Banker’s Lien
In Halsbury’s Laws of England, Vol.20, 2nd Edn.p.552, para 695, lien is defined as follows:
Lien is in its primary sense is a right in one man to retain that which is in his possession belonging to another until certain demands of the person in possession are satisfied. In this primary sense it is given by law and not by contract.
In Chalmers on Bills of Exchange, Thirteenth Edition Page 91 the meaning of “Banker’s lien” is given as follows:
A banker’s lien on negotiable securities has been judicially defined as “an implied pledge.” A banker has, in the absence of agreement to the contrary, a lien on all bills received from a customer in the ordinary course of banking business in respect of any balance that may be due from such customer.”
In Chitty on Contract, Twenty-sixth Edition, Page 389, Paragraph 3032 the Banker’s lien is explained as under:
By mercantile custom the banker has a general lien over all forms of commercial paper deposited by or on behalf of a customer in the ordinary course of banking business. The custom does not extend to valuables lodged for the purpose of safe custody and may in any event be displaced by either an express contract or circumstances which show an implied agreement inconsistent with the lien….
The lien is applicable to negotiable instruments which are remitted to the banker from the customer for the purpose of collection. When collection has been made the proceeds may be used by the banker in reduction of the customer’s debit balance unless otherwise earmarked.
In Paget’s Law of Banking, Eighth Edition, Page 498 a passage reads as under;
THE BANKER’S LIEN Apart from any specific security, the banker can lock to his general lien as a protection against loss on loan or overdraft or other credit facility. The general lien of bankers is part of law merchant and judicially recognised as such.
In Brandao v. Barnett, (1846)12 Cl. and Fin.787 it was staled as under:
Bankers most undoubtedly have a general lien on all securities deposited with them as bankers by a customer, unless there be an express contract, or circumstances that show an implied contract, inconsistent with lien.
The above passages go to show that by mercantile system the Bank has a general lien over all forms of securities or negotiable instruments deposited by or on behalf of the customer in the ordinary course of banking business and that the general lien is a valuable right of the banker judicially recognised and in the absence of an agreement to the contrary, a Banker has a general lien over such securities or bills received from a customer in the ordinary course of banking business and has a right to use the proceeds in respect of any balance that may be due from the customer by way of reduction of customer’s debit balance.
Bank Guarantee
It is in common parlance that the issuance of guarantee is what that a guarantor creates to discharge liability when the principal debtor fails in his duty and guarantee is in the nature of collateral agreement to answer for the debt. It is well-settled that the Bank guarantee is an autonomous contract and imposes an absolute obligation on the Bank to fulfill the terms and the payment in the Bank guarantee becomes due on the happening of a contingency on the occurrence of which the guarantee becomes enforceable.
The Guarantee has been defined in Halsbury’s Laws of England Vol.20, Fourth Edn. page 49 para 101 as that” A guarantee is an accessory contract whereby the promisor undertakes to be answerable to the promisee for the debt, default or miscarriage of another person whose primary liability to the promise must exist or be contemplated.
In the banking system it is understood that Bank guarantee has an dual aspect. In the case of a Bank guarantee the banker is the promisor. It is a contract between the Bank and the beneficiary of the guarantee and it is also a security given to the beneficiary by a third party. Now, it is a well-known business transaction in the World of commerce and it has become the backbone of the banking system. Now coming to its enforceability the same depends upon the terms under which the guarantor has bound himself. He cannot be made liable for more than what he has undertaken.
Therefore the Bank guarantee, as already noticed, is in the nature of a special contract depending upon the happening of a specific event and when once it is discharged the guarantee comes to an end. It has to be borne in mind that the obligations arising under the Bank guarantee arc independent of the obligations arising out of a specific contract between the parties.
In this context it is also necessary to consider the extent to which the Court can go into the nature of the securities offered for the Bank guarantee in the light of the banker’s lien
In United Commercial Bank v. Bank of India and Ors. Supreme Court referred to a passage from R.D. Harbottle (Mercantile) Ltd. and Anr. v. National Westminster Bank and Ors. (1977) 2 All ER 862 with approval which runs as under:
It was only in exceptional cases that the courts would interfere with the machinery of irrevocable obligations assumed by banks. They were the life blood of international commerce. The machinery and commitments of banks were on a different level. They must be allowed to be honoured, free from interference by the courts. Otherwise trust in internal commerce could be irreparably damaged.
In R.D. Harbottle (Mercantile) Ltd. case it was stated in the Headnote as under:
(i) Only exceptional cases would the courts interfere with the machinery of irrevocable obligations assumed by banks. In the case of a confirmed performance guarantee, just as in the case of a confirmed letter of credit, the bank was onl concerned to ensure that the terms of its mandate and confirmation had been complied with and was in no way concerned with any contractual disputes which might have arisen between the buyers and sellers….
The above passage has also been referred in U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. wherein Supreme Court held that the aforesaid represents the correct state of the law. In this case, Supreme Court has affirmed the obligation of payment without dispute by the Bank in the Indian context in cases relating to Bank guarantees. But it is equally obvious that the same liability or obligation on the part of the Bank will not be there when the Bank guarantee is discharged and this needs no emphasis.
From the above discussion it can be gathered that the Bank guarantees are on different level and they must be allowed to be honoured free from interference by the courts and a Bank which gives a guarantee must honour the same according to its terms and it is only in exceptional cases that the court will interfere with the machinery of irrevocable obligations assumed by the banks. Afortiori the same principle applies in respect of Bank guarantees which are discharged.
When once the Bank guarantee is discharged the obligation of the Bank ends and there is no question of going behind such discharged Bank guarantee. The court should refrain from probing into the nature of the transactions between the Bank and the customer which led to the furnishing of the Bank guarantee.
Reference
Syndicate Bank vs Vijay Kumar And Others, AIR 1992 SC 1066, 1