JUDGMENT
Shiv Narayan Dhingra, J.
1. This petition under Section 9 of the Arbitration and Conciliation Act, 1996 (for short, ?the Act?) has been preferred by the petitioners with a prayer to restrain the respondents No. 1 and 2 from invoking a bank guarantee bearing No. 24/93361/07 dt. 11.9.2007 and restraining the respondent No. 3 from making payment thereof till the adjudication and resolution of the disputes and differences as envisaged in the Agreement dated 18.7.2007 and an ex parte order is sought to the same effect.
2. The petitioners’ case is that the petitioners entered into a share purchase agreement with the respondent No. 1 on 18th July 2007. At the time of executing this agreement, the petitioners had also directed its banker to furnish a bank guarantee for a sum of Rs. 1.5 crore valid up to 10th March 2008 in favor of respondent No. 1. This bank guarantee was conditional bank guarantee and was executed in terms of Clause 3.5 of the Agreement. The bank guarantee was executed to secure negative balance, if any that may be discovered in terms of share-purchase agreement towards the petitioners. It is submitted that the petitioners got prepared financial statement in consultation with respondent No. 2 and its Chartered Accountant, on the basis of accounts and record, in exclusive possession of the respondent No. 2. The financial statement was sent by the petitioner to respondent No. 1 and 2 on 27th November 2007 for finalization. In terms of Clause 3.4 of share purchase agreement, the respondent No. 1 could review the financial statement in order to confirm the shareholders’ fund of the company. The calculations of shareholders funds was to become binding within 20 days after receipt of financial statements. The respondent No. 1 vide a letter dated 15th December 2007 sought extension of these 20 days period. The time period was extended up to 24th December 2007. The respondent No. 2 deputed one Mr. Nicolas and thereafter one Mr. Oliver to India in December 2007 and January 2008 for scrutinizing and finalizing the financial statement. The petitioner incorporated all changes as sought by the respondents No. 1 and
3. However, the representatives/officials of respondent chose to raise frivolous issues regarding financial statement and had been delaying making of payment to the petitioners of excess amount payable to him, which worked out to be Rs. 9.6133 crores. Instead of making the payments of the amount dues, the respondents threatened to invoke the bank guarantee on false grounds. Hence, the instant petition.
4. It is settled law that the bank guarantee is an independent contract between bank and the beneficiary of the guarantee. The Courts have to be loath in granting injunction restraining the realization of the bank guarantee except in the situation where a fraud was played in obtaining the bank guarantee which vitiated the very acceptance of such guarantee and the beneficiary wanted to take advantage of the fraud. Secondly, where the encashment of bank guarantee would result in irreparable harm and injustice to one of the parties concerned.
5. Hon’ble Supreme Court in Dwarikesh Sugar Industries Limited v. Prem Heavy Engineering Works (P) Ltd. and Another observed as under:
21. Numerous decisions of this Court rendered over a span of nearly two decades have laid down and reiterated the principles which the courts must apply while considering the question whether to grant and injunction which has the effect of restraining the encashment of a bank guarantee. We do not think it necessary to burden this judgment by referring to all of them. Some of the more recent pronouncements on this point where the earlier decisions have been considered and reiterated are Svenska Handelsbanken v. Indian Charge Chrome, Larsen and Toubro Ltd. v. Maharashtra SEB, Hindustan Steel Workers Construction Ltd. v. G.S. Atwal and Co. (Engineers) (P) Ltd. and U.P. State Sugar Corporation v. Sumac International Ltd. The general principle which has been laid down by this Court has been summarised in the case of U.P. State Sugar Corpn. as follows: (SCC p. 574, para 12)
The law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take the advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country.
Dealing with the question of fraud it has been held that fraud has to be an established fraud. The following observations of Sir John Donaldson, M.R. in Bolivinter Oil SA v. Chase Manhattan Bank are apposite:
…The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear, both as to the fact of fraud and as to the bank’s knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank’s credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the bank to have it discharged.
The aforesaid passage was approved and followed by this Court in U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. .
22. The second exception to the rule of granting injunction, i.e. the resulting of irretrievable injury, has to be such a circumstance which would make it impossible for the guarantor to reimburse himself, if he ultimately succeeds. This will have to be decisively established and it must be proved to the satisfaction of the Court that there would be no possibility whatsoever of the recovery of the amount from the beneficiary, by way of restitution.
