Bombay High Court
Suresh Arjundas Bakhtiani vs Union Of India And Another on 29 August, 1990
Equivalent citations: 1991(1)BOMCR26
JUDGMENT
D.R. Dhanuka J.
1. The petitioner has filed this petition for an interim injunction seeking to restrain the first respondent, their officers, servants, representatives and agents from encashing bank guarantee bond No. 1-10, dated January 23, 1990, for Rs. 1,00,000 issued by the Vijaya Bank, Thane, pending disposal of the petitioner's application under section 20 of the Arbitration Act, 1940, numbered as Arbitration Suit No. 2644 of 1990. The Vijaya Bank if not impleaded as a party to the main petition or to this petition for interim relief, presumably because the said bank is not a party in the arbitration agreement relied upon by the petitioners. The petitioner has invoked section 41 of the Arbitration Act, 1940, in support of this petition for interim relief. I have heard counsel appearing in this petition as well as companion petitions, i.e., Arbitration Petitions Nos. 156 of 1990 and 135 of 1990 at some length. Having regard to the well-settled principles of law laid down by the Honourable Supreme Court and the ratio of the judgment of the Division Bench of the High Court of Calcutta in the case of Hindustan Paper Corporation Ltd. v. Keneilhouse Angami [1990] 68 Comp Cas 361 which is on all fours and, for the reasons set out in subsequent paragraphs of this order, I hold that this petition is not at all maintainable under section 41 of the Arbitration Act, 1940.
2. Some of the material facts concerning this petition are as under :
(a) The petitioners carry on business as engineers and contractors in the name and style of Devidas Construction. The petitioner submitted tenders for carrying out certain construction work to respondent No. 1. The tender of the petitioner was accepted by respondent No. 1 and the petitioner was required to complete the construction work referred to in the petition by 8th ... 1990. It was a stipulation in the said tender that the petitioner must furnish a security deposit of Rs. 1,00,000 in favour of respondent No. 1. In lieu of the said requirement to furnish a security deposit in cash, the petitioner was permitted to furnish a bank guarantee being guarantee No. 1 of 1990 a copy whereof is annexure "C" to the Arbitration Suit No. 2644 of 1990. The said bank guarantee constitutes a separate independent contract between the Vijaya Bank and the Union of India enforceable on its own terms, independently of disputes between the parties which may arise in relation to the main contract which was awarded to the petitioners. By clause 2 of the said bank guarantee, the Vijaya Bank undertook to pay the said amount not exceeding Rs. 1,00,000 to respondent No. 1 without any demur merely on demand notwithstanding any dispute or disputes which may be raised by the contractor. It was provided in the said bank guarantee that the liability of the bank would be absolute and unequivocal. No arbitration clause is to be found in the said contract of bank guarantee.
(b) Clause 25 of the general conditions of the contract forms part of the contract awarded to the petitioners by respondent No. 1. The said clause constitutes an arbitration agreement between the petitioner and respondent No. 1 and is reproduced in paragraph 9 of the petition/plaint in Arbitration Suit No. 2644 of 1990. The Vijaya Bank is not a party to the said arbitration agreement.
(c) The respondents have invoked the said bank guarantee and called upon the Vijaya Bank to make payment of Rs. 1,00,000 by their letter dated August 13, 1990. By letter dated August 18, 1990, the Vijaya Bank called upon Devidas Construction to remit the amount required in order to enable the bank to make the payment under the said bank guarantee. The bank has not raised any dispute in respect of its unconditional to honour the said bank guarantee.
3. The following questions arise for consideration of the court for disposal of this petition.
(1) Whether claim or dispute relating to enforcement of bank guarantee is the subject-matter of any arbitration agreement or any arbitration proceedings ?
(2) Whether the arbitration clause contained in the main contract binds the bank furnishing the bank guarantee ?
(3) If answer to questions Nos. 1 and 2 is in the negative, whether the petitioner can seek an injunction restraining the respondents from encashing the bank guarantee in a proceeding under section 41(b) of the Act although the said section confers power on the court to grant appropriate interim reliefs only for the purpose of and in relation to arbitration proceedings ?
