A significant interim order by the Bombay High Court has clarified that a mutually agreed compensation under a commercial contract, documented in writing and acted upon, cannot be unilaterally revoked by the defendant on the basis of internal audit objections. The court restrained the encashment of bank guarantees pending final adjudication, reinforcing the sanctity of concluded contractual adjustments in infrastructure projects.
Background & Facts
The Dispute
The dispute arises from a sub-concessionaire agreement dated 28.02.2020 between IRB MP Expressway Private Limited (plaintiff) and Mumbai Pune Expressway Limited (defendant) for the tolling, operation, maintenance, and eventual transfer of the Yashvantrao Chavan Expressway under a public-private partnership model. The plaintiff paid an upfront sub-concessionaire fee of Rs. 6,500 crores and a deferred fee of Rs. 1,762 crores, totalling Rs. 8,262 crores, in exchange for the right to collect tolls from 01.03.2020 to 30.04.2030.
Key Facts
- The plaintiff commenced toll collection on 01.03.2020 as per the agreement.
- On 12.03.2020, the plaintiff notified the defendant of a Force Majeure Event due to the onset of the COVID-19 pandemic.
- The Government of Maharashtra imposed a complete lockdown from 21.03.2020 to 31.03.2020; the Government of India extended it from 26.03.2020 to 19.04.2020, resulting in a total 25-day suspension of toll collection.
- On 18.03.2020, the plaintiff invoked Article 27.5 of the agreement, claiming a Non-Political Force Majeure Event.
- On 09.04.2020, the defendant rejected the claim as invalid under Article 27.5.
- On 14.04.2020, the plaintiff reiterated its claim.
- On 20.04.2020, the defendant issued a written offer to compensate the plaintiff for the 25-day loss by adjusting the amount against the interest payable on the upfront fee, with detailed calculation methodology.
- On 21.04.2020, the plaintiff accepted the offer in writing.
- On 18.06.2020, the defendant declared 18.06.2020 as the appointed date, confirming satisfaction of payment obligations after adjustment of the Rs. 71,06,98,942/- compensation.
- In October 2022, the Accountant General (Audit-II), Maharashtra, raised an audit query challenging the compensation.
- On 04.09.2025, the defendant demanded repayment of Rs. 71,06,98,942/- with 9.5% interest within 7 days, threatening to encash bank guarantees.
- The plaintiff filed the suit on 13.02.2025 seeking a declaration that the agreement is valid and subsisting, and an injunction against encashment.
Procedural History
- 28.02.2020: Sub-concessionaire agreement executed.
- 12.03.2020: First Force Majeure notice issued by plaintiff.
- 21.03.2020 - 19.04.2020: Complete lockdown period.
- 09.04.2020: Defendant rejects Force Majeure claim.
- 20.04.2020: Defendant offers compensation in writing.
- 21.04.2020: Plaintiff accepts offer in writing.
- 18.06.2020: Defendant declares appointed date, confirming adjustment of compensation.
- 23.10.2020: Plaintiff requests monthly extension of concession period.
- 22.07.2021: Plaintiff claims additional 22.24 days extension due to second wave.
- 31.10.2022: Defendant informs plaintiff of CAG audit query.
- 08.11.2022: Plaintiff disputes demand for repayment.
- 06.01.2023: Defendant invokes mediation under Clause 37.
- 24.08.2023: Mediation meeting held; no settlement reached.
- 13.10.2023: Independent engineer reports no amicable settlement.
- 04.09.2025: Defendant issues final demand for Rs. 71.06 crores + interest.
- 11.09.2025: Plaintiff responds, reiterating validity of agreement.
- 25.11.2025: Defendant confirms revocation of compensation based on CAG.
- 13.02.2025: Suit filed before Bombay High Court.
- 23.02.2026: Interim application reserved.
- 08.06.2026: Judgment pronounced.
Relief Sought
The plaintiff seeks an interim injunction restraining the defendant from recovering Rs. 1,09,96,23,389/- (comprising Rs. 71,06,98,942/- compensation + interest) by encashing bank guarantees or otherwise, pending final adjudication of the suit.
The Legal Issue
The central question was whether an unconditional bank guarantee can be invoked by a beneficiary to recover an amount for which a written, accepted, and acted-upon compensation agreement has already been made under the principal contract, where the revocation is based solely on an internal audit observation not binding on the plaintiff.
