Recent Judgment on Alternate Dispute Resolution: Supreme Court Reiterates Limited Scope for interference in Bank Guarantee Encashment

The Apex court has reaffirmed that the courts should not interfere with bank guarantees, except in the cases of gross fraud or where allowing encashment would result in irretrievable injustice.

Background of the Case

Jindal Steel and Power Ltd (“Appellant”) awarded a work order worth to Bansal Infra Projects Pvt. Ltd (“Respondent”) for the construction of 400 flats. An advance payment which was secured by a bank guarantee was issued to the Respondent. However, due to the supposed violation and non-performance by the Respondent, the Appellant terminated the Contract and initiated encashment of the guarantee.

The Respondent opted for alternative dispute resolution and filed an application under section 9 arbitration act, formally known as Section 9 of the Arbitration and Conciliation Act, 1996, before the Commercial Court, along with interim applications under Order XXXIX Rules 1–3 CPC. The Commercial Court denied the request for interim relief. After which the Respondent approached the Orissa High Court, which passed an interim order maintaining status quo regarding the bank guarantee.

Issues before the Supreme Court

Whether the High Court was justified in granting interim relief under Section 9 of the Arbitration and Conciliation Act, 1996, by restraining the invocation of the bank guarantee during the pendency of arbitral proceedings.

Judgment

The Supreme Court Bench comprising Justices J.B. Pardiwala and R. Mahadevan reiterated the well-settled principle that courts should not interfere with the invocation of unconditional bank guarantees unless:

1. There is fraud of an egregious nature which vitiates the foundation of the guarantee; or
2. Enforcement would result in irretrievable injustice.

While noting that the High Court’s status quo order was interim in nature, the Court emphasized that such restraint must be exercised only in exceptional cases. It directed the Commercial Court to dispose of the Section 9 application within eight weeks and ordered that the bank guarantee be kept alive and subject to the outcome of those proceedings.

Precedents and Laws

Section 9 of Arbitration and Conciliation Act, 1996 : Empowers courts to grant interim measures before or during arbitration.

Hindustan Construction Co. Ltd v. State of Bihar : A key precedent reaffirming that bank guarantees should normally be honored in accordance with their terms, barring exceptional circumstances.

Source

M/s Jindal Steel and Power Ltd v. M/s Bansal Infra Projects Pvt. Ltd, C.A. No.-006413-006413 – 2025