Delhi High Court
Era Infra Engineering Ltd. vs Central Public Works Department & ... on 11 May, 2017
$~44
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ O.M.P.(I) (COMM.) 185/2017
ERA INFRA ENGINEERING LTD. ..... Petitioner
Through: Mr Suhail Sehgal and
Mr Purushottam, Advocates.
versus
CENTRAL PUBLIC WORKS DEPARTMENT
& ANR. .... Respondents
Through: Mr Manish Mohan, CGSC with
Ms Priyansha Sinha, Ms Sanjana and
Mr Manish Saroha, Advoctes for R-1.
Mr Ashish Rana, Advocate for R-2
CORAM:
HON'BLE MR. JUSTICE VIBHU BAKHRU
ORDER
% 11.05.2017
IA No.5746/2017
1. Allowed, subject to all just exceptions.
2. The application is disposed of.
O.M.P.(I) (COMM.) 185/2017 & IA No.5745/2017
3. The petitioner has filed the present petition under Section 9 of the
Arbitration and Conciliation Act, 1996 (hereafter 'the Act') inter alia
seeking several reliefs. However, the only relief pressed by the learned
counsel for the petitioner is for staying the invocation / encashment of the
performance bank guarantee (the bank guarantee) issued by Bank of India
(respondent No. 2) at the instance of the petitioner.
4. The petitioner had participated in a tender floated by the respondent
for construction of an office building and guest house for A.G. (U.P.) at
Gomti Nagar, Lucknow. The petitioner's bid was accepted and work order
was issued by respondent No.1 (hereafter 'the work order'). The contractual
value of the work was ₹45,23,76,050/- and the works were to be completed
within a period of 16 months. The scheduled date of commencement was
20.10.2010. However, execution of the works was delayed and the petitioner
claims that it was completed on 16.11.2015.
5. One of the disputes between the parties relates to the delay in
execution of the works. Whilst, the petitioner claims that the delays were all
attributable to respondent No.1, the same is disputed by respondent No.1.
6. The agreement in question provides for levy of compensation on
account of delay in execution of the works. Respondent No. 1 has
determined that a delay of 447 days in completion of the works is
attributable to the petitioner and intends to recover the compensation for the
same. This has led the petitioner to file the present petition.
7. Mr Suhail Sehgal, learned counsel appearing for the petitioner had
contended that in terms of agreement between the parties (the agreement),
the bank guarantee could be invoked only on account of any sum to which
the President of India was entitled to. He submitted that since the
respondent was seeking to invoke the bank guarantee on account of un-
adjudicated damages for delay, the invocation was contrary to the terms of
the agreement and, therefore, respondent No.1 was liable to be restrained
from invoking the bank guarantee and respondent No.2 was liable to be
restrained from encashing the same.
8. Mr Sehgal relied on the decisions of the Supreme Court in Union of
India (UOI) v. Raman Iron Foundry: (1974) 2 SCC 231 and Gangotri
Enterprises Ltd. v. Union of India (UOI) and Ors: (2016) 11 SCC 720 in
support of his contention that an unadjudicated claim for compensation
could not be considered as an amount "due" and, therefore, respondent No.1
was not entitled to invoke the bank guarantee. He also referred to the
decision of this Court in Tower Vision India Pvt. Ltd. v. Procall Pvt. Ltd.:
(2013) 112 CLA 364 (Delhi) in support of his contention that an
unadjudicated claim for damages would not qualify as a "debt".
9. Mr Manish Mohan, learned counsel for respondent No.1 has raised
the preliminary objection as to jurisdiction of this Court to entertain the
present petition.
10. He submitted that the tenders in question were floated by respondent
No.1 in Lucknow (U.P.); the tenders (including that of the petitioner) were
submitted at Lucknow; the contract was finalised in Lucknow; and the
works were to be executed at Lucknow. The petitioner was also located in
the State of UP and no part of cause of action had arisen within the territorial
jurisdiction of this Court. Mr Mohan also handed over a communication sent
by Superintendent Engineer of respondent No.1 on 24.04.2017, wherein the
Superintendent Engineer had expressly stated that in exercise of powers
conferred in Clause 2 of the agreement, a sum of ₹4,52,37,605/- had been
determined as compensation payable under clause 2 of the agreement.
11. Mr Sehgal countered the aforesaid submissions and contended that a
determination by the Superintendent Engineer could not be considered as a
determination in the eyes of law; a claim for damages was required to be
determined in a Court of law and not unilaterally by any of the parties. On
the question of jurisdiction, he submitted that this Court would have
jurisdiction as respondent No.2's office was located in Delhi and the bank
guarantee had been issued from New Delhi. He relied upon the decision of
this Court in Milkfood Ltd. v. Union Bank of India: 2007 (2) CTLJ 362
(Del) in support of this contention.
