1. The petitioner has made an application under s. 20 of the Indian Arbitration Act, 1940, for reference of the disputes between the parties to arbitration. With this petition he has made another application under s. 41 read with Sch. 2 of the Indian Arbitration Act and O. 39, rr. 1 and 2 of the Code of Civil Procedure. This order will govern them both.
2. The salient facts are simple. The petitioner, Pesticides India, wanted to purchase raw material known as 'Carbaryl technical' through the canalised agency of State Chemicals and Pharmaceuticals Corporation of India Ltd., (the Corporation), respondent No. 1. Pesticides made an application in the prescribed form. They entered into an agreement with the Corporation. They gave earnest money to them in the form of two bank guarantees Nos. 16 and 17 of 1979, issued on 14th April, 1979, by the State Bank of Bikaner and Jaipur (hereinafter called 'the bank') each one being for an amount of Rs. 1,44,000.
3. In their application dated 6th June, 1979, Pesticides stated that they required 40 metric tonnes of Carbaryl technical which may be supplied to them. The Corporation imports this raw material from foreign countries and supplies them to Indian parties after registering their requirements. As regards the mode of delivery, the terms provide that the 'mode of delivery of raw material, namely, high seas/ex-tank/ex-jetty/ex-godown will be decided upon by CPC depending on the circumstances of each case and the applicant cannot insist on a particular mode of delivery.'
4. On 6th September, 1979, the corporation offered to supply 40 metric tonnes Carbaryl technical to Pesticides at the price of Rs. 34,468 per metric tonne. This was to be done from the vessel, Ex State of Punjab, which was expected to arrive on 12th September, 1979. Pesticides were not able to make full payment of the allotted quantity. They asked the Corporation to give them the facility of Bill Marketing Scheme and allow them 90 days credit in the sum of Rs. 14 lakhs. The Corporation agreed to this. But before the formalities could be completed by Pesticides the vessel, State of Punjab, arrived in Bombay Port on 16th October, 1979. Pesticides completed the formalities on 21st October, 1979. The quantity of 40 metric tonnes which the vessel, State of Punjab, had brought and which was originally allotted to Pesticides had to be sold to some other party. This is the case of the Corporation.
5. It is not in dispute that 11 metric tonnes were supplied by the Corporation to Pesticides from another vessel, Export Commerce, which arrived afterwards. This was supplied on high seas basis. It was accepted by Pesticides. They paid for all metric tonnes and took delivery.
6. The dispute arose regarding the balance quantity of 29 metric tonnes. The Corporation offered regarding the balance quantity on ex-godown basis. The price of ex-godown is quite high. It is over Rs. 63,000 per metric tonne. Pesticides refused to take the balance quantity at this high price. They said that the Corporation was liable to deliver the balance quantity also on the high seas basis as had been done in the case of 11 metric tonnes. The Corporation took the stand on the term of the agreement which provided that an applicant cannot insist on a particular mode of delivery. The mode of delivery was to be decided by the Corporation. The upshot is that Pesticides refused to take delivery of 29 metric tonnes on ex-godown basis which was offered to them by the Corporation.
7. On 7th July, 1980, the chief marketing manager of the Corporation addressed a letter to the bank in these terms :
'Sub : Bank Guarantee No. (i) 16/79 and (ii) 17/79 dated 14th April, 1979, for Rs. 1,44,000 each - A/c. M/s. Pesticides India, UdaiSagar Road, Udaipur-1 (Raj).
Please refer to your above mentioned bank guarantee issued on behalf of M/s. Pesticides India, Udai Sagar Road, Udaipur-1 (Raj). we are to inform you that the party failed to lift the quantity of 29 M's. Curbaryl Technical allotted on 6-9-79. Hence there is a default on the part of the party and we have accordingly invoked the said bank guarantee. We, thereforee, request you to kindly remit Rs. 2,08,800 (Rupees two lakhs eight thousand eight hundred) by bank draft in favor of State Chemicals and Pharmaceuticals Corporation of India Limited, New Delhi, within 15 days from the date of this letter. Please note that you will have to pay interest @ 20% p.a. in case the payment is not received within 15 days as per terms of BG.'
