C. M. Navar ( 1 ) THE main petition between the parties being S. No. 2l15/93 under Section 20 of the Arbitration Act has already been disposed of by order dated 8th August, 1994 and the disputes have been referred to arbitration. The petitioner had also moved an application under Section 41 of the Arbitration Act for restraining respondent No. 2 from encashing and respondent no. 1 from paying to respondent 2 the amounts covered by the bank guarantee No. 87 NDH 1161 dated 28/12/1987 for Rs. 75,000. 00 and No. 88 NDH 217 dated 7/3/88 for Rs. 10,00,000. 00. The interim order of status quo regarding encashment of bank guarantees was passed by this court on 23rd September, 1993. ( 2 ) THE facts as enumerated in the paragraphs 1 to 4 of the petition under Section 20 of the Arbitration Act (hereinafter referred as the Act) may be reproduced as follows: 1. A company known as Punj Sons Private Ltd had as part of its business establishment a Truck Body Building Division carrying on its business from its factory located at 2, Industrial Area, Kalkaji, New Delhi. The said Punj Sons Pvt. Ltd was the flag ship company of what was populary known as PUNJ GROUP of industries. 2. Certain disputes and differences arose between members of the Punj family, including the share holders and directors of the said Punj Sons Pvt. Ltd. All. such disputes and differences were referred to arbitration which resulted in an award dated 08/07/1987 and the award was subsequently decreed by an order of this Hon ble court dated 17. 3. 88 passed in suit No. 2461-A of 1987. By the said award, the Truck Body Building Division was awarded to one of the three groups of the family. 3. Consequent upon the said award, the petitioner company was incorporated to take over as a running concern the said Truck Body Building Divison of Punj Sons Pvt. Ltd which it did soon thereafter. 4. Prior to the said award the predecessor-in-interest of the petitioner namely, Punj Sons Pvt. Ltd had submitted a quotation for development and supply of a specialised chassis for defence vehicle required for Armed Forces, namely. Assembly Frame for Nissan carrier. After detailed discussions, inter alia on the continuous substantial requirements of such Assembly Frames by the respondent no. 4. Prior to the said award the predecessor-in-interest of the petitioner namely, Punj Sons Pvt. Ltd had submitted a quotation for development and supply of a specialised chassis for defence vehicle required for Armed Forces, namely. Assembly Frame for Nissan carrier. After detailed discussions, inter alia on the continuous substantial requirements of such Assembly Frames by the respondent no. 2, large number of offers and negotiations and a grat deal of correspondence, respondent no. 2 placed upon the predecessor-in-interest of the petitioner a supply order for 3000 Nos. of the said Assembly Frame, by its order No. 8 (1)/87/d/s. 1/cpo (DG)-1636 dated 10th August, 1987 issued on behalf of the President of India by one B. K. Anand, Contract/purchase Officer (D) The copy of the supply order dated 10/08/1987 along with the conditions of contract are filed with the petition as Annexure P1. It will not be necessary for me to give any further details of the contract except the details as specified above as that is the matter for the arbitrator to adjudicate. The present interim application is only concerned with two bank guarantees which the petitioners had executed vide clauses 24 and 26 of the contract. Clause 24 related to security deposit of Rs. 75,000. 00 and vide clause 26 the petitioner was entitled to Tooling Advance of Rs. 10,00,000. 00 towards tooling cost against presentation of the bills in the prescribed proforma for the same. The relevant provision reads as follows 26. Recoverable tooling advance of Rs. 10. 00 lakhs towards the tooling cost shall be payable to the contractor against presentation of the bills in the prescribed proforma for the same. This advance shall be refunded pro-rata basis to the purchaser from the contractor s bill representing 95% payment submitted for supplies effected until the total amount of tooling advance is recovered and shall be given in two instalments of Rs. 5. 00 lakhs respectively. Rs. 5. 00 lakhs will be paid along with the order and Rs. 5. 00 lakhs after toolings are made and certified by Vehicle Factory, Jabalpur. The contractor shall furnish an irrevocable Bank Guarantee as per prescribed proforma. In case the contractor fails to develop the items, he will have to refund the advance with interest @ 18% per annum from the date it is paid. 5. 00 lakhs after toolings are made and certified by Vehicle Factory, Jabalpur. The contractor shall furnish an irrevocable Bank Guarantee as per prescribed proforma. In case the contractor fails to develop the items, he will have to refund the advance with interest @ 18% per annum from the date it is paid. ( 3 ) IN accordance with the above said provisions the petitioner furnished two bank guarantees as specifided for the amounts of Rs. 75,000. 00 and Rs. 1 0,00,000. 00 respectively. The relevant clauses of the bank guarantee for the sum of Rs. 10,00,000. 