The invocation of bank guarantees must establish loss due to breach; disputes must be arbitrated as per contract.

ORDER :

SENTHILKUMAR RAMAMOORTHY, J.

The applicant entered into a contract with the respondent for the design and construction of a site assembly shop for FBR 1 and 2 at the BHAVINI plant site at Kalpakkam. The contract contains a provision for resolution of disputes by arbitration. The contract also provides for performance guarantee in the form of a bank guarantee and for retention of 6% of each running account bill as retention money. The applicant procured and submitted two bank guarantees for sum of Rs.2,23,66,425/- and Rs.2,00,00,000/-, respectively. The agreed position is that these two bank guarantees were extended from time to time and the term runs upto

31.03.2026 and 30.06.2026, respectively.

2. By communication dated 02.02.2026 to the Union Bank of India, the first respondent invoked both bank guarantees to the aggregate extent of Rs.3,33,66,425/-. The applicant has approached this Court seeking interim relief to prevent the encashment thereof.

3. Learned counsel for the applicant contended as under:

3.1 The bank guarantees are conditional inasmuch as the demand could be made by the first respondent only if said respondent establishes that loss was caused to it by reason of breach of the contract by the contractor. Such determination may only be made by the Arbitral Tribunal and therefore, the call made on the bank guarantees is invalid;

3.2 The certificate dated 18.06.2024 was issued by the first respondent to certify that 98% of the work had been completed as on said date. About twenty months later, the bank guarantees were invoked without even putting the applicant on notice;

3.3 The bank guarantees were invoked, by alleging that the applicant is responsible for delay. Clause 35 of which deals with compensation for delay, specifies the mechanism for computation based on the extent of delay. All these aspects are required to be examined by the Arbitral Tribunal. In Hindustan Construction Co. Ltd., Vs. State of Bihar and Others [(1999) 8 SCC 436], the Supreme Court considered the issue relating to whether a bank guarantee is conditional or unconditional. Dealing with a bank guarantee similar to the bank guarantees in this case, the Supreme Court construed the bank guarantee as conditional and not unconditional;

3.4 The applicant is ready and willing to extend the bank guarantees until conclusion of arbitral proceedings.

4. The contentions, in response, of learned counsel for the first respondent are as under:

4.1 The applicant submitted final bill dated 20.11.2025. Such final bill was accompanied by an assertion that no further claims would be made;

4.2 After submitting a final bill, the applicant has raised multiple claims. Therefore, the dispute is non-arbitrable;

4.3 The contract provides for completion within twenty four months, whereas the work was completed after six years. This justifies making a call on the bank guarantees.

5. Taking into account the rival contentions, at the outset, the arbitration clause in the contract is set out below:

‘59. Arbitration:

Except where otherwise provided for in the Contract, all questions and disputes relating to the meaning of the specifications, designs, drawings and instructions herein before contained in this Contract or as to the quality of the workmanship or materials used on the work or arising out of the terms and conditions of the Contract whether during the progress of the work or after the completion or abandonment thereof, at the request of the aggrieved party in writing, shall be referred to the sole arbitration of the person no