Conditional bank guarantees can only be invoked upon the occurrence of pre-defined contractual contingencies and defaults.

In brief

The question

1. Whether the subject bank guarantees are unconditional or conditional in nature

The court held

The Court upheld the Single Judge’s order and dismissed the appeal, finding no error in interdicting the bank guarantee encashment

It also directed

It held that the purported claims were not relatable to contractual defaults

With the consent of both parties, the Court appointed Hon’ble Mr. Justice Arun Mishra (Retd.) as the sole Arbitrator to adjudicate the disputes, granting parties liberty to seek further interim relief under Section 17 of the Act

01Facts

The Appellant (NHIDCL) awarded a contract to Respondent No. 1 (the contractor) for National Highway road works under EPC mode

p. 2

Pursuant to the agreement dated 07.02.2024, the Respondent furnished two performance bank guarantees and one mobilization bank guarantee totaling ₹8,63,46,694/-

p. 2

Alleging contractual laxity, the Appellant issued a notice on 14.01.2026 demanding ₹8.496 crores (comprising vendor dues and recovery of released funds) and threatened to encash the bank guarantees upon non-compliance

pp. 2-3

The Respondent challenged this under Section 9 of the Arbitration and Conciliation Act, 1996. The learned Single Judge stayed the encashment on 24.02.2026, finding the guarantees to be "conditional"

p. 3

The Appellant appealed this stay under Section 37(1)(b) of the Act

pp. 1-2

02Issues

i.1. Whether the subject bank guarantees are unconditional or conditional in nature

p. 6 / para. 21

ii.2. Whether the contingencies required for the invocation of the bank guarantees were satisfied by the Appellant’s demand notice

p. 6 / para. 21

03Law Applied

The court applied Section 37(1)(b) regarding appeals and Section 9 regarding interim measures under the Arbitration and Conciliation Act, 1996

pp. 1-2

The court relied on the principles of contractual interpretation of bank guarantees, distinguishing between the "unconditional" nomenclature of a guarantee and specific clauses that restrict invocation to "default in due and faithful performance of obligations"

p. 6, 7

The court also considered the principle of "equity and balance of convenience" in granting injunctions against bank guarantee encashment where the underlying demand does not relate to contractual performance

p. 8

Provisions in the judgment · 6 · Linked ones open on LawLens

Arbitration and Conciliation Act, 1996 Section 9 Section 11 Section 12 Section 17 Section 37 Section 4

04Reasoning

The Court examined the specific language of the bank guarantees. While the opening clauses used the words "unconditionally and irrevocably," a subsequent clause limited invocation to instances where the contractor "committed default in the due and faithful performance of all or any of its obligations"

p. 6 · ¶ 22-23

The Court reasoned that despite the "unconditional" label, the guarantees were substantively linked to pre-defined contingencies

p. 7 · ¶ 24

Upon reviewing the Appellant’s notice dated 14.01.2026, the Court found the demand was for "undisputed vendor dues" (a matter between the contractor and third parties) and "recovery of funds released on assurances"

pp. 7-8

It held these claims did not constitute a failure to perform contractual obligations as envisioned by the guarantee terms

p. 8 · ¶ 26-27