00 may be reproduced as follows: IN consideration of the President of India (hereinafter called "the Government") having agreed to sanction in favour of M/s Punj Sons Private Limited (hereinafter called "the said Contractor") under the terms and conditions of an Agreement no. 8 (1)/87/ D (S. I)CPO (VG)-1636 dated 10. 8. 87 and as amended vide letter No. 8 (l)/87/d/ (S. I)/cpo (VG)-1636/al-30 dated 27. 1. 88 made between the Department of Defence Production and Supplies, Ministry of Defence, Government of India, New Delhi and M/s. Punj Sons Private Limited, Punj House, M-13 Connaught place, New Delhi-110 001 for supply of ASSY FRAME for Nissan Carrier (hereinafter called "the said Agreement") an advance of Rs. 10,00,000. 00 (Rupees Ten Lacs Only) for the due fulfilment by the said Contractor of the terms and conditions contained in the said Agreement, on production of a Bank Guarantee for Rs. 10,00,000. 00 (Rupeesten Lacs^only), we, the Hongkong and Shanghai Banking Corporation, (hereinafter referred to as "the Bank" at the request of M/s. Punj Sons Private Limited (Contractor) do hereby undertake to pay to the Government an amount not exceeding Rs. 10,00,000. 00 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 said Contractor of any of the terms or conditions contained in the said Agreement. 2. We, The Hongkong and Shanghai Banking Corporation do hereby undertake to pay the amounts due and payable under this 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 breach by the said Contractor of any of the terms. or conditions contained in the said Agreement or by reason of the Contractors failure to perform the said Agreement, any such demand made on the bank shall be conclusive as regards the amount due and payable by the Bank under this guarantee. However, our liability under this guarantee shall be restricted to an amount not exceeding Rs. 10,00,000. 00 (Rupees Ten Lacs Only ). 3. We undertake to pay to the Government any money so demanded notwithstanding any dispute or disputes raised by the contractor in any suit or proceeding pending before any Court or Tribunal relating thereto our liability under this present being absolute and unequivocal. The payment so made by us under this bond shall be a valid discharge of our liability for payment thereunder and the contractor shall have no claim against us for making such payment. 4. We, The Hongkong and Shanghai Banking Corporation further agree that the guarantee herein contained shall remain in full force and effect during the period that would be taken for the performance of the said Agreementand that it shall continue to be enforceable till all the dues of the Government under or by virtue of the said Agreement have been fully paid and its claims satisfied or discharged or till Department of Defence Production and Supplies, Ministry of Defence, Government of India, New Delhi certified that the terms and conditions of the said Agreement have been fully and properly carried out by the said Contractor and accordingly discharged this guarantee. Unless a demand or claim under this guarantee is made on us in writing on or before the 31 st March, 1990 we shall be discharged from all liability under this guarantee thereafter. 5. Unless a demand or claim under this guarantee is made on us in writing on or before the 31 st March, 1990 we shall be discharged from all liability under this guarantee thereafter. 5. We, the Hongkong and Shangai Banking Corporation, further agree with the government that the government shall have the fullest liberty without our consent and without affecting in any manner our obligations hereunder to vary any of the terms and conditions of the said Agreement or to extend time of performance by the said contractor from lime to time or to postpone for any time of from time to time any of the powers exercisable by the government against the said contractor and to forbear or enforce any of the terms and conditions relating to the said Agreement and we shall not be relieved from our liability by reason of any such variation or extension being granted to the said Contractor. or for any forbearance, act or ornmission on the part of the government or any indulgence by the government to the said contractor or by any such matter or thing whatsoever which under the law relating to, sureties would, but for this provision, have effect of so relieving us. 6. This guarantee will not b. e discharged due to any change in the constitution of the bank of the contractor. 7. We, the Hongkong and Shanghai Banking Corporation, lastly undertake not to revoke this guarantee during its currency except with the previous consent of the Government in writing. " ( 4 ) TO similar effects are the terms and conditions contained in the bank guarantee No. 87 NDH 1161 dated 28/12/1987 for Rs. 75,000. 