4. An exactly identical question arose before the High Court of Calcutta in the case of Hindustan Paper Corporation Ltd. v. Keneilhouse Angami [1990] 68 Comp Cas 361. In that case, the learned single judge had directed that disputes between the parties be referred to arbitration and such direction included adjudication by arbitration in respect of the right of the beneficiary against the bank arising out of the bank guarantee although the bank was not a party to the arbitration clause. It was held by the Honourable Division Bench of the High Court of Calcutta in that case, after referring to earlier judgments of the High Court of Calcutta and certain other judgments, as under :
(i) The bank and the beneficiaries are the only parties in bank guarantee.
(ii) The right of the beneficiary under a bank guarantee to enforce payment under the bank guarantee is governed by the bank guarantee itself and not by the terms and conditions of the original contract.
(iii) The bank guarantee is a contract from the original contract pursuant to which the bank guarantee is furnished.
(iv) The bank is not a party to the original contract or to the arbitration clause.
(v) The arbitration clause contained in the main contract is not part of the contract of bank guarantee. The said arbitration binds the bank but does not cover the dispute arising out of the contract of bank guarantee which contract is separate and independent of the main contract.
(vi) A claim arising out of the bank guarantee is not a dispute arising out of the original contract.
5. Having regard to the above conclusions, the Honourable Division Bench of the High Court of Calcutta held that the disputes relating to the enforcement of bank guarantee was not referable to arbitration and section 41 of the Arbitration Act was, therefore, not applicable.
6. It was held by the Honourable Supreme Court in its judgment in Tarapore and Co. v. Tractoroexport, Moscow [1970] 40 Comp Cas 447, that the obligation of the bank to pay the amount in terms of a bank guarantee or letter of credit was absolute, irrespective of disputes between the parties under the original contract. The same view was taken by the Honourable Supreme Court in several other cases and it cannot be now disputed that the rights and obligations under a bank guarantee are to be viewed independently of the disputes between the parties to the main contract.
7. In United Commercial Bank v. Bank of India , the Honourable Supreme Court in terms held, in the context of a transaction of irrevocable letter of credit, as under (headnote of AIR) :
"A bank issuing or confirming a letter of credit in not concerned with the underlying contract between the buyer and seller. Duties of a bank under a letter of credit are created by the document itself but, in any case, it has the power and is subject to the limitations which are given or imposed by it, in the absence of the appropriate provisions in the letter of credit."
8. The Honourable Supreme Court quoted the observations of Lord Justice Jenkins from his decision in the case of Hamzeh Malas and Sons v. British Imex Industries Ltd. [1958] 2 QB 127 (CA) reading as under (page 1438 of AIR) :
"... the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods which imposes on the banker an absolute obligation to pay ... and that 'this was not a case in which the court ought to exercise its discretion and grant the injunction.' The same consideration apply to a bank of guarantee."
9. These very principles were applied by Lord Denning M.R. in a case pertaining to a contract of guarantee. The observations of Kerr J. in the case of R. D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd. [1977] 3 WLR 752 (QB), were cited with approval by Lord Denning M.R. in the case of Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. [1977] 3 WLR 764 (CA).
10. It is well-settled by the decisions of the apex court and High Courts that a bank guarantee is a separate and independent contract between the bank and the beneficiary enforceable on its own terms, independently of disputes between the parties to the main contract in pursuance whereof the bank guarantee is furnished. The only parties to the contract of a bank guarantee are the bank and the beneficiary. The party at whose instance the bank guarantee is furnished is not a party to the contract of bank guarantee. Similarly, the bank is not a party to the main contract and is unconcerned with it. The arbitration clause contained in the main contract cannot bind the bank as the bank is not a party to the main contract. It is futile to contend that the arbitration clause contained in the main contract must be treated as incorporated in the contract of the bank guarantee. No such incorporation is possible. In a given case, the bank may be ready and willing to honour its commitment arising out of the bank guarantee as soon as the beneficiary of the guarantee invokes the guarantee, irrespective of disputes and contentions raised by the party at whose instance the guarantee is furnished. It is not possible to accept the submission that the dispute raised by the petitioner in respect of enforcement or non-enforcement of bank guarantee is liable to be referred to arbitration, without even impleading the bank as a party thereto or that the arbitration clause contained in the main contract would cover the dispute as to the enforcement of the bank guarantee by the beneficiary. The above-referred argument is just required to be stated only to be rejected.
