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Prasun Chandra Das (Banker)     06 May 2013

Conditional claim on bank guarantee

Banks frequently receive "conditional claims" from the beneficiaries of Bank Guarantees issues by them, on behalf of their customers. In such conditional claim letters, the beneficiaries ask the Banks to extend the BG before the expiry/claim date, or invoke the BG. Normally, Banks contact the customers and have the BG extended, leading to no invocation. But some legal experts are of the opinion that such a conditional claim is no claim at all, or an improper/invalid claim, and should not be entertained. They opine that on receipt of such conditional claims, Banks should write to the Beneficiaries saying that as per terms & conditions of the BG, they are liable to invoke the BG if an unconditional claim/invocation letter is received. In other words, the reason why a BG is being invoked cannot be because "it was not extended".

My personal opinion is that a conditional claim is a valid claim, and Banks should invoke the BG and pay to the Beneficiary, if the BG is not extended. The very purpose of the conditional claim letter is that the beneficiary wants to continue to be covered against risk of default on the part of the BG applicant, and thus seeks extension of the BG. Since the cover is lost on non-extension, the Beneficiary can demand payment immediately. In most conditional claim letters, the wordings are "on non-extension of the BG by expiry/claim date, this conditional claim letter may please be treated as a letter for invocation of the BG." I think even if it seems that the reason why the BG is being invoked is that "it was not extended", Banks should invoke the BG and pay the Beneficiary.

I tried to find a legal definition of "a valid claim" but could not find it. Request Legal experts in the forum to opine on the matter.  


 4 Replies

Prasun Chandra Das (Banker)     10 May 2013

cps ramachary ... kumar doab ... others.....


pls reply ....

Anjuru Chandra Sekhar (Advocate )     11 May 2013

Whether a claim is a valid claim or not depends on the terminology used in the bank guarantee.  Bank guarantee is not a specific format like demand draft.  Each draft is an agreement and terms of agreement vary from one BG to other. If the terminology is such that it can be paid unconditionally when invoked either directly or through a letter in the nature of standing instruction as you mentioned, then there is no wrong in paying to the beneficiary.


However, if the BG contains specific restrictions and imposes conditional terms that during such and such circumstances it cannot be paid or it can be paid only during such and such circumstances then the banker is obliged to follow accordingly.  All the same, the contestant would be the customer only not the beneficiary in case any problem arises. Hence it would be prudent to include as one of the terms in the Bank Guarantee on behalf of the bank that BG will be paid even in the eventuality of a "conditional claim".  Then you are covered as banker for the risk of litigation.

1 Like

narendra.s.p (Chief Manager(Law))     14 May 2013


 Please refer Master Circular on Bank guarantee: DBOD. No. Dir. BC. 14 /13.03.00/2009-10 dt.01/07/2009 where at clause (iv) of para, it is advised by RBI that a clause would be incorporated by Directorate General of Supplies and Disposal (DGS&D) in the tender forms of Directorate General of Supplies and Disposal 229 (Instruction to the tenderers) to the effect that whenever a firm fails to supply the stores within the delivery period of the contract wherein bank guarantee has been furnished, the request for extension for delivery period will automatically be taken as an agreement for getting the bank guarantee extended. Banks should make similar provisions in the bank guarantees for automatic extension of the guarantee period.

Anjuru Chandra Sekhar (Advocate )     15 May 2013

There is a difference between the BG given by bank in favor of a seller to cover the risk of making supplies to a buyer, and the BG given by the bank in favor of buyer to compensate the loss of not delivery of supplies in time.  The subject BG as quoted in the above RBI circular relates to the guarantee given to the buyer in case the seller fails to deliver the goods in time. As DGS&D is a government organization, it is for Reserve Bank of India to regulate the BG issued in favor of DGS&D in such a way that the claimant (being government) suffers no loss because of the customer not extending the Bank Guarantee to cover the risk of claimant.  These bank guarantees cannot be equated to the Bank Guarantees given in favor of seller by banks.  The subject quoted by Narendra is entirely different from the subject Prasuna Chandra discussed.  

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