In the modern business environment, characterised by
spatial distance and inability of the parties to a commercial
transaction in performing a realistic assessment of the
creditworthiness of a business partner, there is often a need for
the use of instruments that secure payments.1
“Bank Guarantee” is a commercial
instrument that has emerged as a contemporary solution for
securing payment of money in a commercial dealing.
The Indian Contract Act (ICA), 1872 defines a “contract of
guarantee” as a contract to perform the promise, or discharge
the liability, of a third person in case of his
default.2Similarly, bank guarantee (hereinafter referred
to as “BG”) can be defined as a
unilateral legal contract in which a bank (guarantor)
undertakes an obligation to guarantee to pay the beneficiary a
certain amount of money specified in the guarantee if the debtor
from the original contract does not fulfil his contractual
obligations.
