JUDGMENT
Vijender Jain, J.
1. This is an application filed under Section 41(b) read with the Second Schedule of the Indian Arbitration Act, 1940. It has been stated in the application that the petitioner has filed the petition under Section 20 of the Indian Arbitration Act in which disputes which has arisen inter-se between the parties have been mentioned. Mr. Kanwal Narain, learned counsel for the petitioner, has vehemently argued that the contract was performed diligently and any delay on account of the performance of contract was on account of non-handing over of the site and other delays caused by the defendant. For that reason he has prayed that this court may grant an injunction against the respondent from encashing the bank guarantee till the disputes between the parties are resolved. This Court on 23.12.1991 granted ex parte order restraining the respondent not to encash the bank guarantee No. 80/87. In support of his arguments, Mr. Kanwal Narain has cited a decision of a Single Judge of this court in the case of Nangia Construction (India) Pvt. Ltd. v. National Buildings Construction Corporation Ltd (Rep. as 1990 (2) Delhi Lawyer 403). On the basis of the reasoning, Counsel has argued that a contract of bank guarantee is different than a letter of credit. He has further argued that in terms of Nangia Construction (India) Pvt. Ltd. case (supra) if any, clauses are invited in a contract of guarantee that will be hit by Section 23 of the Indian Contract Act. The next argument of the learned counsel for the petitioner in alternative is that court at this stage has to look at the prima facie consideration on the basis of material placed on record and the equities of the case and to see that no injustice is caused to the petitioner if bank guarantee is not encashed as far as respondent is concerned, his interest is safeguarded by keeping the bank guarantee till the disposal of the suit.
2. On the other hand, Mr. V. P. Singh, learned Senior Counsel for the respondent, has argued that there is a catena of decision that bank guarantee and letter of credit are to be treated on the same footing and bank in under an obligation to pay and encash the amount under the bank guarantee irrespective of the terms of contract, performance or non-performance of the contract. Mr. Singh has cited before me a Single Bench decision of this court in the case of Bhasin Associates Limited v. Hyundai Heavy Industries Co. Ltd and another (1991 (3) Delhi Lawyer 43). In this case D. P. Wadhwa, J. after taking note of Nangia Construction India Pvt. Ltd. (supra) discussed the law in relation to bank guarantee for its encashment and summarised the principle of invoking the bank guarantee in the following terms.
“1. A confirmed letter of credit and the bank guarantee stand on the same footing. The obligations assumed by the bank in a bank guarantee are irrevocable. Bank must honour its commitments according to the terms of the bank guarantee. A bank guarantee constitutes a bargain between the banker and creditor (seller in the case of letter of credit) which imposes on the banker an absolute obligation to pay.
2. An irrevocable letter of credit has a definite implication. It is independent of an unqualified by the contract of sale or other underlying transactions. These observations a fortiori apply to a bank guarantee because on the bank guarantees revolve many of the internal trade and transactions in a country. Otherwise the very purpose of bank guarantees would be negatived and the fabric of trading operation will get jeopardised.
3. The contractual duty owned by an issuing or confirming bank to the buyer to honour the credit notified by him on presentation of apparently conforming documents by the seller is matched by a corresponding contractual liability on the part of the bank to the seller to pay him the amount of the credit on presentation of the documents. This principle is same in the case of bank guarantee.
4. Bank is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contractual obligations or not; nor with the question whether supplier is in default or not. The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exceptions being (1) when there is a clear fraud by one of the parties of which the bank has notice or the bank guarantee has been obtained by misrepresentation or concealment of material facts, and (2) injunction can be granted to prevent irretrievable injustice but only in very special and exceptional cases and, of course, depending upon the facts of that case.
5. Also a bank guarantee providing for payment on demand without proof or conditions is in the nature of a promissory note payable on demand and where the plaintiff has not established fraud on the part of the defendant, the bank is required to honour the bank guarantee on demand made by the defendant.
