Time to Revisit the Law on Bank Guarantees: A Call for Balance

Despite years of clarity and consistent judgments, Indian courts today seem to apply the law on bank guarantees in a rigid and mechanical manner. While the principle that an unconditional bank guarantee must be honoured is rooted in commercial logic, its blind application has caused unfairness—even in deserving cases.

⚖️ The Problem with “Unquestioned Autonomy”

Bank guarantees are supposed to protect legitimate obligations, not become tools of coercion or pressure. Yet, courts rarely interfere, even when the invocation of a guarantee appears abusive. Over time, the exceptions—fraud, irretrievable injustice, and special equities—have become too narrow or inconsistently applied. It's time to rethink and refine these exceptions.

1. Fraud: A Toothless Exception?

Courts say fraud must be “egregious”—so serious that it shakes the very foundation of the guarantee—and known to the bank. But in practice, almost no case satisfies this high standard.

Even when the beneficiary misrepresents compliance or fabricates defaults, relief is denied unless there’s clear, documented, and admitted evidence. This makes it nearly impossible to stop an abusive invocation.

👉 Suggestion: A strong prima facie case of fraud, backed by credible evidence, should be enough for temporary relief. Otherwise, the exception remains meaningless.

2. Irretrievable Injustice: More than JustMoney

The law says injunctions can be granted when the damage caused by invocation cannot be undone. But courts often argue that money can be recovered later through a civil suit. In India, though, enforcing such decrees is slow and uncertain.

Consider this: If invocation results in blacklisting, cancellation of other contracts, reputational harm, or financial collapse—can that really be "recovered" later?

👉 Suggestion: Courts must recognise real-world consequences while evaluating irretrievable harm, not just theoretical recoverability.

3. Special Equities: A Misunderstood Ground:-

Originally seen as part of irretrievable injustice, special equities got separate attention in Standard Chartered Bank v. HEC Ltd., 2019. Later, in Hindustan Construction Co. v. NHPC Ltd. (2023), the Delhi High Court granted relief where arbitral awards already favoured the contractor.

However, in Project Varsha (2024), the same court pushed back, saying special equities must still result in irretrievable injustice. Economic hardship or pending disputes don't qualify.

👉 Suggestion: Special equities should stay—but must be narrowly applied. Relief should be rare and based on extraordinary facts, like final arbitral awards or clear breaches of contract terms.

4. A System Tilted Towards Beneficiaries:-

With courts hesitant to interfere, some beneficiaries misuse guarantees to pressure the opposite party—sometimes even when they themselves defaulted. This leads to unjust enrichment and violates the very spirit of commercial fairness.

🛠️ 5. What Needs to Change?

Here’s a roadmap for reform:

• ✅ Clear Supreme Court ruling on whether special equities are a separate exception or just a part of irretrievable injustice.

• ✅ Update the test for irretrievable harm—recognise situations like blacklisting, collapse of operations, or other irreversible outcomes.

• ✅ Refine special equities—use it only in exceptional cases, where enforcing the guarantee would be unjust despite the contract.

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Final Word: Flex, Don’t Break the Law

The law must evolve with changing realities. The answer is not routine interference, but a principled, limited approach that upholds both justice and commercial certainty.

Bank guarantees should protect against genuine default—not reward bad faith. Courts must uphold fairness, not just autonomy.