Bank Guarantee: Precautions :

The liability of the bank under a guarantee depends on:

(i) the amount of the guarantee and (ii) the period of 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. 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 unless 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.

Further in case of invocation, the banker is required to ensure that: (a) invocation is made within the validity period (b) the amount is not more than the guaranteed amount (c) the person invoking has powers to invoke the guarantee