Courts Should Refrain From Interfering With Invocation Of Bank Guarantee Except In Cases of Egregious Fraud Or Where Encashment Would Result In Irretrievable Injustice: Supreme Court
Expounding the legal position on the invocation of bank guarantees, the Supreme Court reiterated that 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.
The appeal before the Apex Court was filed by the appellants challenging the order of the Orissa High Court restraining the appellants from invoking the bank guarantee during the pendency of the proceedings under section 9 of the Arbitration and Conciliation Act, 1996.
The Division Bench of Justice J.B. Pardiwala and Justice R. Mahadevan observed, “We are aware of the established legal principle 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. This Court in Hindustan Construction Co. Ltd v. State of Bihar and others , emphasized that bank guarantees serve as the backbone of commercial transactions and must be honored in accordance with their terms.”
Advocate Saket Sikri represented the Appellant while AOR Shubhranshu Padhi represented the Respondent.
Factual Background
The appellants issued a work order to the first 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. To execute the said work, the appellants had given an advance, and to secure the same, the first Respondent furnished a bank guarantee to the appellants. However, due to the respondent’s continuous failure and poor performance, the appellants were constrained to terminate the work order. Consequently, the appellants sent a letter highlighting the disregard for construction norm and requesting the Respondent to refund the debit balance of Rs. 4,12,54,904 attributed to unadjusted advances and other deductions, failing which, the bank guarantee would be encashed.
The Respondent filed an arbitration petition under Section 9 of the Arbitration and Conciliation Act, 1996, before the Commercial Court, along with applications under Order XXXIX Rules 1 and 2 and Order XXXIX Rule 3 CPC, seeking to pass an order of interim measure restraining 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.
The Commercial Court rejected the application seeking to grant an ex-parte injunction, against which, Respondent filed a writ petition, whereby the High Court granted an order of status quo concerning the encashment of the bank guarantee. The High Court ordered that the interim order staying encashment of the bank guarantee shall continue until the disposal of the Arbitration Petition, which was under challenge at the instance of the appellants.
Reasoning
The Bench noted that after hearing both sides and with the consent of the parties, the High Court disposed of the writ petition by the order impugned 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.
It was further noticed by the Bench that the High Court 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 the Respondent 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.
“Thus, in view of the ongoing arbitration proceedings concerning the bank guarantee, it is imperative to maintain the existing position regarding the bank guarantee until the final outcome of the Section 9 arbitration petition”, it further added.
Noting that the Section 9 arbitration petition is now ripe for arguments before the Commercial Court on behalf of the appellants, the Bench disposed of the appeal by directing, “…the parties are directed to advance all their contentions along with necessary documents, and the Commercial Court shall 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.”
Cause Title: M/s Jindal Steel and Power Ltd v. M/s Bansal Infra Projects Pvt. Ltd (Neutral Citation: 2025 INSC 640)
Appearance:
Appellant: Advocates Saket Sikri, Manish Kharbanda, AOR Charu Mathur, Advocates Naman Joshi, Ajay Pal, Neha Maniktala, Ekta Gupta, Ritika Vohra, Guneet Sidhu, Amber Tickoo
Respondent: AOR Shubhranshu Padhi, Advocates Prabodha Chandra Nayak, Jay Nirupam, D. Girish Kumar, Pranav Giri, Ekansh Sisodia
