Arbitration Petition No. 34 of 1991

14th October, 1991.

Petitioner Counsel: Dr. D. Y. Chandrachud, D. D. Madan, M/s. Gagrat and Co.
Respondent Counsel: N. G. Thakkar, S. A. Bhalwal , C. N. Mehta, M/s. Vyas and Bhalwal

JUDGMENT

ORDER :- I am passing orders on three suits which are for referring disputes to arbitration and on three petitions which are for interim reliefs in those proceedings. The circumstances giving rise to these proceedings are stated in the following paragraph.

2. It will be noticed from the titles of the suits given above that the parties are the same in all the three suits. However, three different suits have been filed because they arise from three different agreements which are in respect of three different shipping vessels viz. (i) M. V. Ramey Tide, (ii) M. V. Jensen Tide, and (iii) M.V. Mire Tide. Suit No. 347 of 1991 arises from the agreement pertaining to M.V. Ramey Tide, Suit No. 348 of 1991 arises from the agreement pertaining to M.V. Jensen Tide, and Suit No. 349 of 1991 arises from the agreement pertaining to M.V. Mire Tide. These three vessels are foreign vessels which the plaintiffs had chartered from the foreign owners M/s. Tidewaters Marine Service Inc. Foreign vessels cannot be legally plied in Indian Waters without licence from the Director General of Shipping, Government of India. The plaintiffs obtained "Specified Period Licences" in respect of these vessels. Prior to the dispute, the last of such licences for M.V. Ramey Tide expired on 20th December 1990, that for M. V. Jensen. Tide expired on 30th November 1990, and that for M. V. Mire Tide expired on 30th November 1990. The plaintiffs entered into three separate agreements in respect of the three vessels with the 1st defendants under which they charter hired these three vessels to the 1st defendants for one year with effect from the date of delivery of the vessel to the 1st defendants as provided in clause 1.2.1 of each agreement. M. V. Ramey Tide was delivered on 21st December 1989 and the one year period in respect of the said vessel ended on 20th December 1990. M. V. Jensen Tide was delivered to the 1st defendants on 20th November 1989 and the one year period expired on 19th November 1990. M. V. Mire Tide was delivered on 25th November 1989 and the one year period expired on 24th November 1990. On 17th October 1990 there was further renewal of the periods of the charter hire agreements for one year. This would however require extension of the licence from the Director General of Shipping and this was sought for by the plaintiffs by their letter dated 3 1st October 1990 but by a telex dated 13th December 1990 the Director General of Shipping informed the plaintiffs that the request for extension was not acceded to as per Government decision. The plaintiffs then informed the 1st defendants that the D. G. Shipping had refused to extend the licences and, therefore, the agreements would stand cancelled and to treat the communication in each case as notice under clause 13.1 of each agreement. According to the plaintiffs on 5th January 1991 they handed over the vessels to the foreign owners from whom they had obtained the same. Further, according to the plaintiffs, on 11th January 1991 they received a letter dated 4th January 1991 from the D. G. Shipping that licence for M. V. Jensen Tide was extended for three months and on 12th January 1991 they received a letter, dated 10th January 1991 from the D.G. Shipping that the licence period for the other two ships was also extended for three months. It appears that the 1st defendants charged the plaintiffs for breach of contract and they sought to invoke the three Bank guarantees that were given pursuant to the three agreements (i.e. the main agreements). In each Bank guarantee there is reference to the corresponding main agreement requiring the plaintiffs to furnish a performance guarantee and the guarantee goes on to state -

"....The State Bank of India, (hereinafter referred to as THE BANK) which expression shall unless repugnant to the context or meaning thereof, include all its successors, administrators, executors and assigns) do hereby guarantee and undertake to pay to the extent of Rs. 5,63,450/- (Rupees five lakh sixty three thousand four hundred and fifty only) in aggregate at any time without any demur, reservation, recourse, contest or-protest and/or without any reference to the Contractor. Any such demand made by the Contractor on the Bank shall be conclusive and binding notwithstanding any difference before any Court, Tribunal, Arbitrators or any other authority. We agree that the Guarantee herein contained shall be irrevocable and shall continue to be enforceable till it is discharged by the Commission in writing. The Commission shall have the fullest liberty, without affecting in arty way the liability of the Bank under this Guarantee from time to time, to extend the time for performance of the Contract by the Contractor or vary the terms of the Contract.

