Author – Aditi Goel, 4th year student at Symbiosis Law School, NOIDA.
CITATION – AIR 1995 Bom 337
BENCH – M Pendse, N Vyas
ORIGINAL COPY – N/A
Issue in question:
- Whether, under Section 20 of the Arbitration Act, an interim relief given in respect of a Bank Guarantee can be refused on the ground that the guarantor bank is not a party to the suit ?
Background of the case:
- Appellant’s tender for construction was accepted by the respondents and a contract was entered in April 1991.
- The contract was for the cost of Rs. 21,25,072.94 and a security deposit of Rs. 1,13,000 was also made. Here, the appellants furnished a bank guarantee of Canara Bank.
- Due to the delays, there were hindrances and breaches committed by the respondents. This resulted in uncompleted work within stipulated time.
- Respondents issued a seven days notice threatening to terminate the contract in February 1992. Similar notice was given in September 1992 and a notice of termination in March 1993. This resulted in termination of contract in March 1993.
- A few days later, appellants raised a claim that arose due to the default on part of the respondents, called upon the Deputy Chief Engineer of the respondent to decide this matter under Clauses 63 and 64 of General Conditions of Contract.
- One of the claims of the appellant was to release the bank guarantee as no decision was taken by the respondents. Appellants invoked Clause 64 of the General Conditions of Contract which referred to the disputes of arbitration in April 1993.
- Later that month, the respondents sent a letter to the Canara Bank informing them that the contract was terminated, hence the bank should honour the bank guarantee.
- In May 1993, an arbitration suit was filed under Section 20 of the Arbitration Act, praying the following:
- Arbitration Agreement forming part of the contract dated 16th April, 1991 be filed in the Court;
- Claims of the appellants be referred to arbitration as per the Arbitration Agreement;
- Court should appoint an arbitrator for the pending suit;
- Respondents be restrained from taking any further steps for encashing the bank guarantee.
- Canara Bank is not a joint co-defendant in the suit.
- In May 1993, an ad interim order regarding the injunction regarding the Bank Guarantee was passed and operative upto 11th May, 1993, which was extended till June 1993.
- A day before the extinction of the extended date, an impugned order was passed vacating the ad interim order. Judge, while vacating the ad interim order held that the bank is a necessary party to the dispute of encashing bank guarantee. Bank is not a party to the arbitration agreement.
- Section 20 of the Arbitration Act – it was clear to the court that parties of an arbitration agreement may apply to this section to have the agreement filed in court and a reference be made to arbitration.
- There are a few conditions that are necessary to make Section 20 applicable. Those conditions are:
- Parties must have entered into the arbitration agreement.
- The agreement must have been entered in before a suit, with respect to its subject-matter, is filed in court.
- Differences mentioned in the agreement must have arisen and the court has the jurisdiction to handle the matter.
- If the above mentioned conditions are satisfied, the parties may either avail the procedure mentioned under Chapter II of the Arbitration Act; without the intervention of the court, or have the agreement filed in court under this Section.
- Conclusion of the interpretation of this section is that only the parties of the arbitration agreement could be parties in Section 20 proceedings.
- Party which is not a part of the arbitration agreement cannot be dragged in proceedings under Section 20.
- Court agreed with the previous judgement where it said that Canara Bank could not have been joined as a respondent, however the bank was a necessary party.
- The Arbitration Act was not applicable because bank guarantee was a separate and independent contract between the Bank and the beneficiary.
- Court then considered Section 126 of the Indian Contract Act, where the section defined what a contract of guarantee is.
- A contract of guarantee requires three parties – principal debtor, surety and creditor. The obligation of surety depends on the debtor’s default.
- Court commented that the reason to refuse consideration of an interim relief of injunction is incorrect. Since the bank is not a party to the arbitration agreement, it cannot be joined as a party defendant under Section 20.
- In the view of all the cases and provisions, the court set aside the impugned order. The proceedings were remitted back to the Judge for considering the merits of the matter in light of the observations made by the Court. The ad interim relief ceased to continue till the pendency of the decision.
- Section 20 of the Arbitration Act is an important clause for any dispute that may arise in an agreement. While the entire concept of arbitration is to avoid court proceedings, some reasons are too complicated to avoid such proceedings. For this, Section 20 helps us analyse ways in which a party can approach the Court. Sub-sections (2), (3) and (4) lay down the procedure that has to be followed, whereas sub-section (5) makes the provisions applicable to the proceedings under this Section.
- This case can help us lead to conclusions that have been laid in several other cases, that a bank guarantee agreement is distinct from an arbitration agreement. They are two separate agreements with separate parties and cannot be combined together. This is the very reason why it is also important to know that despite having a bank guarantee, the bank cannot be considered as a party in any arbitration suit for the sole reason of a Bank Guarantee Agreement.