8. When Pesticides came to know that the Corporation has made a demand on the bank to pay the amount of Rs. 2,08,800 they immediately brought the present petition on 21st July, 1981. They sought an injunction against the bank restraining them from making payment to the Corporation. R. N. Aggarwal J. By order dated 21st July, 1980, issued the injunction prayed for. The Corporation has now moved that this injunction order be discharged.
9. The question is what is the meaning and effect of the bank guarantee in this case. The bank guarantee dated 14th April, 1979, is in these terms :
'In consideration of your having agreed to register the (item) CARBARYL TECHNICAL requirements of M/s. PESTICIDES INDIA Props. : Mewar Oil and General Mills Ltd., Post Box No. 20, Udai Sagar Road, Udaipur-313001 (hereinafter referred to as 'the actual user allottee') we, the State Bank of Bikaner and Jaipur, Chetak Circle, Udaipur- 313001, as also our successors, or assigns, bind ourself unconditionally and irrevocably, guarantee and undertake that in the event of any default/failure on the part of the actual user/allotted to observe all or any of the conditions prescribed/to be prescribed by you in regard to the above said registration and/or allocation order that may be issued by you, we shall on your first demand without protest or demur and without reference to the actual user allottee and notwithstanding any contestation by actual/user/allotted or existence of any dispute whatsoever/between you and the actual user/allotted pay forthwith to you or to your succession and assign any sum up to Rs. 1, 44,000 (Rupees one lakhs and forty four thousand) that you demand. We agree that a communication from any one of your chief marketing managers to the effect that there has been a default/failure on the part of the actual user/allotted shall be final, conclusive and binding on us.
The guarantee herein contained shall not be affected by (i) any for- balance or indulgence of any kind shown by you to the actual user/allotted and/or (ii) by any change in conditions or registration/allocation prescribed by you and/or (iii) any change in the constitution of the bank or Corporation and/or the actual .
This guarantee is a continuous guarantee and is valid for a period of 12 months from the date of its issue and a claim under it must be preferred within six months from the date of its expiry.
Notwithstanding anything contained in the foregoing clauses, our liability under this guarantee is restricted to Rs. 1,44,000. Our guarantee shall remain in force for a period of 12 months from the date of issue, i.e., up to 13th April, 1980, and a claim under it must be preferred with us within 6 months from the date of expiry. Unless a demand or claim under this guarantee is made on us within 6 months from the date of expiry, i.e., 13th October, 1980. We shall be relieved and discharged from all liabilities there under.'
The other guarantee of Rs. 1,44,000 was in identical terms.
10. It will be seen that the Corporation addressed their letter dated 7th July, 1980, within the period of six months after the date of expiry of the guarantee. The chief marketing manager said in the letter that Pesticides have committed default and that the Corporation was invoking the bank guarantee. They required the bank to pay them Rs. 2, 08,800 within 15 days.
11. Pesticides raise a dispute. Their positive case is that the Corporation has committed breach of contract inasmuch as they were bound to supply the balance quantity of 29 metric tonnes on high seas basis which they have filed to do. In other words they say that they were not legally bound to accept the balance quantity of 29 metric tonnes on ex-godown basis because the ex-godown price is very high. Whether the Corporation has committed breach of contract of Pesticides are in default is a question which has to be decided by the arbitrator. But the bank guarantees are independent of this dispute. They are autonomous in character. They are self-contained. The bank has undertaken to pay the amount of the guarantees in the event of default/failure on the part of Pesticides to observe all or any of the conditions regarding the supply of goods 'on the first demand without protest or demur and without reference to' Pesticides. They have further agreed to make the payment 'notwithstanding any contestation' by Pesticides or the 'existence of any dispute whatsoever' between the Corporation and the Pesticides. It means this, that the bank has agreed to pay 'unconditionally and irrevocably' the amount of the bank guarantees in the event of default of Pesticides.
