Unconditional Bank Guarantees May Be Encashed Upon Contract Termination Regardless of Pending Liquidated Damages Disputes

The Appellant (a Joint Venture) entered into an Engineering, Procurement, and Construction (EPC) Agreement with the Respondents for a railway project. Under Clauses 7.1.1 and 7.5, the Appellant furnished three Performance Bank Guarantees (PBGs) and one Retention Bank Guarantee (RBG)

Following disputes, a Single Judge in a previous Section 9 petition recorded an agreement on May 26, 2026, that certain communications regarding the imposition of Liquidated Damages (Rs. 47.75 Crores) would not be acted upon until the Dispute Adjudication Board (DAB) rendered a decision

Subsequently, the contract was terminated on May 29, 2026

When the Respondents moved to encash the Bank Guarantees, the Appellant sought a restraint order, which was denied by the Single Judge on July 16, 2026. The Appellant challenged this denial before the Division Bench.

1. Whether the invocation of Bank Guarantees violated the undertaking/assurance given by the Respondents in the previous judicial order dated May 26, 2026

2. Whether the Appellant established a case of fraud, irretrievable injustice, or special equities to warrant an injunction against the invocation of unconditional Bank Guarantees

Section 9 of the Arbitration and Conciliation Act, 1996, regarding interim measures

The foundational principles governing unconditional bank guarantees mandate that courts must not interfere with such guarantees except in cases of established egregious fraud or irretrievable injustice.

The doctrine derived from Svenska Handelsbanken v. Indian Charge Chrome Ltd. and U.P. Cooperative Federation Ltd. v. Singh Consultants & Engineers (P) Ltd.

The distillation of law from CRSC Research and Design Institute Group Co Ltd v. Dedicated Freight Corridor Corporation of India Ltd, which holds that "special equities" is a facet of irretrievable harm and that a mere dispute between parties does not satisfy the threshold for an injunction

The Court rejected the Appellant’s argument that the Bank Guarantees were only encashable for damages linked to the stayed communications. It observed that Clause 21.6.1(a) of the EPC Agreement provides an independent right to the Respondent to encash PBGs and RBGs upon termination of the contract

Since the contract was terminated on May 29, 2026—an event subsequent to the initial undertaking—the invocation was legally distinct from the specific recovery of liquidated damages stayed by the previous order

Applying the Svenska Handelsbanken standard, the Court found no evidence of "egregious fraud" or "irretrievable injustice," noting that any wrongful recovery of money could be resolved through restitution in the pending arbitration. The Court emphasized that the bank's obligation is independent of the underlying contract disputes

In the absence of established fraud or proof that recovery of funds would be impossible later, no injunction against an unconditional Bank Guarantee can be granted.

The Court dismissed the appeal in limine, holding that the learned Single Judge committed no error in refusing to restrain the invocation