Delhi high court refuses to restrain encashment of performance bank guarantee, says invocation need not specify amount recoverable

Delhi High Court Verdict on Performance Bank Guarantee: No Restriction on Encashment, Invocation Need Not Specify Recoverable Amount.

Case Name: Sanjeevni Infra Projects Ltd. v. Union of India and Anr.

Case No: O.M.P.(I) (Comm.) 469/2026 and I.A. 27830/2026, decided on 7 October 2026

Coram: Justice Manoj Jain

Citation: (2026) ibclaw.in 6080 HC

The Delhi High Court has dismissed a petition under Section 9 of the Arbitration and Conciliation Act, 1996 seeking to restrain encashment of a Performance Bank Guarantee, holding that an invocation letter is not unsustainable merely because it does not specify or crystallise the amount to be recovered from the contractor.

The petitioner was engaged by the Union of India to construct a Regional Centre Building at Sector 30, Rohini, New Delhi. As per the contract, it furnished a Performance Bank Guarantee of Rs. 1,37,00,000 issued by HDFC Bank. The petitioner alleged that the respondent had, in a malafide manner, determined the contract and invoked the guarantee. The petitioner had already filed an application seeking appointment of an arbitrator.

The guarantee was renewed and valid up to 19 October 2026. Under its terms, the bank undertook to pay on a demand from the Government stating that the amount claimed is required to meet the recoveries due or likely to be due from the contractor, notwithstanding any dispute raised by the contractor, and the bank's liability was described as absolute and unequivocal.

The petitioner argued that the invocation letter dated 1 October 2026 did not mention what amount, if any, was due or recoverable, and did not even state that invocation was for recovery due or likely to be due. Since invocation was not strictly as per the guarantee, it was contended, the petitioner was entitled to a restraint order. Reliance was placed on Marshal Infradevelopers India Private Limited v. Union of India and Another.

The Court extracted the invocation letter, which stated that the contractor had failed to complete the work despite repeated directions, that the contract had been determined under Clause 3, and that the guarantee had become liable for invocation and encashment so as to meet the recoveries due or likely to be due from the contractor. The Court held that the letter contained the prime-most ingredient for invocation, as it stated in no uncertain terms that invocation was to meet recoveries due or likely to be due. The absence of a specified or crystallised amount did not mean that the invocation was not in terms of the contract. The petitioner's contention was termed hyper-technical.

Marshal Infradevelopers was distinguished on the ground that the invocation there was found to be cryptic and did not meet the stipulated requirement, as it only stated that the guarantee was being sent for immediate encashment because the contract had been terminated.

The Court then reiterated that the scope of interference in such matters is very restricted. Referring to U.P. State Sugar Corpn. v. Sumac International Ltd. and Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co., it noted that a beneficiary is entitled to realise an unconditional bank guarantee in terms thereof irrespective of pending disputes, that a bank guarantee is an independent contract, and that courts should be slow in restraining its realisation. Only two exceptions are recognised, being fraud of an egregious nature that vitiates the foundation of the guarantee, and irretrievable harm or injustice. Referring to Garg Builders v. Hindustan Prefab Ltd., the Court also noted the element of public interest in requiring banks to honour their commitments.

On the facts, fraud was neither pleaded nor argued. On irretrievable injustice, the Court held that it cannot be said to be fulfilled by mere pleading of loss or financial hardship, since a party furnishing a guarantee is at the risk of its encashment and always has the legal remedy to sue for recovery due to wrongful encashment. What the petitioner needed to show was that it would eventually be impossible to recover the amount if the Arbitral Tribunal decided in its favour, as laid down in Black Gold Resources Private Limited v. International Coal Ventures Pvt. Ltd. and Another. No such situation existed.

The Court also recorded the submission of the Union of India that, after termination, a fresh tender had to be issued to complete the balance work, and the amount eventually recoverable from the petitioner would be well above the amount under the guarantee. The guarantee was noted to be unconditional and irrevocable.

Finding that no case was made out, the Court dismissed the petition and disposed of the pending application. It clarified that its observations were tentative and solely for deciding the petition, and that nothing was an expression on the merits of the dispute to be decided by the Arbitral Tribunal.