Disputes Over Main Contract Cannot Justify Restraining Independent Bank Guarantee: Bombay High Court

The Bombay High Court has recently dismissed a contractor's plea for interim protection against the invocation of a ₹43.40 lakh counter-guarantee furnished in connection with a sewerage rehabilitation project of the Municipal Corporation of Greater Mumbai (MCGM).

The court held that disputes over the execution of the underlying contract cannot, by themselves, justify restraining payment under an independent bank guarantee.

Justice Amit Borkar observed that the obligation to make payment under an independent guarantee must be considered separately from disputes concerning the performance of the main contract.

“The dispute about performance of the main contract and the obligation to make payment under an independent guarantee are two different matters. Normally, both cannot be treated as the same,” the court held.

The petition was filed by Gravit-Onsite-JV, India, which had been awarded a contract worth around ₹19.90 crore in June 2018 to rehabilitate a 1,725-metre pipeline. The work was originally scheduled to be completed by May 31, 2021.

The contractor attributed the delay to the COVID-19 pandemic, the Russia-Ukraine war, delays in obtaining traffic and ward permissions, and MCGM's refusal to permit excavation of concrete roads. It also claimed that MCGM rejected its proposal to use alternative technology that would have allowed the remaining work to be completed without excavation.

The contractor argued that it had repeatedly expressed its willingness to complete the remaining work and that the usual restrictions on restraining bank guarantees should not apply because the contract had not been terminated.

The court rejected this argument, holding that the absence of a termination order does not remove the legal restrictions on restraining an unconditional bank guarantee. It relied on the Supreme Court's decisions in U.P. State Sugar Corporation v. Sumac International Ltd., Himadri Chemicals Industries Ltd. v. Coal Tar Refining Company and Gujarat Maritime Board v. Larsen & Toubro Infrastructure Development Projects Ltd. to reiterate that such guarantees can ordinarily be restrained only in exceptional cases involving egregious fraud or irretrievable injustice.

The court also examined the documents and found that the petition had conflated two separate instruments. Bank of Baroda had issued the underlying bank guarantee in favour of MCGM, while ICICI Bank had issued the counter-guarantee in favour of Bank of Baroda. MCGM was the beneficiary of the former, whereas Bank of Baroda was the lender and beneficiary under the latter.

The court noted that neither MCGM nor its Chief Engineer was shown to be entitled to make a demand under the counter-guarantee. It also found that the document recorded May 31, 2026 as its expiry date, and the contractor had not produced an amendment or renewal establishing that it remained valid until January 31, 2027, as claimed.

It went on to observe that the contractor's letters expressing readiness to complete the remaining work did not establish that the entire delay was attributable to MCGM. However, it clarified that it was not deciding which party was responsible for the delay or whether the contract's termination was valid.

It also held that the contractor had not shown that payment under the guarantee would cause irretrievable injustice or make recovery impossible if it ultimately succeeded in arbitration. The fact that the project concerned a public sewerage infrastructure facility was also relevant while considering the balance of convenience, the court observed.

Dismissing the petition, the court clarified that its decision was limited to the request for interim protection against invocation of the specified counter-guarantee. The rival claims concerning delay, termination, and compensation were left open for determination in appropriate proceedings.