Anil Dev Singh, J.
(1) This order will dispose of application (I.A No.8462/91) of the petitioner u/s 41 read with IInd Schedule of the Arbitration Act for restraining the respondent from invoking and encashing the bank guarantee No.NPL/28/89 dated May 23,1989 subsequently renewed vide letter dated August 9,1990. The facts necessary for the disposal of this application are as follows: The respondent by its letter dated May 23,1989 awarded the work of "providing project management consultancy services for Lower Periyar Hydroelectric Project in Kerala" to the petitioner on the terms and conditions contained therein (for short ''Agreement''). The petitioner was to give consultancy on several matters including the following:
"A)Review of the physical and financial progress of the work once in a month and suggest remedial measures for the recovery of back-log and prepare a recovery plan. b) To assist in correspondence with the clients on important issues haying financial/commercial bearing. c) To assist Npcc officials in preparation of claims. d) To get the measurements recorded for the work done on monthly basis by the Project Authorities timely and expeditiously. e)To ensure realisation of the running and final bill amount, promptly and regularly from the client within the time scheduled in the contract. f) Preparation of rates for extra items of work and getting the same approved from the clients at the earliest".
(2) According to the agreement the respondent was required to pay to the petitioner 10% of the total fee amounting to Rs.2.25 lacs as initial payment against furnishing of a bank guarantee by the latter for the said amount. This initial payment was to be adjusted from running payment of work on pro rata basis at the rate of 10% of the amount of running account bills. There is no dispute that the initial payment was made to the petitioner against irrevocable and unconditional bank guarantee,being bank guarantee No.P.L/BG/28/89 dated May 23,1989 issued by New Bank of India for a sum of Rs.2.25 lacs in favor of the respondent. The bank g provides as follows:
"NOW Therefore in consideration of premises aforesaid and at the request of the Consultants, we. New Bank of lndia,Nehru Place,New Delhi and having its Registered office at No. I Tolstoy Marg, New Delhi (herein after called the ''Bank'') so as to bind ourself and our successors and assigns do hereby irrevocably undertake and guarantee due performance of the said agreement(which expression shall include all amendments thereto)by the consultants and/or in case the amount of initial payment now made remains unadjusted from the running account bills for which the recovery is made on pro-rata basis @ 10% of the amount of running account bills, and do further hereby irrevocably undertake to pay to the Corporation on demand in writing without demur and without reference to the Consultants, all or any sum of money at any time due on demand, but up to an aggregated limit of Rs.2,25,000.00 on account of any breach of the said agreement by the consultants or any amount remains due unadjusted from R.A bills of the consultants."
"WE further agree that as between us and the Corporation for purpose of this guarantee, any notice of breach of agreement/performance by the Consultants given to us by Corporation or any amount remains due unadjusted from the R.A. bills of the Consultants and any amount claimed in such notice by the Corporation on account thereof, shall be final and binding on us as to the factum of breach and the amount payable by us not exceeding Rs.2,25,000.00 or the amount remains unadjusted, by the Corporation here under relating thereto"
(3) A perusal of the bank guarantee shows that the bank was to make the payment on demand to the Corporation without demur and without proof of any breach of the underlying agreement.
(4) By letter of the respondent dated July 16,1991 notice of termination of the contract was given to the petitioner. In this letter it was pointed out that the petitioner''s performance during the execution of the work was not found satisfactory, that the petitioner was guilty of committing breach of contract and that it failed to perform its obligations under the contract. It was also slated that the agreement will stand terminated at the expiry of one month from July 16,1991. On the same day the respondent sent a letter to the bank invoking the bank guarantee. In the said letter it was maintained that the consultants did not complete the work in respect of which initial payment was given to them and an amount of Rs.2,13,130.30 remains due and unadjusted from the running account bills of the consultants, It was also certified In the said letter that the petitioner had committed breach of contract and had failed to perform its obligations which resulted in loss to the Corporation.The petitioner calls in question the invocation of the bank guarantee.
(5) Learned counsel for the petitioner submits that the invocation is not in terms of the bank guarantee and the underlying contract is also vitiated by fraud practiced by the respondent on the petitioner. (To be continued on February 20,1992). 20.2.1992 Elaborating the first submission learned counsel contends that the terms of the agreement have to be read into the bank guarantee and there have been no breach of the same by the petitioner and in absence of such a breach the respondent had no authority to terminate the agreement. It was further contended that at no earlier point of time the respondent complained about the work and performance of his client. It is the contention of the learned counsel that if execution of the work by the petitioner was unsatisfactory the respondent would have immediately terminated the contract on the expiry of one year period in terms of clause 6 of the agreement. As a sequester he submits that since the work was found satisfactory the petitioner was continued right from May 23,1989 to July 15,1991. The further argument is that if after completion of one year period the contract is not terminated, then in that event clause 6 of the agreement does not permit the respondent to terminate the same.
