Unconditional advance bank guarantees remain encashable despite contractual disputes absent egregious fraud or irretrievable injustice.

The Petitioner was awarded a contract by Respondent No. 1 for supplying an Airfield Crash Fire Tender for Nanded Airport for a contract value of ₹7.03 crore.

Against an advance payment of ₹1,48,94,068, the Petitioner furnished Advance Bank Guarantee No. 03352GI3D2403957 through Respondent No. 2-bank. The guarantee was unconditional, irrevocable and payable on demand.

After MIDC resumed possession of Nanded Airport, Respondent No. 1 directed the Petitioner to stop work and terminated the contract under the “Termination for Convenience” provision of Article 24 of the GCC.

Respondent No. 1 demanded refund of the advance and stated that the Bank Guarantee would be returned upon receipt of the refund.

The Petitioner later asserted a claim of ₹4,63,82,051 under Article 24.1 for work performed and materials procured. Respondent No. 1 rejected that claim and subsequently invoked the Bank Guarantee on 1 September 2026, within its claim period.

The Petitioner approached the Bombay High Court under Section 9 of the Arbitration and Conciliation Act, 1996, seeking to restrain invocation and encashment of the Advance Bank Guarantee.

Whether Respondent No. 1 could invoke and encash the unconditional Advance Bank Guarantee despite disputes concerning termination of the underlying contract and the Petitioner’s monetary claim under Article 24.1 of the GCC?

Whether the Petitioner established any recognised exception—egregious fraud, irretrievable injustice, or special equities—justifying an injunction against encashment?

Whether the absence of prior notice, invocation near the end of the claim period, or Respondent No. 1’s alleged undertaking to return the guarantee invalidated the invocation?

The Court applied Section 9 of the Arbitration and Conciliation Act, 1996, while recognising that an unconditional bank guarantee constitutes an independent contract between the bank and the beneficiary.

Relying principally on Jindal Steel & Power Ltd. v. Bansal Infra Projects (P) Ltd., (2025) 10 SCC 176, and Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co., (2007) 8 SCC 110, the Court held that courts should ordinarily not interfere with invocation or encashment of an unconditional bank guarantee except where there is egregious fraud going to the foundation of the transaction or where encashment would cause irretrievable injustice of the kind that makes restitution impossible.

Disputes under the underlying contract, alleged breach by the beneficiary, or a mere apprehension of non-recovery are insufficient grounds for injunctive relief.

The guarantee must be enforced according to its terms, particularly where it is unconditional, payable on demand, and expressly provides that payment is not affected by disputes between the contracting parties.

The Court found that the Bank Guarantee expressly required Respondent No. 2 to pay on written demand, without demur, contest, protest, reference to the Petitioner, or the need for Respondent No. 1 to provide reasons or prove loss.

It also made the Purchaser’s invocation binding on the bank notwithstanding disputes under the main contract.

Accordingly, whether Respondent No. 1 terminated under Article 24 or subsequently relied on Article 39, and whether the Petitioner was entitled to compensation under Article 24.1, were matters for arbitration and did not affect the independent obligation under the guarantee.

The invocation was connected with the very purpose of the guarantee: recovery of the unrefunded advance for which the guarantee had been furnished.

The Petitioner’s expenditure on manufacturing or procuring components did not amount to repayment or adjustment of the advance; its claim for reimbursement could be determined separately in arbitration.

The Petitioner’s quantified claim could not automatically be set off against the secured advance because that claim remained disputed and unadjudicated.

The Court further held that no egregious fraud had been shown. The Petitioner’s allegations amounted, at most, to contractual disputes concerning termination and recovery of the advance.

Nor was irretrievable injustice established: the Petitioner relied only on an apprehension that Respondent No. 1 might lack the financial capacity to repay, whereas Respondent No. 1 produced material showing that it remained a going concern with assets and receivables.

The absence of separate prior notice did not invalidate the invocation because the guarantee did not make such notice a condition of payment, and invocation occurred within the claim period.

The statement that the guarantee would be returned was conditional upon receipt of the advance and therefore did not bar invocation when the advance remained unpaid.

The Petitioner failed to establish egregious fraud, irretrievable injustice, or any other exceptional circumstance warranting interference under Section 9.

The Petition was dismissed; any interim restraint against invocation or encashment was vacated; and the parties’ substantive claims and counterclaims were expressly kept open for determination under the contractual dispute-resolution mechanism.

There was no order as to costs.