B.N. Kirpal, J.
(1) This appeal arises from the order passed on an application under older 39 Rules 4 and 5 Civil Procedure Code . moved by the appellant wherein it had sought permission to invoke bank guarantee which had been furnished by the respondent.
(2) It appears that the appellant was trying to negotiate with the Iranian State Railways for the supply of certain goods. In order to be able to negotiate the proposed contract the appellant, it seems, approached the respondents in order to ascertain for itself as to whether it would be in a position to make the supplies.
(3) Some understanding between the parties was apparently arrived at. This is reflected in a bank guarantee dated 14th July, 1976 in favor of the appellant by the Punjab National Bank, Shahdara, Delhi, which had been furnished at the instance of the respondent. The relevant portions of the bank guarantee, with which we are concerned in the present case, read as under:
'WITH reference to contract made between Iranian State Railways and M/s. Harprashad & Company Limited, Mahajan House, E 1 & 2 Ndse Part Ii New Delhi for supply of Railway Track Components and in compliance with request made by M/s. Sudarshan Steel Rolling Mills, 601 Motiram Road, Shahdara, Delhi-110032. We Punjab National Bank, Shahdara, Delhi-32, hereby guarantee the good performance of the obligations which M/s. Sudarshan Steel Rolling Mills has assumed towards Harparshad & Company Limited in accordance with the above contract. In case M/s. Sudarshan Steel Rolling Mills fails in the judgment of M/s. Harparshad & Company Ltd. to carry out and fulfill any of the obligation assumed under the said contract, we undertake to promptly pay the Punjab National Bank, Parliament Street, New Delhi, in favor of M/s. Harparshad & Company Ltd., or their order, purely upon receipt of first written notice, any amount up to Rs. 12,13,616.00 that may be claimed by them for any reason or purpose, at their own discretion without it being necessary for M/s, Harparshad & Company Ltd., to issue a declaration or take action through administration legal or order channels, or to prove the default of M/s. Sudarshan Steel Rolling Mills, and/or the variety of the affirmations made by them. Guarantee will be effective on execution of contract between Messra Harparshad & Co. Ltd. and Messrs Sudershan Steel Rolling Mills/receipt of confirmed orders/LC in favor of Messra Sudarshan Steel Rolling Mills.'
(4) Thereafter on 3rd March, 1977 a formal contract between the? appellant and the Iranian State Railways was executed. The aforesaid bank guarantee contemplated that a formal contract between the parties herein would be executed. After the appellant had entered into an agreement with the Iranian State Railways, it entered into the said formal agreement with the respondents on 22nd June., 1977. Under this agreement the respondent (who was referred to in the agreement as the 'contractor') undertook certain obligations to be fulfied qua the appellant (referred to in the agreement as the 'exporter'). The provisions of the said agreement, which arc relevant for the purposes of this appeal, are contained in Clauses 4,5 and 7 which read as follows:
'4.That the 'Contractor' shall be paid in Indian Rupees for supply of the goods at price equivalent to Us $ 490.34 per metric ton C & F Khorramshahr Bunder Shahpour. This C & F price of Us S 490.34 per metric tonnes mentioned above has been arrived at after deducting from the gross C & F price of Us $ per metric ton, a sum of Us $ 20.06 per metric ton) being the share of cash incentive apponionable to the 'Exporter' calculated @24% on Us 83.60 i.e. F.OB. value assigned to 'Exporter' out of the total cash incentive receivable from the Government of India. It is agreed by and between the parties that in the event of any variation in the rate or amount of cash assistance, proportionate change will be made in the amount of Us S 20.06 per metric ton as aforesaid and corresponding change will be made in the price of Us $ 490.34 per metric ton C & F Iranian Port. payable to the contractor.