00 which was termed as security deposit under the relevant provisions of the contract. It will not be necessary to reproduce this guarantee in view of the fact that there is no material difference between this bank guarantee and the bank guarantee already reproduced above. Respondent no. 2 vide letter dated 6th September, 1993 wrote to the petitioner company that they have failed to supply the outstanding material as specified in the letter and thereby committed breach of contract and the supply was accordingly cancelled. This communication is filed as Annexure P 25 to the petition and reads as follows: REGISTERED AD No. 8 (l)/87/d (S. I)CPO (VGE)-1636al-533 Government of India Ministry of Defence Deptt of Defence Prodn. This communication is filed as Annexure P 25 to the petition and reads as follows: REGISTERED AD No. 8 (l)/87/d (S. I)CPO (VGE)-1636al-533 Government of India Ministry of Defence Deptt of Defence Prodn. and Supplies New Delhi, the 06/09/1993, To M/spsl Engg. (P) Ltd B-10/1, Okhla Industrial Area Phase II, New Delhi-110 020 Subject: S. O. No. 8 (1)/d/ (S. 1)/cpo (VGE)-1636 dt. 10/8/87 for supply of Assy Frame for Nissan Carrier Dear Sirs, Since you have failed to supply the outstanding 624 nos. of Assy. Frame for Nissan Carrier against subject supply order even by the extended date of 31/7/93 and. thereby committed breach of contract, as the time of delivery is the essence of the contract, the supply order is hereby cancelled for 624 nos. , at your risk and cost under Clause 9 (iii) (c) to Schedule b governing the supply order. The amount recoverable from you towards risk purchase and for general damages will be intimated to you in due course. Yours faithfully, (K. K. Marwaha) 3 Contract Purchase Officer (M) For and on behalf of the President of India ( 5 ) THE abovesaid respondent then wrote to respondent 1 for encashment of the bank guarantees vide communication dated 06/09/1993. It will suffice to reproduce only one communication in this regard which is identical with: the communication in, respect Of other bank guarantee: NEW Delhi, 06/09/1993 The Manager on The Hongkong and Shanghai Banking Corpn. 9th floor, Merchantile House Kaslurba Qandhi. Marg New Delhi-110 001 Subject-Bank Guarantee No. 88ndh21 7 dt. 07/03/83 and 05/11/92 for Rs. 10. 00 lakhs issued, on behalf of M/s PSL Engg. New Delhi Dear Sir, You have issued bank,guarantee No 88 NDH 217 dated 7/3/88 and 5/11/92 for Rs. 10. 00 lakh valid upto 30/11/93 on behalf of M/s PSL Engg. New Delhi, against supply order No. 8. (l)/8. 1/d/ (S. 1)/cpo (VGE)-1636 dated 10/8/87 in lieu of advance payment given to this firm. M/s PSL Engg. have failed to execute the contract and there is breach of contract on the part of this firm. This contract has been cancelled at the risk and cost of the firm vide this office amendment dated 6/9/93. (l)/8. 1/d/ (S. 1)/cpo (VGE)-1636 dated 10/8/87 in lieu of advance payment given to this firm. M/s PSL Engg. have failed to execute the contract and there is breach of contract on the part of this firm. This contract has been cancelled at the risk and cost of the firm vide this office amendment dated 6/9/93. You are, therefore, advised to treat this letter as demand for the encashment of above BG and amount be sent through a demand draft in favour of "cda Hqrs", g Block, New Delhi within 15 days of issue of this letter failing which matter shall be reported to RBI, New Delhi for further suitable action. Kindli acknowledge receipt. Yours faithfully (K. K. Marwaha) Contract Purchase Officer (M) ( 6 ) AGGRIEVED by the said communications of 06/09/1993 issued by respondent 2 to respondent 1 invoking the two bank guarantees the petitioner has approached this court in the present proceedings. Mr. Sandeep Sethi, learned counsel appearing on behalf of the petitioner has vehemently contended that the invocation of both the bank guarantees is not in accordance with the terms of the bank guarantees as no loss or damage has been indicated to be suffered or likely to be suffered by respondent no. 2 and since there is no averment in this regard the bank guarantees cannot be encashed in favour of respondent 2. He has relied upon judgment of this court as reported in Ansal Properties and Industries Ltd Vs. Union of India and Ors 54 (1994)DLT 307. He has specifically relied on paragraph 10 which reads as follows: 10. I have given my thoughtful consideration to the submissions made by learned Counsel for the parties and I have perused the records. I have set out in extenso the terms of the Bank Guarantees and the letter invoking the Bank Guarantees to highlight as to whether the Bank Guarantees have been invoked according to its terms. As held by a learned Single Judge of this Court in the case of M/s. V. K. Constructions Works Ltd. (supra) a Bank Guarantee can only be encashed as per its terms and the extent of default has to be averred and to that extent it is encashable nothing more, nothing less and the Court will intervene to prevent any action on the part of the beneficiary which may be contrary to the terms of the Bank Guarantee. In this connection a reference may also be made to the judgement of the Supreme Court reported in the case of U. P. Cooperative Federation Ltd. V. Singh Consultants and Engineers (P) Ltd. , (1988) 1 Supreme Court cases 174. In this case, the Supreme Court approved the observations of. Lord Denning, M. R. that "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 contractual obligation or not; nor with the question whether supplier is in default or not. The Bank must pay according to its guarantee, on demand if so stipulated without proof or conditions. " ( 7 ) THE learned counsel for respondent no. 2 on the other hand has contended that invocation of the bank guarantees is in accordance with the terms and conditions specified