Court Rules that Invocation Letter Stating Recoveries Due or Likely to be Due from Contractor Suffices; Injunction Against Encashment Denied Without Proof of Fraud or Irretrievable Injustice
In a significant ruling on October 7, 2026, the Delhi High Court, presided over by Justice Manoj Jain, dismissed the petition filed by M/s Sanjeevni Infra Projects Limited seeking to restrain the encashment of an unconditional and irrevocable Performance Bank Guarantee (PBG) furnished to the Union of India. The petitioner challenged the invocation of the PBG on the ground that the invocation letter did not specify the exact amount due or recoverable, claiming that this non-specification rendered the invocation invalid.
The court extensively analyzed the terms of the PBG, which was issued by HDFC Bank for Rs. 1.37 crores and was valid until October 19, 2026. The guarantee expressly provided that the bank would pay the amount demanded by the government "without any demur," and that such demand would be conclusive regarding the amount due or payable. The invocation letter dated October 1, 2026, referenced the contractor's failure to complete the work within stipulated time and stated that the guarantee was invoked to meet recoveries "due or likely to be due" from the contractor.
Rejecting the petitioner's hyper-technical objection, the Court held that the invocation letter met the essential contractual requirements by explicitly linking the invocation to recoveries due or likely to be due. The absence of a crystallized exact recoverable amount in the invocation notice did not invalidate the demand under the terms of the guarantee.
The Court reiterated well-settled legal principles that unconditional bank guarantees are independent contracts and must be honored irrespective of any underlying disputes between parties. Judicial interference by way of injunction against encashment is permissible only in exceptional cases involving egregious fraud that vitiates the guarantee's foundation or where irretrievable injustice would occur. Mere financial hardship or apprehension of loss does not constitute grounds for injunction.
Referring to a series of authoritative judgments including U.P. State Sugar Corpn. v. Sumac International Ltd. (1997) 1 SCC 568, Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co. (2007) 8 SCC 110, and recent Delhi High Court rulings, the Court emphasized that the bank's liability under such guarantees is absolute and unequivocal. The petitioner failed to demonstrate any fraud or exceptional circumstances warranting judicial restraint.
The Court also noted that the petitioner had initiated arbitration proceedings concerning the contract dispute, and that any remedy for wrongful invocation, if established, lies in the arbitral forum and not in restraining the bank guarantee's invocation.
Given that the Union of India had to re-tender the balance work due to the contractor's failure, the amount recoverable was likely to exceed the guarantee sum, further justifying the invocation.
In conclusion, the Delhi High Court dismissed the petition and refused to grant an injunction against the encashment of the bank guarantee. The judgment underscores the strict and narrow scope of judicial intervention in matters concerning unconditional bank guarantees, reinforcing their role as vital instruments in commercial contracts.
Bottom Line:
Arbitration and bank guarantee - Unconditional and irrevocable performance bank guarantee - Mere non-specification of exact recoverable amount in invocation letter does not invalidate invocation when letter clearly states that encashment is to meet recoveries due or likely to be due from contractor - Injunction against encashment can be granted only in cases of egregious fraud or irretrievable injustice - Financial hardship alone is not sufficient.
Statutory provision(s):
Section 9, Arbitration and Conciliation Act, 1996
M/s Sanjeevni Infra Projects Limited v. Union of India, (Delhi) : Law Finder Doc Id # 2993047
