Dr. M.K. Sharma, J.

1. In pursuance of tenders floated by defendant No. 1 for civil construction work of the Press Shop of its company at Gurgaon the plaintiff submitted its tender in the form prescribed by defendant No. 1. After negotiation the contract was allotted to the plaintiff. One of the clauses of the contract was that the contractor would submit a performance guarantee equivalent to 5% of the contract sum in the form of a Bank guarantee from any nationalised Bank in New Delhi and that the said guarantee should be valid for a period of 9 months or till the completion of the project. In terms of the aforesaid clause of the contract the plaintiff furnished a performance Bank guarantee on 27.9.1994 for Rs. 15 lac which was issued by defendant No. 2, Bank of India.

2. After the contract was awarded the plaintiff started the construction work. It has been alleged by the plaintiff that there were various delays and hindrances created by defendant No. 1 which adversely affected the smooth execution of the work by the plaintiff and that it had to suspend the work on various occasions. According to the plaintiff while the period contemplated under the contract for execution of the contract was 9 months, in view of hindrances and delays on the part of defendant No. 1 it took nearly about 18 months for the plaintiff to complete the entire work. It is also alleged that the defendant No. 1 failed and/or neglected to make payment towards the bills of the plaintiff although the aforesaid bills were certified by the Consultant of the defendant No. 1 and in all at present more than Rs. 3.62 crore is due to the plaintiff from defendant No. 1 on account of its various bills, securities, etc.

3. The defendant No. 1 however, denied that the plaintiff completed the construction work awarded to it and stated that the plaintiff was never in a position to execute the contract and that the contract was not executed by the plaintiff within the prescribed time as a consequence of which the defendant No. 1 suffered losses and damages and moreover the work done by the plaintiff admittedly due to paucity of funds was sub-standard and that the defendant No. 1 had to incur additional expenditure in getting the work corrected by outside agencies in respect of which the defendant No. 1 incurred extra expenses. It is further stated that the defendant No. 1 was compelled to review the scope of work of the plaintiff since the plaintiff failed and neglected to execute the contract in terms of the contract and was compelled to issue a legal notice on 27.11.1995 claiming about Rs. 8.99 crores from the plaintiff.

4. The performance Bank guarantee which was furnished by the plaintiff on 27.9.1994 for Rs. 15 lacs issued by defendant No. 2, Bank of India, was renewed from time-to-time and at present the same is valid upto 31.1.1997. The defendant No. 1 has now sought to invoke the performance Bank guarantee furnished by the plaintiff and issued by defendant No. 2. It is the case of defendant No. 1 that it was seeking to encash the Bank guarantee only because the work had not been completed and that there is a claim of the defendant No. 1 as against the plaintiff.

5. As against the aforesaid action of defendant No. 1 seeking to enforce the Bank guarantee the present suit has been instituted by the plaintiff seeking for a decree of permanent injunction in favour of the plaintiff and against the defendants restraining the defendant No. 1 from encashing the Bank guarantee No. BG-24/72 dated 27.9.1994 and also restraining the defendant No. 2 from making any payment under said guarantee to defendant No. 1. The plaintiff also filed an application under Order 39 Rules 1 and 2 of the Code of Civil Procedure seeking for a temporary injunction restraining the defendants 1 and 2 from encashing the Bank and guarantee furnished by the plaintiff in favour of defendant No. 1.

6. After the institution of the suit the defendants appeared through their counsel and taking into consideration the statement made by the plaintiff that it would get the validity of the Bank guarantee extended till 31.1.1997, the Counsel appearing for defendant No. 1 stated that he would not encash the Bank guarantee until further orders from this Court. Accordingly, the Bank guarantee now stands extended till 31.1.1997.

7. The Counsel appearing for the plaintiff submitted that the plaintiff at present has a claim of more than Rs. 3.62 Crore against defendant No. 1 on account of its various bills, securities, etc. and in that view of the matter the action on the part of defendant No. 1 towards invoking the performance Bank guarantee is fraudulent particularly when the work was completed in January, 1997. It was further submitted that even the Consultant of the defendant No. 1 certified the running bills of the plaintiff to the extent of Rs. 10 lacs which still remained to be paid to the plaintiff and that the contract work had also been completed by the end of 1995 and the plant wasinaugurated on 8.1.1996 and that the production of the factory had also commenced from February, 1996. It is submitted that the work having been virtually completed on 8.1.1996 the plaintiff was entitled to the payment due to it as also to the release of the performance guarantee whereas the defendant No. 1 in an illegal and mala fide manner is trying to encash the performance Bank guarantee. According to him the claim of defendant No. 1 against the plaintiff is a counterblast to get rid of the payment of the legal dues of the plaintiff and, therefore, the action of defendant No. 1 towards encashing the performance Bank guarantee is illegal, mala fide and fraudulent and, accordingly, the plaintiff is entitled to the injunction sought for in the present suit. In support of his submission the learned Counsel relied upon the decision of the Supreme Court in Hindustan Steel Works Construction Ltd.v. Tarapore and Co. reported in JT 1986 (6) SC 295 and EM and EM Tradersv.DDA; reported in 1986(2) Arbitration Law Reports page 140.

