JUDGMENT
D.P. Wadhwa, J.
1. In this petition under section 20 of the Indian Arbitration Act 1940 (for short “the Act”), an application (I.A. No. 3566 of 1990) was filed under section 41 read the provisions of the Second Schedule to the Act read with section 151 of the Code of Civil Procedure. By this application the petitioner sought restraint on the second respondent the Punjab National Bank, from releasing the amount of the bank guarantee given by it at the instance of the petitioner in favor of the first respondent. Since the second respondent the bank, is not a party to the arbitration agreement the petitioner and the first respondent this led to the filling of another application also under section 41 of the Act read with Order 39, rules 1 and 2 and section 151 of the Code of Civil Procedure it being I.A. No. 3600 of 1990. In this the petitioner sought restraint on the first respondent from encashing the aforesaid bank guarantee. Before notices could issue the first respondent appeared as it had filed a caveat under section 148 of the Code. Mr. Shanti Bhushan learned counsel for the first respondent stated that for the purpose of the decision for the first was not necessary to file any reply and that the matter could be argued on the basis of the records already before me.
2. I may briefly refer to the facts as enumerated in the petition. It appears that the first respondent invited tenders of certain civil construction work for its captive power plant to Anghul district Dhenkanal in the State of Orissa. The offer of the petitioner for work by letter of intent dated May 24, 1986. This was followed by a formal contract dated November 19, 1986. The value of the work awarded was Rs. 962 lakhs given by the Punjab National Bank the second respondent. This bank guarantee is in fact a composite bank guarantee and I will refer to the same in detail at a later stage. As the work progressed certain additional works were done by the petitioner and the value of the work stood enhanced from Rs. 962 to Rs. 1,141 lakhs.
3. The petitioner presented running bills for payment for the work done by it. It was paid up to the 58th running bill. The 59th bill is stated to be pending. It has received payment of the value of Rs. 1, 066.71 lakhs up to the 58th running bill. The gross value of the 59th running bill is stated to be Rs. 10 lakhs which amount the petitioner claims has not so far been released by the first respondent. Then the petitioner says that over and above the work under the agreement aforesaid it has done further works of the value of over Rs. 126 lakhs which according to the petitioner was to be paid by the first respondent as per actual expenses at the prevailing rates. The petitioner then claims a further sum of Rs. 23.40 lakhs which according in para 16 of the petition. Apart from these two amounts of Rs. 126 and Rs. 23.40 lakhs the petitioner claims yet another sum amounting to Rs. 96 lakhs on account of extended stay for over three years beyond December, 1986, to December, 1989, for carrying out the work. Under this head the petitioner claims expenses towards office establishment salary and wages of site staff, rental/hire charges of plant and machinery and equipment and administrative overheads. The petitioner then states that the first respondent is not paying anything which is lawfully due to the petitioner and instead raising a bogie of works having not been done and which the first respondent was saying would get done through a third agency at the risk and cost of the petitioner.
4. The petitioner admits that only a small amount of work of the value of Rs. 70,000 and Rs. 50,000 has to be done which it says that it is prepared to carry out but without admitting any liability and further states that this is more or less maintenance work and not the work not executed by the petitioner as alleged by the first respondent. The first respondent has demanded a sum of Rs. 1,17,00,000 from the petitioner by notice dated April 20, 1990, for alleged delay in execution of the work and has threatened to invoke the bank guarantee. According to the petitioner the bank guarantee is not an unconditional one and that the threatened action of the first respondent to invoke the same is nothing but a fraud as a means of unjust enrichment. The petitioner says that no loss or damage has been alleged to have been suffered by the first respondent. The mobilisation advance of Rs. 90 lakhs has since been fully adjusted in the running bills and this fact has, in fact, been admitted by Mr. Shanti Bhushan during the course of the arguments. There is thus no claim towards refund of any mobilisation advance and according to the petitioner the first respondent is claiming Rs. 70,000 for the “undone work” and delay penalties and is now threatening to encash the bank guarantee. A reference has been made to the arbitration clause in the general conditions of contract which constitutes the arbitration agreement between the parties. The petitioner claims to have a prime facie case and says that the balance of convenience is also in its favor, and if the bank guarantee is encashed the petitioner will suffer irreparable injury and the loss occasioned to him will be irretrievable and that its whole business will be ruined. Instead it claims that an amount more than the bank guarantee is due to it from the first respondent which the first respondent is alleged to be withholding illegally.
