1. The petitioner has filed this petition for an interim injunction seeking to restrain the 1st respondent, their officers, servants, representatives and agents from encashing the bank guarantee bond No. 1-10 dated 23-1-1990 for Rs. 1,00,000/- issued by 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 is 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 High Court of Calcutta in the case of Hindustan Paper Corporation Limited v. Keneilhouse Angami reported in 68 Company Cases 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 petitioner carries 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 — (sic) 1990. It was the stipulation of 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 security deposit in cash, the petitioner was permitted to furnish a bank guarantee being guarantee No. 1/90 a copy whereof is Annexure ‘C’ to the Arbitration Suit No. 2644 of 1990. The said bank guarantee constitutes a separate independent contract between 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. 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 Contract forms part of the contract awarded to the petitioners by respondent No. 1. The said clause constitutes 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. Vijaya Bank is not a party to the said arbitration agreement.
(c) The respondents have invoked the said bank guarantee and called upon Vijaya Bank to make payment of Rs. 1,00,000/- by their letter dated 13-8-1990. By letter dated 18-8-1990 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 obligation 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 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 negative, whether peitioner 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 Limited v. Keneilhouse Angami reported in 68 Company Cases 361. In that case the learned Single Judge had directed that disputes between the parties be referred to arbitration and such direction included adjudication of 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 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 a 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 separate 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 and does not cover the dispute arising out of the contract of Bank Guarantee which contract is separate and independent of 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. It was held by the Honourable Supreme Court in its judgment in Tarapore and Co. v. Tracteroexport, Moscow reported in (1969) 1 SCC 233 : AIR 1970 SC 891 that the obligation of the bank to pay the amount in terms of a bank guarantee or letter of credit was absolute irrespective of dispute 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.
6. In United Commercial Bank v. Bank of India reported in (1981) 2 SCC 766 : AIR 1981 SC 1426 the Honourable Supreme Court in terms held in the context of transaction of irrevocable letter of credit as under:
“A bank issuing or confirming a letter of credit is 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.”
7. The Honourable Supreme Court quoted observations of Lord Justice Jenkins from his decision in the case of Hamzeh Malas v. British Imex Industries Ltd., (1958) 2 QB 127 reading as under:
“…….. the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods which impose 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 considerations apply to a bank guarantee.”
8. 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, 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.
9. It is well settled by the decisions of the Apex Court and the 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 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, 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 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 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 of the Bank as a party thereto or that the arbitration clause contained in the main contract would cover the dispute as to enforcement of the Bank Guarantee, by the beneficiary. The above referred argument is just required to be stated in order to be rejected.
10. 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 reported in (1983) 4 SCC 417 : AIR 1984 SC 29. 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 Second Schedule to issue interim injunction but such 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………”
11. 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.
12. 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 injunction only against 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., reported in (1988) 1 SCC 174, was rejected by the Supreme Court. It was observed in paragraph 21 of the judgment of the Supreme Court as under:
“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 the 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.”
13. 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 was clearly referable to arbitration. The above submission of Shri Thakkar does not take note of the well settled proposition of law that the 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 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 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 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 enforcement of 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.
14. It appears to be useful to extract some of the 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:
(a) “As to the question of enforcement of the Bank Guarantee as 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.”
15. In view of the above discussion I dismiss the application of the petitioner as not maintainable with no order as to costs. Parties would maintain status quo till 14-9-1990. 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, if any appeal is filed against this order, the petitioner to give 48 hours' notice to the respondents.
Application dismissed.