The Commission shall have the fullest liberty without effecting this Guarantee to postpone, from time to time, exercise power vested in them or of any right which they might have against the Contractor and to exercise the same at any time and in any manner and either to enforce or to forbear to enforce any covenants contained or implied in the contract between the commission and the Contractor or any other course of remedy or security available to the Commission. The Bank shall not be released of its obligations under these presents by any exercise by the Commission of its liberty with reference to matters aforesaid or any of them or by reason of any other act or forbearance or other acts of Commission or omission on the part of the Commission or any other matter or thing whatsoever which under law should, but for this provision, have the effect of relieving the Bank.

The Bank also agrees that the Commission at its option be entitled to enforce this Guarantee against the Bank as the principal debtor, in the first instance, without proceeding against the Contractor and notwithstanding any security or other guarantee that the Commission may have in relation to the Contractor's liabilities."

Under the main agreement between the plaintiffs and the 1st defendants, there is a clause for arbitration for referring the disputes/differences or questions to arbitration. The plaintiffs have, therefore, filed these three suits for the reliefs as pointed out above. They also took out three arbitration petitions for interim reliefs and sought ad interim orders. On 4th February 1991 the trial Court had refused to grant any ad interim injunction. Against those three orders, the plaintiffs had filed appeals being Appeals Nos. 133, 134 and 135 of 1991 to the Appellate Bench of this Court. In the meanwhile, the Bank guarantees in respect of Jensen Tide and Mire Tide were already encashed and, therefore, the appeals relating to those vessels viz. Appeals Nos. 134 and 135 of 1991 were withdrawn. Appeal No. 133 of 1991 was decided on 5th July 1991 and the order passed thereon is as follows :

"The Appeal is treated as included in the day's cause list and taken up for hearing.

Notice of the Appeal is waived by Mr. Thakkar learned Counsel appearing on behalf of Respondent No. 1. Upon the oral request of the learned counsel for the Appellants, name of Respondent No. 2 deleted, so far as the Appeal is concerned.

The Appeal arises out of a Petition under section 41 of the Arbitration Act, 1940, hereinafter called "the said Act", seeking interim relief in an Arbitration Suit under section 20 of .the said Act. The Trial Court having refused to grant ad interim relief, the original Petitioners have brought the present Appeal.

We have heard the learned counsel for the parties at length and have taken into consideration all the relevant factors and aspects. We are of the view that this is a fit and proper case in which the Arbitration Suit under section 20 should be heard on an expeditious basis and that till it is heard the ad interim relief granted by the Appeal Court at the stage of admission should continue to remain operative.

Under the circumstances, subject to what follows, the Appeal succeeds to the extent that the order of ad interim relief granted by the Appeal Court on April 29, 1991 shall continue to remain operative till the Arbitration Suit is heard and decided. The Court is informed that no affidavit in reply has been filed in the Arbitration Suit. Let this be done on or before 22nd July 1991. Affidavit in rejoinder, if any, to be filed on or before 12th August, 1991. The Suit along with the Petition shall be taken up for hearing in the week next thereafter i.e. in the week commencing on and from 26th August 1991 and it will be heard preferably from day to day and dispose of as expeditiously as possible. However, if for some unavoidable reasons, the Arbitration Suit cannot be heard and decided as provided hereinabove. It will be open to the Respondent to move the Trial Court for hearing the Petition under section 41 separately and to pass appropriate orders as to interim relief in accordance with law.

We are informed that two other Arbitration Suits between the same parties and involving the same point, namely. Arbitration Suits Nos. 348 of 1991 and 349 of 1991, are also pending. By consent of parties, it is directed that all the three Suits shall 'be heard together.

The learned counsel for the Appellants states that the Bank Guarantee having been invoked by the Respondent within 60 days in the Arbitration Suit with which we are concerned herein, there is no question of the expiry thereof and that there is, therefore, no need to give a separate direction that the Bank Guarantee be kept alive till the Suit is heard. In view of the statement, no orders are issued in that regard.

We wish to make it clear that the Appeal Court shall not be deemed to have expressed any opinion on the merits of the dispute.

No order as to costs.

No order on Notice of Motion No. 1115 of 1991."

It is in these circumstances that out of the three Arbitration Petitions, only Arbitration Petition No. 34 of 1991 survives for decision on the question of grant of interim injunction and the same is now heard by me. The three suits are also heard by me on the point of referring to arbitration the disputes mentioned in paragraph 10 of each plaint.

3. Dr. Chandrachud submitted, and in my opinion, rightly, that two questions arise for my decision viz. (i) Whether the dispute regarding invoking the Bank guarantee is referable to arbitration or not? and (ii) Whether interim injunction ought to be granted or not?

