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CS Professional · Strategic Management and Corporate Finance · Raising of Funds - Non Fund Based

Under an unconditional (on demand) bank guarantee, the beneficiary invokes the guarantee while the applicant claims that the underlying contract was not breached. Which statement reflects the general position?

The bank pays on a valid demand as per the guarantee terms, because the guarantee is independent of the underlying contract. The applicant and beneficiary settle their dispute separately, with payment restrained only in exceptional cases such as fraud.

  1. AThe bank must first wait for a court decision on the dispute
  2. BThe bank pays on demand per the guarantee terms, and the dispute is settled between applicant and beneficiary afterwardsCorrect
  3. CThe bank can refuse payment whenever the applicant objects
  4. DThe guarantee lapses automatically once a dispute is raised

Explanation

A guarantee is independent of the underlying contract. Courts generally restrain payment only in exceptional cases such as fraud or irretrievable injustice. Otherwise the bank honours a valid demand and the parties resolve their dispute separately, so the other options are wrong.

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