6. In the present case in order to see the nature of bank guarantee, the Court will have to consider the provisions of the bank guarantee relied upon by the applicant. Clauses 1, 3, 4 and 5 of the bank guarantee read as under:
1. We, Punjab and Sind Bank having our head office at Rajendra Place, New Delhi do hereby guarantee and undertake to pay to the Company immediately on demand, any or, all monies payable by the Vendors to the extent of Rs. 1.5 crore (Rupees one crore fifty lakhs only) (hereinafter referred to as the Guarantee) as aforesaid at any time up to six calendar months from the Effective Date i.e. up to 10th March, 2008 without any demur, reservation, contest, recourse or protest or dispute and/or without any reference to the Vendor. Any such demand made by the Company on the Bank shall be conclusive and binding notwithstanding any difference between the Purchaser and the Vendor or any dispute pending before any court, tribunal, arbitrator or any other authority. We agree that the Guarantee shall be irrevocable and shall continue to be enforceable till the Company discharges this Guarantee or the expiry of the period of six months from the Effective Date, whichever is earlier.
3. The Bank shall not be relieved of its obligation under this Guarantee by any exercise by the Purchaser of its liberty with reference to the matters aforesaid or any of them or by reason of any other act or forbearance or other acts or omission or commission on the part of the Purchaser or any other indulgence shown by the Purchaser or by other matter or thing whatsoever which under law would but for this provision have the effect of relieving the Bank.
4. The Bank agrees that the Company at its option shall be entitled to enforce this Guarantee against the Bank as a principal debtor, in the first instance without proceeding against the Vendor and notwithstanding any security or other guarantee that the Purchaser may have in relation to the Vendor’s liabilities. This Guarantee is a continuing guarantee and shall apply to all the obligations guaranteed hereunder whenever arising and shall endure to the benefit of the successors and/or assigns of the Company and be binding upon the Bank and its successors and permitted assigns.
5. The Bank hereby agrees that, without the concurrence of the Bank, the Purchaser and the Vendors shall be at liberty to vary, alter or modify the terms and conditions of the SPA. The Bank agrees that the liability under this Guarantee shall in no manner be affected by any such variations, alterations, modifications, waivers, dispensations with or release of security, and that no further consent of the Bank is required for giving effect to any such variation, alteration, modification, waiver, dispensation with, or release of security.
7. It is clear from the above clauses of the Bank Guarantee that the bank guarantee executed by the bank in favor of the beneficiary was an unconditional bank guarantee and the payment of the amount was to be made by the Bank without any demur, reservation, contest or protest and without reference to the petitioner. The demand made by the beneficiary was to be considered as a conclusive and binding notwithstanding any difference between the petitioner and respondent No. 1.
8. Counsel for the petitioners relied upon the recital in the bank guarantee which provides:
Mr. Baldev Singh Dhiman domiciled and residing at N-163, Panchshila Park, New Delhi-110017, India has been identified as the Key Shareholder of the Company and has agreed to furnish an irrevocable bank guarantee from the Bank in favor of the Company for a sum of Rs. 1.50 Crore (Rupees one crore fifty lakhs only) for a period of six months from the date of issuance of this guarantee. The purpose of the guarantee is to cover the negative balance payment, if any, arrived at on the basis of calculations as derived as per formula specified under Clause 3.5 of the SPA.
9. It is argued by learned Counsel for the petitioner that this bank guarantee was conditional and the condition was that it was furnished to cover the negative balance under the share purchase agreement and in case there was no negative balance according to the applicant, the bank guarantee could not be invoked. I consider that this argument of learned Counsel for the petitioner is far-stretched. The recital only shows at whose instance and for what purpose the bank guarantee was being given by the Bank. This is normal that a bank guarantee contains recitals as to at whose instance and why bank guarantee was given. The reason why the bank executed the bank guarantee and on whose instance the bank gave the bank guarantee do not make the bank guarantee a conditional bank guarantee. The conditions of Bank Guarantee are to be read in covenants of the bank guarantee by which the bank bound itself to do certain acts in favor of the beneficiary. If in the material part of the bank guarantee, there is a condition that when bank guarantee is invoked, the beneficiary has to satisfy certain conditions, then and then only the bank guarantee is a conditional one.
10. This is not a case where irreparable loss can be caused to the petitioner by invoking the bank guarantee, the beneficiary would only get a specific amount which, according to the beneficiary, was shortfall or negative balance. In case, the petitioner is able to show before the Arbitrator that there was no negative balance, the Arbitrator can always pass an award in favor of the petitioner for payment of the entire amount along with the necessary interest.
11. In view of my above discussion, I consider that this petition is not maintainable and is liable to be dismissed. It is accordingly dismissed as such. No orders as to costs.