5. After referring to the case of the petitioner as above let me now set out the relevant terms of the bank guarantee. This bank guarantee is dated June 29, 1984. It refers to the letter of intent dated April 20, 1984, by which the offer of the petitioner was accepted by the first respondent of the total value of Rs. 9 crores. Then it states that a condition had been put on the petitioner that it would furnish a bank guarantee of Rs. 90 lakhs from a nationalised bank as security deposit for the period till expiry of the defect liability period and the petitioner has accepted this condition and further that the first respondent had agreed that the petitioner would be paid mobilisation advance of Rs. 90 lakhs on production of the bank guarantee of an equal value and such mobilisation advance was to be recovered at the rate of 10% of the value of the work executed and billed from each running account bill commencing with the first running account bill. The bank guarantee further recites that it has been agreed between the petitioner and the first respondent that there shall be one bank guarantee against both mobilisation advance and security deposit and that when the mobilisation advance and security deposit and that when the mobilisation advance paid to the petitioner by the first respondent is recovered periodically from the running account bills the guarantee against such amount of mobilisation advance so recovered shall be treated as guarantee towards security deposit of equal value. Further, that the bank guarantee shall operate against the full value of the security deposit when the mobilisation advance is fully recovered and shall be valid till the end of the defect liability period. (As noted above the whole of the mobilisation advance has since been recovered.)
6. The relevant operative portion of the bank guarantee reads as under :
“Now, therefore, in consideration of the mutual covenants and at the instance of the contractor, the surety hereby gives gives an irrevocable and unconditional guarantee to pay on first demand without demur to the owner a sum of Rs. 90,00,000 (rupees ninety lakhs only) in such manner as the owner may direct should the contractor or in the payment of any money due to the owner or in case the amount at 10% from the running bills of the contractor cannot be deducted by the owner towards the payment of mobilisation advance. The owner shall have the full liberty without reference to the surety and without affecting the guarantee to postpone for any time or from time to time the exercise of any of the powers and rights conferred on the owner under the contract with the contractor and/or to enforce from enforcing any powers or rights or by reason of time being given to the contractor and such postponment or forbearance would not have the effect of releasing the surety from its obligations under this deed. The right of the owner to recover a sum up to Rs. 90,00,000 (rupees ninety lakhs only) from the surety in the manner aforesaid will not be affected or suspended by reasons of the fact that any dispute or disputes has or have been raised by the contractor and/or that any dispute or disputes is or are pending before any officer tribunal or court.
The guarantee herein contained shall not be determined or affected by the liquidation or winding or winding up dissolution or change of constitution or insolvency of the contractor but shall in all respects and for all purposes be binding and operative until payment of all money due to the owner in respect of such liability or liabilities.”
7. The first respondent then wrote a letter dated May 1, 1990, to the second respondent invoking the bank guarantee in question. It was stated in the letter that the petitioner had failed to fulfilll its contractual obligations and had failed to execute the work in terms of the contract and further that it has committed default in performing the terms and conditions of the contract and also in paying the money due to the first respondent. It is also mentioned that besides that the petitioner was also liable to pay compensation for delay under the terms of the contract and that the amounts recoverable from the petitioner were far in excess of amounts covered under the bank guarantee and the second respondent was asked to pay the amount of Rs. 90,00,000 immediately. Before this letter invoking bank guarantee was sent to the second respondent, the first respondent also wrote a letter dated April 20, 1990, to the petitioner. In this it was pointed out that the petitioner failed to complete the work in all respects and portions of the work done by it were also found defective which had been notified to the petitioner had not accounted for the material issued to it by the first respondent and huge recoveries were outstanding against it in that regard. Huge advances were also stated to be outstanding against the petitioner by way of advances, material advance, direct labour payments made by the first respondent due to the default of the petitioner, rectification of work through other agencies at the risk and cost of the petitioner removal of surplus earth and debris and other defective works etc. The petitioner was also told that on account of its failure to complete the work within the stipulated period it had rendered itself liable for payment of compensation for delay in terms of the contract which worked out to 10% of the value of the contract. Reference in this letter was then made to various notices, reminders etc. sent to the petitioner and lastly it was then mentioned that the first respondent was left with no option but to terminate the contract. It threatened to get the balance work as well as the defective work executed at the risk and cost of the petitioner which it stated would be intimated to the petitioner in due course. Then lastly it was stated that without prejudice to the aforesaid rights of the first respondent it called upon the petitioner to pay a sum of Rs. 1,17,90,532 towards compensation for delay within April 30, 1990.
