Invocation of an unconditional bank guarantee cannot be restrained absent egregious fraud or special equities.

The parties entered into an EPC Agreement dated 21 August 2018 for construction and maintenance of a highway bypass. After provisional and completion certificates were issued, pavement deterioration was reported. NHAI attributed it to deficient construction and maintenance; GR Infraprojects disputed liability, attributing the deterioration principally to overloading and allegedly inadequate contractual specifications. NHAI sought approximately ₹102.49 crore for rehabilitation and consequential damages, and the disputes were referred to arbitration.

During the arbitration, NHAI sought to encash the Performance Bank Guarantee (PBG). On GR Infraprojects’ application under Section 17 of the Arbitration and Conciliation Act, 1996, the Arbitral Tribunal restrained invocation and directed that the PBG remain alive during the proceedings. NHAI appealed under Section 37 of the Act.

Whether the Arbitral Tribunal was justified in restraining NHAI from encashing an unconditional and irrevocable PBG

Under the settled law governing unconditional bank guarantees, courts may restrain encashment only in exceptional circumstances, including egregious fraud of which the bank has notice and which vitiates the guarantee’s foundation, or special equities where encashment would cause irretrievable harm or injustice. The Court relied on the Division Bench decision in Black Gold Resources Private Limitada v. International Coal Ventures Pvt. Ltd., FAO(OS)(COMM) 211/2025.

An unconditional PBG is an independent obligation; disputes concerning the underlying contract do not, without an applicable exception, justify restraining its invocation.

The Court treated the competing explanations for pavement deterioration and the parties’ dispute over contractual responsibility as matters for the pending arbitration, not as grounds to restrain an unconditional PBG.

It held that financial burden on the contractor, or the possibility that it might ultimately succeed in arbitration, did not amount to irreparable harm; that consequence is inherent in performance security.

NHAI’s continuing rehabilitation expenditure and highway-maintenance obligations likewise did not prevent invocation in accordance with the PBG’s terms.

The appeal was allowed, with all merits of the parties’ claims and counterclaims left open for determination by the Arbitral Tribunal.