6. It is not material if the injunction sought is against the bank or the party invoking the bank guarantee as the net effect would be restraining the bank from performing the bank guarantee. That cannot be done. One cannot do indirectly what one is not free to do directly. Frame of the suit by not impleading the bank cannot make any difference in the position of law.
7. If the bank guarantee is invoked and on that account the person giving the bank guarantee is ruined he is not without remedy. He is not to suffer any injustice which is irretrievable. He can sue the party invoking wrongly the bank guarantee for damages.
8. When it is said that in the presence of “special equities” arising from a particular situation which might entitle the party on whose behalf bank guarantee is given to an injunction restraining the bank in performance of bank guarantee, the words “special equities” only mean a situation where the injunction is sought to prevent injustice which is irretrievable.
9. The view that in a given case the matter will still be referred to arbitration and in those circumstances if bank guarantee was permitted to be encashed, it would be improper, cannot be sustained in view of the well settle principles on which the bank guarantees are operated.
10. It is not the rule that there should be a prima facie case. In order to restrain the operation either of irrevocable letter of credit or of bank guarantee, there should be serious dispute and there should be a good prima facie case of fraud and special equities to prevent irretrievable injustice between the parties. The courts usually refrain from granting injunction to restrain the performance of the contractual obligations arising out of a letter of credit or a bank guarantee.”
3. An appeal was preferred against the order of learned Single Judge and the Division Bench of this court in Bhasin Associate Limited v. Hyundai Heavy Industries Company Ltd. and another (Rep. in 1991 (4) Delhi Lawyer (DB) 198), affirms the finding of the learned Single Judge. Similar view has been taken by Arun Kumar, J. in the case of M/s. V.K. Constructions Works Ltd. v. Bank of Rajasthan and another . In this case the observations referred to by learned counsel for the petitioner has been taken note of by the learned Single Judge and the same has been negatived. Mr. Singh has further cited the case of Swenska Handelsbanken v. M/s. Indian Charge Chrome and others ((1994) 1 Supreme Court Cases 502), and argued that the Supreme Court has carved out only two exceptions when an injunction can be issued in relation to the enforcement of the bank guarantee. The Supreme Court in Swenska Handelsbanken case (supra) has laid down that if the party alleges fraud or if an irretrievable injury is caused only in these circumstances an injunction may be issued for encashment of the bank guarantee. The irretrievable injury, which the Supreme Court has discussed, is defeated in the case of Itek Corporation v. The First National Bank of Boston etc. while summing up the discussion on the points urged before it, the Supreme Court held :
“The High Court was also in error in considering the question of balance of convenience. In law relating to bank guarantees, a party seeking injunction from encashing of bank guarantee by the suppliers has to show prima facie case of established fraud and an irretrievable injury. Irretrievable injury is of the nature as noticed in the case of Itek Corporation. Here there is no such problem. Once the plaintiff is able to establish fraud against the suppliers or suppliers-cum-lenders and obtains any decree for damages or diminution in price, there is no problem for effecting recoveries in a friendly country where the bankers and the suppliers are located. Nothing has been pointed out to show that the decree passed by the Indian courts could not be executable in Sweden.”
4. Following the principles laid down by the Supreme Court as well as reasoning given in the case of Bhasin Associate Ltd. (supra), and M/s. V.K. Constructions Works Ltd. (supra), I think that it is not a fit case to grant injunction. I would not like to advert on the merits of the case as it will affect the case of either party.
5. Application is dismissed with no order as to costs.
S. 3983 of 1991
6. This is a petition under Section 20 of the Indian Arbitration Act. The parties agree that there is a valid and subsisting arbitration clause. It is mutually agreed by the parties that Hon’ble Mr. Justice S. S. Chadha, a retired Judge of this court be appointed as Arbitrator for adjudicating the disputes raised by the petitioner for arbitration. The respondent will also be at liberty to file any counter-claims before the said Arbitrator. The Arbitrator shall enter into reference within one month from passing of this order. After entering into reference, the Arbitrator shall make the award within four months. The fee of the Arbitrator will be decided by the Arbitrator himself.
7. Petition is disposed in terms of the aforesaid order.