Supreme Court Upholds Stay on Bank Guarantee Encashment, Leaves Question on S.37 Arbitration Act Appealability Open

Supreme Court Upholds Stay on Bank Guarantee, Prioritizes Ongoing Arbitration Over Jurisdictional Debate

New Delhi – In a significant commercial dispute, the Supreme Court has upheld an interim order restraining Jindal Steel and Power Ltd ( JSPL ) from encashing a bank guarantee furnished by Bansal Infra Projects Pvt. Ltd. ( Bansal Infra ). A bench of Justices J.B. Pardiwala and R. Mahadevan prioritized the smooth continuation of ongoing arbitration proceedings, choosing to leave key legal questions on the appealability of interim orders under the Arbitration Act open for a future case.

The Court directed the Cuttack Commercial Court to decide the main application under Section 9 of the Arbitration and Conciliation Act, 1996, within eight weeks, while ensuring the bank guarantee remains active until then.

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Background of the Dispute

The case originates from a work order issued by JSPL to Bansal Infra in January 2022 for the construction of 400 flats, valued at nearly ₹44 crore. JSPL provided an advance of ₹3.73 crore, which was secured by an unconditional bank guarantee from Bansal Infra for the same amount.

After several extensions, JSPL terminated the contract, citing poor performance, delays, and quality issues. On March 25, 2024, JSPL demanded a refund of over ₹4.12 crore, threatening to encash the bank guarantee if the payment was not made by April 30, 2024.

In response, Bansal Infra approached the Commercial Court in Cuttack under Section 9 of the Arbitration Act, seeking an interim stay on the bank guarantee's encashment. The Commercial Court declined to grant an ex parte ad-interim injunction and issued notice to JSPL . Bansal Infra then challenged this order before the Orissa High Court by filing a writ petition under Article 227 of the Constitution, which granted an interim stay on the encashment. This High Court order was subsequently challenged by JSPL in the Supreme Court.

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Key Legal Arguments

Jindal Steel and Power Ltd (Appellants):

- Alternate Remedy: JSPL ’s primary argument was that the High Court should not have entertained a writ petition under Article 227, as Bansal Infra had an equally efficacious alternative remedy. They contended that the Commercial Court's refusal to grant an ex parte injunction was an order "refusing to grant any measure under Section 9" and was therefore appealable under Section 37(1)(b) of the Arbitration Act.

- Minimal Judicial Interference: JSPL argued that the High Court's intervention undermined the Arbitration Act's principle of minimal judicial interference and allowed Bansal Infra to pursue parallel proceedings, delaying the arbitral process.

- Unconditional Bank Guarantee: They asserted that courts should not interfere with the encashment of an unconditional bank guarantee except in cases of egregious fraud or special equities, which they claimed were absent here.

Bansal Infra Projects Pvt. Ltd. (Respondents):

- No Appealable Order: Bansal Infra argued that an appeal under Section 37 lies only against a final order under Section 9, not an interlocutory order like issuing notice. They maintained that since no appeal was available under the CPC, the Commercial Courts Act, or the Arbitration Act, their only remedy was to invoke the High Court's supervisory jurisdiction under Article 227.

- Irretrievable Injustice: They claimed the delays were caused by JSPL and that allowing the encashment before adjudication would cause them irretrievable injustice and financial hardship.

- Bonafides: To demonstrate their good faith, Bansal Infra highlighted that they had consistently extended the validity of the bank guarantee as directed by the courts.

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Supreme Court's Pragmatic Approach

While acknowledging the significant legal questions raised by JSPL regarding jurisdiction, the Supreme Court chose a pragmatic course. The bench noted that the arbitration proceedings were already underway, with an Arbitral Tribunal constituted and the main Section 9 petition partly heard by the Commercial Court.

The Court observed:

"Thus, we are of the view that the order passed by the High Court is merely an interim measure intended to protect the interests of both parties."

The bench emphasized that since the bank guarantee had been extended and would remain in force, no prejudice was caused to JSPL by maintaining the status quo until the Commercial Court's final decision.

The judgment stated:

"Admittedly, Respondent No. 1 initiated arbitration proceedings... In view of the ongoing arbitration proceedings concerning the bank guarantee, it is imperative to maintain the existing position regarding the bank guarantee until the final outcome of the Section 9 arbitration petition."

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Final Decision and Implications

The Supreme Court disposed of the appeal without deciding on the substantial questions of law concerning the interplay between Section 37 of the Arbitration Act and Article 227 of the Constitution. The Court directed the parties to argue their case before the Commercial Court, which must deliver a final order on the Section 9 petition within eight weeks. Until then, the stay on the encashment of the bank guarantee will continue, provided Bansal Infra keeps it alive.

This decision underscores the judiciary's focus on facilitating the arbitral process while protecting the interests of all parties through interim measures. By leaving the complex jurisdictional question open, the Court has allowed for a resolution on merits in the primary forum, reinforcing the supportive, rather than supervisory, role of courts in arbitration.