12. Who has to decide the question of default under the guarantee A communication from any one of the chief marketing manager to the bank that there has been a default on the part of the Pesticides shall be 'final, conclusive and binding on us'. Such is the wide wording of this guarantee. The word of the chief marketing manager is the final word. If he writes to the bank that Pesticides have committed default the bank is bound to pay. Such is the absolute character of the document. The bank is not concerned with the dispute between Pesticides and the Corporation. They are not concerned with the rights and wrongs of the parties. They have agreed to pay without 'protest or demur' or 'contestation'. Pesticides may contest their liability but the bank has nothing to do with that. The bank has agreed to make the payment on the happening of an event. And the event is the event of default by Pesticides. Of the default the chief marketing manager is the sole judge. Neither the bank nor Pesticides can question his decision in so far as this guarantee is concerned.
13. This guarantee is a new creature in our law. It is a new business transaction in the world of commerce. This transaction is called the performance guarantee or performance bound. The merchants find it useful in their business both inland and overseas. The seller of goods asks the buyer to furnish a performance bound so that he can realise the money from the bank in the event of buyer's default. Its purpose is to provide security to the seller for the fulfillment by the buyer of his obligation under the contract. These performance bounds are the life-blood of international commerce. They are a creation of the mercantile genius of the commercial community. What was in vogue in international banking has now been extended to our inland commerce. Except in clear cases of fraud of which the banks have notice, the courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration as available to them or stipulated in the contracts.
14. This performance guarantee, as it is called, is very much like a confirmed letter of credit. It stands on the same footing as an irrevocable documentary credit. It has many similarities to a letter of credit. It has been long established that when a letter of credit is issued and confirmed by a bank, the bank must pay if the documents are in order and the terms of the credit are satisfied. As in the case of irrevocable letter of credit the bank is not concerned to see whether one party has committed the breach on the other, so in the case of these performance guarantees the bank agrees to pay the amount on the happening of a specified event.
15. There is a contractual dispute between Pesticides and the Corporation here in which the rights and wrongs are not clear. That dispute has to go to the arbitrator. He will decide whether the Corporation was right or Pesticides were right. All that the bank has to see is whether the event has happened on which its obligation to pay has arisen. The event in the present case is the demand by the chief marketing manager. He has informed the bank that Pesticides have committed the default. The bank must now honour its undertaking. They have agreed to pay without demur of disputation. They have agreed to pay on the 'first demand', 'notwithstanding any contestation' by Pesticides. They are not concerned with the dispute between Pesticides and the Corporation under the underlying contract of supply. Although the agreement is expressed to be a guarantee it has much more of the characteristic of a promissory note than the characteristics of a guarantee. It is virtually a promissory note payable on demand (per Denning MR in Edward Owen Eng. Ltd. v. Barclays Bank International  1 ALL ER 976;  1 QB 159. The bank has given its guarantee. I might almost say it promises to pay on demand without demur or disputations. They gave that promise. Now a demand has been made. The bank must honour it. This Court cannot interfere with the obligations of the bank. Nor can Pesticides prevent the bank from honouring its promise to pay.
16. Lord Denning has described the nature of this transaction in these words (at p. 983 of 1 All ER and at p. 171 of 1 QB) :
'All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer, nor with the question whether the supplier has performed his contracted obligation or not, nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exception is when there is clear fraud of which the bank has notice.'
17. On these performance guarantees there have been some recent cases in courts. The leading English case in Edward Owen Eng. Ltd. v. Barclays Bank International  1 All ER 976. This basic decision has been followed in this country in Texmaco Ltd. v. State Bank of India, : AIR1979Cal44 and Harparshad and Co Ltd. v. Sudarshan Steel Rolling Mills,  50 Camp Cas 709. A recent decision is Premier Tyres v. State Trading Corporation of India Ltd.  51 Camp Cas 316. A Division Bench of this court has notices the earlier decisions on the subject of performance guarantees. They have come to the conclusion that the performance guarantee is an autonomous and independent contract and that it is irrevocable in character and the obligations arising under the bank guarantees are independent of the obligations arising out of the contract between the parties. The performance guarantee imposes an absolute obligation on the bankers to pay irrespective of any dispute which may arise between the parties on the question whether a party has fulfillled his part of the contract or not. It is independent of the primary contract of sale between the buyer and the seller.