12. This Court is not persuaded to hold that it has jurisdiction to entertain
the present application. The question of jurisdiction of a court, in the context
of Section 9 of the Act, has to be determined by reference to Section 2(1)(e)
of the Act, which defines "Court" as under:-
"1 (e) "Court" means-- (i) in the case of an
arbitration other than international commercial arbitration,
the principal Civil Court of original jurisdiction in a district,
and includes the High Court in exercise of its ordinary
original civil jurisdiction, having jurisdiction to decide the
questions forming the subject-matter of the arbitration if the
same had been the subject-matter of a suit, but does not
include any Civil Court of a grade inferior to such principal
Civil Court, or any Court of Small Causes;
(ii) in the case of international commercial arbitration,
the High Court in exercise of its ordinary original civil
jurisdiction, having jurisdiction to decide the questions
forming the subject-matter of the arbitration if the same had
been the subject-matter of a suit, and in other cases, a High
Court having jurisdiction to hear appeals from decrees of
courts subordinate to that High Court."
13. In view of the above, the question to be addressed is whether this
Court would have the jurisdiction to entertain the suit in relation to the
subject matter of arbitration, if there was no arbitration agreement between
the parties. In the present case, the disputes between the petitioner and
respondent No.1 have arisen in connection with a contract which was
entered into at Lucknow and was to be performed in Lucknow. The entire
subject matter of disputes between the petitioner and respondent no.1 has,
plainly, arisen at Lucknow. The fact that the contract required a bank
guarantee to be furnished by the petitioner, which was issued by a bank
(respondent No. 2) in Delhi would not extend the jurisdiction of this Court
over the subject matter of arbitration.
14. The decision in the case of Milkfood Limited (supra) is of little
assistance to the petitioner. In that case, the subject disputes were between
the plaintiff and the defendant bank which had issued bank guarantees but
had failed to honour the same. It is settled law that a bank guarantee is an
independent contract. In that case, the Court held that the bank guarantees
did not specify any place for payment and the letters invoking the bank
guarantees were written by the plaintiff from Delhi and the defendant also
had a zonal office at Delhi. In the present case, the arbitration agreement
(clause) between the petitioner and respondent No.1 was entered into at
Lucknow for works to be performed at Lucknow and, thus, the subject
matter of the contract falls within the jurisdiction of the courts at Lucknow
and not in Delhi.
15. Having stated the above, this Court is also not persuaded to accept
that any order interdicting the bank guarantee ought to be issued in the facts
of the present case. The disputes between the petitioner and respondent No.1
as to which party is responsible for the delay in execution of the works and
is in breach of the contract, are contractual disputes, which do not warrant
interdiction of the bank guarantee. The law on interdicting the bank
guarantees is well settled and has been reiterated by courts in numerous
decisions. A bank guarantee can be interdicted only in cases of egregious
fraud or special equities (See: U.P. Cooperative Federation Ltd v. Singh
Consultants and Engineers (P) Ltd.: (1988) 1 SCC 174, Svenska
Handelsbanken v. M/s Indian Charge Chrome and Others: (1994) 1 SCC
502 and Larsen & Toubro Limited v Maharashtra State Electricity Board
and Others: (1995) 6 SCC 68).
16. Prima facie, the contention that invocation is contrary to the terms of
clause 1 of the agreement, also cannot be readily accepted. Clause 1 of the
agreement is set out below:-
"CLAUSE 1
(i) The contractor shall submit an irrevocable
Performance Guarantee of 5% (Five percent) of the
tendered amount in addition to other deposits
mentioned elsewhere in the contract for his proper
performance of the contract agreement, (not
withstanding and/or without prejudice to any other
provisions in the contract) within period specified in
Schedule 'F' from the date of issue of letter of
acceptance. This period can be further extended by
the Engineer-in-Charge upto a maximum period as
specified in schedule 'F' on written request of the
contractor stating the reason for delays in procuring
the Performance Guarantee, to the satisfaction of the
Engineer-in-Charge. This guarantee shall be in the
form of Cash (in case guarantee amount is less than
Rs. 10,000/-) or Deposit at Call receipt of any
scheduled bank/Banker's Cheque of any scheduled
bank/Demand Draft of any scheduled bank/Pay Order
of any scheduled bank (in case guarantee amount is
less than Rs. 1,00,000/-) or Government Securities or
Fixed Deposit Receipts or Guarantee Bonds of any
Scheduled Bank or the State Bank of India in
accordance with the form annexed hereto. In case a
fixed deposit receipt of any Bank is furnished by the
contractor to the Government as part of the
performance guarantee and the Bank is unable to
make payment against the said fixed deposit receipt,
the loss caused thereby shall fall on the contractor
and the contractor shall forthwith on demand furnish
additional security to make good the deficit.
(ii) The Performance Guarantee shall be initially valid
upto the stipulated date of completion plus 60 days
beyond that. In case the time for completion of work
gets enlarged, the contractor shall get the validity of
Performance Guarantee extended to cover such
enlarged time for completion of work. After
recording of the completion certificate for the work
by the competent authority, the performance
guarantee shall be returned to the contractor without
any interest.