8. During the course of arguments, it was further pointed out that parties had agreed to put a ceiling on the liquidated damages to be claimed by the first respondent at 5% of the total contract price and not 10% as claimed now by the first respondent. This would, therefore, mean that clause 24.1 relating to compensation for delay, which is an under, would get modified :
“24.1 Time is the essence of the contract. In case the contractor fails to complete the work within the stipulated period, he shall be liable to pay the owner as compensation not in form of penalty an amount equal to 1% of the value of contract per week of the delay subject to a maximum of 10% of the value of the contract. The parties agree this is a genuine pre-estimate of the loss/damages which will be suffered on account of delay/breach on the part of the contractor and the said amount will be payable on demand without there being any proof of the actual loss or damages caused by such delay/breach.”
25. As I read the bank guarantee (which is now limited to a performance guarantee after the mobilisation advance has been recovered by the first respondent) it stipulates as under :
1. It is an irrevocable and unconditional guarantee to pay on first demand without demur to the first respondent a sum of Rs. 90 lakhs;
2. This would be so in vase the petitioner commits default (i) in performing any of the terms and conditions of the contract or (ii) in the payment of any money due to the first respondent; or (iii) in case the amount at the rate of 10% from the running bills of the petitioner cannot be deducted by the first respondent towards payment of mobilisation advance.
3. Any indulgence given by the first respondent to the petitioner in performance of the terms of the contract would not affect the bank guarantee in any way.
4. The right of the first respondent to recover a sum up to Rs. 90 lakhs in the aforesaid circumstances would not be affected or suspended by reason of the fact that any dispute or disputes has or have been raised by the petitioner and/or that any dispute is or are pending before any officer tribunal or court.
26. I also find that the letter dated May 1,5,1990, of the first respondent to the second respondent, the bank invoking the bank guarantee is in terms of the bank guarantee para 2 of this letter clearly asserts that the petitioner has failed to fulfill his contractual obligations and has failed to execute the work in terms of the contract, etc., and was also liable to pay compensation for delay under the terms of the contract. If that be so, then the second respondent under the terms of the bank guarantee which was given at the instance of the petitioner, has to pay on first demand without demur the amount of bank guarantee and that would be irrespective of the fact whether any dispute has been raised by the petitioner under the contract or whether any such dispute is pending before any officer, tribunal or court.
27. Mr. Arun Mohan, learned counsel for the petitioner however contended that since the bank guarantee in question was only a performance guarantee and the plant of the first respondent was functioning and earning profits and there were huge dues to the petitioner from first respondent and the work which admittedly was not done was so insignificant compared to the work already done by the petitioner and handed over to the first respondent that invoking of the bank guarantee was fraudulent and that the bank guarantee could not be invoked on vague and indefinite assertions pertaining to breach of the terms of the conditions of contract. He said that an irreparable loss would be caused to the petitioner if the bank guarantee was invoked and he further said that the balance of convenience was also in his favor. He said that since the first respondent had not filed any reply either to the petition under section 20 of the Arbitration Act or to the application seeking interim relief the averments made therein must be taken to be correct and in the circumstances therefore, he said that the bank guarantee could not be invoked. He said that the would keep the bank guarantee alive during the pendency of these proceedings.
28. Mr. Shanti Bhushan appearing for the first respondent, referred to the wording of the bank guarantee and the letter invoking the same. He said that there was no choice with the second respondent, the bank, except to pay in terms of the bank guarantee. Mr. Bhushan said that work. He said that it was always possible for a contractor to conjure disputes and that cannot thwart the encashment of the bank guarantee. Mr. Shanti Bhushan also said that this court would have no jurisdiction to entertain the present proceedings and in this connection he referred to the following clause of the general conditions of contract between the parties :
“Jurisdiction/Governing Laws :
(a) For all disputes arising out of this contract the jurisdiction shall lie under the jurisdiction of direct courts in the respective areas in the State of Orissa (India) only.
Governing Laws :
The contract shall be governed by and constructed according to the laws in force in India.”
9. According to Mr. Shanti Bhushan, the work was to be executed at Angul, district Dhenkanal in the State of Orissa and as such only the District Court there would have jurisdiction in the matter. In this connection, he relied upon a decision of the Supreme Court in A. B. C. Laminart Pvt. Ltd. v. A. P. Agencies . Mr. Shanti Bhushan also said that if invocation of the bank guarantee is stopped its whole purpose would be frustrated. Having agreed to the terms of the bank guarantee in terms thereof, the petitioner could not go back upon the same and rise a bogie of any money due to it from the first respondent or raise any dispute to stop the encashment of the bank guarantee. Mr. Bhushan said that the petitioner had no case and the balance of convenience was entirely in favor of the first respondent and it would be the first respondent who will suffer loss if stay is granted stopping the payment under the bank guarantee. Mr. Bhushan said that, in the circumstances of the case, the court has no jurisdiction in the matter. Admittedly, he said, the work was not executed within the stipulated period and was still not complete and further that the petitioner was granted extension from time to time and the last extension granted to complete the work was up to May, 1989, and thereafter, the petitioner again applied for extension up to September 30, 1989, which had yet not been granted.