(5) The 'Exporter' has approached shipping Companies for special reduction in the freight rate. It is specifically agreed by and between the parties that in the event of any special reduction in the freight rate inclusive of all surcharges, it obtained by and due to efforts of the 'Exporter' from the shipping companies the benefit of this special reduction shall be appropriated as follows : Special reduction up to Us $ 20 per ton Along with all the cash indentives thereon resulting by virtue of F.O.B. price going up on account of the special reduction in freight, to be appropriated for the benefit of the 'Exporter', Any special reduction over and above Us $ 20 per metric ton Along with all the cash incentives resulting by virtue ofF.O.B. price going up, to be shared equally between the 'Exporter' and the 'Contractor'.the 'Contractor' will be at liberty to make shipments according to his convenience in accordance with the Article No. 3 of the 'Purchase Contract'. If for the special reduction a minittium quantity is specified the same will not exceed 200 tonnes per shipment. Any normal decrease in freight or surcharges thereon shall be to the account of the 'Contractor' Along with the cash incentive resulting by virtue of F.O.B. prices going up. It is agreed between the parties that prices shall be accordingly adjusted as and when such special reduction takes place and to the extent of shipments sent under such special reduced rate of fieight. That the 'Exporter' has furnished a performance guarantee of the value of the 10% of the 'Goods' to be supplied to 'Foreign Buyer' under the 'Purchase Contract', of the Punjab National Bank, Parliament Street, New Delhi. The said performance guarantee has been furnished by the Punjab National Bank against a counterguarantee of the contractor. It is clearly agreed and understood that in the event of any amount being paid or payable under the performance guarantee of the 'Exporter' to the 'Foreign Buyer' due to fault of the 'Contractor' the 'Contractor' through its counter-guarntee or otherwise shall make good the payment made pursuant to the aforesaid bank guarantee by Punjab National Bank and any such payment shall be exclusively and solely to the account of 'Contractor' and the Punjab National Bank's certificates in respect of payment made under the performance guarntee shall be final and binding upon the 'Contractor.'The appellant wanted to invoke the said bank guarantee as, according to it, the Iranian State Railways had not paid a sum of Us $ 2,60,000 under the contract. In order to prevent the said guarantee from being invoked, the respondent filed Suit No. 933 of 1978 wherein it was prayed that the permanent injunction should be issued restraining the appellant herein from invoking the afoiesaid bank guarantee dated 14th July, 1976.
(6) Along with the aforsaid suit the respondent herein filed an application for the grant of an interim injunction for restraining the present appellant from encashing the bank guarantee. The injunction, as prayed for, was granted. The appellant herein then filed an application for vacation of the same.
(7) By order dated 1st December, 1978 the aforesiad interim applications of the parties in the aforesaid suit were disposed of by D.K. Kapur J. An injunction was granted restraining the present appellant from encashing the bank guarantee. It was directed that the bank guarantee should not be encased unless the Iranian State Railways invoke the- performance guarantee furnished to it by the appellant. It was further held that the appellant herein could encash the bank guarantee if the appellant found that the respondents have failed to fulfill the obligations under the contract. The learned Judge directed that whenever the appellant wanted to invoke the bank guarantee it should inform the court by an application about the same rind, if the court permits, then the bank guarantee may be encashed.
(8) An appeal was filed against the said decision. The said appeal was however, dismissed by a Division Bench of this court in a judgment which is reported as Mis. Harparshad & Co. Ltd. v. Sudarshan Steel Mills and others, : AIR1980Delhi174 . It was observed by the Division Bench that, in terms of the bank guarantee, the appellant herein should have given a notice in writing to the bank stating that in its judgment the respondents herein had failed to carry any of the obligations imposed upon them by the agreement dated 22nd June, 1977 and, thereforee, the appellant had become entitled to recover the amount under the bank guarantee. Unless such a notice was given the bank was not obliged to mike the payment.. It is turn this reason the appeal was dismissed.
(9) The appellant then filed an application under Order 39 Rule 4, being 1.A. 2937 of 1980, from whose decision the present appeal arises. In this application the appellant sought to inform this court that it desired to encash the bank guarantee for a sum of Rs. 8,82, 541-75. According to the appellant this sum had become due and payable to it in terms of Clauses 4 and 5 of the agreement dated 22nd June, 1977 and, in it's judgment, this was the loss which had been suffered by the appellant herein on account of the failure of the respondent to perform and fulfill the obligations contracted by the respondents herein under the agreement dated 22nd June, 1977. The appellant gave the details how this amount of Rs. 8,82, 541-75 had been arrived at and also filed documents in support of its claim.
(10) The respondent filed its reply opposing the said application. It also contended that the aforesaid amount was not payable to the appellant. In paragraph 6 of the reply it was contended by the respondent as follows: -
'THAT the bank guarantee dated 14-7-1976 furnihed by defendant no. 3 for plaintiff to defendant no. I was for the good performance of the contract and it was subject to the contract dated June 22, 1977 executed between the plaintiff and defendant No. 1. It is specifically denied being wrong, false, malafide and illegal that the plaintiff has committed any breach of the above said contract and/or has failed to fulfill the obligations under the above said contract dated June 22, 1977 which has enabled the defendant No. I to invoke and encash the bank guarantee amount.'