18. Mr. Aggarwal on behalf of Pesticides contest the proposition that the bank guarantee is an independent contract. He says that it is a tripartite contract between the buyer, seller and the bank. He has referred me to State Bank of India v. Economic Trading Co., : AIR1975Cal145 and Major General Mahabir S. S. J. D. Rana v. Llyods Bank Ltd., : AIR1968Cal371 . I am afraid I cannot agree with him. The law is now settled beyond dispute. There is no doubt that these performance guarantees have to be interpreted on their own terms and if the terms, wide as they are as in this case, impose an absolute obligation then the bank is bound to pay to the seller. The buyer does not come into the picture because the bank has undertaken to pay 'notwithstanding the contestation' by the buyer. The buyer's remedy is to have his dispute with the seller resolved either through court or if there is any arbitration clause, through arbitration.
19. The bank is not concerned with the rights and wrongs of the underlying disputes but only with the performance of the obligation which they themselves have confirmed. The letter of guarantee is addressed to the seller in unqualified terms. It is not subject to disputes such as there may be between the buyer and the seller. These promises must be allowed to be honoured, free from interference by the courts.
20. For these reasons I discharge the injunction order dated 21st July, 1980, and dismiss is No. 2369 of 1980. There will, however, be no order as to costs.
21. Counsel for the Corporation says that there is no dispute between the parties which can be referred to arbitration. I do not agree. The Corporation had agreed to supply 40 metric tonnes of Carbaryl technical. 11 metric tonnes they supplied on high seas basis. The balance quantity of 29 metric tonnes they offered to supply ex-godown. Pesticides refused to accept the delivery. They claim that the Corporation ought to have supplied this balance quantity also on the high seas basis because in the allocation made on 6th September, 1979, the Corporation had agreed to supply the entry quantity of 40 metric tonnes on the high seas basis. The question for the decision of the arbitrator will, thereforee, be : Whether the Corporation has committed a breach of contract in not supplying 29 metric tonnes on the high seas basis : If this question is decided in favor of Pesticides they can claim damages or refund of the earnest money.
22. This being the dispute between the parties I cannot agree that there is no dispute which needs to be referred to the arbitrator. Counsel has referred to Rai Bahadur Basakha Singh and Sons (Contractors) P. Ltd. v. Indian Drugs and Pharmaceuticals Ltd., : AIR1979Delhi220 . That authority in my opinion has no application because from the petition, under s. 20 of the Indian Arbitration Act, disputes between the parties can clearly be spelt out. In para. 12 the case of the Pesticides is that having made an allocation order once for selling 40 metric tonnes of Carbaryl technical on high seas the Corporation had absolutely lost its right to go back on that commitment and it was no longer open to the Corporation to change the mode of delivery. In para. 14 this is repeated. Pesticides assert that they are entitled to claim delivery of 29 metric tonnes on high seas basis and rate. In para. 12 they complain that the refusal to supply 29 metric tonnes on high seas basis amounts to a breach of contract for which they are entitled to damages. I am, thereforee, of the view that in the petition the dispute has been formulated and this dispute requires adjudication by the arbitrator.
23. I accordingly appoint Mr. M. S. Joshi, a retired judge of this court, as sole arbitrator in this case. I fix his interim fees at Rs. 1,000 to be paid by Pesticides. The fees will be paid by the Pesticides directly to the arbitrator. Cost will be in the discretion of the arbitrator. The parties will appear before him on 7th March, 1981, at his residence at 11.00 a.m.