8. On the other hand the Counsel appearing for defendant No. 1 repudiated the submissions of the learned Counsel for the plaintiff and submitted that not only the work allotted to the plaintiff under the contract was not completed but whatever work has been completed is also sub-standard and the defendant No. 1 was forced to get the balance work completed through other agency. The defendant No. 1, it is stated, is entitled to receive from the plaintiff an amount of Rs. 8.99 crore as claimed in the notice issued to the plaintiff and in that view of the matter the defendant No. 1 is entitled to enforce the Bank guarantee. He further submitted that no fraud having been alleged by the plaintiff at the time of execution of the Bank guarantee nor the plaintiff having been able to show that it would suffer any irretrievable damages the performance of the Bank guarantee is possible and the same is required to be enforced. The learned Counsel in support of his submissions relied upon several decisions of the Supreme Court namelyU.P. State Sugar Corporationv.Sunmac International Ltd., reported in 1996(8) Supreme Today 530; U.P. Co-operative Federation Limited v.Singh Consultants and Engineers (P) Ltd., reported in 1988(1) SCC 174; Svenska Handels Banken v.M/s. Indian Charge Chrome and Others; 1994 (1) SCC 502 [LQ/SC/1993/920] =I (1994) BC215 (SC); Larsen and Toubro Limited v. Maharashtra State Electricity Board and Others; reported in 1995 (6) SCC 68 [LQ/SC/1995/922] ; Hindustan Steel Works Construction Limited v.Tarapore and Co. and Another; reported in JT 1996 (6) SC 295 [LQ/SC/1996/1057] ; and National Thermal Power Corporation Ltd.v. Flowmore Pvt. Ltd.;reported in (1995) 4 SCC 515 [LQ/SC/1995/631] =59 (1995) DLT 333 (SC).

9. In U.P. State Sugar Corporation (supra) the Supreme Court has held that the law relating to invocation of such Bank guarantees is by now well settled. The Supreme Court in the said judgment in paragraph 11 has held thus:

When in the course of commercial dealings an unconditional Bank guarantee is given or accepted, the beneficiary is entitled to realize such a Bank guarantee in terms thereof irrespective of any pending disputes. The Bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a Bank guarantee would otherwise be defeated. The Courts should, therefore, be slow in granting an injunction to restrain the realisation of such a Bank guarantee. The Courts have carved out only two exceptions. A fraud in connection with such a Bank guarantee would vitiate the very foundation of such a Bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional Bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a Bank guarantee would adversely affect the Bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would over-ride the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are not necessarily connected, though both may co-exist in some cases.

10. When an unconditional Bank guarantee is given or accepted the beneficiary is entitled to realise such a Bank guarantee in terms thereof irrespective of any pending disputes and the Bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customers. The Courts have however, carved out two exceptions(i) the same being a fraud committed in connection with such a Bank guarantee; or (ii) causing an irretrievable harm or injustice to one of the parties concerned for allowing the encashment of the unconditional Bank guarantee.

11. The aforesaid summary of the law relating to invocation of Bank guarantee has been arrived at by the Supreme Court after appreciating various decisions referred to in the said judgment, some of which have been relied upon by the Counsel appearing for the parties herein. Under such circumstances the law relating to invocation of Bank guarantee being well settled by several decisions of the Supreme Court, in the present case the only responsibility left with me is to test and apply the said principles on the facts of the present case.

12. Admittedly, there is a dispute between the parties in respect of the contract. It is admitted by the parties that under the terms of the contract the disputes that arise between the parties are required to be adjudicated upon by an Arbitrator and with such a direction the petition filed under Section 20 of the Arbitration Act could be disposed of. But the question that arises for my consideration is whether the Bank guarantee furnished by the plaintiff in favour of defendant No. 1 could be enforced by the defendant No. 1 as sought to be done in the present case under the facts and circumstances of the present case.