(11) The appellant filed a rejoinder to the said reply reiterating the averments containd in the application. Byorder dated 1st December, 1980 R.N.Aggai wal J. dismissed the appellant's application. The learned Single Judge held that the bank guarantee referred to the purchase contract between the appellant and the Iranian State Railways and the guarantee made no reference to the agreement dated 22nd June, 1977. It was observed that on the day when the bank guarantee was furnished by the respondcnt, the only obligation in contemplation of the parties were those contained in the contract between the appellant and the Iranian State Railways The agreement between the parties dated 22nd June, 1977 was held not to be incontemplation of the parties. According to thee learned Judge this view find support) from clauses 2 and 7 of the contract dated 22nd June, 1977. It was lastly observed that disputes have already been referred to arbitration and the bank guarantee should not be allowed to be invoked.
(12) We are unable to agree with the conclusion arrived at by the learned single Judge. In our opinion the bank guarantee could be invoked if the appellant was of the view that the obligations under the agreement dated 22nd June, 1977 have not been fulfillled by the respondent. The bank guarantee is unhappily worded, but on a close scrutiny of the facts the only conclusion possible is that the 'contract' referred to in the bank guarantee, the non fulfillment of which entitles the appellant herein to invoke the bank guarantee, can only be the 'contract' between the parties herein, and the bank guarantee does not refer to the contract between the appellant and the Iranian State Railways, as held by the learned single Judge. It is important to note that the bank guarantee dated 14th July, 1976 in terms states that 'it will be effective on execution of contract between M/s. Harparshad & Go. Ltd. v. M/s.Sudarshan Steel Rolling Mills.........'. In the bank guarantee it is stated that the bank guarantee ''the good performance of the obligations which M/s. Sudarshan Steel Rolling Mills have assumed towards M/s Harparshad & Co. Ltd., in accordance with the above contract.' The money is to be paid if the respondent 'fails in the judgment of M/s. Harparshad & Co. Ltd., to carry out and fulfill any of the obligations assumed under the said contract...............'. At the time when the bank guarantee was issued, no contract between the Iranian State Railways and M/s. Harparshad & Co. Ltd., had in fact come into existence. In any case the respondent herein was not a party to that contract. Under the contract dated 3rd March 1977, between appellant herein and the Iranian State Railways, no obligations were assumed by the respondent. There was no privity of contract between the respondent and the Iranian State Railways. The last portion in the Bank guarantee, wherein it is stated that the same will come into effect on the execution of a contract between the parties herein, leads us to believe that there was an oral agreement between the parties which was reduced to writing on 22.6.1977. The respondent had to discharge its obligations towards the appellant under the said agreement and not under the agreement between the appellant and the Iranian State Railways. The bank guarantee makes reference only to that contract under which obligations have been assumed by the respondent towards the appellant. That contract can only be the contract dated 22nd June, 1977.
(13) As already noted, the bank guarantee is to be effective only on formal contract between the parties being executed. If the agreement dated 22nd June, 1977 had not been entered into there would be no obligations to be performed by the respondent towards the appellant. The bank guarantee was to come into operation not on the day it was executed but was to come into operation at a future date. That future date was to be the date when the contract between the parties had been executed. The agreement between the parties was executed on 22nd June, 1977 and it is with effect from that day that the bank guarantee become effective and came into operation. The question of invoking the bank guarantee can, thereforee, arise only after 22nd June, 1977 and not earlier. The occasion for interperting the terms of the of the bank guarantee would thus arise only after 22nd June, 1977, after it has come into operation, and the word 'contarct, referred to in the bank guarantee can only mean the contract dated 22nd June, 1977 for it is under that agreement that certain obligations have been taken over by the respondent. We are, thereforee, of the opinion that the bank guarantee had been wrongly construed, by the learned single Judge, to mean that the 'contract' referred to in the said bank guaratee was the 'contract' of purchase between the appellant and the Iranian State Railways and not the agreement dated 22nd June, 1977.
(14) There is one other reason why the learned single Judge could not have come to that conclusion which he did. The Law of pleading requires that a party cannot urge contrary to what it has pleaded. In paragraph 6 of its reply to I A. 2937/80, which has been quoted herein above, the rcspondent has clearly admitted that the bank guarantee dated 14th July, 1976 furnished by it 'was for good performance of the contract and it was subject to the contract dated June 22, 1977 included issues the planitiff and contant no. I' . The respondent thereforee, clearly admitted in it's reply that the bank guarantee has furnished by it in respect of the contract dated 22nd June, 1977. There being no dispute between the parties of this issue, the contrary finding cannot be sustained.