10. Learned counsel for the parties then referred to a few reported decision on the question of encashment of the bank guarantee and the court’s jurisdiction to issue interim orders, but I will refer to only three of these decisions and these being. U.P. Co-operative Federation Ltd v. Singh Consultants and Engineers (P.) Ltd. , Siemens Ltd. v. South India Cements Ltd. [1989] 3 Delhi Lawyer 245, a judgment delivered by Sunanda Bhandare J., and Nangia Construction (India) Pvt. Ltd. v. National Buildings Construction Corporation Ltd. [1992] 73 Comp Case 701 (Delhi) I.A. No. 3945 of 1989, in Suit No. 1375-A of 1989 a judgment delivered by Mahinder Narain J. on April 23, 1990 (SC), Sabyasachi Mukharji J. (as His Lordship then was) discussed various principles relating to encashment of the bank guarantee and stated as under (at page 297) :
“On the basis of these principles I reiterate that commitments of banks must be honoured free from interference by the courts. Otherwise, trust in commerce, internal and international, would be irreparably damaged. It is only in exceptional cases, that is to say, in cases of fraud or in case of apprehension of irretrievable injustice that the court should interfere.”
11. In this case, there were two bank guarantees in favor of the U.P. Co- operative Federation Ltd. the appellant before the Supreme Court and these were to the effect that (i) the sole judge for deciding whether the seller had failed to fulfill the terms of the sale shall be the U.P. Co-operative Federation Ltd.; (ii) the guarantee was valid up to a certain period; (iii) claims, if any, must reach the bank in writing on or before the expiry date of the guarantee after which the bank would no longer be liable; (iv) the bank’s liability under the guarantee was limited to a certain amount; and (v) the guarantee was not to be revoked by the bank in any case before the expiry of its date without the written permission of the U.P. Co-operative Federation Ltd. When the U.P. Co-operative Federation Ltd. invoked the bank guarantees the respondent filed a petition under section 41 of the Arbitration Act, 1940 in the Court of the Civil Judge Lucknow praying for an order restraining the appellant U.P. Co-operative Federation Ltd. from Realizing and encashing the bank guarantees. The learned Civil Judge declined to issue any injunction and dismissed the application. Being aggrieved by this decision the respondent went up before the Allahabad High Court. The High Court allowed the revision petition holding that the invocation of the guarantees was illegal. The Supreme Court allowed the appeal of the U.P. Co-operative Federation Ltd. against the order of the Allahabad High Court and restored the order of the Civil Judge, Lucknow. In another para of the judgment Mukharji J. again observed that in order to restrain the operation either of an irrevocable letter of credit or of a confirmed letter of credit or of a bank guarantee, there should be a serious dispute and there should be a good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Otherwise the very purpose of bank guarantees would be negatived and the fabric of trading operation will get jeopardised. Jagannatha Shetty J. concurring with the opinion of Mukharji J. further observed that the sound banking system may, however, require more caution in the issuance of irrevocable documentary credits, and it would be for the banks to safeguard themselves by other means and generally not for the court to their rescue with injunctions unless there is established fraud.
12. Following this decision of the Supreme Court Bhandare J. in Siemens Ltd’s case [1989] 3 Delhi Lawyer 245 declined to grant any injunction. She observed as under :
“Thus, though in a case where the party seeks reference to arbitration, section 41 read with rule 2 of the Second Schedule of the Arbitration Act gives a power to the court to give protection to secure the amount in difference in the reference, ordinarily the court will refrain from granting injunction to restrain the performance of the contractual obligations arising out of a bank guarantee otherwise in every such case where a reference is sought parties will seek injunction against encashment of bank guarantees. This will frustrate the very purpose of commercial transaction like a bank guarantee”.
