A bank guarantee is paid on a compliant demand, and a court stops payment only for a clear case of fraud, irretrievable injustice or special equities

An unconditional bank guarantee is a contract between the issuing bank and the beneficiary, separate from the contract it secures, so a demand that follows its terms obliges the bank to pay without weighing the dispute behind it. A court restrains payment only for a clear case of fraud, irretrievable injustice or special equities, as the Supreme Court restated in Standard Chartered Bank v. Heavy Engineering Corporation Ltd. (Civil Appeal No. 9288 of 2019, 18 December 2019). The restraint is sought under Order XXXIX rules 1 and 2 of the Code of Civil Procedure, 1908 or section 9 of the Arbitration and Conciliation Act, 1996. A suit for compensation for breach falls on its words under Article 55 of the Limitation Act, 1963, which allows three years, and a paper guarantee executed in Karnataka bears stamp duty of INR 300.

Why is a bank guarantee a contract of its own?

Section 126 of the Indian Contract Act, 1872 defines a contract of guarantee as a contract to perform the promise, or discharge the liability, of a third person in case of his default. The giver is the surety, the person whose default is covered is the principal debtor, and the person to whom it is given is the creditor. Section 127 provides that anything done, or any promise made, for the benefit of the principal debtor may be a sufficient consideration to the surety for giving the guarantee, and section 129 calls a guarantee extending to a series of transactions a continuing guarantee.

Section 128 makes the surety's liability co-extensive with that of the principal debtor, unless the contract provides otherwise. The Supreme Court in Standard Chartered Bank, quoting the three-Judge Bench decision in Ansal Engineering Projects Ltd. v. Tehri Hydro Development Corporation Ltd., stated that a bank guarantee is an independent and distinct contract between the bank and the beneficiary, not qualified by the underlying transaction or by the validity of the primary contract. In a performance guarantee the bank is the surety, the contractor the principal debtor and the employer the creditor.

What must a demand say, and what must the bank do?

The Court cited Hindustan Construction Co. Ltd. v. State of Bihar for the point that an invocation not in accordance with the terms of the guarantee is bad. What a demand must contain therefore comes from the guarantee: usually a written demand, delivered as the guarantee directs, within the validity or claim period, for no more than the guaranteed sum, with any certificate the guarantee requires, such as a declaration of default.

In Standard Chartered Bank the first letter of invocation named no condition and was held inadequate, but later letters setting out the losses satisfied the guarantee. Once a demand complies, the Court held, the bank may not decide whether the invocation was justified.

Chapter XVI of the Reserve Bank of India (Commercial Banks - Credit Facilities) Directions, 2025, which carries forward the Reserve Bank of India (Non-Fund Based Credit Facilities) Directions, 2025 of 6 August 2025, says in paragraph 404 that a guarantee shall in general be irrevocable, unconditional and incontrovertible, with a clear mechanism for honouring it without demur. Paragraph 406 requires the bank's policy to address invocation, settlement, claim period and tenor. Paragraph 407 requires the bank to honour an invoked guarantee in accordance with its terms unless a court order restrains it. Paragraphs 404, 406 and 407 were read in the text updated as on 15 July 2026. Clause 4 of the August 2025 Directions brought them into force from 1 April 2026, or an earlier date a bank chose under its internal policy, for new and renewed facilities. Earlier facilities stayed under the existing instructions, last consolidated for scheduled commercial banks, up to 31 March 2025, in the Reserve Bank's Master Circular on Guarantees and Co-acceptances of 1 April 2025. Its paragraph 2.5.8 allowed a refusal only at a fairly senior level and only where payment would not be rightful under the guarantee.

When will a court restrain payment?

The Court in Standard Chartered Bank stated, as the settled position, that the dispute between the beneficiary and the party at whose instance the guarantee was given is immaterial, and that the exceptions arise when there is a clear case of fraud, irretrievable injustice or special equities. It reproduced Gujarat Maritime Board v. Larsen and Toubro Infrastructure Development Projects Ltd.: courts are slow to restrain realisation, a contractual dispute is no ground, and the grounds are fraud of an egregious nature that vitiates the very foundation of the guarantee and of which the beneficiary seeks to take advantage, or irretrievable harm or injustice if an unconditional guarantee is encashed. The submissions recorded in the judgment describe the first exception as fraud of which the bank has notice. The extract from Ansal adds that fraud or special equity must be pleaded and prima facie established by strong evidence as a triable issue.

A demand for a sum the guarantee does not cover, or made after a claim period that section 28 allows, raises a different point. The invocation is then not in terms of the guarantee, and the bank may decline on that footing without either exception.

