Bank guarantees are central to most construction and engineering, procurement and construction (EPC) turnkey project contracts, whether securing a mobilisation advance, performance obligation or retention amount. Employers have long treated encashment of such guarantees as conclusive.
But the Supreme Court decided otherwise in National Projects Construction Corporation v Ishvakoo (India) (2026).
In a petition under section 9 of the Arbitration and Conciliation Act, 1996, the court allowed a contractor who lost the arbitration to seek deposit of the encashed money while its challenge to the award was pending. The court reinforced that section 9 exists to preserve money or property in dispute; it does not reward successful parties.
Advance guarantee encashment lacks counterclaim
The employer gave the contractor a mobilisation advance under an infrastructure works contract, secured by bank guarantees.
During arbitration under a section 9 application, the parties agreed before Delhi High Court that the contractor would maintain the guarantees and the employer would not invoke them until arbitration concluded and any award became enforceable.
The employer could invoke the guarantees if arbitration established its entitlement to recover the advance.
Section 9 relief despite loss
When the contractor failed to keep the guarantees alive, the employer invoked them and recovered the entire advance. Significantly, the employer never filed a counterclaim to recover the advance, and the tribunal never held that the employer was entitled to retain the amount recovered.
The contractor challenged the award under section 34 of the abovementioned arbitration act and sought, under section 9, return of the amount equivalent to the bank guarantees. Delhi High Court agreed, and the employer appealed.
Relying on Home Care Retail Marts Private v Haresh N Sanghavi, the Supreme Court reiterated that section 9 of the arbitration act is available even to an unsuccessful party because it preserves the arbitration’s subject matter.
Award debtor clears higher threshold
However, the court also cautioned that an award debtor has a higher threshold to cross; section 9 may be invoked only in rare and compelling circumstances by an unsuccessful party.
The Supreme Court noted facts that made the case exceptional: under the parties’ arrangement, the employer could encash the guarantee only after the arbitration confirmed entitlement to the advance (this confirmation never came); the employer filed no counterclaim for the advance; the award did not find misuse of the advance; and the arbitrator, unaware the guarantees had been encashed, wrote the award as if they were still live.
The result was that the employer held INR35 million (USD363,400) without an arbitral basis. The court found this to cause irreparable prejudice and unjust enrichment and upheld the deposit order.
Post-award section 9 safeguards clarified
The court noted that the usual interim-relief test under Essar House Private v Arcelor Mittal Nippon Steel India – namely, prima facie case, balance of convenience and irreparable harm – still applied, but at a higher post-award threshold.
Without the earlier section 9 order tying retention to an arbitral finding, the contractor would have relied on these usual tests and the missing counterclaim. As a result, the earlier order gave the court a concrete basis for its conclusion.
Guidance on guarantee encashment disputes
More broadly, the judgment brings clear, useful guidance and a possible way forward in bank guarantee encashment disputes. It helps employers, contractors and arbitrators alike when a section 9 order specifies that the right to encash or retain guarantee depends on the ultimate adjudication. That puts all parties on clear notice that a substantive claim over that money must be raised and decided, not left unaddressed.
For EPC, infrastructure and construction businesses, the practical lesson is that encashing a guarantee does not close the matter.
Substantively deciding the bank guarantee issue in arbitration brings clarity and finality to the award, rather than leaving the question to surface in court years later.
Contracts can also specify the circumstances in which a guarantee may be encashed. Where they do, adjudication by the tribunal becomes unavoidable, since the contract itself makes the right to encash or retain the money conditional on that finding.