therein and there is no merit in the contention of the petitioner. He has strongly relied upon the judgment of the Supreme Court as reported Svenska Handelsbanken Vs. M/s Indian Charge Chrome and Ors, JT 1993 (6) SC 189. ( 8 ) I have considered the respective contentions of the learned counsel the parties. The law is fairly well settled by theSupreme Court here a bank had given a performance guarantee, it was require honour the guarantee according to its terms and was not concern whether either party to the contract which underlay the guarantee was in default. These observations find place on the basis of the settle law in England and are referred to in the judgment of the Supreme court in U. P. Cooperative Federationa Ltd Vs. Singh Consultants and Engineers Pvt. Ltd [1988] 1 SCR page 1124. The relevant ration from page 1137 may be reproduced as follows: Where, therefore, a bank had given a performance guarantee it was required to honour the guarantee according to its terms and was not concerned whether either party to the contract which underlay the guarantee was in default. The only exception to that rule was where fraud by one of the parties to the underlying contract had been extablished and the bank had notice of the fraud. The only exception to that rule was where fraud by one of the parties to the underlying contract had been extablished and the bank had notice of the fraud. Accordingly, as the defendants guarantee provided for payment on demand without proof or conditions, and was in the nature of a promissory note payable on demand, and the plaintiffs had not established fraud on the part of the buyers, the defendants were required to honour their guarantee on the demand made by the Libyan Bank. ( 9 ) THE above said judgment in U. P. Cooperative Federation case is cited with approval along with other judgments of the Supreme Court in Svenska Handelsbanken Vs. M/s Indian Charge Chrome and Ors. (supra) which specifically deals with the mobilisation advance which was similar in nature as given to the petitioner in. the main bank guarantee in the present case. The Supreme Court has relied on another judgment of that court as reported in General Electric Technical Services Company Inc. Vs. Punj Sons (P) Ltd and Anr. {1991} 3 SCR 412. Reference may be made to paragraphs 78 and 80 which read as follows: 78 On the question, whether the Court was justified in restraining the Bank from paying the appellant under the Bank Guarantee at the instance of respondent -1, allowing the appeal of the appellant-company, this Court held as under :- IN the instant case, the High Court has misconstrued the terms of the Bank Guarantee and the nature of the inter- rights of the parties under the contract. The mobilisation advance is required to be recovered by the appellant from therunning bills submitted by the respondent. If the full mobilisation advance has not been recovered, it would be to the advantage of the respondent. Secondly, the Bank is not concerned with the outstanding amount payable by the appellant under the running bills. The right to recover the amount under the running bills has no relevance to the liability of the Bank under the guarantee. The liability of the Bank remained intact irrespective of the recovery of mobilisation advance or the non payment under the running bills. The failure on the part of the appellant to specify the remaining mobilisation advance in the letter for encashment of Bank. Guarantee is of little consequence to the liability of the Bank under the guarantee. The liability of the Bank remained intact irrespective of the recovery of mobilisation advance or the non payment under the running bills. The failure on the part of the appellant to specify the remaining mobilisation advance in the letter for encashment of Bank. Guarantee is of little consequence to the liability of the Bank under the guarantee. The demand by the appellant is under the Bank Guarantee and as per the terms thereof. The Bank has to pay and the Bank was willing to pay as per the undertaking. The Bank cannot be interdicted by the Court at the instance of respondent 1 in the absence of fraud or special equities in the form of preventing irretrievable injustice between the parties. The High Court in the absence of prima facie case on such matters has committed an error in restraining the Bank from honouring its commitment under the bank guarantee. " 80. The Court first decided that all the terms of the first bank guarantee were there except that earlier guarantee was towards the mobilisation advance whereas the later guarantee was a composite bank guarantee for both performance of the contract as well as for the recovery of mobiilisation advance. The Court noticed how the liability under the guarantee will get reduced from stage to stage by realisation from running bills towards mobilisation advance and under the first guarantee itself the bank had undertaken to pay to the appellant the amount guaranteed without any demur merely on demand stating that the amount is due by way of loss or damage caused to or would be caused to or suffered by any breach committed by the respondent on any of the terms or conditions contained in the Agreement or by reason of respondents failure to perform the agreement and that such demand. shall be conclusive as regards the amount due and payable by the bank under the guarantee. The appellant had only sought to enforce the bank guarantee for the balance amount of the mobilisation advance on a complaint that respondent no. 1 had failed to perform the contract as per terms and conditions. As mobilisation advance could be recovered earlier only from the running bills and since the contract had been terminated, the balance of mobilisation advance was sought to be recovered from the bank guarantee. 