Courts to avoid interfering with invocation of bank guarantee except in cases of fraud or irretrievable injustice: Supreme Court

New Delhi: The Supreme Court has said 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 underscored the bank guarantees served as the backbone of commercial transactions and must be honoured in accordance with their terms.

The court cited Hindustan Construction Co Ltd Vs State of Bihar and others (1999) in this regard.

The court upheld the Orissa High Courts 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 in its dispute with by M/s Jindal Steel and Power Ltd.

On a challenge to the High Court's order by JSPL, the bench noted an arbitral tribunal was constituted to adjudicate the disputes between the parties.

"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," the bench said.

As the respondent No 1, the real estate developer has given an undertaking to extend the validity of the bank guarantee till the disposal of the Section 9 arbitration petition, as such, no prejudice whatsoever is occasioned to the appellants, for the present, the bench pointed out.

Without deciding any legal issues and leaving it open, the bench directed 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," the court said.

The dispute in the matter arose out of a work order to the respondent by the JSPL for construction of 400 flats at Jindal Nagar, South Block (Sharmik Vihar) for a total value of Rs 43,99,46,924.13.

Following the respondent’s alleged failure and poor performance, particularly in relation to quality deficiencies, missed deadlines, and non-compliance with contractual obligations, the JSPL was constrained to terminate the work order. The respondent then filed an arbitration petition in the Commercial Court.