Delhi High Court

Ircon International Limited vs Simplex Projects Limited on 22 August, 2016

           THE HIGH COURT OF DELHI AT NEW DELHI
%                                      Judgment delivered on: 22.08.2016

+       ARB. A. (COMM.) 10/2016 & IA 4167/2016
IRCON INTERNATIONAL LIMITED                               ..... Appellant

                                    versus
SIMPLEX PROJECTS LIMITED                                  ..... Respondent

Advocates who appeared in this case:
For the Appellant    : Mr Krishnendu Datta, Advocate with Mr
                       Jaspreet Singh Chawla, Advocate
For the Respondent   : Mr S.D. Singh, Mr Rahul Singh, Ms Surabhi
                       Shukla and Ms Sneha Ghosh, Advocates.
CORAM
HON'BLE MR JUSTICE VIBHU BAKHRU
                                JUDGMENT

VIBHU BAKHRU, J

1. M/s Ircon International Limited (hereafter 'Ircon') - a Government of

India undertaking - has filed the present appeal under Section 37 of the

Arbitration and Conciliation Act, 1996 (hereafter 'the Act') impugning an

order dated 17.03.2016 passed by the Sole Arbitrator (hereafter 'the

impugned order') under Section 17 of the Act.

2. By the impugned order, the Arbitrator has held that the encashment

of the Bank Guarantee (hereafter 'BG') in the sum of `1,74,83,608/- relating

to the mobilisation advance, was not justified to the extent of

`1,30,66,840/-. Consequently, the Arbitrator has directed the release of `1

crore lying with the Registrar General of this Court to the respondent

(hereafter „Simplex‟) along with interest accrued thereon within a period of

30 days and has further directed Ircon to refund a sum of `30,66,840/- after

adjusting any outstanding interest computed at the rate of 13.75% per

annum.

3. Ircon has challenged the aforesaid order mainly on the ground that (i)

it is contrary to the established principles for restraining encashment of

BGs; and (ii) that the impugned order is beyond the scope of Section 17 of

the Act as according to Ircon, an order directing refund of the monies

recovered would not qualify as an interim measure of protection and

amounts to final adjudication of the disputes.

4. Before addressing the controversy, it is relevant to briefly narrate the

background in which Simplex's application under Section 17 of the Act

came to be considered by the Sole Arbitrator.

5. Ircon awarded the work of construction of Road Over Bridge (ROB),

including the sub structure and super structure and approaches at Level

Crossing No.72, at Patna City to Simplex by a Letter of Acceptance (LOA)

dated 19.08.2008. The original value of the said contract was

`34,96,72,164/- and the work was required to be completed within a period

of 18 months from the date of the commencement of work, that is, 18

months from 19.08.2008.

6. In terms of the contract, Simplex provided two BGs to Ircon; (i) BG

no.0006BG00078913 dated 13.09.2012 from ICICI Bank towards

mobilisation advance for a sum of `1,74,83,608/- and (ii) BG no.

00050100003133 dated 24.03.2010 from Axis Bank towards performance

security for a sum of `69,93,443/-.

7. The execution of the project was delayed and certain disputes arose

between the parties with each party alleging that the other was responsible

for the delay in execution of the project. Ircon invoked the two BGs and,

by separate letters dated 10.07.2015, called upon the respective banks,

ICICI Bank and Axis Bank, to pay the amount guaranteed. This led

Simplex to approach this Court under Section 9 of the Act [O.M.P.(I)

338/2015], inter alia, praying as under:

"i. allow the present petition by setting aside and quashing the invocation letter dated 10.7.2015 written by the Respondent No.l to the Respondent No.2 and 3 for encashment of Bank Guarantee in question and the Respondent No.2 be restrained from encashing the Bank Guarantee No.0006BG00078913 dated 13.9.2012 for a sum of Rs.1,74,83,608/- valid upto 11.9.2015

ii. restrain the Respondent NO.3 herein to encash the Bank Guarantee No.00050100003133 dated 24.3.2010 for a sum of Rs.69,93,443.00 in favour of Respondent No.1 forthwith

iii. direct the Respondent No.2 and 3 to maintain status quo with respect to the Bank Guarantee No.0006BG00078913 dated 13.9.2012 and Bank Guarantee No.00050100003133 dated 24.3.2010 and the Respondent No.1 be restrained from making any claim and to invoke/ encash the aforesaid Bank Guarantees and the Respondent No.2 and 3 be restrained from depositing the Bank Guarantees in the account of Respondent No.1 in any manner.

iii. make the interim orders absolute as per the provisions of Section 9 and till the disposal of the dispute"

8. The said petition was taken up for hearing on 14.07.2015 and on the

said date, this Court directed Ircon to maintain status quo as on date till the

next date of hearing. This Court further directed that "if the respondent no.1

has received the demand draft from the bank and has not yet deposited the

same with the bank, respondent no.1 shall withhold the same till the next

date of hearing".

