Corporate Guarantee Cannot Replace Unconditional Bank Guarantee Agreed Between Parties: Bombay High Court

The Bombay High Court has recently held that a corporate guarantee cannot replace an unconditional bank guarantee agreed between commercial parties merely because a party is willing to furnish one, observing that the two provide different degrees of security.

Granting interim relief to Oil and Natural Gas Corporation Ltd. (ONGC), Justice Amit Borkar directed Afcons Gunanusa Joint Venture to renew and continue unconditional bank guarantees worth USD 29.91 million, EUR 4.55 million and ₹22.09 crore, furnished towards ONGC's liquidated damages claim, until ONGC's challenge to an arbitral award is finally decided.

Rejecting Afcons' offer to replace the bank guarantees with a corporate guarantee, a bench of justice Amit Borkar observed:

"At the same time, it cannot be ignored that a corporate guarantee and an unconditional Bank Guarantee issued by a nationalised bank are not the same. Both stand on different footing and give different degree of security. Therefore, merely because the respondent is willing to furnish a corporate guarantee, it may not become substitute for the security agreed between the parties."

The dispute arose from a contract executed on May 29, 2008 under which ONGC engaged Afcons Infrastructure Ltd. for the construction, installation and commissioning of an offshore hydrocarbon project. Afcons Infrastructure Ltd. and PT Gunanusa Utama Fabricators subsequently constituted the respondent joint venture for execution of the project.

The project was to be completed by 30 April 2011, failing which ONGC was entitled to recover liquidated damages.

After Afcons sought extensions, the parties amended the contract on 22 July 2011 by inserting Clause 6.3.4, under which Afcons furnished unconditional bank guarantees securing 110% of ONGC's maximum liquidated damages claim instead of ONGC immediately recovering liquidated damages.

The clause provided that the bank guarantees would remain valid until the issue relating to ONGC's entitlement to recover liquidated damages was finally settled.

The project was completed between October 31, 2012 and January 2, 2013 after a delay of more than 220 days. Afcons invoked arbitration on 20 July 2015.

By an order dated April 22, 2022, the arbitral tribunal directed that the bank guarantees remain alive until the final award. However, in its award dated 10 March 2026, it rejected ONGC's counterclaim for liquidated damages and directed that the bank guarantees be returned within ten days.

After Afcons sought return of the guarantees on 26 and 27 March 2026, ONGC challenged the award under Section 34 of the Arbitration and Conciliation Act on June 8, 2026 and, on June 13, 2026, sought post-award interim protection under Section 9.

ONGC argued that although the tribunal held Afcons responsible for the delay, found the liquidated damages clause applicable and denied it an unconditional extension of time, it rejected the counterclaim solely because ONGC had not proved actual loss. It also contended that the tribunal ignored binding Supreme Court precedents and improperly relied on a ministerial statement made in Parliament.

Afcons argued that ONGC had neither pleaded nor proved any loss and that requiring security of nearly ₹400 crore despite its success in arbitration would cause prejudice. It nevertheless offered to furnish a corporate guarantee instead.

Justice Borkar observed that every party to an arbitration agreement can invoke Section 9 until enforcement of the award under Section 36, although an unsuccessful party must establish rare and compelling circumstances.

The court held that Clause 6.3.4 prima facie indicated that the parties intended the bank guarantees to remain in force until the dispute attained finality.

The Court also noted that both parties had challenged different parts of the arbitral award under Section 34, showing that the dispute had not yet reached finality.

Justice Borkar observed that the tribunal had held Afcons responsible for the delay and found the liquidated damages clause applicable. Read alongside Clause 6.3.4, which required the bank guarantees to continue until the dispute was finally resolved, these factors justified preserving the agreed security until ONGC's challenge to the award is decided.

The Court accordingly directed Afcons Gunanusa Joint Venture to renew and continue the bank guarantees until the Section 34 proceedings are decided. It clarified that the order merely preserves the contractual security and does not, by itself, entitle ONGC to invoke the guarantees.

For Petitioner (Oil and Natural Gas Corporation Ltd.): Senior Advocate Sharan Jagtiani with Advocates Chitra Rentala, Atul Jain, Ritwik Kulkarni, Sohan Kinkhabwala, Alabh Lal and Abhimanyu Chaturvedi, instructed by Trilegal.

For Respondent (Afcons Gunanusa Joint Venture): Senior Advocate Rajeev Sharma with Advocates Mayur Khandeparkar, Abhishek Birthray, Kunal Kanungo, Shreya Sharwa, Tanmay Nandi, Kartikeya Tripathi and Rupa Shaw, instructed by Khaitan & Co.