13. The Bank guarantee furnished by the plaintiff and issued by defendant No. 2 is on record. The said Bank guarantee is irrevocable in nature as is apparent from a bare perusal of the same. The same stipulates that the defendant No. 2 is responsible to the defendant No. 1 on behalf of the plaintiff upto a total amount of Rs. 15 lacs. The Bank has undertaken to pay to the defendant No. 1 upon its first demand a sum to the limit of Rs. 1 lac without the defendant No. 1 needing to prove or show ground or reasons for its demand for the sums specified therein.

14. It is now necessary for me to examine whether there is any fraud committed by the defendant No. 1 in connection with the Bank guarantee. It has been held by the Supreme Court that the plea of fraud in connection with the Bank guarantee is to be examined in relation to the time factor during which the underlying contract was executed. In the present case it is an admitted fact that no plea of fraud has been alleged in respect of execution of the Bank guarantee relating to the time when the said guarantee was executed. In the absence of pleadings of commission of any fraud at the time of execution of the Bank guarantee, it is held that no fraud has been committed by the defendant No. 1 at the time of execution of the Bank guarantee and, therefore, the question of the Bank guarantee being vitiated on the first count has no foundation at all. Under the circumstances, I am now to examine whether the second exception provided to the general rule is attracted in the facts and circumstances of the present case i.e. whether allowing the encashment of the unconditional Bank guarantee would result in irretrievable harm and injustice.

15. The learned Counsel appearing for the plaintiff submitted that if fraud has been committed by the defendant No. 1 subsequent to the execution of the Bank guarantee then also the Court can hold that the Bank guarantee has been vitiated inasmuch as a demand by the beneficiary under the Bank guarantee may become fraudulent by subsequent events or circumstances. There could be no dispute with regard to the aforesaid submission of the learned Counsel for the plaintiff. If on appreciation of the facts and circumstances of the case it is found that in view of subsequent events or circumstances fraud is apparent then also the same may lead to irretrievable injury to the party. The learned Counsel appearing for the plaintiff submitted that the plaintiff has a claim against the defendant No. 1 which is due and payable to him by the defendant No. 1 and that the counter claim sought to be raised by defendant No. 1 is a counter-blast to the aforesaid claim of the plaintiff and that the encashment of the Bank guarantee has been sought for not on genuine purpose but on deceitful means.

16. In my considered opinion, there appears to be claim and counter claim in between the parties which gives rise to the existence of a dispute between the parties to the contract, which cannot be a ground for issuing an injunction to restrain the enforcement of Bank guarantee. The aforesaid allegations made by the plaintiff are without any merits and I hold that it cannot be said that the counter claim made by the defendant No. 1 is in any manner deceitful or fraudulent. The aforesaid disputes which arise between the parties cannot be resolved until and unless a decision thereon is given by a Competent Authority. The claim of the plaintiff that a huge amount is due and payable to it by the defendant No. 1, cannot be said to be established as of date as the counter claim of the defendant No. 1 cannot be said to be established so long a binding decision on the same is not given by the appropriate Court. Under these circumstances, I am of the considered opinion that the factors relied upon by the learned Counsel for the plaintiff to allege that the plaintiff would suffer irretrievable injury in case the Bank guarantee is allowed to be encashed and/or enforced are not sufficient to make the case an exceptional one so as to bring it within the second exception. I am not satisfied that any irretrievable injury would be caused to the plaintiff if the Bank guarantee furnished by the plaintiff and issued by defendant No. 2 is allowed to be enforced and/or encashed. The application under Order 39 Rules 1 and 2, CPC filed by the plaintiff, therefore, has no merit and is, accordingly, rejected.

17. As stated above both the parties agreed that for a speedy resolution of the disputes they are willing and agreeable to refer all the disputes under or arising out of the contract to the sole arbitration of Justice P.K. Bahri, a retired Judge of this Court. I accordingly, refer all the disputes arising between the parties to the sole arbitration of Justice P.K. Bahri. The Arbitrator shall make/publish his award within 4 months from the date of receipt of a copy of this order or within such reasonable period as the parties may agree upon. It shall be open to the Arbitrator to fix his remuneration in consultation with the parties.

With the aforesaid observations and directions the application under Order 39 Rules 1 and 2 stands dismissed and the petition under Section 20 or the Arbitration Act is disposed of in the aforesaid terms.