How is the restraint sought?

In a suit, Order XXXIX rule 1 of the Code of Civil Procedure, 1908 lets a court grant a temporary injunction where property in dispute is in danger of being wasted, damaged, alienated or wrongfully sold in execution, or the defendant threatens to dispose of property to defraud creditors or to dispossess or injure the plaintiff. Rule 2 lets a plaintiff suing to restrain a breach of contract apply at any time after the suit begins, before or after judgment, on terms as to duration, accounts or security.

Where the contract has an arbitration clause, section 9(1) of the Arbitration and Conciliation Act, 1996 lets a party apply to a court, before or during arbitral proceedings or at any time after the award but before it is enforced under section 36, for an interim measure such as securing the amount in dispute or an interim injunction. Under section 9(2), if the court orders a measure before the proceedings begin, they must commence within ninety days of the order or further time the court allows. Under section 9(3), once the tribunal is constituted the court entertains the application only if the remedy under section 17 may not be efficacious.

On either route the court examines the grounds above, and paragraph 407 yields to an order.

What do the claim period and limitation add?

A guarantee commonly carries an expiry date, up to which the demand must be lodged, and a claim period after expiry for a default within the validity. Each is a clause, read with section 28 of the Indian Contract Act, 1872. Section 28(b) makes void, to that extent, an agreement that extinguishes rights or discharges a party from liability on the expiry of a specified period so as to restrict enforcement. Exception 3 saves such a term in a bank's guarantee if the period is not less than one year from the date of occurring or non-occurring of a specified event.

Article 55 of the Schedule to the Limitation Act, 1963 prescribes three years for compensation for breach of any contract not specially provided for, running from the breach, or where it continues from its cessation. A beneficiary suing the bank for refusing a valid demand, or a contractor suing for loss from a wrongful invocation, is on the words within it, so far as the suit is for compensation.

What does stamp duty come to in Karnataka?

Section 3 of the Karnataka Stamp Act, 1957 charges the Schedule instruments executed in Karnataka and, under clause (b), those executed outside it that relate to a matter in the State and are received there. Article 56, inserted by Karnataka Act 4 of 2024 with effect from 3 February 2024, fixes INR 300 for a paper bank guarantee and INR 200 for an electronic one, whatever the sum guaranteed.

What does the arithmetic look like?

An illustration. The parties, amounts and dates are hypothetical. The guarantee is assumed to require payment within five working days of a compliant demand, with no holiday in that week.

Contract between Employer E and Contractor C                INR 50 crore
Performance guarantee issued by a bank in Bengaluru,
executed on paper in Bengaluru, 14 April 2027                INR 5 crore
  Stamp duty, Article 56 (paper)                              INR 300
  Expiry                          31 March 2028 (Friday)
  Claim period of twelve months   ends 31 March 2029

Friday 24 March 2028      E's written demand reaches the bank a week
                          before expiry; it states the default,
                          claims INR 5 crore and encloses
                          the required certificate
Monday 27 March 2028      C files a suit with an Order XXXIX rules 1
                          and 2 application, or a section 9 petition
Tuesday 28 March 2028     Hearing; any order rests on fraud,
                          irretrievable injustice or special equities
Friday 31 March 2028      Fifth working day after the demand: last day
                          for the bank to pay if no order restrains it

If a section 9 order is made on 28 March 2028
  Arbitration must commence by           26 June 2028 (ninety days)
If the bank refuses payment on 31 March 2028
  E's suit, Article 55, three years      ends 31 March 2031
C's claim for a wrongful encashment paid on 31 March 2028
  Article 55, three years, assumed from payment
                                         ends 31 March 2031

The demand is within the validity, so the claim period matters only if it is defective: a fresh compliant demand lodged by 31 March 2029 would be in time on the assumed clause. The stamp duty is the same INR 300 for any sum guaranteed.

What remains unsettled?

Four points.

Whether special equities are a ground of their own. Paragraph 23 lists the three in one phrase. The Gujarat Maritime extract names two grounds, and the Ansal extract ties special equity to the prevention of irretrievable injustice. The judgment does not say whether they stand alone.

How much notice the bank must have of a fraud before it may refuse. Counsel's submission speaks of fraud of which the bank has notice, but the Court's conclusion in paragraph 23 does not repeat the words.

How Exception 3 to section 28 applies to a claim period that runs from expiry. The Exception counts one year from a specified event and does not say whether expiry, or the default, is that event.

Whether a beneficiary's suit for the sum guaranteed is a suit for compensation under Article 55. The article speaks of compensation, and a claim for a fixed sum is not plainly one.