(15) We also find that the attention of the learned Judge was presumably not drawn to the observations of the Division Bench in the earlier case between the parties. It was observed by the Division Bench that the bank guarantee could be invoked when the appellant states that the respondent 'has failed to carry out any of the obligations imposed upon it by the agreement dated 22nd June, 1977'. The Division Bench decided the case on the basis that the contract referred to in the bank guarantee was a contract dafed 22nd June, 1977 and not the contract between the appellant and the Iranian State Railways.
(16) It was contended by the learned counsel for the respondent that according to Clause 7 of the agreement dated 22nd June, 1977 the bank guarantee could be invoked if the appellant herein is required to pay any amount to the Iranian State Railways, in terms of the performance guarantee executed by it in favor of that Railways. We are unable to agree with this submission. The agreement dated 22nd June, 1977 does not say that the bank guarantee could be operated upon only if any sum becomes payable to the Iranian State Railways on a default being committed by the respondent. The obligations of the respondent to make payment are to be found in the bank guarantee. Clause 7 of the agreement dated 22nd June, 1977 only clarifies that the bank guarantee would also cover the Iranian contract, but whether the bank guarantee could be encased or not will really depend upon the terms of the bank guarantee, and the terms of the bank guarantee canont be varied or overridden by any of the terms of the agreement dated 22nd June, 1977. This is also held in the earlier decision by the Division Bench at page 180 of the report, when it was observed that 'the a.greement dated 22nd June, 1977, has been read wiih the bank guarantee only to understand the terms of the bank guarantee and not to override the terms of the bank guarantee.' The bank guarantee is to 1)5 invoked if the respondent does not fulfilll, its obligations in favor of the appellant in terms of the agreement dated 22nd June, 1977. Clause 7 of the said agreement only extends the operation of the bank guarantee. The said clause is, infact, in the nature of an indemnity and it would entitle the appellant to encash the bank guarantee if the appellant has to make pay ment to the Iranian State Railways due to any fault of the respondent herein.
(17) It was contended on behalf of the respondent that as disputes between the parties are pending adjudication) the single Judge was right in issuing the temporary injunction. In our opinion merely because suits between the parties are pending would not, ipso facto, entitle the plaintiff to the grant of an injunction. It was held by this court in M/s. Harparshad & Go. 'a case (Supra) that the liability under the bank guarantee is absolute and cannot be evaded by raising disputes. The court held that 'any dispute raised under the agreement of 22nd June, 1977 can be a reason for non payment of the amount due under the bank guarantee. The bank guarantee is an automonous and independent contract and must have effect according to its own terms.'
(18) The case of Harprashad & Co., was followed by another Division Bench of this court in its judgment in the case of Premier Tyre Ltd. v. State Trading Corporation 1981 R.L.R. 138. Inpremier Tyre's case a bank guarantee had bean given which was in the nature of a performance guarantee. According to Premier Tyre Ltd., a dispute had arrived as to whether any default had been committed by it or not and as such the State Trading Corporation should be restrained from Realizing the bank guarantee. The single Judge having refused to grant an interim injunction an appeal was filed. Sachar J. speaking for the bench, observed that 'it is now well settled that performance guarantee stands on a similar footing to an irrevocable letter of credit. The bank which gives a performance guarantee must honour that guarantee according to its terms'. It was held that in terms of the bank guarantee it was wholly irrelevant as to whether a dispute has been raised and as to whether the party which furnished the bank guarantee had failed to fulfill its obligations or had become liable to make the payment. The terms of the bank guarantee have to be seen on their own.
(19) A bank guarantee is a contract between the issuing bank and the person in whose favor the guarantee has been furnished. Though the bank guarantee may have been issued by the banker at the instance of its client, as far as the bank guarantee is a concerned, it is a bilateral contract between the banker and the party in whose favor the guarantee has been furnished. The parly at whose instance the guarantee has been furnished is, in a way, a stranger to the said contract of bank guarantee. The person in whose favor the bank guarantee has been issued has a right to ask the bank to fulfilll its obligations in terms of the bank guarantee. If the tems of the bank guarantee entitles a party to ask for the payment of money from the bank then that light cannot be interfered with merely for the reason that there exists a dispute between that party and the client at whose instance the bank guarantee had been issued.