9. The Court further directed that a competent officer of Ircon is to

remain present in Court on the next date, that is, 17.07.2015. On the next

date, this Court was informed that Banks (ICICI Bank and Axis Bank) had

issued the demand drafts for encashment of the BGs and the same had been

deposited by Ircon in its bank account on 14.07.2015 at around 5:30 p.m.

and 6:00 p.m. This Court noted that this was a clear violation/contempt of

the order dated 14.07.2015 as the panel counsel for the Railways was

present in Court on 14.07.2015 and had communicated the order to the

Manager (Legal), Ircon.

10. In the above circumstances, the Court issued a Show Cause Notice

and in the meantime, directed Ircon to deposit the entire amount received

on encashment of the BGs with the Registrar General of this Court. In

compliance with the said order, Ircon deposited the sum of `2,44,77,051/-

with the Registrar General of this Court in respect of the two BGs, which

were the subject matter of O.M.P.(I) 338/2015. It is relevant to state that

two other BGs pertaining to another contract had also been similarly

encashed and the same were subject matter of another petition [O.M.P.(I)

339/2015]. This Court had also directed that the amounts encashed in

respect of those BGs for an aggregate sum of `1,38,22,777/- be also

deposited with this Court.

11. Both petitions, O.M.P.(I) 338/2015 and O.M.P.(I)339/2015, were

taken up by this Court together on 11.01.2016. Insofar as

O.M.P.(I)339/2015 is concerned, the amount deposited in this Court was

released to Simplex as disputes between the parties had already been

adjudicated.

12. Insofar as O.M.P.(I)338/2015 is concerned, this Court noted that the

Sole Arbitrator had been appointed and, therefore, directed the said

application under Section 9 of the Act to be treated as an application under

Section 17 of the Act, to be decided by the Arbitrator. Insofar as the

amount of `2,44,77,051/- deposited in this Court is concerned, this Court

directed that a sum of `1,44,77,051/- along with interest accrued thereon be

released to Ircon and the balance amount of `1 crore along with accrued

interest be retained with the Registrar General of this Court in a fixed

deposit till the decision of the Arbitrator under Section 17 of the Act.

13. In compliance with the orders passed by this Court, the Sole

Arbitrator considered Simplex's application - filed under Section 9 of the

Act in this Court - as an application for interim measures under Section 17

of the Act and passed the impugned order.

Submissions

14. Mr K. Datta, Advocate appearing for Ircon submitted that the

impugned order is contrary to the settled principles regarding injunctions

against encashment of BGs. He referred to the decision of the Supreme

Court in UP Cooperative v. Singh Consultants and Engineers (P) Ltd.:

(1988) 1 SCC 174, in support of his contention that the BG was an

independent contract and its encashment could not be restrained except in

case of fraud affecting the underlying transaction. He submitted that in the

present case, none of the grounds for restraining encashment of a BG had

been established.

15. He further contended that the entire mobilisation advance had not

been recovered and, therefore, Ircon was within its rights to invoke the BG

furnished against the mobilisation advance. He contended that although

Simplex had the option to furnish multiple BGs for values aggregating the

mobilisation advance which could be released progressively, Simplex had

opted for a single BG and, therefore, the said BG could be encashed even if

a small fraction of the mobilisation advance was required to be recovered.

16. Next, Mr Datta referred to clause 60 of the Contract and contended

that in view of the said clause, Ircon was well within its right to encash the

BGs even in respect of its claims relating to another contract. He submitted

that even though the mobilisation advance - against which the guarantee in

question was given - had been partly recovered, Ircon could encash the BGs

as it had substantial claims against Simplex, albeit, in relation to another

contract.

17. Lastly, he contended that the impugned order was beyond the scope

of Section 17 of the Act as it directed Ircon to refund the amounts of

`1,30,66,840/- already recovered by Ircon. Thus, the decision was not in

the nature of an interim measure of protection within the scope of Section

17 of the Act.

