1. The petitioner entered into a contract with the Union of India for the construction of residential accommodation for certain units at Meerut being agreement No. CENZ/ MRT/E/34 of 1971-72 (hereinafter referred to as Contract agreement). The contract agreement was subject to General Conditions of Contracts as contained in I.A.F.W. 2,249. Under Clause 64 of the said General Conditions of Contracts, the petitioner/contractor was entitled to running payments at intervals of not less than one month, Such running payments were to be made up to the extent of 90% of the value of work executed and the remaining 10% could be retained by the Union of India as a reserve in case of works not exceeding Rs. 5 Lacs; 7 1/2% on the next Rs. 5 Lacs and 5% on the balance after the first Rs. 10 Laws. In one of the provisos to said clause 64 it was provided that the contractor may be paid advance on account to the full value of work executed on the site on his furnishing Guarantee bond(s) from a Scheduled Bank for the amount of the retention money which should otherwise be recover able from him under the contract, that the said bond shall be executed for a period and on a form as directed by the Accepting Officer and that the Contractor shall further arrange to extend the period of the Guarantee bond or shall furnish fresh Guarantee bond(s) of equal value so as to cover the period till after payment of the final bill. The petitioner in pursuance of the said clause 64 was asked to furnish a guarantee bond in the sum of Rs. 4 Lacs only in lieu of the reserve of the retention money applicable to the contract. The petitioner furnished the guarantee bond of National and Grindlays Bank Ltd. and a copy of the same has been placed on the record, as Annexure P-1 to the petition. The guarantee bond was renewed from time to time and finally extended up to 30-4-1976.
2. The petitioner completed the entire work on July 14, 1975. The final bill was prepared by the respondents but the Petitioner signed the bill only on October 10, 1975 and that also under protest. The final payment was made to the petitioner on April 1, 1976. In the meantime the in his letter dated March 12, 1976, copy Annexpure P-6 to the petition alleging that the disputes have arisen under the contract and requested the Engineer-in Chief to appoint an arbitrator for adjudication of those disputes/claims in accordance with the agreement. The Engineer-in-Chief has not go far appointed any arbitrator.
3. On April 22, 1976, the Chief Engineer addressed a letter to the Grindlays Bank Limited pointing out that the bank guarantee bond bearing No. 1204/75/16 dated February 27, 1975 for Rs. 4 Lacs was executed by the bank in favor of M/s. Rawla Construction Company and since certain recoveries against the contractor have arisen, called upon the said bank to afford credit of Rs. 4 Lacs to the revenue deposit of Ge (East) Meerut in terms of para 2 of the Bank Guarantee Bond. A copy of this letter was endorsed to the petitioner. It is at that stage that the petitioner filed the present application under Section 20 of the Arbitration Act, 1940 praying to the Court that the arbitration agreement as contained in clause 70 of the General Conditions of Contracts attached to the contract agreement between the parties be filed in the Court and an order of reference in accordance with said Clause 70 be made for adjudication of the disputes that have been raised by the petitioner. This is registered as Suit No. 300-A of 1976. Along with the petition under S. 20 of the said Act, the petitioner also moved an application, being I.A. 945 of 1976, under S. 41 read with IInd Schedule of the said Act praying that the Court may restrain the respondents from giving effect to their letter dated April 22, 1976 and from encashing the guarantee bond.
I.A. 945 of 1976 came up for the Court on ex parte hearing before April 29, 1976 when the Court issued notice to the respondents and further restrained the respondents from encashing the bank guarantee. After pleadings in the suit as well as the replies to the I.A. were completed by the parties, the matter is placed before the Court for hearing in the suit as well as in the I.A. I have heard the learned counsel for the parties.
