not a ground to issue injunction restraining the beneficiary to enforce the
bank guarantee.
The liability of, the bank is absolute and unequivocal and bank should not
be concerned with the ultimate decision of a court in such cases.
Bank guarantee is an independent and distinct contract between the bank and the
beneficiary. Unless fraud or special equity present, the beneficiary cannot be
restrained from encasing the bank guarantee even if dispute arises in performance of
the contract.

Thank You