18. Mr S.D. Singh, learned counsel appearing for Simplex countered the

arguments advanced by Mr Datta. He submitted that the BG in question

was not an unconditional BG but was for recovery of mobilisation advance.

He referred to clause 3 of the Contract, and submitted that since in the

present case, it was not disputed that the mobilisation advance had been

recovered to the extent of `1,30,66,840/-, the BG could not be encashed to

that extent. He referred to the decision of the Supreme Court in Hindustan

Construction Co. Ltd. v. State Of Bihar and Others: (1999) 8 SCC 436 in

support of his contention that invocation of the BG was not in terms

thereof.

Reasoning and Conclusion

19. As indicated hereinbefore, Simplex's application under Section 17 of

the Act was initially filed in this Court under Section 9 of the Act and was

considered by this Court for the first time on 14.07.2015. At that stage,

Simplex had prayed for an order quashing the letter of invocation dated

10.07.2015 and had further sought an order restraining the banks (ICICI

Bank and Axis Bank) from encashing the BGs. On 14.07.2015, this Court

passed an ad interim order inter alia restraining Ircon from encashing the

demand drafts in the event the same had been received by Ircon. Since the

demand drafts had been encashed after passing of the order, this Court had

directed the amounts recovered by encashment of BGs, to be deposited with

the Registrar General of this Court. Subsequently, the application under

Section 9 of the Act was directed to be considered by the Arbitrator by

treating the same as an application under Section 17 of the Act.

20. The impugned order must be read in the above context and, thus,

cannot be construed as an order in the nature of an interim award directing

refund of amounts already recovered by Ircon. The impugned order must

be understood in the context of Simplex's application under Section 9 of the

Act. At the material time when the application was moved, Ircon had not

deposited the demand drafts in its accounts.

21. As indicated above, this Court had directed deposit of the amount of

the BGs in this Court. Plainly, this was for the purpose of ensuring that

Simplex is not presented with fait accompli. In the circumstances, the

contention that the release of the funds deposited/recovered by Ircon are

beyond the scope of Section 17 of the Act cannot be accepted.

22. The next question to be considered is whether the injunction

restraining the encashment of the BGs ought to have been granted as the

import of the impugned order is to restrain Ircon from encashing the BG

furnished to secure recovery of mobilisation advance, to the extent of

`1,30,66,840/-. It has been contended on behalf of Simplex that the BG was

not unconditional and its invocation was not in terms of the said BG. In

order to address the aforesaid issues, it is necessary to advert to the

language of the said BG, the relevant extract of which is reproduced

hereunder:-

"In accordance with the provisions of the conditions of contract, Sub-Clause 3.2 ("Advance Payment") of the above- mentioned contract, M/s. Simplex Projects Limited, having its registered office at 12/1, Nellie Sengupta Sarani, Kolkata - 700 087 (hereinafter called "the Contractor") shall deposit with M/s. IRCON International Limited, a bank Guarantee to guarantee his proper and faithful performance under the said Clause of the Contract in an amount of Rs.1,74,83,608/- (Rupees One Crore Seventy Four Lacs Eighty Three Thousand Six Hundred Eight Only).

We, the ICICI Bank Limited, having registered office at "Landmark", Race Course Circle, Vadodara - 390 007 and one of its branch among others at ICICI Bank Limited 20, Sir R.N. Mukherjee Road, Kolkata - 700 001 (hereinafter referred to as "the Bank") as instructed by the Contractor, agree unconditionally and irrevocably to guarantee as primary obligator and not as Surety merely, the payment to M/s. IRCON International Limited on their first demand without whatsoever right of objection on our part and without his first claim to the Contractor, in the amount not exceeding Rs.1,74,83,608/- (Rupees One Crore Seventy Four Lacs Eighty Three Thousand Six Hundred Eight Only).

xxxx xxxx xxxx xxxx xxxx This guarantee shall remain valid and in full effect from the date of the advance payment under the Contract upto 12th March, 2013 (until M/s. IRCON International Limited receives/recovers full repayment of advance along with interest accrued thereon from the Contractor)."

23. Although it cannot be disputed that the above BG was furnished to

Ircon for securing the sums advanced by Ircon in terms of sub-clause 3.2 of

the Contract, however, the same does not render the BG a conditional one.