13. In that case, the guarantee stipulated for payment to the purchase on demand an amount of Rs. 18 lakhs payable by the supplier against any loss or damage that may be caused to or suffered by the purchaser on account of unsatisfactory performance of the equipment on commissioning and that the purchaser’s right to recover that amount of Rs. 18 lakhs from the guarantor would not be affected or suspended by reason of the fact that any dispute or disputes were pending before any officer, tribunal or court. Then Mahinder Narain J. in Nangia Construction (India) (P). Ltd’s, case [1992] 73 Comp Case 701 gave a lengthy judgment and referred to the provisions of sections 23 and 126 of the Contract Act (casting doubts on the validity of unconditional bank guarantees) and to article 141 of the Constitution. In this case, the bank guarantee was furnished by the bank to back contractor of the principal contractor. Mahinder Narain J. relying on a Division Bench decision of this court in Jainsons Clothing Corporation v. State Trading Corporation of India Ltd. [1990] 68 Comp Case 526 (Delhi); [1986] Rajdhani Law Reporter 566 was also of the view that inasmuch as the guarantee executed by the principal contractor had not been invoked by the client it would not be right to permit the encashment of the bank guarantee furnished by the “back to back” contractor of the principal contractor. The learned judge also held in the facts and circumstances before him, that petitioners had established a prima facie case in their favor, the balance of convenience also lay in their favor and that in case the injunction was not granted and the money was taken away irreparable loss would be suffered by the petitioners inasmuch as more than a crore of rupees would be taken away by the person who had, prima facie, been less than honest, and might be even fraudulent in its dealing with the petitioner and the State of Haryana. He, therefore, granted injunction restraining the encashment of the bank guarantee and at the same time directed that the bank guarantee be kept alive till the final disposal of the suit.
14. Mr. Arun Mohan, learned counsel for the petitioner, in reply tried to distinguish the aforesaid decisions, especially the decision of the Supreme Court and said that U.P. Co-operative Federation Ltd. was the sole Judge for invoking the bank guarantee which he said was not the case before me. He said the clause regarding jurisdiction referred to above was vague and indefinite and that this would not exclude the jurisdiction of the Delhi High Court. I may note that except for this clause it is admitted by Mr. Shanti Bhushan, that this court would have jurisdiction in this matter as part of the cause of action did arise in Delhi. Prima facie, it does appear to me that the clause regarding jurisdiction is not very specific and to an extent the submission of Mr. Arun Mohan appears to be correct.
15. In the instant case, as was before the Supreme Court in U.P. Co- operative Federation Ltd.’s case [1989] 65 Comp Case 283, I am of the opinion that there is no fraud involved and no question of irretrievable injustice is involved. The argument that in case the money under the bank guarantee is taken away be the first respondent then an irreparable loss will be caused to the petitioner, would then in every case where there is a bank guarantee. Equities have to be balanced. In case ultimately it is found that no money was due to the first respondent and the bank guarantee was wrongly encashed, the petitioner is not without remedy. No argument has been addressed before me on the question of section 126 of the Contract Act or as to the validity of the bank guarantee and no such question, therefore, arises before me as was before Mahinder Narain J. Rather, as noted in earlier part of this order it was contended that the bank guarantee was not unconditional. At this stage itself I may note another statement of Shetty J. in U.P. Co-operative Federation Ltd.’s case [1989] 65 Comp Case 283 where he said that the basic nature of the case related to the obligations assumed by the bank under the guarantee given to U.P. Co-operative Federation Ltd. If under the law the bank cannot be prevented by the respondent from honouring the credit guarantees the U.P. Co-operative Federation Ltd. also could not be restrained from invoking the guarantees. The Hon’ble judge said that what applies to the bank must equally apply to U.P Co-operative Federation Ltd. and further that the frame of the suit by not impleading the bank could not make any difference in the position of law, and further that equally it would be futile to contend that the court was justified in granting the injunction since it had found a prima facie case in favor of the respondent. The learned judge further observed that the question of examining the prima facie case or balance of convenience did not arise if the court could not interfere with the unconditional commitment made by the bank in the guarantees in question. In the present case, no doubt, the bank has been made a party in the petition but I do not think that the bank is either a necessary party in the petition under section 20 of the Arbitration Act. In fact that was a reason why I.A. No. 3600 of 1990 was filed. It is also difficult to understand under what provision the court can direct the bank to keep the bank guarantee alive. A direction is, however, generally issued to the petitioner to keep the bank guarantee alive but then bank may not be bound by the same and refuse to renew or extend the bank guarantee. If that happens the first respondent would certainly be in deep waters. Of course is not court is not helpless if such a situation does arise.
16. Considering all the facts of the case and the principles of law applicable thereto, I am of the opinion that the first respondent cannot be restrained from encashing the bank guarantee in question. These applications (I.A. Nos. 3566 and 3600 of 1990) are therefore, dismissed.