(iii) The Engineer-in-Charge shall not make a claim under
the performance guarantee except for amounts to
which the President of India is entitled under the
contract (not withstanding and/or without prejudice
to any other provisions in the contract agreement) in
the event of:
(a) Failure by the contract to extend the validity
of the Performance Guarantee as described herein
above, in which event the Engineer-in-Charge may
claim the full amount of the Performance Guarantee.
(b) Failure by the contractor to pay President of
India any amount due, either as agreed by the
contractor or determined under any of the
Clauses/Conditions of the agreement within 30 days
of the service of notice to this effect by Engineer-in-
Charge
(iv) In the event of the contract being determined or
rescinded under provision of any of the
Clause/Condition of the agreement, the performance
guarantee shall stand forfeited in full and shall be
absolutely at the disposal of the President of India."
17. Sub-clause 1(iii)(b) of the agreement expressly provides that the
Engineer In-Charge shall not make a claim under the performance
guarantees except on failure of the contractor to pay any amount due, either
as agreed or determined, under any of the clauses / conditions of the
agreement. This Sub-clause does not proscribe the Engineer In-charge from
invoking the bank guarantee for recovery of any sum determined under
clause 2 of the agreement.
18. The relevant extract of clause 2 of the agreement reads as under:-
"CLAUSE 2
Compensation
for Delay
If the contractor fails to maintain the required
progress in terms of clause 5 or to complete the work
and clear the site on or before the contract or extended
date of completion, he shall, without prejudice to any
other right or remedy available under the law to the
Government on account of such breach, pay as agreed
compensation the amount calculated at the rates
stipulated below as the authority specified in schedule
'F' (whose decision in writing shall be final and
binding) may decide on the amount of tendered value
of the work for every completed day/month (as
applicable) that the progress remains below that
specified in Clause 5 or that the work remains
incomplete
This will also apply to items or group of items for
which a separate period of completion has been
specified.
(i) Compensation @ 1.5% per month of
for delay of work delay to be computed
on per day basis
Provided always that the total amount of
compensation for delay to be paid under this
Condition shall not exceed 10% of the Tendered
Value of work or of the Tendered Value of the item or
group of items of work for which a separate period of
completion is originally given.
The amount of compensation may be adjusted or set-
off against any sum payable to the contractor under
this or any other contract with the Government. In
case, the contractor does not achieve a particular
milestone mentioned in schedule F, or the re-
scheduled milestone(s), in terms of Clause 5.4, the
amount shown against that milestone shall be
withheld, to be adjusted against the compensation
levied at the final grant of Extension of Time. With-
holding of this amount on failure to achieve a
milestone, shall be automatic without any notice to be
contractor. However, if the contractor catches up with
the progress of work on the subsequent milestone(s),
the withheld amount shall be released. In case the
contractor fails to make up for the delay in subsequent
milestone(s), amount mentioned against each
milestone missed subsequently also shall be withheld.
However, no interest, whatsoever, shall be payable on
such withheld amount."
19. It is expressly provided that the decision of the authority specified in
Schedule 'F' shall be final and binding. In the present case, the petitioner
was issued a show cause notice on 26.12.2016 as to why compensation
chargeable under Clause 2 not be imposed. The petitioner responded to the
said show-cause notice by a letter dated 06.01.2017. The Superintendent
Engineer thereafter determined that the petitioner was responsible for 447
days delay and imposed a compensation of ₹4,52,37,605/-. The aforesaid
determination would, prima facie, fall within clause 1(iii)(b) of the
agreement.
20. Indisputably, the petitioner would have recourse to challenge the
aforesaid determination. Prima facie, the question whether any
compensation was at all payable under clause 2, could be a subject matter of
arbitration; however, the quantification of the compensation appears to be an
excepted matter.
21. The decision in the case of Gangotri Enterprises Ltd. (supra) is
inapplicable to the facts of the present case. In that case, the respondent had
sought to invoke the performance bank guarantee against its claims in
another contract. The Supreme Court had inter alia noted that the bank
guarantee in question was in the nature of a performance bank guarantee
furnished for execution of works, which admittedly, were completed to the
satisfaction of the respondent. The Court had also explained that a claim for
damages in relation to another contract which was pending adjudication in
an arbitration proceeding could not be considered as amount "due" to the
respondent therein.
22. In the facts of the present case, the execution of the works has been
delayed and thus, there is a dispute as to whether the petitioner has
performed the works in terms of the agreement. It is well settled that
unconditional bank guarantees cannot be interdicted on account of existence
of disputes.
23. In view of the above, the present petition and the pending application
are dismissed. The parties are left to bear their own costs.
VIBHU BAKHRU, J
MAY 11, 2017
RK