It has been expressly stated that the Bank agrees to unconditionally and

irrevocably guarantee the payment to Ircon on its first demand without any

right of objection.

24. An unconditional BG is one where the bank agrees to

unconditionally pay the guaranteed amount to the beneficiary on a demand

being made in terms of the BG. The fact that the BG was furnished at the

instance of Simplex in terms of clause 3.2 of the Contract, would not in any

manner dilute the unconditional nature of the said BG.

25. The reliance placed by the learned counsel for Simplex on the

decision of the Supreme Court in Hindustan Construction Co. Ltd. (supra)

is misplaced as in that case the language of the BG was materially different.

In that case, the BG had expressly provided that the bank would pay an

amount not exceeding `10,00,000/- "in the event that the obligations

expressed in the said clause of the above-mentioned contract have not been

fulfilled by the contractor giving the right of claim to the employer for

recovery of the whole or part of the advance mobilisation loan from the

contractor under the contract."

26. The Supreme Court highlighted the aforequoted language of the BG

and held that the BG was conditional on the contractor failing to fulfill his

obligation as expressed in clause 9 of the contract in question. The express

language to the aforesaid effect is absent in the BG in question.

27. The next question to be addressed is whether Ircon could be

restrained from encashing the BG to the extent of `1,30,66,840/- in view of

the fact that mobilisation advance to the aforesaid extent had been

recovered by Ircon.

28. At the outset, it would be necessary to note that there is no dispute as

to the fact that the BG in question was furnished by Simplex to secure the

mobilisation advance provided by Ircon to Simplex. Simplex had also

furnished another BG for due performance of the contract in the sum of

`69,93,443/-. The aforesaid performance BG was also encashed by Ircon

and the Arbitrator has not directed refund of the said amount. Although the

Arbitrator has observed that the breach of contract on account of delay was

not attributable to one party alone, he has refrained from expressing any

final conclusion. The Arbitrator noted that Ircon had terminated the

contract and in terms of clause 50.2 (a) was entitled to forfeit the whole or

such portions of the performance security amount. He observed that since

the dispute in regard to the alleged breach of contract was to be finally

adjudicated, no ruling in regard to the BG issued as performance security

could be made at the present stage. However, insofar as the BG for securing

mobilisation advance is concerned, there was no dispute as to the relevant

facts.

29. It cannot be disputed that the BG in question was provided in terms

of clause 3.1(iii) of the Contract. Clause 3 of the Special Conditions of

Contract is relevant and is reproduced below:-

"3.0 MOBILIZATION ADVANCE

3.1 Conditions for Payment:

If requested by the Contractor in writing, the Employer/Engineer shall make an interest bearing mobilization advance payment to the Contractor for an amount not more than 10 (Ten) percent of the original contract value. The mobilization advance shall be paid exclusively for the costs of mobilization in respect of the Works. The Mobilization advance shall be simple interest bearing at the rate of 13.75 % per annum. Payment of such advance shall be made after fulfillment of the following conditions to the satisfaction of the Engineer:-

i) Execution of the agreement between the Engineer and the Contractor.

ii) Submission of Performance Security by the contractor in accordance with Clause 8.2 of General Conditions of Contract.

iii) Submission of an unconditional bank guarantee in the format annexed as Annexure-I from a scheduled bank in India for an amount equivalent to the mobilization advance being paid and amount of interest for one year. The Bank guarantee may be split into not more than four separate Bank Guarantees & each having a minimum value of 2.5% of the original contract value. Such Bank Guarantee shall remain effective until the advance payment alongwith the interest has been recovered from the Contractor. Bank

guarantee(s) for the amount recovered from the Contractor shall be released to the Contractor progressively.

3.2 Payment:

After fulfillment of the pre-conditions as described in para 3.1 above, the mobilization advance shall be released to the Contractor in following stages:-

Stage - I - Maximum 5% of the contract value on fulfillment of the conditions described in clause 3.1 above.

Stage - II - Maximum 5% of the contract value on establishment of site camps and offices, mobilisation of necessary Plant and Machinery and man power and other facilities for commencement of work.

3.3 Recovery:

The recovery of Ist installment of mobilisation advance along with upto date interest shall commence from the Contractor's on account bills w. e. f. 3rd on account bill or on completion of works to a value of 15% of the total contract value, whichever is earlier and the full recovery shall be effected before completion of works for a value of 80% of the total contract value. The recovery schedule shall be made by the Engineer based on the payments made.