4. The respondents have no objection in getting the disputes adjudicated by arbitration in terms of clause 70 of the General Conditions of Contracts. The said clause 70 is quoted in para 10 of the petition and is admitted as correct. It contains the arbitration agreement between the parties being that the amount claimed is due by parties providing for all disputes between way of loss or damage -caused to or the parties being referred to the sole would be caused to or suffered by the arbitration of an Engineer Officer to be appointed by the authority mentioned in the tender documents. It is admitted by the parties that the authority mentioned in the tender documents is 'Engineer-in Chief.' Military Engineers Services, New Delhi. I, thereforee, direct that the arbitration agreement between the parties contained in Contract No. CENZ/MRT/E/34 of 71-72 be filed in this Court within one month. The petitioner has mentioned the disputes/claims that had then arisen in the letter dated March 12, 1976. Mr. Daljit Singh states at the Bar that certain further disputes have arisen between the parties after 12-3-1976 and they should also be referred to arbitration, The Engineer in-Chief should appoint an Engineer Officer as an arbitrator within one month in accordance with said clause 70. The disputes raised by the petitioner in the letter dated March' 12, 1976 shall stand referred to the appointed arbitrator. It will be open to the petitioner to raise further disputes/claims before the arbitrator that have since arisen. It will also be open to the Union of India to raise counter-claims or disputes that have arisen up to date before the appointed arbitrator.
5. Suit No. 300-A of 1976 is allowed leaving parties to bear their own costs.
6. The next question for consideration is whether the ex parte injunction granted on April 29, 1976 restraining the respondents from encashing the bank guarantee should be made absolute or not and if so to what extent. The recitals in the bank guarantee clearly show that it was issued in consideration of the President of India having agreed not to retain Rs. 4 lacs out of the reserve or the retention money as provided under the Terms & Conditions of the Contract Agreement. National & Grindlays Bank Ltd. (now succeeded by Grindlays Bank Ltd.) undertook to pay to the Government an amount not exceeding Rs. 4 Lacs against any loss or damage caused to or suffered or would be caused to or suffered by the Government by reason of any breach by the petitioner of any of the terms of conditions contained in the contract agreement. Clause 2 of the Guarantee Bond contains an undertaking of the bank to pay the amount due and payable under the guarantee without any demur, merely on a demand from the Government stating that the amount claimed is due by way of loss or damage caused to or would be caused to or suffered by the Government by reason of any breach by the petitioner of any of the terms or conditions contained in the said contract agreement or by reason of the petitioner's failure to perform the said contract agreement. It is further provided that any such demand on the bank shall be conclusive as regards the amount due and payable by the bank under this guarantee but liability shall be restricted to an amount not exceeding Rs. 4 Lacs.
7. The bank guarantee, thereforee, constitutes an agreement between the bank and the Government under which there is an absolute obligation of the bank to make the payment to the Government merely on a demand from the Government, The bank is prohibited under the guarantee from raising any objection. Any demand made on the bank in accordance with the eventualities mentioned in clause 2 is conclusive as regards the amount due and payable by the bank. There may be disputes between the petitioner and the Government about the amount claimed by way of loss or damage caused to or would be caused to or suffered by the Government by reason of any breach by the petitioner of any of the terms and conditions contained in the contract agreement or by reason of the petitioner's failure to perform the said contract agreement but so far as the bank is concerned, it has to make payment on demand without any demur. The bank guarantee is a definite under taking on the part of the bank and constitutes an engagement of the bank to pay to the Government merely on demand. The bank has assumed the liability and responsibility to satisfy directly the claim of the Government. Thus an independent contract has been created between the bank and the Government by reason of the bank undertaking to the Government in consideration of the Government having agreed not to retain Rs. 4 lacs out of the reserve or the retention money as under the said contract agreement, to pay up to Rs. 4 lacs without any demur merely on demand from the Government. Such bank guarantees have assumed great significance in the present commercial system and in contracts between the Government and the contractors. An elaborate system has been built on the footing that the banks would always honour without any objection the obligation under the guarantee and on that assurance the reserve or retention money is not retained by the Government. Such contracts have to be respected and not interfered with.
8. In M/s. Tarapore and Co. Madras v. M/s. V/o Tractoroexport Moscow, : 2SCR920 the obligations under the letter of credit came up for consideration before the Supreme Court. It was observed that opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods are up to contract or not. A vendor of goods selling against a confirmed letter of credit is selling under the assurance that nothing will prevent him from receiving the price. If the buyer has an enforceable claim that adjustment must be made by way of refund by the seller and not by way of retention by the buyer. It was held:
'The letter of credit is independent of and unqualified by the contract of sale or underlying transaction. The autonomy of an irrevocable letter of credit is entitled to protection. As a rule Courts refrain from interfering with that autonomy.'
