The Delhi High Court ruled that a bank guarantee is an independent contract, enforceable solely by its terms and distinct from any underlying agreements or disputes.
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NEW DELHI: The Delhi High Court, in its landmark judgment dated 24th July 2025 in Kotak Mahindra Bank Ltd. v. Union of India & Ors., has emphatically reaffirmed the legal doctrine that a bank guarantee (BG) is an independent and autonomous contract, entirely distinct from the underlying agreements between other parties.
This ruling underscores the long-settled principle that when a bank issues an unconditional and irrevocable BG, it must honor the commitment based solely on the terms contained in that guarantee, regardless of any external arrangements or disputes.
Background
Kotak Mahindra Bank had issued five unconditional and irrevocable bank guarantees on behalf of a contractor, Sunil Hitech Engineers Ltd., to secure mobilization advances provided by the Ministry of Road Transport and Highways (MoRTH) for highway development projects in Bihar.
Later, MoRTH invoked these guarantees when the contractor defaulted. Kotak Bank contested the invocation, arguing that the underlying agreements, particularly the arrangement that project payments would flow through an escrow account held with Kotak, were violated, thus discharging the bank from liability.
It cited Sections 133 and 139 of the Indian Contract Act, 1872, which provide for the discharge of a surety if contract terms are varied without the surety’s consent or if the creditor impairs the surety’s eventual remedy.
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High Court’s Findings
Justice Jyoti Singh dismissed the bank’s suit and held,
“A bank guarantee is an independent contract from the underlying agreements… To test the validity of invocation of a BG, one can only look at the terms of the BG and not the underlying or main contract.”
The Delhi High Court made several critical observations while deciding the case. It held that irrevocable bank guarantees (BGs) are sacrosanct, emphasizing that Kotak Mahindra Bank had unconditionally undertaken to pay the guaranteed amount “without any demur, reservation, recourse, contest or protest.”
The Court noted that the escrow arrangement or requirement of a No Objection Certificate (NOC) from the bank was not mentioned in the BGs, rendering such arguments irrelevant to its enforcement.
Furthermore, it relied on the Supreme Court’s ruling in Himadri Chemicals v. Coal Tar Refining Co. to reiterate that courts may interfere with BG invocation only in cases of egregious fraud or irretrievable injustice, neither of which was present in this case.
Finally, the Court clarified that side agreements or external understandings cannot override the express terms of an unconditional BG, as doing so would impermissibly convert an unconditional BG into a conditional one, contrary to settled legal principles.
The Court dismissed Kotak’s claim for a refund of Rs 48.77 crores paid under the BGs.
“Liberty is, however, reserved to the Plaintiff to pursue its claims before the Liquidator, which are stated to be pending and/or to take recourse to such legal remedies as may be available to it against Defendant No.3.”
Case Title: Kotak Mahindra Bank Vs Union of India
CS(COMM) 497/2019
READ JUDGMENT HERE
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