3.4 Calculation of Interest:

Interest shall be computed on diminishing balance basis on the amount of advance outstanding. The date of issue of cheque shall be reckoned as the date on

which the recovery has been made for purpose of computing the outstanding advance and working out the interest."

30. It is apparent from the above that the BG in question was required

only to secure the amount advanced to Simplex as mobilisation advance. In

terms of the contract, it was not obligatory on the part of the contractor to

avail of the mobilisation advance. However, Ircon had agreed to grant the

same subject to fulfillment of certain conditions, one of which was an

unconditional BG to secure the amount of mobilisation advance as well as

the interest thereon. Clause 3.1(iii) also provided an option for the

contractor to split the BG into not more than four BGs, each having a

minimum value of 2.5% of the original contract value. Admittedly, the BGs

were to be released progressively and commensurately with the recovery of

the mobilisation advance. In the present case, there is no dispute that Ircon

has recovered the mobilisation advance with interest to the extent of

`1,30,66,840/-.

31. It is Ircon‟s case that notwithstanding the undisputed position that (a)

Ircon has recovered the mobilisation advance to the extent of

`1,30,66,840/- and (b) that the BG in question was furnished only to secure

the recovery of the mobilisation advance, Ircon was still entitled to encash

the BGs for the following reasons:-

(a) That the entire mobilisation advance had not been recovered

and as Simplex had provided a single BG for the entire amount of the

mobilisation advance, the same could be encashed. It is contended

that Simplex could have opted for splitting the BG into separate BGs

of a lesser value and had Simplex opted for doing so, the BGs would

have been released but since Simplex opted for a single BG instead

of multiple BGs for lesser sums, Simplex was not obliged for a

partial release of the BG in question.

(b) That in terms of clause 60 of the contract, Ircon is entitled to

retain any sum for Ircon‟s claims for another contract and, thus, Ircon

could have invoked the said BG against its claims in another

contract.

32. In my view, both the aforesaid contentions are without merit. Merely

because Simplex did not opt for splitting the BG into separate BGs of lesser

sums, would not disentitle Simplex from getting the BG released to the

extent it had repaid the mobilisation advance. Merely because, there is a

singular BG for a larger sum, does not entitle the beneficiary to invoke the

BG for the entire amount. The BG amount only puts a cap on the maximum

amount that would be paid by the bank. There was no restriction on Ircon

to claim a lesser amount against the said BG. Since, admittedly, only a sum

of `44,16,768/- remained to be recovered against mobilisation advance,

Ircon was obliged to invoke the BG only to the aforesaid extent.

33. The second contention, namely, that Ircon is entitled to invoke the

BG provided to secure mobilisation advance for claims in relation to

another contract is also not persuasive.

34. Clause 60 of the Contract reads as under:-

"60.0 LIEN IN RESPECT OF CLAIMS IN OTHER CONTRACTS Any moneys due to the Contractor either alone or jointly with others, including the performance guarantee amount returnable to him may be withheld or retained or encashed by exercise of lien by the Client/Employer/ Engineer against any claim of the Client/Employer/ Engineer or any other branch, office department or subsidiary of the client/Employer/Engineer in respect of a sum of money arising out of or under any contract other than the present contract made by the Contractor alone or jointly with the client/Employer/Engineer or any other branch, office, department or subsidiary of the client/Employer/Engineer. It is agreed term of contract that the sum of money so withheld or retained under this clause by the client Employer/Engineer, shall be kept withheld or retained till the claims arising out of or under the contract, are either mutually settled or determined by the Arbitrator, or by the competent court, as the case may

be and that the Contractor shall have no claim for interest or damages whatsoever on this account or any other account, in respect of any sums of money withheld retained, under this clause and duly notified to the Contractor."

35. A plain reading of the aforesaid clause indicates that although Ircon

is entitled to withhold moneys due to the contractor including the

performance guarantee amount returnable to the contractor, however, Ircon

is not entitled to encash the BG against mobilisation advance. Although, the

aforesaid clause covers the performance BG - which Ircon had already

encashed - the same does not cover BG furnished to secure mobilisation

advance.

36. The law relating to granting injunctions against invocation of the BG

is now well settled. Indisputably, a BG is a separate and independent

contract and a Court would not interfere with the same unless the party

presents a strong prima facie case of an established fraud vitiating the

underlying agreement. It is only an exceptional case that a Court would