No Injunction Against Unconditional Bank Guarantee Invocation Unless Fraud Proven: Delhi HC

The Delhi High Court has reaffirmed that the autonomy of unconditional bank guarantees must be preserved, ruling that internal contractual disputes cannot serve as a ground for staying their invocation unless egregious fraud or irretrievable injury is established.

In a significant verdict, a Single Judge Bench of Justice Mini Pushkarna, presided over by Justice Mini Pushkarna, dismissed a petition seeking to restrain the encashment of a bank guarantee following a contract termination. The Court emphasized that a bank guarantee is an independent contract, distinct from the underlying commercial agreement between the parties.

Court on Liquidated Damages and Extension of Time

The dispute reached the Court under Section 9 of the Arbitration and Conciliation Act, 1996. The petitioner sought to stay a letter levying liquidated damages and to restrain the respondent from invoking a bank guarantee. The petitioner argued that since the respondent had previously extended the project completion deadline without levying liquidated damages, it was now estopped from claiming the same.

However, the Court observed that the extension was contingent upon the completion of the work. Since the petitioner abandoned the site and terminated the contract before the extended deadline, the respondent's right to claim damages remained prima facie intact. The Court noted that the Arbitration and Conciliation Act, 1996 requires only a prima facie assessment at the interim stage, leaving the final adjudication of liabilities to the Arbitral Tribunal.

Autonomy of Unconditional Bank Guarantees

Addressing the prayer to stay the Bank Guarantee dated 18th July, 2025, the Court highlighted its unconditional nature. It relied on the settled principles laid down by the Supreme Court in Gujarat Maritime Board Versus Larsen and Toubro Infrastructure Development Projects Limited and Another and U.P. State Sugar Corporation Versus Sumac International Limited ( "(1997) 1 SCC 568": 1996 CaseBase(SC) 1748), noting that courts should be slow to interfere with commercial instruments that facilitate trust in trade.

The Court, in its reasoning, observed: "A Bank Guarantee is a separate contract, which obligates the bank to pay the guaranteed amount on demand. The disputes between the parties under the main contract, is no ground for issuing an order of injunction or to restrain the enforcement of a Bank Guarantee. Further, an injunction against the invocation of an unconditional Bank Guarantee cannot be granted except in a situation of egregious fraud or irretrievable injury."

Threshold for Irretrievable Injury

The Court further clarified that mere financial hardship or commercial distress does not meet the legal threshold for 'irretrievable injury'. Citing Black Gold Resources Private Limited Versus International Coal Ventures Pvt. Ltd. and Another and Dwarikesh Sugar Industries Limited Versus Prem Heavy Engineering Work (P) Ltd. and Another, the Court held that such an exception applies only when restitution would be impossible in law. In this case, since the petitioner failed to prove that recovery of the amount would be impossible if they succeeded in arbitration, no injunction was warranted.

Regarding the petitioner's reliance on Jindal Steel and Power Limited and Another Versus Bansal Infra Projects Private Limited and Others and Union of India Versus Chenab Construction Joint Venture, the Court found them inapplicable to the current facts, noting that the stage of evidence is yet to come in the present arbitration.

Case Details:
Case No.: O.M.P.(I) (COMM.) 218/2026
Case Title: KALPATARU PROJECTS INTERNATIONAL LIMITED v. JSW INFRASTRUCTURE LIMITED
Appearances:
For the Petitioner(s): Mr. Dayan Krishnan, Sr. Advocate with Dr. Sunil Mittal, Mr. Malak Bhatt, Mr. Anu Tiwari, Mr. Prithviraj Dey and Mr. Sukrit Seth, Advocates
For the Respondent(s): Mr. Darpan Wadhwa, Sr. Advocate with Mr. Nakul Mohta, Ms. Misha Rohatgi Mohta, Mr. Amer Vaid and Ms. Sneha Menon, Advocates

Source: 2026 CaseBase(DEL) 382