4. On the first question, it was submitted by Dr. Chandrachud that a contract of guarantee is necessarily a tripartite agreement. Contract of guarantee is defined in section 126 of the Contract Act as follows :

"126. "Contract of guarantee", "surety", "principal debtor", and "creditor". - A "contract of guarantee" is a contract to perform the promises or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the "surety", the person in respect of whose default the guarantee is given is called the "principal debtor" and the person to whom the guarantee is given is called the "creditor". A guarantee may be either oral or written."

Contract of indemnity is defined in section 124 of the Contract Act and that reads as follows :

"124. "Contract of indemnity" defined. -A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a "contract of indemnity".

The Supreme Court held in Punjab National Bank Ltd. vs. Sri Bikram Cotton Mills Ltd.. AIR 1970 SC 1973 as follows - A contract of guarantee requires concurrence of three persons - the principal debtor, the surety and the creditor - the surety undertaking an obligation at the request express or implied of the principal debtor The obligation of the surety depends substantially on the principal debtor's default; under a contract of indemnity liability arises from loss caused to the promises by the conduct of the promisor himself or by the conduct of another person. The Calcutta High Court (Sabyasachi Mukharji and A. K. Janah. JJ.) observed in State Bank of India vs. The Economic Trading Co., AIR 1975 Cal. 145 that in the case of Bank Guarantee, by definition the third party was always on the scene. This question also arose for decision in the case of Nangia Construction (India) (P.) Ltd. vs. National Buildings Construction Corporation Ltd., (1990) 2 Company Law Journal 265 (Delhi). It was pointed out there that statutory provisions regarding guarantees were to be found in sections 124 to 147 of the Indian Contract Act, 1872 and that specifically section 126 of the Contract Act dealt with guarantees. Then, a reference was made to the Supreme Court decision in AIR 1970 SC 1973 and it was observed : "In view of the aforesaid law declared by the Supreme Court in AIR 1970 SC 1973, by virtue of Article 141 of the Constitution, it was not permissible for any person to hold otherwise. The Supreme Court had clearly stated that a contract of guarantee requires concurrence of three persons. This being the situation, a contract of guarantee because of section 126 of the Contract Act, has always to be considered as a tripartite document in India. By virtue of the provision of section 126 of the Indian Contract Act, 1872, every bank guarantee is a tripartite contract between the banker, the beneficiary and the person at whose instance the bank issues the bank guarantee. Thus, if a contract between two persons postulates that one of them shall furnish a bank guarantee, then the bank guarantee cannot be independent of the principal contract on account of which the bank guarantee was issued by the banker in favour of the beneficiary."

5. Reliance was placed by Mr. Nitin Thakkar on behalf of the 1st defendants on decision dated 29th August 1990 given by Dhanuka, J. in Arbitration Petition No. 155 of 1990. Now, it is true that Dhanuka, J. observed there that the party at whose instance the bank guarantee is furnished is not a party to the contract of bank guarantee. But, and I say with respect, this observation appears to me to be in direct conflict with what the Supreme Court held in Punjab National Bank's case on the meaning of a guarantee as defined in section 126 of the Contract Act. I therefore hold that the dispute regarding invoking the Bank Guarantee is referable to arbitration.

6. As regards the second question, relevant portion of the Bank Guarantee has already been reproduced above. It is very similar to the Bank Guarantee that came for consideration before the Supreme Court in the case of U. P. Co-operative Federation Ltd. vs. Singh Consultants and Engineers (P.) Ltd., (1988) I SCC 174 where the facts were as follows : The respondent entered into an agreement with the appellant for constructing a vanaspati manufacturing plant for the latter. The contract required the respondent to furnish two bank guarantees for proper construction and successful commissioning of the plant. Accordingly the Bank of India executed two bank guarantees in favour of the appellants. The relevant portion of one of the bank guarantees is as follows :

"Now, therefore, the Bank hereby guarantees to make unconditionalpayment of Rs. 16.5 lacs (Rupees sixteen lacs fifty thousand only) to the Federation on demand at its office at Lucknow without any further question or reference to the seller on the seller's failure to fulfil the terms of the sale on the following terms and conditions :

(A) The sole judge for deciding whether the seller has failed to fulfil the terms of the sale, shall be the PCF.

(B).............

(C) .............

(D) Bank's liability under this guarantee deed is limited to Rs. 16.5 lacs (Rupees sixteen lacs fifty thousand only).

(E) This guarantee shall not be revoked by the Bank in any case before the expiry of its date without written permission of the Federation."