1 had failed to perform the contract as per terms and conditions. As mobilisation advance could be recovered earlier only from the running bills and since the contract had been terminated, the balance of mobilisation advance was sought to be recovered from the bank guarantee. The bank had undertaken to pay this amount and in fact the bank was prepared to pay the same. It was in these circumstances that the court accepted the appeal and observed that the law has been settled in the aforesaid case of U. P. Cooperative Federation Ltd. and again noticed the obsevations of Mukherji, J. in that case and observed at page 421 that the High Court has misconstrued the terms of the bank guarantee and the nature of the inter se rights of the parties under the contract. It was on the question whether the amount was due under the terms and conditions of the bank guarantee that the learned Judge speaking for the Court observed that in the absence of prima facie case on such matters the High Court committed error in restraining the bank from honouring its commitment under the bank guarantee. ( 10 ) THE facts of the present case are quite similar to the cases as decided by the Supreme Court and referred above. The petitioner had received a sum of Rs. 10,00,000. 00 as tooling advance as referred to in paragraph 26 of the contract which has already been reproduced earlier. The petitioner had executed an irrevocable bank guarantee as per the prescribed proforma by which respondent 1 had undertaken to pay the amounts under the said bank guarantees. The only objection which is now raised by the petitioner is that in the letter of invocation there is no mention of any loss or damage caused to the Government. The petitioner had executed an irrevocable bank guarantee as per the prescribed proforma by which respondent 1 had undertaken to pay the amounts under the said bank guarantees. The only objection which is now raised by the petitioner is that in the letter of invocation there is no mention of any loss or damage caused to the Government. This contention is devoid of force as a mere reading of clause 2 clearly indicates that the amounts due and payable under the guarantees were liable to be paid merely on a damand from the Government stating that the amount claimed was due by way of loss or damage caused to or would be caused to or suffered by the government by reason of breach by the said contractorof any of the terms or conditions contained in the said Agreement or by reason of the contractor s failure to perform the said Agreement, and any such demand made on the bank shall be conclusive as regards the amount due and payable by the bank under this guarantee". The mere objection that the letter of invocation dated 06/09/1993 does not specify any loss or damage which has been caused to respondent 2 by reason of failure to perform the Agreement is merit-less in the facts and circumstances of the present case. It may be noticed that the letter dated 06/09/1993 refers to the cancellation of the contract vide another communication of the same date which is addressed to the petitioner which clearly states that the suply order was cancelled and the amount recoverable from the petitioner towards risk purchase and for general damages will be intimated in due course. I am, therefore, not inclined to accept the technical plea raised by the petitioner, particularly in view of the fact that clause 2 of the bank guarantee bond even stipulates the encashment of the guarantee on the plea of the loss which would be caused to or suffered by the government by reason of breach. In this view, it cannot be said that the invocation of the Bank guarantees are not according to their terms. There is no prima facie case in favour of the petitioner on present facts. The Supreme Court in the judgments mentioned above has settled the law and the present case is fully covered by the dicta therein. The judgment of this court in Ansal Properties and Industries Ltd Vs. There is no prima facie case in favour of the petitioner on present facts. The Supreme Court in the judgments mentioned above has settled the law and the present case is fully covered by the dicta therein. The judgment of this court in Ansal Properties and Industries Ltd Vs. Union of India (supra) will not be applicable as it is delivered on its own facts. In the absence of the fraud or special equities in the form of preventing irretrievable injustice between the parties,. the Bank, respondent 1 herein, cannot be restrained from honouring its commitment under the bank guarantees. ( 11 ) THE application is accordingly dismissed and interim order made on 23/09/1993 is hereby vacated. . ( 12 ) THERE will be no order as to costs.