11. Shri Rajadhyaksha, learned counsel appearing for the respondents in Arbitration Petition No. 135 of 1990, has relied upon paragraph 21 of the judgment of the Honourable Supreme Court in the case of H. M. Kamaluddin Ansari and Co. v. Union of India, . In paragraph 21 of the said judgment, it was observed as under :
"Once this court came to the conclusion that the court has power under section 41(b) read with the Second schedule to issue interim injunction can only be for the purpose of and in relation to arbitration proceedings and further that the question whether any amounts were payable by the appellant to the respondent under other contracts was not the subject-matter of the arbitration proceedings and, therefore, the court obviously could not make any interim order ..."
12. The view which I am taking in this petition is clearly supported by the above referred judgment of the Supreme Court cited by Shri Rajadhyaksha.
13. Shri Thakkar argued that the petitioner was not seeking any injunction so as to restrain the bank from making the payment under the said bank guarantee to the respondent, and the petitioner was seeking an injunction only against the respondents from encashing the bank guarantee. An exactly identical submission urged before the Supreme Court in the case of U.P. Co-operative Federation v. Singh Consultants and Engineers (P.) Ltd. [1989] 65 Comp Cas 283, was rejected by the Supreme Court. It was observed in paragraph 21 of the judgment of the Supreme Court as under (at page 293) :
'In the instant case, the learned judge has proceeded on the basis that this was not an injunction sought against the bank but this was an injunction sought against the appellant. But the net effect of the injunction is to restrain the bank from performing the bank guarantee. That cannot be done. One cannot do indirectly what one is not free to do directly."
14. Shri Thakkar then argued that the petitioner had furnished the security deposit to the respondents in the form of the above-referred bank guarantee and the claim and disputes pertaining to the refund or otherwise of the said security deposit were clearly referable to arbitration. The above submission of Shri Thakkar does not take note of the well-settled proposition of law that a bank guarantee is a separate and independent contract between the bank and the beneficiary enforceable on the terms contained therein, and that the bank guarantee is enforceable independently of disputes and claims arising out of the main contract. If the respondents encash the bank guarantee, the contract of the bank guarantee is worked out. If it is ultimately held in arbitration proceedings between the parties to the main contract that the respondents are liable to refund the amount of security deposit to the petitioners, the respondents would have to do so. Encashment of a bank guarantee is always subject to the result of litigation or arbitration between the parties to the main contract. That is no ground for holding that the arbitration clause contained in the main contract becomes part and parcel of the contract of bank guarantee which is undoubtedly a separate and independent contract between different parties. It is quite clear to me that the claim relating to the enforcement of a bank guarantee is not covered by the arbitration clause and is not referable to arbitration. Accordingly, section 41 of the Act is not at all applicable.
15. It appears to be useful to extract some of the most relevant passages from the above referred judgment of the High Court of Calcutta deriving its support from earlier judgments. Some of the observations made by the Honourable High Court of Calcutta are extracted below for ready reference (at page 369 of 68 Comp Cas :
"(a) As to the question of enforcement of the bank guarantee by the beneficiary against the bank, the rights and liabilities are to be governed by the bank guarantee itself and not by the terms and conditions of the original contract;
(b) The bank guarantee itself is a contract separate from the original contract pursuant to which the bank guarantee is furnished. The bank is not a party to the original contract. Similarly, the party at whose instance the bank guarantee is furnished pursuant to the agreement is not a party to the bank guarantee."
16. In view of the above discussion, I dismiss the application of the petitioner as not maintainable with no order as to costs.
17. Parties would maintain status quo till September 14, 1990. I am passing this order on the request of Mr. Thakkar in order to enable his client to consider his position and to carry the matter higher if so advised. In case any appeal is filed against this order, the petitioner is to give 48 hours notice to the respondents.