No court interference in bank guarantees unless fraud or irretrievable harm: Supreme Court
The Supreme Court has, on May 7, 2025 emphasised that the courts should refrain from interfering with the invocation of a bank guarantee except in cases of fraud of an egregious nature or in cases where allowing encashment would result in irretrievable injustice.
A bench of Justices J B Pardiwala and R Mahadevan pointed out that bank guarantees serve as the backbone of commercial transactions and must be honoured in accordance with their terms as held in Hindustan Construction Co Ltd Vs State of Bihar and others (1999).
The court was dealing with a civil appeal filed by M/s Jindal Steel and Power Ltd and another against the Orissa High Court's order of August 20, 2024, which disposed of a writ petition filed against the order by the Commercial Court in arbitration petition filed by the respondent M/s Bansal Infra Projects Pvt Ltd and others.
The Commercial Court had rejected the prayer for ex parte ad interim injunction made in an application under Order XXXIX Rule 3 and Section 151 of the Code of Civil Procedure, 1908 filed in the application under Section 9 of the Arbitration and Conciliation Act, 1996, observing that no order of injunction could be passed without affording an opportunity of hearing to the opposite parties.
Accordingly, it had directed issuance of notice to the opposite parties. Challenging the said order of the Commercial Court, respondent no.1 filed the writ petition before the High Court, which, as an interim measure, granted an order of status quo till the next date of hearing with regard to encashment of bank guarantee.
The dispute related to the appellants issuing a work order to the respondent for the construction of 400 flats at Jindal Nagar, South Block (Sharmik Vihar) for a total value of Rs. 43,99,46,924.13.
Due to the respondent’s continuous failure and poor performance, particularly in relation to quality deficiencies, missed deadlines, and non-compliance with contractual obligations, the appellants were constrained to terminate the work order, forcing the respondent to file an arbitration petition in the Commercial Court.
The appellants sought a refund of the debit balance of Rs 4,12,54,904 attributed to unadjusted advances and other deductions on or before April 30, 2024, failing which, the bank guarantee could be encashed. The respondent no. 1 then approached the Commercial Court and sought an ex parte interim protection against the encashment of the bank guarantee.
The respondent sought an order to restrain the appellants not to proceed further as per the termination notice and not to encash the bank guarantee till the constitution of the Arbitral Tribunal. As the Commercial Court rejected the application, the respondent filed the writ petition before the High Court, which granted an order of status quo with regard to the encashment of the bank guarantee.
Upholding the High Court's order, the bench noted the High Court disposed of the writ petition, inter alia stating that if the appellants were permitted to invoke the bank guarantee, the prayer made in the Section 9 arbitration petition would likely become infructuous.
"Ultimately, it was directed that the interim order restraining the appellants from encashing the bank guarantee shall remain in force until the disposal of the arbitration petition pending before the Commercial Court, subject to Respondent No. 1 extending the validity of the bank guarantee. Thus, we are of the view that the order passed by the High Court is merely an interim measure intended to protect the interests of both parties," the bench said.
Having noted that an Arbitral Tribunal was constituted to adjudicate the disputes between the parties and a hearing was held, the bench said, in view of the ongoing arbitration proceedings concerning the bank guarantee, it was imperative to maintain the existing position regarding the bank guarantee until the final outcome of the Section 9 arbitration petition.
Since the respondent no. 1 had given an undertaking to extend the validity of the bank guarantee till the disposal of the Section 9 arbitration petition, the bench also said, as such, no prejudice whatsoever was occasioned to the appellants, for the present.
"Therefore, we will not decide the legal issues raised herein and the same are left open," the bench said, directing the parties to advance all their contentions along with necessary documents before the Commercial Court, which would pass appropriate orders within a period of eight weeks thereafter.
Until such time, the bank guarantee shall be kept alive and shall be subject to the outcome of the Section 9 arbitration petition, it said.
Case Title: M/s Jindal Steel And Power Ltd & Anr Vs M/s Bansal Infra Projects Pvt Ltd & Others
Download judgment here