Can an Audit Query Justify Stopping a Bank Guarantee? The Bombay High Court Rules on Irretrievable Injustice and the Finality of COVID-19 Settlement Agreements in Large-Scale Infrastructure Disputes.
Case: IRB MP Expressway Private Limited v. Mumbai Pune Expressway Limited
Court: Bombay High Court
Date: 08-06-2026
Law: Indian Contract Act, Code of Civil Procedure, Commercial Courts Act.
In the high-stakes world of infrastructure and Public-Private Partnerships (PPP), the bank guarantee is often treated as a "sacrosanct" instrument. The prevailing wisdom in Indian jurisprudence is that an unconditional bank guarantee must be honored by the bank regardless of any pending disputes between the parties. However, a recent judgment by the Bombay High Court in IRB MP Expressway Private Limited v. Mumbai Pune Expressway Limited provides a masterclass in the exceptions to this rule, specifically when a settled agreement is threatened by the sudden intervention of an internal government audit.
The Illusion of the Absolute Bank Guarantee
The most striking takeaway from this judgment is the court's willingness to pierce the veil of an "unconditional" bank guarantee. Traditionally, courts only intervene in cases of egregious fraud. However, this ruling reinforces the second, often neglected exception: "irretrievable injustice". The court found that when a party attempts to recover funds that were already settled through a concluded contract, the autonomy of the bank guarantee cannot be used as a shield for such recovery.
"The courts should be slow to grant an injunction restraining the realisation of an unconditional bank guarantee. However, there is no absolute bar in protecting the guarantor in the event of a fraud of an egregious nature... and/or where allowing the encashment... would result in irretrievable harm or injustice to the party concerned."
The Finality of Settlement vs. Audit Objections
Perhaps the most counter-intuitive aspect of this case is the role of the Accountant General (AG). The defendant attempted to revoke a compensation agreement—previously settled in writing—simply because an internal audit query challenged the validity of that compensation. The court held that a bilateral contract, once concluded and acted upon, cannot be unilaterally dismantled by one party citing an internal communication to which the other party was not even a signatory.
This is a vital protection for private contractors. It establishes that "audit risk" is an internal matter for government bodies and cannot be used to retroactively change the commercial terms of a settled agreement without a full trial.
Force Majeure as a Concluded Fact
The dispute originated from the 25-day COVID-19 lockdown in 2020. While many cases have debated whether the pandemic constitutes a Force Majeure event, this judgment highlights a different angle: the "concluded fact". Because the defendant had already issued a letter in June 2020 recording satisfaction of payment obligations after adjusting for the lockdown loss, they were effectively estopped from reopening the issue years later.
The court noted that the defendant did not just agree to the compensation in principle but "accordingly acted upon it", adjusting payments and declaring the "appointed date" for the project. This level of performance makes the agreement binding, regardless of later changes in heart or external audit pressures.
The "Irretrievable Injustice" Threshold
For legal practitioners, the judgment clarifies what constitutes "substantial evidence" of irretrievable harm. It wasn't just the threat of losing money; it was the fact that the defendant was using a performance security (intended to ensure the work is done) to recover a specific, disputed debt that had already been settled. The court found that allowing the defendant to bypass the trial process and simply "grab" the money via a bank guarantee would cause a prejudice that could not be easily undone.
"The plea of irretrievable injustice and harm is not vague in the present case and is supported by substantial evidence of the parties’ written agreement to compensate the plaintiff for the loss of revenue during the first lockdown."
A Forward-Looking Shield for Infrastructure Players
This judgment serves as a constructive reminder that while the autonomy of bank guarantees is a cornerstone of commerce, it is not a license for arbitrary recovery. For the infrastructure sector, it provides a necessary shield against "retroactive contractual revisionism" driven by administrative audits. It underscores that once a commercial settlement is reached and acted upon, it gains a legal life of its own, independent of the internal bureaucratic queries that may follow.