(6) I am afraid the submissions of the learned counsel do not hold good in view of the irrevocable and unconditional bank guarantee furnished by his client to the respondent. Disputes high lighted by the learned counsel for the petitioner do not affect the obligations of the bank arising from the bank guarantee under which it is liable to make the payment to respondent without demur on latter''s demand. The bank guarantee postulates that a notice of breach of the agreement by the petitioner given to the bank by the respondent and any amount claimed therein on account of unadjusted initial payment shall be final and binding on the bank as to the factum of the breach and the amount payable.The crucial words in the bank guarantee arc".......We, New Bank of India.............irrevocably undertake and guarantee due performance of the said agreement.......and do further hereby irrevocably undertake to pay to the Corporation on demand in writing without demur and without reference to the Consultants, all or any sum of money at any time due on demand,............" "..............any notice of breach of agreement/performance by the Consultants given to us by Corporation ....... any amount clamed in such notice by the Corporation on account thereof shall be final and binding on us as to the factum of breach and the amount payable by us......." On a plain reading of the bank guarantee it is clear that the right of the respondent to claim the initial payment which remains unadjusted from the running bills docs not depend upon the proof of breach of contract by the petitioner. The demand of the respondent in this regard has been made final and binding on the bank under the bank guarantee. The question whether there was any breach of the agreement by the petitioner or whether the contract has been wrongly terminated does not affect the obligations of the bank to pay the amount claimed by the respondent under the terms of the bank guarantee. It is well settled that the bank guarantee is a distinct and independent agreement from the underlying contract and the obligations arising under the bank guarantee have to be honoured by the bank irrespective of the disputes between the parties to the principal contract. The bank guarantee may have been furnished in consonance with the terms and conditions of the underlying contract but that does not mean that the bank guarantee becomes a part and parcel of the same. The terms of the principal contract cannot be read into the bank guarantee unless the same are specifically incorporated therein by reference or by reproduction. In the instant case there is no scope for the argument that the terms and conditions of the underlying contract have to be read into the bank guarantee to determine the question whether the contract has been terminated in accordance therewith and whether the amount claimed by the respondent from the bank under the bank guarantee is due or is in consonance with the agreement as the bank guarantee specifically makes the notice of breach of the agreement by the petitioner and any amount claimed in the said notice final and binding on the bank as to the factum of breach and amount payable by the bank. In M/s.Triveni Engineering Works Ltd Vs. M/s.Belganga Sahakari Sakhar Karkhana Ltd. and another 1991(4)Delhi Law 189, a similar question was raised by the seller of a sugar plant. In that case the seller contended that the sugar plant had given the requisite performance and the purchaser had wrongly invoked the bank guarantee. This court negativing the contentions of the seller held as follows: "The position with regard to bank guarantees have been settled by a catena of authorities of the Supreme court.In U.P.Co operative Federation Ltd. Vs. Singh Consulta
(7) A fortiori disputes between the parties to the underlying contract as to whether the seller-plaintiff has committed any . breach of the agreement or the plant has given guaranteed performance cannot affect the power of the purchaser-defendant No. I to invoke the bank guarantee. The bank guarantee being an independent contract between the bank and defendant No.1.payment whereunder to the beneficiary (defendant No. 1) is not to be suspended or stopped by reason of existence of disputes between the plaintiff- seller and defendant No. I-purchaser, as is explicitly provided in the bank guarantee itself. Parties entered into the bargain on the footing that an unconditional and irrevocable bank guarantee will be honoured in its letter and spirit. Even when the bank guarantee was furnished as a result of the underlying contract, the same cannot be said to be a part and parcel of the principal contract between the seller and the purchaser. The bank guarantee is a distinct and special type of agreement creating obligations and commitments directly between the bank and the beneficiary. the bank guarantee cannot be rendered otiose by asking the beneficiary to supply proof of breach/default of the seller with regard to the underlying contract.
(8) The question as to whether the plant gave the stipulated performance as required by the agreement cannot be gone into in these proceedings. The matter can be settled by the mode which has been laid down in the agreement. The parties have agreed to refer the disputes, if any,between them to arbitration. It will be for the arbitrator to decide as to whether the plant was capable of crushing sugar cane to the extent of 2500 TCD. It is not for this court to investigate at this stage whether or not adequate quantity of sugar cane was available with the factory or whether the plant acquired crushing speed of 2500 Tcd per day working 22 hours a day. These disputes are essentially for the arbitrator to resolve on the basis of evidence which may be lead before him."
(9) Having regard to the above observations of the court in M/s. Triveni Engineering Works Ltd.(Supra)the question as to whether the petitioner performed satisfactorily or otherwise is a question of fact for which remedy provided by the agreement can be invoked by the parties. Such a question cannot be considered in the application filed under Order 39 rule I CPC or Section 41 read with IInd schedule of the Arbitration Act for restraining the bank from honouring its commitments under the bank guarantee.
