Unconditional Bank Guarantee Can Be Invoked Despite Contract Termination Dispute: Delhi High Court Reiterates

The Delhi High Court has reiterated that an unconditional performance bank guarantee can be invoked even if the contractor disputes the legality of the contract's termination, an issue the court said must be decided in arbitration.

A single-judge bench of Justice Jasmeet Singh relied on precedents set by the apex court to hold that it cannot go into such questions while deciding a petition under Section 9 of the Arbitration and Conciliation Act.

The Court clarified that it cannot go into the legality of termination at the interim stage. “This Court today in a Section 9 petition cannot adjudicate whether the termination of the Contract was right or wrong or whether the respondent No. 2 was entitled to recover the overburden charges already paid, as such issues touch the merit of the matter and are for the Arbitral Tribunal to decide,” Justice Singh observed.

The dispute involved Black Gold Resources Private Limitada, a coal mining contractor at the Benga coal mine in Mozambique, and Minas de Benga Limitada, which operates the mine and is part of the same group as International Coal Ventures. The parties entered into a mining services contract in November 2017, which was later extended till August 2025.

Differences surfaced over alleged shortfalls in overburden removal. Payments for invoices raised between August and October 2024 were withheld. A default notice followed in November 2024. In March 2025, the contract was terminated, and the bank that had issued a USD 10.53 million performance bank guarantee was asked to encash it.

Black Gold approached the High Court seeking to stay both the termination and the invocation of the bank guarantee. It argued that the termination was illegal and that, under the contract, the guarantee could not be invoked unless the termination was valid. The company also claimed the invocation letter did not specify any breach and warned that encashment would push it into insolvency. The mine operator opposed the plea, saying the guarantee was unconditional and payable on demand.

Dismissing the petition, the court said it was bound by settled law on unconditional bank guarantees.

After examining the terms of the guarantee, the Court said, “A bare perusal of the recitals and terms of the PBG, as extracted above, show that it is an unconditional and irrevocable PBG. The recitals of the PBG itself states that it‟s the bank‟s duty to “irrevocably” and “unconditionally” pay the respondent on demand, without any requirement to establish breach by the petitioner. The PBG in unequivocal words states that any demand made by the respondent shall be conclusive, irrespective of any dispute pending between the parties before any court or tribunal or arbitration. ”

The court added that once the contract had been terminated, the beneficiary was entitled to invoke it. “Once the Contract had been terminated for breach (without commenting rightly or wrongly), the respondent No. 2 (Minas de Benga Limitada), in terms of the PBG, is entitled to encash the PBG,” the court said.

The court also rejected the plea that financial distress justified stopping the invocation.

“Irretrievable injustice, as an exception to the rule of non-interference with invocation of unconditional bank guarantee, is not fulfilled by mere pleading of loss or financial hardship,” the court said.

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