Bank Guarantee Dispute in Arbitration: Key Legal Insights

Introduction

In a significant decision concerning the scope of interim judicial intervention in arbitration-related disputes, the Court in Jindal Steel and Power Ltd. & Anr. v. Bansal Infra Projects Pvt. Ltd. & Ors. [Civil Appeal No. 6413 of 2025, decided on May 7, 2025], examined whether an order refusing ex parte interim relief under Section 9 of the Arbitration and Conciliation Act, 1996, could be challenged through a writ petition under Article 227 of the Constitution.

The ruling provides critical guidance on the appealability of orders under Section 9, the invocation of bank guarantees in arbitration disputes, and the court’s discretionary power in commercial matters involving construction contracts and arbitration clauses.

Background and Factual Matrix

The dispute arose from a construction contract dated January 24, 2022, between Jindal Steel and Power Ltd. (JSPL) and Bansal Infra Projects Pvt. Ltd., for constructing 400 flats at “Sharmik Vihar,” valued at approximately ₹44 crore. An advance of ₹3.74 crore was paid by JSPL, secured by an unconditional bank guarantee furnished by Bansal Infra.

Due to alleged continuous lapses in project quality, delayed performance, and violation of contractual conditions, JSPL issued a termination notice and threatened to encash the bank guarantee unless ₹4.12 crore was refunded by April 30, 2024.

In response, Bansal Infra filed a Section 9 petition under the Arbitration Act, accompanied by an application for ex parte interim injunction to restrain encashment of the bank guarantee. The Commercial Court, Cuttack, refused to grant ex parte relief, prompting Bansal Infra to approach the Orissa High Court under Article 227.

Issues Before the Court

1. Whether an ex parte order passed under Order XXXIX Rule 3 CPC in Section 9 proceedings is appealable under Section 37 of the Arbitration Act.
   
2. Whether the High Court erred in exercising its supervisory jurisdiction under Article 227 where an alternate statutory remedy was available.
   
3. Whether the High Court could stay encashment of a bank guarantee pending disposal of the Section 9 petition.
   
4. Whether dual proceedings (arbitration invocation and court action) violate the spirit of the Arbitration Act.
   

Arguments by the Appellants (JSPL)

• The impugned order refusing ex parte relief amounted to a refusal under Section 9 and was thus appealable under Section 37(1)(b) of the Arbitration Act.
  
• The High Court should not have entertained a writ petition under Article 227, bypassing the remedy of statutory appeal.
  
• The Commercial Court’s refusal to grant ex parte relief did not constitute any perversity or miscarriage of justice .
  
• Cited decisions, including :
  
  • Hindustan Construction Co. v. State of Bihar (1999) 8 SCC 436: emphasized that unconditional bank guarantees must be honoured unless fraud or irretrievable injustice is established.
    
• Urged the Court to curb parallel litigation and uphold the integrity of arbitration as a standalone remedy .
  

Arguments by the Respondents (Bansal Infra)

• The Section 9 petition was partly heard, and the Commercial Court’s refusal of ex parte relief was interim, not final.
  
• Section 37(1)(b) permits appeals only against orders “granting or refusing any measure,” which should be interpreted as final orders under Section 9.
  
• Given no appeal or revision was maintainable under the Commercial Courts Act, 2015, the writ petition was justified.
  
• There were “special equities” in Bansal Infra’s favour; encashment would cause irretrievable injustice.
  
• The bank guarantee had already been extended to June 30, 2025, showing no prejudice to JSPL.
  

Reasoning and Findings

The Court noted the following:

• Interim orders under Order XXXIX Rule 3 CPC do not constitute final determinations under Section 9 and therefore may not attract appealability under Section 37.
  
• The Arbitration and Conciliation Act, 1996, though a self-contained code, does not explicitly prohibit writ jurisdiction, particularly where no effective remedy exists.
  
• The High Court’s intervention was confined to preserving the subject matter — i.e., the bank guarantee — until the Commercial Court decided the Section 9 petition.
  
• It reiterated principles from Hindustan Construction Co. and U.P. Coop. Federation v. Singh Consultants that courts should interfere with encashment of bank guarantees only where fraud or injustice is evident.
  
• However, since the arbitration process was active and the Commercial Court was seized of the matter, the Court declined to adjudicate the legal issues raised and focused on preserving the interim balance between the parties
  

Final Order

The Court disposed of the appeal with the following directions :

• The Commercial Court shall decide the Section 9 petition within eight weeks.
  
• Until disposal, the bank guarantee shall remain valid and uninvoked.
  
• The legal questions regarding Section 37’s scope and Article 227 jurisdiction were left open for future consideration.

FAQs:

1. What is the time limit to file an appeal with the NCLAT in an insolvency case under the IBC?

If you want to appeal an order from the National Company Law Tribunal (NCLT) in a case under the Insolvency and Bankruptcy Code (IBC), you must file your appeal with the National Company Law Appellate Tribunal (NCLAT) within 30 days from the date of that order. This deadline is specified in Section 61 of the IBC.

2. Can the NCLAT excuse a delay if I miss the 30-day deadline for filing an insolvency appeal? How much delay can be excused?

Yes, the NCLAT can excuse a delay in filing an appeal, but only for a very limited additional period. If you can show there was a “sufficient cause” for not filing within the initial 30 days, the NCLAT has the power to allow an appeal filed within a further 15 days. This means the NCLAT can only excuse a delay of up to 15 days beyond the original 30-day deadline, making the absolute maximum period 45 days from the date of the NCLT order to file your appeal.

3. Does the general law that allows courts to excuse delays (Section 5 of the Limitation Act) apply to insolvency appeals before the NCLAT?

No, Section 5 of the Limitation Act, 1963, which gives courts general power to condone delays if “sufficient cause” is shown, does not apply to appeals filed under Section 61 of the Insolvency and Bankruptcy Code (IBC). The IBC is a special law with its own specific provisions for timelines. The NCLAT’s power to condone delay in IBC appeals is strictly limited to the 15 days explicitly mentioned in Section 61(2) of the IBC.

4. Why are the deadlines for filing appeals in insolvency cases under the IBC so strict?

The Insolvency and Bankruptcy Code (IBC) is designed to resolve insolvency cases quickly and efficiently. Strict timelines are a core feature of the IBC to ensure certainty and prevent delays in the insolvency resolution process. The legislative intent is to ensure that these matters are concluded in a time-bound manner. Allowing extensions beyond the statutorily prescribed limits would undermine this objective because time is considered crucial in these statutory appeals.

5. What is the consequence if the NCLAT excuses a delay in an insolvency appeal beyond the maximum 45-day period allowed by the IBC?

If the NCLAT condones a delay beyond the total period of 45 days (which is the initial 30 days plus the additional 15 days grantable for sufficient cause) allowed under Section 61(2) of the Insolvency and Bankruptcy Code, such an order would be considered “ultra vires”. This means the NCLAT acted beyond its legal power and authority. The NCLAT has no power to condone delays beyond the period stipulated in the statute. Therefore, an order condoning delay beyond this limit can be set aside.

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