9. In the contract agreement the Government had a right to retain certain percentage out of the bills submitted by the petitioner as reserve or retention money. The petitioner was paid on ac count of the full value of the executed work on the site because he furnish ed the guarantee bond from the bank to the extent of Rs. 4 lacs for the amount of the reserve or retention money which would have otherwise been re covered from the petitioner under the contract. The Government would have retained the money if the bank guarantee had not been furnished by the petitioner. But with a view to facilitate the entering into of the contracts and the payment of the full value of the work executed, the Government adopted the alternative mode of securing that money by obtaining a bank guarantee. The undoubted value of such bank guarantees given on behalf of contractors in the contracts with the Government and/or public undertakings is becoming an in creased practical advantage to the con tractors, but at the same time securing the amount due and payable to the Government and/or Public Undertakings. But this system of securing the reserve or retention money would break down completely, if the Courts start issuing injunctions which would result in freezing the amount due and payable under the bank guarantee. The bank guarantee is a well recognised and accepted mode of enforcing the obligations arising out of the contract and has to be protected in the same manner as the irrevocable letter of credit was protected by the Supreme Court * In such cases the Courts should refrain from interfering with the rights which flow from the bank guarantees. The Court's jurisdiction to grant injunctions is wide, but it would be wrong to interfere normally with the established commercial practice.
10. However, on the facts of the case before me the position is slightly different. In the reply it is stated that there was physical completion of the work and for this reason the final bill was also paid, that on post-payment audit and technical examination of the works and the final bill, some over-payments have been discovered in respect of works executed by the petitioner, and that as a result of this, the respondents have to make recoveries of about Rs. 3,00,000/- the petitioner. Clause 67 of the General Conditions of Contracts reserves a right to the Government to carry out post-payment audit and technical examination of the works and the final bill, including all supporting vouchers, abstracts etc. A right is further reserved with the Government to carry out checks and enforce the recovery when detected, notwithstanding the fact that the amount of the Final Bill may be included by one of the parties, as an item of dispute before the arbitrator appointed under the Arbitration Clause of the contract and notwithstanding the fact that the amount of the bill figures in the arbitrator's award. It further provides that if as a result of such audit and technical examination any overpayment is discovered in respect of any work done by the contractor or alleged to have been done by him under the Contract it shall be recovered by Government from the Contractor by any or all of the methods prescribed in the contract agreement. Thus it was open to the Government to carry out post-payment audit and technical examination and if any overpayment is detected it can be recovered from the petitioner under the contract agreement.
11. In the reply there is a mere assertion that 'As a result of this the respondent has to make recoveries of about Rs. 3 Lacs from the Petitioner'. No further details have been furnished either in the reply or in the affidavit in support thereof. The demand which has been made against the Grindlays Bank Ltd. only contained this statement that 'certain recoveries against the above contract have arisen'. This is not within the scope of Clause 2 of the Guarantee Bond. Had the Government made a demand stating that the amount claimed is due either by way of loss or damage caused to or would be caused to or suffered by the Government by reason of any breach by the petitioner of any of the terms or conditions contained in the said contract agreement or by reason of the petitioner's failure to perform the contract agreement, then such demand would have been conclusive as regards the amount due and payable by the bank, otherwise not. Then the alleged recoveries are of about Rs. 3 Lacs, but the Government has asked the Bank to deposit Rs. 4 Lacs. This demand, thereforee, could not -be for the amount due and payable by the petitioner. In the absence of any demand having been in terms of Clause 2 of the Guarantee Bond, the Guarantee Bond could not be enforced. This is my, prima facie, opinion expressed on the application for the grant of the interim relief. Thus the respondents have no, prima facie, case in their favor calling upon the Grindlays Bank Ltd. to afford the credit of Rs. 4 lacs to the Revenue. But the bank guarantee has to be kept alive till the disputes are settled by the arbitrator.
12. The result of the above discussion is that the ex parte injunction granted on April 29, 1976 is made absolute till the award is made by the arbitrator. Mr. DaIjit Singh, however, points out that Clause 3 of the Guarantee Bond provides that in the event of notice of demand being served on the bank, the liability of the bank under the guarantee will continue until terminated by operation of law. In my opinion, this is not sufficient and may create complications and disputes. The petitioner will keep the bank guarantee alive till the date of the award and 3 months thereafter by obtaining extension of the bank guarantee from the Grindlays Bank Ltd. within a fortnight from today. The petitioner may extend the bank guarantee for a period of one year in the first instance. In the circumstances I leave the parties to bear their own costs.
13. Order accordingly.