The Punjab and Haryana High Court has clarified that performance bank guarantees cannot be encashed by public authorities merely on the assertion of disputed contractual claims, especially where an arbitration clause exists. The judgment reinforces the principle that writ jurisdiction under Articles 226 and 227 is not a substitute for contractual remedies, and parties must exhaust agreed dispute resolution mechanisms before seeking judicial intervention.
Background & Facts
The Dispute
The petitioner, M/s Ridhi Sidhi Electrical Engg. & Const. Company, a proprietorship concern, was awarded turnkey contracts by the respondent-DHBVNL for the execution of 33KV sub-stations. The petitioner completed the work under the contracts in 2013 and submitted bills for payment. Despite this, the respondent did not issue a no-dues certificate or release the performance security in the form of bank guarantees. In December 2022, the respondent attempted to encash the bank guarantees, citing alleged deficiencies in work under one of the contracts. The petitioner contends that the work was fully completed and that the respondent’s attempt to encash the guarantees is an abuse of process to recover dues from unrelated contracts.
Key Facts
- The petitioner was awarded the contract under CWP No. 29664 of 2022 in August 2013 with a contractual value of Rs. 1.97 Crore
- The respondent made a payment of Rs. 1.64 Crore by December 2013
- The petitioner did not submit a final bill, and no formal measurement or final acceptance of work was conducted
- The petitioner continuously renewed the bank guarantees as requested by the respondent
- In view of the COVID-19 pandemic, the bank guarantee amount was reduced and a revised guarantee was furnished
- On 30.12.2022, the respondent attempted to invoke the bank guarantee
- The respondent is attempting to adjust the bank guarantee of one contract against alleged defaults in another contract
- No arbitration proceedings have been initiated by the petitioner
Procedural History
- August 2013: Work order issued by DHBVNL to the petitioner
- December 2013: Respondent paid Rs. 1.64 Crore; petitioner completed work
- 2014 - 2022: Petitioner renewed bank guarantees periodically at respondent’s request
- 2020 - 2022: Bank guarantee amount reduced due to pandemic-related adjustments
- 30.12.2022: Respondent attempted to encash bank guarantee
- 2022: Four writ petitions (CWP Nos. 29662 - 29665 of 2022) filed before the High Court seeking restraint on encashment and release of bank guarantees
- 25.03.2026: Judgment delivered by Justice Jagmohan Bansal
The Parties' Positions
For the Petitioner: The work was completed in 2013, bills were submitted, and the respondent’s delay in processing payments does not justify encashment of bank guarantees. The respondent is using the guarantee as a tool to recover unrelated dues and is acting in bad faith.
For the Respondent: There is a genuine dispute regarding completion of work, absence of final measurement, and non-submission of final bills. The matter is governed by an arbitration clause in the contract, and the petitioner has bypassed the agreed dispute resolution mechanism.
Relief Sought
The petitioner sought:
- A direction to the respondents to release the performance bank guarantees
- A prohibition against encashment of the bank guarantees
- A declaration that the respondent cannot adjust guarantees across unrelated contracts
The Legal Issue
Can a public authority encash a performance bank guarantee under a contract where there is a disputed claim regarding completion of work, and an arbitration clause exists, without first allowing the parties to resolve the dispute through arbitration?
Arguments Presented
For the Petitioner
The petitioner argued that the work was completed in 2013 and that the respondent’s failure to issue a no-dues certificate or conduct final measurement does not create a valid ground for encashment. The continuous renewal of bank guarantees over nine years, including adjustments during the pandemic, demonstrated acquiescence. The respondent’s attempt to encash the guarantee in 2022, after a decade of inaction, was mala fide and amounted to harassment. The petitioner contended that the writ court has jurisdiction to prevent abuse of process and protect legitimate rights.
For the Respondent
The respondent argued that the petitioner never submitted a final bill or completed the formalities required under the contract. No measurement of work was conducted, and the payment of Rs. 1.64 Crore was only an interim payment. The contract contained a mandatory arbitration clause, and the petitioner’s failure to invoke it bars judicial intervention under writ jurisdiction. The dispute over completion of work is factual and complex, and cannot be adjudicated by the High Court in a writ petition.
The Court's Analysis
The Court acknowledged that the petitioner had completed the work and that the respondent had made partial payment. However, the absence of a final bill, measurement, or formal acceptance created a genuine dispute over the completion of contractual obligations. The Court emphasized that the presence of an arbitration clause in the agreement is a decisive factor.
"There is an arbitration clause and petitioner can very well invoke the same. Accordingly, the petitioner is relegated to alternative remedy of dispute resolution."
The Court held that writ jurisdiction under Articles 226 and 227 cannot be invoked to determine disputed questions of fact or to enforce contractual obligations where an alternative remedy exists. The Court further noted that the respondent’s attempt to encash the bank guarantee after nearly a decade of inaction, and while attempting to adjust guarantees across unrelated contracts, raised concerns of unfairness.
The Court balanced these competing interests by imposing a conditional restraint. It recognized that while the petitioner must pursue arbitration, the respondent should not be permitted to unilaterally encash the guarantee during the pendency of arbitration, especially given the long delay in asserting claims and the absence of any prior notice of default.
The Verdict
The petitions were disposed of with the following directions:
- The respondent shall not encash any of the performance bank guarantees until the appointment of an arbitrator
- The petitioner must initiate arbitration proceedings under the contract within 45 days from the date of judgment
- If arbitration is initiated, the respondent shall consider the period of pendency of the present writ petition and the fact that it itself has claimed the contract remains unresolved
- All pending miscellaneous applications are dismissed
What This Means For Similar Cases
Arbitration Clauses Override Writ Jurisdiction
- Practitioners must advise clients to strictly follow contractual dispute resolution mechanisms before approaching courts under Article 226
- Courts will not entertain writ petitions to enforce payment or release guarantees where arbitration is contractually mandated
- Failure to invoke arbitration may result in dismissal of writ petitions, even where the claim appears meritorious
Bank Guarantees Are Not Instruments of Coercion
-
Public authorities cannot use bank guarantees as leverage to recover disputed dues from unrelated contracts
-
Encashment of guarantees without prior notice or adjudication of default may be viewed as mala fide
-
Courts may impose conditional stays on encashment to prevent abuse, even while directing parties to arbitration
-
Always verify the presence and enforceability of arbitration clauses in public contracts before filing writ petitions
-
Where guarantees are involved, document all communications and renewals to establish acquiescence or delay
-
Advise clients to initiate arbitration promptly upon dispute arising to preserve rights and avoid prejudice
