Introduction
A Division Bench of the Madras High Court, in Banque Cantonale De Geneve vs. Owners and Parties Interested in the Vessel M V Polaris Galaxy by its recent judgement and order of 13 July 2021, provided much needed guidance on the wording and terms of a bank guarantee furnished to the court as security for a claim.1
Typically, property that is attached is released by furnishing a bank guarantee issued to the court. Such guarantees are to remain valid until disposal of the suit. There have been cases where litigants have intentionally or otherwise procured guarantees renewable at their instance. Clearly, claimants run the risk of their claim being unsecured in the event that the guarantee is not renewed before its expiry. This could result in the claimant being remediless, particularly where the defendant does not have any assets within the jurisdiction of the court. The Madras High Court's recent judgement remedies the problem by directing litigants to furnish a guarantee that remains valid until the disposal of the suit.
Facts
In this case, the claimant sought and obtained arrest of a vessel for a claim for mis-delivery i.e., delivery of cargo without production of bills of lading. The defendant furnished a bank guarantee to the court in order to secure the release of the ship.
The Bank Guarantee
The guarantee was valid only for a period of one year and was renewable thereafter at the instance of the defendant. The claimant complained that after one year it was at the mercy of the defendant since the guarantee could be renewed only on the defendant's volition. The claimant also objected to the wording of the guarantee, as it did not contain a term authorising the court to invoke and encash it if not renewed prior to its expiry.
Judgement
The court held that the claimant's grievance was fully justified and in an instructive passage explained the purpose and rationale underlying a bank guarantee. The court ruled that when securing a claim, the court was required to protect the interests of the claimant until determination of the suit. The court observed that this principle applied with greater force when the opponent is based in a foreign country having no assets in India.
The defendant's reliance on a subsequent letter from the bank undertaking to keep the guarantee alive until disposal of the suit, was given short shrift. The court ruled that the letter was of no value, since the guarantee clearly provided that it could only be renewed by the defendant. More importantly, the Court clarified that in case of documentary credits like a bank guarantee, it is only the terms incorporated in the document itself, that matter. Surrounding transactions and letters/undertakings issued will have no value in interpreting the meaning of such documentary credits, which are to be strictly construed in accordance with their terms. The court refused to give credence to the separate undertaking by the bank. The Court held that such terms relating to renewal must be contained in the guarantee itself.
Conclusion
This is a positive development as it puts an end to the pernicious practice adopted by recalcitrant parties furnishing a defective bank guarantee to the court. The judgement also aligns Indian practice and procedure governing bank guarantees to that prevalent internationally. It is also a timely guide to court registries and banks that the guarantee furnished must secure the complete claim amount along with interest and costs. The ruling is of much relevance and resonance as it applies to guarantees furnished in all commercial matters in court.
Footnote
1. ZBA successfully represented the claimant in this case where the defendant furnished a defective bank guarantee to secure the release of an arrested vessel without any provision for its renewal or invocation.
The above is a generic analysis and should not be regarded as a substitute for specific advice based on the facts of a client's objectives and specific commercial agreements reached. Please do reach out to us at mail@zba.co.in for any queries.
