- (1.) This is an application under S.41 of the Arbitration Act. The facts of the case are shortly as follows :- The petitioner and the respondent admittedly entered into eleven contracts whereby the petitioner was to construct eleven schools in Nalut, Libya at the cost of LD. 2,437,525,000. All the contracts were written contracts and all dt. 21-08-79. The contracts contain inter alia two clauses with which this Court is concerned in disposing of the application. Clause 25.1.- Retention money a) The Associate shall within the time specified in the Letter of Intent/Letter of acceptance deposit with the principal a further sum in addition to the earnest money paid with the offer to work up to a rate of 1% of the value as initial retention money in cash or Government securities, performance bond by a Bank acceptable to the principal. b) To this sum shall be added the deductions from the Associates' interim bills for work done as specified under Cl.2.12 hereof, so as to make a total retention of 5% of the contract value as aforesaid. c) When the retention money reaches a limit of three thousand five hundred Libyan Denars, the Associate, if he so desires, may convert the amount into a Bank guarantee as approved by the principals d) The retention money shall remain at the entire disposal of the principals as a security for the satisfactory execution and completion of the works in accordance with the conditions of the contract. The principals shall be at liberty to adjust and appropriate from the retention money such penalties and dues as may be payable by the Associate under the contract and the amount by which retention money is reduced by such appropriation will be made good by further deduction from the Associate's subsequent bill's in the manner as aforesaid until the retention money is restored to the full limit mentioned above. e) On due satisfactory performance and completion of the contract in all respects the retention money will be refunded to the Associate without any interest after passing of the final bill on presentation of an absolute no demand certificate from the Engineer in the prescribed form and up to return in good condition of any specification, drawings, samples or other property belonging to principals which may have been issued to the Associate. Clause 3.11 - Advance The Associate shall be paid a mobilisation advance up to a maximum of 5% of the value of the contract after signing of the contract against a bank guarantee in favour of the principal from an approved nationalised bank in India. The advance will be paid in two stages as follows :- a) A maximum of 20% of the mobilisation advance or 1% of the value of the contract shall be paid in Indian rupees before departure of the Associates and his labourers to Libya. This advance shall be in Indian rupee. b) The balance 4% of the contract value will be paid in Libya in Libyan Denars after deducting the cost of air-ticket, if any, purchased by the principals for the journey from India to Libya in respect of the Associate, his employees and labour. c) The recovery of the mobilisation advance paid shall be made in Libyan Denars on pro rata basis increased by 10% from running bills till full amount is recovered so that the recovery of mobilisation advance is recovered by the time 90% of the work is completed.
(2.) Pursuant to the above terms of the agreement, the respondent paid to the petitioner Rs. 32.50 lakhs by way of mobilisation advance and, as against that the petitioner instructed the United Commercial Bank, No.10, Brabourne Road Branch to issue a Bank guarantee securing repayment of Rs. 32.50 lakhs in favour of the respondent beneficiary, it evident from Cl.3.11 that the respondent and the petitioner clearly expressed their intention that the bank guarantee to be furnished, pursuant to this clause, would be for securing repayment of the advance made by the respondent and for nothing else. It is one of the functions of the Commercial Banks to issue bank guarantee as advance payment guarantee in favour of the beneficiary at the request and in accordance with the instructions of their customers. The bank must act according to the instructions of the customer in this respect and has no authority or right to act contrary to such instruction or to do anything exceeding the authority given to the Bank by its customer. No bank has any right or authority to saddle its customer with any additional liability under a guarantee by issuing the same contrary to the instruction by its customer. If the bank exceeds its authority, the customer will not be bound by the provisions introduced in the guarantee by the bank contrary to the instruction of the customer. It is the bounden duty of the bank to strictly follow the instructions of the customer because the guarantee agreement is entered into only between the bank and the beneficiary. The customer, at whose instance the guarantee is issued, does not become a party to the said document.
(3.) In this case, the petitioner was throughout under the impression that the guarantee No. 399/79 dt. 10-11-79 issued by the United Commercial Bank under Cl.3.11 of the contract is a mobilisation advance guarantee only as would be evident from the correspondence which passed between the petitioner and the respondent. By letter dt. 86-82 being Annexure-'H-1' to the petition, the petitioner clearly stated : "....... it is not a performance guarantee but a mobilisation advance guarantee and if any amount is due and recoverable against this guarantee, the same may be kindly indicated to our bankers so that they can process your request of performing this guarantee above.";