Despite well-settled principles and repeated reaffirmation by the courts, the law on bank guarantees has reached a point where judicial non-interference has become, or at least appears to have become, mechanical. While the doctrine that an unconditional bank guarantee must be honoured regardless of underlying disputes is grounded in commercial prudence, its rigid application has led to manifest unfairness even in deserving cases. The rare exceptions of fraud, irretrievable injustice, and special equities have been so narrowly interpreted or inconsistently applied that they have lost any practical significance. It is time to revisit and reset the doctrine!
Fraud is the first exception. It must be "egregious" vitiating the very foundation of the bank guarantee, and such fraud must be known to the bank. Courts routinely cite this exception but almost never find it satisfied. In real-world disputes, a beneficiary may fabricate defaults, misrepresent compliance, or act contrary to clear contractual terms and milestones. Yet courts often dismiss such allegations unless there is documentary evidence of fraud that is unequivocal and admitted. This insistence on an impossibly high standard deprives the exception of its teeth. A strong prima facie case of fraud, supported by credible evidence, ought to be enough to justify interim relief. The current threshold makes the exception illusory.
Then there is the exception of irretrievable injustice. In U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., (1988) 1 SCC 174, the Supreme Court described it as a situation where permitting invocation would cause such harm that restitution is impossible. But how should courts interpret "irretrievable"? It is no answer to say that money can be recovered later. Anyone who has enforced a civil decree in India knows how hollow that assurance rings. When invocation causes blacklisting, termination of other contracts, reputational harm, or financial collapse, the injustice is indeed irretrievable. Recent decisions reaffirm that unless there is evidence that recovery is factually or legally impossible, the courts will not interfere. But in our country, recovery through civil decrees is a lengthy and uncertain process. Shouldn’t that practical reality be part of the equation?
Then comes the most misunderstood exception, a creature called “special equities”. Initially treated as a subset of irretrievable injustice, the term gained independent footing after the Supreme Court’s judgment in Standard Chartered Bank v. Heavy Engineering Corp. Ltd., 2019 SCC OnLine SC 1638. There, the Court appeared to suggest that special equities could independently justify an injunction. This created further confusion. Litigants began invoking broad notions of fairness or commercial hardship under the label of special equities. The Delhi High Court, in Hindustan Construction Co. Ltd. v. NHPC Ltd., 2023 SCC OnLine Del 819, accepted this formulation, granting relief where the contractor had already obtained arbitral awards neutralising the beneficiary’s claims. The Court found that invocation at that stage would amount to unjust enrichment and would negate the effect of the awards.
However, more recent decisions have pushed back. In Director General, Project Varsha v. Navayuga-Van Oord JV, 2024 SCC OnLine Del 6459 (“Project Varsha”), the Delhi High Court reaffirmed that special equities must partake the character of irretrievable injustice. The Court quashed an arbitral tribunal’s order restraining invocation, holding that the tribunal had stretched the doctrine too far. It stressed that special equities are not a separate ground but must be tethered to circumstances that render restitution impossible. In more recent decisions, the Delhi High Court has denied injunctions, reiterating that neither economic hardship nor pending contractual disputes constitute grounds for relief.
Even the Supreme Court, in its recent decision in M/s Jindal Steel & Power Ltd. v. Bansal Infra Projects Pvt. Ltd., Civil Appeal No. 6413 of 2025, reaffirmed the narrow scope of interference. The bench noted that courts should refrain from granting injunctions except in cases of egregious fraud or irretrievable injustice. While the Court maintained a limited interim injunction in that case to preserve the status quo, it did so without relaxing the threshold bar.
This brings us to the central problem. Despite these settled principles, injunctions are rarely granted. Courts have become overly cautious, preferring not to interfere even when invocation is patently abusive. One consequence is that beneficiaries have become emboldened. Guarantees are invoked mechanically, often to pressure the other side into settlement or to extract performance that was never contractually due. It is not uncommon for the party that has itself defaulted to terminate the contract without basis, and then invoke the bank guarantee under the guise of performance failure. In such a case, surely, the invocation deserves scrutiny.
Bank guarantees are not intended to be weapons. They are meant to back legitimate obligations, not to reward contractual misconduct. When a beneficiary has itself defaulted, or where invocation flies in the face of the underlying contract, courts must step in. The fear that interference will undermine commercial certainty is overstated. A calibrated approach—one that weeds out frivolous pleas while granting relief in truly exceptional cases is the need of the hour.
So where do we go from here?
First, the Supreme Court should settle the confusion. The divergence between various views needs resolution. There must be an authoritative pronouncement on whether special equities are an independent ground or merely another formulation of irretrievable harm. The Delhi High Court's Division Bench in CRSC Research & Design Institute v. Dedicated Freight Corridor Corporation of India Ltd., 2020 SCC OnLine Del 1632, has taken the view that special equities are not a standalone exception. That view aligns with commercial logic and doctrinal consistency.
Second, the courts should rearticulate what constitutes irretrievable injustice. The test should reflect real-world consequences, not abstract notions of restitution. If invocation causes business collapse, cancellation of linked contracts, or regulatory consequences that cannot be undone, the injury is irretrievable, even if the money is technically recoverable.
Third, the concept of special equities should be retained but interpreted narrowly. Relief should be granted only where the facts are so extraordinary that non-interference would defeat the very basis of justice. For example, where the contractor has a binding award in its favour, or where the invocation is contrary to the contract’s express milestones, special equities may apply. But mere inconvenience or a pending dispute should not suffice.
The High Court’s reasoning in Project Varsha rightly emphasised that equity cannot override autonomy without extraordinary justification. The doctrine must serve commerce, not obstruct it. But it must also prevent unjust enrichment, coercion, and arbitrary invocation.
If equity is to mean anything, it must be capable of flexing in rare but deserving cases. Otherwise, the exception becomes a formality. The present state of the law—where courts are bound by precedent but pulled by facts—serves neither justice nor commercial certainty. A doctrinal reset is overdue.
None of this calls for routine injunctions. Far from it. But the law must give courts the tools to intervene when faced with abuse. A principled approach that preserves the sanctity of bank guarantees while allowing relief in rare cases is the need of the hour. Courts must not abdicate their role as guardians of fairness in the name of autonomy. They must act, not out of sympathy, but out of duty—a duty to ensure that the exceptions remain meaningful.
The law on bank guarantees has stood the test of time. But for it to remain relevant, it must evolve. The answer is not dilution of the established principles but refinement and clarity. And above all, the recognition that justice, too, is part of commercial certainty.
About the author: Saurabh Seth is an advocate practicing in the Delhi High Court and heads Chambers of Saurabh Seth.
The author would like to acknowledge the research and valuable inputs from Shantanu Agarwal, Neelam Deol, Abhiroop Rathore, Abhinav Tyagi, Manas Arora and Ananya Garg, Advocates.
The views expressed by the author are personal and should not be construed as legal advise.
Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.
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