Arguments Presented
For the Appellant/Petitioner
The plaintiff argued that the compensation of Rs. 71,06,98,942/- was not a mere offer but a concluded contract evidenced by the defendant’s letter dated 20.04.2020 and the plaintiff’s acceptance on 21.04.2020. The defendant subsequently acted upon this agreement by declaring 18.06.2020 as the appointed date, confirming payment obligations were satisfied after adjustment. The plaintiff relied on Hindustan Construction Co. Ltd. v. State of Bihar and Kkspun India Ltd. v. OFB Tech Pvt. Ltd. to argue that courts must prevent irretrievable injustice when a party is deprived of a contractual benefit already granted. The plaintiff emphasized that the CAG’s observations are internal, non-binding, and cannot override a mutual written agreement.
For the Respondent/State
The defendant contended that the bank guarantee is unconditional and irrevocable under Article 9.1 of the agreement and governed by the principles in U.P. State Sugar Corporation v. Sumac International Ltd. and Mahatma Gandhi Sahakari Sakhar Karkhana v. National Heavy Engineering Coop. Ltd. It argued that the lockdown constituted a Non-Political Force Majeure Event under Article 27.5, for which no compensation is permissible. The defendant further relied on Vinitec Electronics v. HCL Infosystems to assert that the mere reference to the contract in the guarantee does not make it conditional. It claimed that the plaintiff’s claim was invalid under the agreement and that the CAG’s audit findings justified reversal of the compensation.
The Court's Analysis
The Court undertook a meticulous review of the correspondence between the parties, focusing on the letters dated 20.04.2020 and 21.04.2020. It held that the defendant’s offer was clear, specific, and unconditional: it proposed a precise calculation method, stated that the compensation was "final and in full response," and required only written acceptance. The plaintiff’s acceptance was unequivocal and acted upon by the defendant when it declared the appointed date on 18.06.2020, confirming satisfaction of payment obligations after adjustment.
"The defendant’s offer was not subject to any approval, nor was it contingent upon third-party audit clearance. It was a commercial decision made by the defendant, accepted by the plaintiff, and implemented by the defendant itself."
The Court distinguished the nature of the bank guarantee from the underlying contract. While acknowledging that bank guarantees are typically enforceable without proof of breach (U.P. State Sugar Corporation), the Court emphasized the exception for irretrievable injustice. It found that the plaintiff’s case met this threshold: the defendant was attempting to recover an amount that had already been contractually adjusted and accounted for in the declaration of the appointed date. To permit encashment now would effectively nullify a binding agreement and deprive the plaintiff of a benefit it had already received and relied upon.
The Court rejected the defendant’s reliance on CAG observations, noting that the plaintiff was not a party to the audit process and that the CAG’s findings, even if valid, could not override a private contractual arrangement. The Court further held that the defendant’s attempt to revoke the compensation after two years, without any prior notice or opportunity to the plaintiff, amounted to an abuse of process.
The Court also noted that the plaintiff’s alternative prayer for extension of the concession period was not ripe for adjudication at the interim stage, but the core issue of the agreed compensation was clear and established.
The Verdict
The plaintiff succeeded. The Court granted an interim injunction restraining the defendant from recovering Rs. 1,09,96,23,389/- by encashing the bank guarantees or otherwise, pending final disposal of the suit. The injunction specifically covers the amount of Rs. 71,06,98,942/- (the agreed compensation) plus interest at 9.5% from 04.09.2025, until further order. The Court directed that the injunction shall remain in force until the final adjudication of the suit, and the defendant shall not take any step to invoke the guarantees referenced in Exhibit "GG" to the plaint.
What This Means For Similar Cases
Written Compensation Agreements Override Audit Objections
- Practitioners must argue that any mutual, documented, and implemented adjustment under a commercial contract cannot be unilaterally reversed by third-party audit findings.
- Internal audit reports are not binding on private parties absent contractual incorporation.
- Courts will protect parties who have acted in reliance on written agreements, even if those agreements are later challenged.
Bank Guarantees Are Not Absolute - Irretrievable Injustice Is a Valid Ground
- The fraud or irretrievable injustice exception to unconditional bank guarantee enforcement is not theoretical - it applies where a party has already received and acted upon a contractual benefit.
- The burden is on the party seeking injunction to show concrete, quantifiable prejudice, which the plaintiff did by demonstrating the adjustment was reflected in the appointed date declaration.
- Merely alleging a dispute is insufficient; the party must show that enforcement would nullify a concluded transaction.
Contractual Interpretation Trumps Technical Classification of Force Majeure
- Whether a lockdown is "political" or "non-political" under a force majeure clause becomes irrelevant if the parties subsequently negotiate and agree on compensation.
- Courts will enforce the substance of the agreement over the form of the contractual clause.
- Parties should document all mutual adjustments in writing, even if initially disputed, as they may later serve as the basis for equitable relief.