The other was guarantee to secure an advance and it is not necessary to consider the second Bank guarantee here. When a dispute arose between the parties as to erection and performance of the plant, the respondent approached the Court of Civil Judge by a petition under section 41 of the Arbitration Act read with Rules 1 and 2 of Order 39, Civil Procedure Code seeking an injunction restraining the appellant from invoking the Bank guarantees. The trial Court dismissed the petition. The respondent then moved a revision petition before the High Court. The High Court allowed the revision and proceeding on the basis that the injunction was sought not against the Bank but against the appellant, restrained the appellant from invoking the Bank guarantees. The appellant then filed an appeal before the Supreme Court. The question before the Supreme Court was only one, namely, whether there was any scope for injunction. The Supreme Court answered the question in the negative stating that an irrevocable commitment either in the form of a confirmed Bank guarantee or an irrevocable letter of credit could not be interfered with except in case of fraud or in case of question of apprehension of irretrievable injustice. As pointed out earlier. the Bank guarantee in our case is in similar terms with the Bank guarantee in U. P. Co-operative Federation's case. It is an irrevocable commitment in the form of a confirmed Bank guarantee. Therefore, no injunction can be granted except in case of fraud or in case of question of apprehension of irretrievable injustice. In the present case, neither there is any fraud nor is there any case of apprehension of irretrievable injustice. Further, though I have stated above that the bank guarantee in our case is very similar to the bank guarantee in U. P. Co-operative Federation case, I might clarify that there is one difference but that difference makes the case for refusal to grant injunction still stronger and I will explain that difference while considering M/s. J. R. Enterprises vs. M/s. State Trading Corporation of India, AIR 1987 Delhi 188.

7. Reliance was placed by Dr. Chandrachud in the case of M/s. J. R. Enterprises vs. M/s. State Trading Corporation of India Ltd., AIR 1987 Delhi 188. There also there was a main agreement and a bank guarantee. The bank guarantee stated - "The Bank do hereby unconditionally and irrevocably guarantee that if the Agents fail to perform any of their obligations, contained in the said contract dt. 10-9-1982 including any amendments or modifications to the aforesaid contract dt. 10-9-1982 made between the Agents and the STC, the Bank shall pay forthwith to the STC such amount or amounts as the Bank may be called upon to pay subject to the maximum of Rs. 10 lakhs (Rupees Ten lakhs) plus interest..... Any amount notified to the Bank in writing by a General Manager of the STC as being due from the Bank under or by virtue of this revolving guarantee shall be conclusive evidence against the Bank of the amount due to the STC and shall not be questioned by the Bank." Now, in the first place, there is a material difference between the guarantee in our case and the guarantee given in M/s. J. R. Enterprises 'case. The difference may be explained by giving different instances. An instance may arise where under a contract between A and B, B has to perform the contract and A may demand performance security from B and this security may be in the form of cash deposit to be paid at the time of commencement of the contract or at any subsequent time during the contract (care being taken to see that this date is before occurrence of default). After the default on the part of B has occurred, it is then that A may appropriate the deposit amount or part of it as damages towards the loss which he may have suffered. Thus, there are two material points of time viz. (i) an earlier point of time when the deposit amount is payable by B to A even though A has not suffered any loss, and (ii) a later date when loss is suffered giving a right to A to appropriate the deposit amount towards his loss. If B, instead of paying cash deposit, furnishes a Bank guarantee, other terms being the same, then the Bank would be liable to pay the cash amount to A even before the loss is suffered. In our case, the payment under the Bank guarantee has to be made by the Bank to the extent of Rs. 5,63,450/- at anytime without any demur, reservation, recourse, contest or protest and/or without any reference to the Contractor. In short, this is replacement of payment of cash deposit. In J. R. Enterprises' case payment under the Bank Guarantee became due only when loss is suffered. This is the difference between our case and M/s. J. R. Enterprises' case. However, J. R. Enterprises' case conflicts with the decision of the Supreme Court given in U. P. Co-operative Federation Ltd.'s case where payment under the Bank guarantee would become due on loss being suffered. For all these reasons, I hold that no injunction can be granted.

8. Hence, I pass the following order :-

ORDER

Arbitration Petition No. 34 of 1991 stands dismissed. Arbitration Petitions Nos. 35 of 1991 and 36 of 1991 do not survive and hence dismissed. No order as to costs. Mr. Kapadia prays for continuation of ad interim injunction for a period of 4 weeks. The ad interim injunction is continued for 4 weeks.

In Suits Nos. 347 of 1991, 348 of 1991 and 349 of 1991, order in terms of prayers (a) and (b) in each of these three suits.

Order accordingly.