Bank Guarantee & Arbitration: A Legal Analysis

Juhi Bansal, LL.M (2023-24), Institute of Law, NIRMA University

ABSTRACT

Bank guarantees play a vital role in arbitration proceedings as they serve as a form of financial protection to ensure that parties fulfill their contractual commitments. This study delves into the importance of bank guarantees in arbitration, illustrating their relevance through case studies such as the Skypower Solar India Pvt Ltd v. Sterling and Wilson International FZE case. The research also explores legal viewpoints on when and how bank guarantees can be invoked or restrained, particularly under Section 9 of the Arbitration & Conciliation Act, 1996. It discusses the different types of bank guarantees, such as conditional and unconditional, with a specific focus on their usage in construction contracts. The research also delves into the distinctions between performance guarantees, advance payment guarantees, and retention guarantees, outlining the specific criteria for invoking each type. It has been observed that bank guarantees may be withheld in instances of substantial fraud or to prevent irreparable harm, as highlighted in landmark cases such as Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co. and N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. & Ors. The criteria for court intervention are strict, indicating a reluctance to intervene unless there is clear evidence of fraud or a potential for significant injustice. The paper concludes that while bank guarantees are typically upheld for arbitration purposes, legal precedents dictate when injunctions may be warranted. This approach aims to maintain a fair balance between upholding financial agreements and safeguarding parties from potential fraud or harm in commercial transactions.