(10) The second contention of the learned counsel that the underlying contract stands vitiated by the fraudulent action of the respondent in as much as the contract has been terminated illegally also does not appeal to me. The only fraud alleged in the petition is that the respondent is trying to claim the amount in question even when the same was not due to be paid to it. In support of the submission learned counsel for the petitioner has invited my attention to various letters written by his client wherein it has blamed the respondent for delaying the work and finding fault with latter''s performance. On the other hand learned counsel for the respondent has focussed my attention to various communications addressed to the petitioner wherein it has been pointed out that the petitioner was not carrying out the work which was assigned to it under the agreement. The question as to who was not performing in accordance with the agreement is again a question of fact and will be decided by the appropriate forum. It is not a case where prima facie one can come to a conclusion that the blame lies at the door of a particular party. It is a matter where evidence will have to be led to find out as to who was at fault. The allegations of fraud are not potent enough to vitiate the underlying contract. Merely alleging fraud docs not prove fraud. In Bhasin Associates Ltd. Vs. Hyundai Heavy Industries Co.Ltd. and another 1991Delhi Law a Division Bench of this court took the view that the invocation of the bank guarantee should not be interfered with by the courts of law unless a case of fraud which vitiates the underlying contract is made out. In this connection it was observed as follows:
"THE law as to the contractual obligation under the bank guarantee is now well settled. In
(11) I also see no irretrievable loss to the petitioner if the bank is permitted to do what it is obliged to do under the bank guarantee as the petitioner can claim the amount in question in arbitration proceedings. In
"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 per forming the bank guarantee. That cannot be done. One cannot do indirectly what one is not free to do directly. But a maltreated man in such circumstances is not remedyless.The respondent was not to suffer any injustice which was irretrievable. The respondent can sue the appellant for damages. In this case, there cannot be any basis for apprehension that irretrievable damages would be caused if any. I am of the opinion that this is not a case in which injunction should be granted. An irrevocable commitment either in the form of confirmed bank guarantee or irrevocable letter of credit cannot be interfered with except in case of fraud or in case of question of apprehension of irretrievable injustice has been made out. This is the well settled principle of the law in England. This is also a well settled principle of law in India, as I shall presently notice from some of the decisions of the High Court and decisions of this court".
(Emphasis supplied).
(12) In view of the above discussion, I have no hesitation in rejecting the second contention of the learned counsel for the petitioner. It was faintly, argued by the learned counsel for the petitioner that according to the terms of the agreement the invocation of the bank guarantee could be made by the respondent only after the expiry of one month from the notice of termination. He submitted that the notice of termination was issued on July 16,1991 and the invocation of bank guarantee was also made on the same day, which according to him is not warranted by Clause 6 of the agreement. It was further urged that under the said clause if the petitioner fails to make the payment of the unadjusted amount after the termination takes effect,only then the bank guarantee is liable to be invoked by the respondent and not otherwise.These submissions again are not available to the petitioner as clause 6 has not been incorporated in the-bank guarantee. During the course of arguments it was suggested to the learned counsel for the petitioner that in case his client is ready to pay the alleged unadjusted amount of initial payment to the respondent then a direction to that effect could be made and in that event it would not be then open to the respondent to have the bank guarantee encashed. No favorable response came from the learned counsel. Since termination of the contract came into force from July 15,1991 and no payment of unadjusted amount has been made so far by the petitioner to the respondent in terms of clause 6 of the agreement,the aforesaid submissions of the learned counsel even otherwise are of no consequence at this stage.
(13) In the aforesaid view of the matter the interim injunction dated July 25, 1991 is vacated. The application stands disposed of. SuitNo.2154/91 Learned counsel for the parties pray that the matter in dispute be referred to an arbitrator. Accordingly I appoint Mr.Justice J.D.Jain,a former Judge of this court, as an arbitrator. Parties will be liberty to File claims and counter-claims before the arbitrator. The learned arbitrator will enter upon reference and give his award within four months. It will be open to the learned arbitrator to fix his fee. The fee of the arbitrator will be borne by the parties in equal ratio. It is clarified that in case the learned arbitrator is of the opinion that the bank guarantee was wrongly invoked in as much as no money was due and payable to the respondent and actually fault lay with the respondent it will be open to the arbitrator to direct the refund of the encased amount with interest at the prevalent rates. In case the arbitrator is of the opinion that the money was due and payable to the respondent the petitioner will be similarly liable to pay interest at the prevalent rate as determined by the arbitrator on account of having delayed the encashment of the bank guarantee for all these months. This order will be communicated to the arbitrator immediately. The parties may appear before the arbitrator at 4 P.M. at his residence on February 28,1992. February 20,1992. Anil Dev Singh, J.
(14) At this stage learned counsel for the respondent appeared and submitted that the Managing Director of the respondent company has been authorised by the agreement to appoint an arbitrator for resolution of the disputes between the parties and the court should not appoint an arbitrator as this will amount to filing an agreement different from the one to which parties consented. The oral prayer of the learned counsel for the respondent cannot be considered now as the order has already been pronounced.
