Supreme Court Directs Commercial Court To Decide Section 9 Petition Within Eight Weeks; Bank Guarantee To Remain Alive

A bench of Justices J.B. Pardiwala and R. Mahadevan heard an appeal by M/s Jindal Steel and Power Ltd. challenging the High Court of Orissa’s interim order restraining invocation and encashment of a bank guarantee pending disposal of proceedings under Section 9 of the Arbitration and Conciliation Act, 1996.

The Court disposed of the appeal without deciding the substantive legal questions raised and directed the Senior Civil Judge (Commercial Court), Cuttack to conclude the Section 9 proceedings by passing appropriate orders within eight weeks of the filing of objections. The Supreme Court recorded that the High Court’s order was “merely an interim measure intended to protect the interests of both parties” and noted that Respondent No.1 had extended the bank guarantee until 30.06.2025 and undertook to keep it alive until the arbitration was finally adjudicated. The Court, in its reasoning, observed: “8. Now, a bank guarantee is the common mode of securing payment of money in commercial dealings as the beneficiary, under the guarantee, is entitled to realise the whole of the amount under that guarantee in terms thereof irrespective of any pending dispute between the person on whose behalf the guarantee was given and the beneficiary. In contracts awarded to private individuals by the Government, which involve huge expenditure, as, for example, construction contracts, bank guarantees are usually required to be furnished in favour of the Government to secure payments made to the contractor as "advance" from time to time during the course of the contract as also to secure performance of the work entrusted under the contract. Such guarantees are encashable in terms thereof on the lapse of the contractor either in the performance of the work or in paying back to the Government “advance", the guarantee is invoked and the amount is recovered from the bank. It is for this reason that the courts are reluctant in granting an injunction against the invocation of bank guarantee, except in the case of fraud, which should be an established fraud, or where irretrievable injury was likely to be caused to the guarantor. This was the principle laid down by this Court in various decisions. In U.P. Coop. Federation Ltd v. Singh Consultants & Engineers (P) Ltd., the law laid down in Bolivinter Oil SA v. Chase Manhattan Bank was approved and it was held that an unconditional bank guarantee could be invoked in terms thereof by the person in whose favour the bank guarantee was given and the courts would not grant any injunction restraining the invocation except in the case of fraud or irretrievable injury. …”

Background The dispute arose from a work order dated 24.01.2022 by the appellants for construction of 400 flats and an advance of Rs. 3,73,95,490/-, secured by an unconditional bank guarantee dated 08.03.2022. The contract completion date was extended several times; the appellants alleged persistent poor performance, quality deficiencies and missed deadlines and issued termination notices and a demand for refund of a debit balance of Rs. 4,12,54,904/-. Respondent No.1 filed Arbitration Petition No.14 of 2024 under Section 9 seeking interim protection restraining invocation of the bank guarantee and sought ex parte relief under Order XXXIX Rule 3 CPC. The Senior Civil Judge (Commercial Court), Cuttack rejected the ex parte ad interim injunction application and directed issuance of notice. Respondent No.1 moved the High Court under Article 227; the High Court granted interim status quo on encashment of the guarantee, directed parties to appear before the Commercial Court on 27.08.2024, required the opposite parties to file objections within ten days, and directed that the Commercial Court try to conclude the proceeding preferably within six weeks. The High Court also directed extension of the bank guarantee (initially till 31.12.2024 and subsequently renewed). The appellants challenged the High Court order before the Supreme Court.

The Supreme Court recorded the competing contentions: appellants contended that interlocutory orders in Section 9 proceedings were appealable under Section 37 of the Arbitration Act and that the High Court should not have exercised supervisory jurisdiction under Article 227; respondents contended that no efficacious alternative remedy was available and that special equities justified interim protection. The Court noted settled precedent that courts normally refrained from interfering with invocation of an unconditional bank guarantee except in cases of established fraud or irretrievable injustice, but observed that the High Court’s order was interim and protective in nature. The Court left the substantial legal issues open and directed expedited adjudication in the Commercial Court, while keeping the bank guarantee alive pending the Section 9 outcome.

Case Details: Case No.: CIVIL APPEAL NO. 6413 OF 2025 (ARISING OUT OF SLP (CIVIL) NO. 21916 OF 2024) Case Title: M/s Jindal Steel and Power Ltd. & Anr. v. M/s Bansal Infra Projects Pvt. Ltd. & Others Appearances: For the Petitioner(s): [Counsel not indicated in the reported judgment] For the Respondent(s): [Counsel not indicated in the reported judgment]