(20) Reference in this context may usefully be made to a decision of the Supreme Court in the case of United Commercial Bank v. Bank of India and others : 3SCR300 , the court observed as follows
'A letter of credit sometimes resembles and is analogous to a contract of guarantee. In Elian v.Matsas, (1966) 2 All. E.R. 495, Lord Denning. M.R., while refusing to grant an injunction stated...... a bank guarantee is very much like a letter of credit. The courts will do their utmost to enforce it according to its terms. They will not, in the ordinary course of things, interfere by way of injunction to prevent its due implementation. Thus they refused in Malas v. British lmex Industries Ltd. But that is not an absolute rule. Circumstances may arise such as to warrant interference by injunction. A bank which gives a performance guarantee must honour that guarantee according to its terms. In R.D. Harcottle (Mercantile) Ltd. v. National Westminster Bank Ltd. (1977) 3 Wlr 752 Keri,J. considered the position in principle. We would like to adopt a passage from his judgment at p. 761: It is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by banks. They are the lifebloodoj international commerce. Such obligations are regarded as collateral to the underlying rights and obligations between the marchants at either end of the banking chain. Except possibly iii 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. The courts are not concerned with their difficulties to enforce such claims ; these are risks which the mechants take. In this case the plaintiffs took the risks of unconditional wording of the guarantees. The machinery and commitments of banks are on a different level They must be allowed to be honoured, free from interference by the cousts. Otherwise trust in international commerce could be irreparably damaged- . The observations of Kerr J. have been cited with approval by Lord Denning, M.R. in Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. (1977) 3 Wlr 764'.
(21) A similar view with regard to performance guarantee has also been taken by this court in the case of Pesticides India, Props Mewar Oil & Gen. Mills Ltd .v. State Chemicals and Pharmaceuticals Corporation of India Ltd. and others 1982 Delhi 78 and Mi's. Banwari Lal Radhe Mohan v. Punjab State Co operative Supply & Marketing Federation Ltd. Chandigarh and another 1982 Delhi 357. In both these cases it was held that the performance guarantees are similar to letters of credit and the obligations of the bank is absolute in terms of the bank guarantee and the same cannot be lightly interfered with by the courts and the bank. cannot be restrained from making payment in terms of the bank guarantee. In our opinion the said decisions lay down the correct law.
(22) In the present case the appellant has clearly stated that a sum of R'. 8,02, 541-75 is due to it as the respondent has failed to fufill its obligations contained in Clauses 4 and 5 of the agreement dated 22nd June, 1977. In the judgment of the appellant this amount had become payable by the respondent. In our view the terms of the bank guarantee have been fulfillled with the result that the bank was under an obligation to pay the amount demanded by the appellant. The bank cannot be restrained by an injunction from discharging its obligations arising out of a bank guarantee. It is to be borne in mind that, as observed in United Commercial Bank's cage (supra) as well as in Premier Tyre Ltd's case (supra) the court usually refrains from granting injunction to restrain the performance of a contractual obligation arising out of a bank guarantee. The respondent has not been able to show that in the present case any fraud has been committed. In fact none has been alleged. This being so, the mere fact that there is a dispute pending between the parties, which has yet to be adjudicated upon, would be no ground for restraining the bank from co nplying with its obligations under the bark guarantee.
(23) It was then submitted by the learned counsel for the respondent that the agrecmcnt dated 22nd June, 1977 contemplates that all disputes between the parties will be decided by arbitration. The arbitration clause contained in the said agreement can, in our opinion, not prevent the appellant from invoking the bank guarantee. As already observed, the agreement dated 22nd June, 1977 is independent of the bank guarantee. The provisions of the agreement dated 22nd June, 1977 cannot be incorporated into the bank guarantee. The bank guarantee can be invoked without having resort to the arbitration proceedings. The appellant has an independent right against the bank for invoking the bank guarantee in accordance with the terms thereof.
(24) It was lastly contended that the claim of the appellant is malafide. Prima facie we find that this is not so. According to clause 5 of the agreement if there is special reduction in the freight rates due to the efforts of the appellant then the benefit thereof will go to the appellant to the extent specified in the said clause. Our attention has been drawn to various documents filed along with 1.A. 2937/80 which prima facie show that the appellant had been making demands to have the rate of freight decreased. It does prima facie appear that it was due to the efforts of the appellant that the freights were reduced. We would not, however, like to give oui considered opinion on this aspect of the case because this may seriously prejudice the suits which are pending between the parties. We are however, of the opinion that it cannot be said that the claim put forth by the appellant was malafidfe as is sought to be contended before us by the learned counsel for the respondent.
(25) For the aforesaid reasons the impugned judgment dated 1st December, 1980 is set aside and I.A. No. 2937/80 is allowed and the appellant is permitted to encash the bank guarantee for the sum of Rs. 8,07, 541-75. The appellant would be entitled to costs. Counsel's fee Rs. 650.00 .