Supreme Court Directs Expeditious Resolution in Bank Guarantee Dispute, Upholds Interim Protection.


07 May 2025 Arbitration Law >> Business & Commercial Law   |   Civil Appeals >> Civil & Consumer Law  

The Supreme Court of India, on May 29, 2025, disposed of an appeal challenging an interim order of the Orissa High Court that restrained the encashment of a bank guarantee. The Supreme Court, while leaving open the intricate legal questions regarding the maintainability of appeals and writ petitions in such matters, emphasized the importance of expediting arbitration proceedings and maintaining the status quo of the bank guarantee.

The dispute originated from a work order issued by the appellants to Respondent No. 1, M/s. Bansal Infra Projects Private Limited, on January 24, 2022, for the construction of 400 flats at Jindal Nagar, South Block (Sharmik Vihar), valued at over Rs. 43.99 crores. An advance of Rs. 3,73,95,490/- was provided to Respondent No. 1, secured by an unconditional bank guarantee dated March 8, 2022.

 
 

The project, initially slated for completion by September 30, 2022, saw multiple extensions, with the final deadline extending to September 30, 2023. The appellants terminated the work order on July 7, 2023, citing Respondent No. 1's alleged poor performance, including quality deficiencies, missed deadlines, and non-compliance with contractual obligations. An amended work order was subsequently issued on July 13, 2023, which included a condition for the forfeiture of retention money if the handover extended beyond September 30, 2023.

Following continued issues, on February 21, 2024, the appellants highlighted disregard for construction norms by Respondent No. 1 and, on March 25, 2024, demanded a refund of a debit balance of Rs. 4,12,54,904/- due to unadjusted advances and other deductions by April 30, 2024, failing which the bank guarantee would be encashed.

In response, Respondent No. 1 filed an Arbitration Petition (No. 14 of 2024) under Section 9 of the Arbitration and Conciliation Act, 1996, before the Commercial Court, Cuttack, seeking an interim injunction to restrain the appellants from encashing the bank guarantee. The Commercial Court rejected the ex parte ad interim injunction, directing the issuance of notice to the opposite parties.

Aggrieved by this, Respondent No. 1 filed a writ petition (W.P. (C) No. 11844 of 2024) under Article 227 of the Constitution before the High Court of Orissa. The High Court initially granted an interim order of status quo regarding the encashment of the bank guarantee. Subsequently, on August 20, 2024, the High Court disposed of the writ petition, directing the Commercial Court to expedite the Section 9 petition and maintaining the interim order restraining the bank guarantee's encashment until its disposal, contingent on Respondent No. 1 extending the bank guarantee.

The appellants then approached the Supreme Court, contending that an order rejecting an ex parte injunction in a Section 9 petition is appealable under Section 37(1)(b) of the Arbitration and Conciliation Act, 1996, and therefore, the High Court should not have exercised its supervisory jurisdiction under Article 227. They also argued against judicial interference with unconditional bank guarantees in the absence of fraud or special equities.

Respondent No. 1, conversely, argued that the Commercial Court's order was an interim measure, not a final order under Section 9, and thus not appealable under Section 37. They also highlighted that the alleged non-compliance was due to delays caused by the appellants, leading to the High Court's finding of "special equities" in their favor.

The Supreme Court acknowledged the established principle that courts should generally refrain from interfering with bank guarantee invocations, except in cases of egregious fraud or irretrievable injustice. However, noting that the High Court's order was an interim measure intended to protect both parties' interests and that the Section 9 arbitration petition is partly heard, the Supreme Court deemed it imperative to maintain the existing position regarding the bank guarantee.

Crucially, Respondent No. 1 has extended the bank guarantee until June 30, 2025, and has undertaken to further extend its validity until the disposal of the Section 9 arbitration petition. Given that no prejudice is currently being caused to the appellants, the Supreme Court opted not to decide the complex legal questions raised by the parties, leaving them open for future consideration.

The Supreme Court directed the Commercial Court to hear the remaining arguments from the appellants and pass appropriate orders in the Section 9 arbitration petition within eight weeks. Until then, the bank guarantee will remain valid and subject to the outcome of the Section 9 petition. This decision underscores the judiciary's commitment to facilitating expeditious dispute resolution through arbitration while ensuring equitable interim arrangements.


Section 9, Arbitration and Conciliation Act - 1996  

Section 37, Arbitration and Conciliation Act - 1996  

Arbitration and Conciliation Act, 1996