HC: The ‘balance of convenience' is in permitting the Arbitral Tribunal, which has been constituted to determine the mutual liabilities and claims of the parties [Read Judgment]

On 22^nd July, a bench of the Delhi High Court consisting of Justices Asha menon and Rajiv Sahai Menon held that it is beyond the jurisdiction of the court to direct restitution in proceedings under Section 9 of the Arbitration and Conciliation Act as restitution by its very nature involves a final determination of rival contentions even if it were to appear just and proper to do so. The court further held that substantive questions of law has to be left to be decided in arbitration as it the mode of dispute resolution chosen by the parties. It was also stated that the “balance of convenience” is in permitting the Arbitral Tribunal, which has been constituted to determine the mutual liabilities and claims.

Facts of the case:

The Court in the case was hearing two appears filed under Section 37 of the Arbitration & Conciliation Act, 1996, challenging an interim order dated 13th May, 2020, passed by the learned Single Judge on an application filed by Leighton India Contractors Private Ltd under section 9.

The parties had entered into a Contract Agreement dated 19th September, 2013, in respect of works for the project of DLF Limited named as “The Camellias”, which was a residential project with a Contract Price of Rs.1438,72,27,078/- In compliance of Clause 15 of the C.A. dated 19th September, 2013, Leighton furnished a total of six Bank Guarantees (BG). According to Leighton, it had completed the project by September, 2017. . However, some minor works remained to be completed. However, despite request, DLF did not issue the Completion Certificate to them and rather sought to encash the BGs. Thus, Leighton was forced to come to court with its application under Section 9 of the A&C Act restraining DLF from encashing the bank guarantees.

Arguments of Leighton:

Sh. Sandeep Sethi, learned Senior Counsel, submitted the following:

1. It was contended that it was only during the hearing that Leighton learnt that the letter of invocation of the BGs was dated 2nd May, 2020 and the invocation was for two reasons namely, that Leighton had failed to “extend the validity of Performance Bond in advance”, and “for various dues and defaults” which is a vague reason.
2. Leighton had claimed that its application under Section 9 of the A&C Act was maintainable in view of the express provisions of the contract agreement.
3. The learned Senior Counsel submitted that on 4th May, 2020, the BGs stood extended and confirmed by the Axis Bank by their letter dated 5th May, 2020 and DLF, by alleging that the BGs had not been extended in terms of Clause 15.1 of C.A., had no right to invoke the BGs.
4. It was submitted that possession of more than 200 flats out of 429 completed flats were handed over to DLF and were in the possession of the allottees.
5. It was argued that assuming that there were some minor works, repair or maintenance related issues, which were required to be attended by Leighton, the value of the same could not be more than Rs.50 lakhs and in such circumstances, invocation and encashment of the BGs for a sum more than Rs.222 crores was patently illegal, fraudulent and an abuse by DLF.

Argument of DLF:

Sh. Rajiv Nayar and Sh. Randeep Rai, learned Senior Counsel submitted the following arguments:

1. It was submitted that the PBGs and RBGs were unconditional BGs as per Clause 2 of the BG’s, vesting the complete right on the owner i.e., DLF, to be the sole judge with regard to the performance of the Contract, and the Bank was not to question or ask any evidence when any demand notice was sent for encashment of the guarantees.
2. It was further contended that under Clause 15 of the GCC read with SCC, Leighton was required to renew the BGs 30 days prior to the expiry and non-renewal gave a right to DLF to invoke the BGs.
3.  Learned Senior Counsel further submitted that all the questions relating to the completion of work were really to be decided by the learned Arbitral Tribunal.
4. Learned Senior Counsel also submitted that Leighton was seeking a refund under Order XXXVIII Rule 5 CPC without even disclosing a case inasmuch as there is no pleading that DLF was indulging in any such activities, which would defeat an Award, if at all granted in favour of Leighton.
5. It was also submitted that substantial disputes pending with the Arbitral Tribunal relating to claims and counter-claims are yet to be resolved. Before such resolution, any view taken by this Court on merits would be prejudicial to the parties.

Observation and order of the Court:

The Hon’ble bench of the court made the following observation:

1. Under law, the Bank is not required to obtain the permission or concurrence of the Guarantor. To that extent, there is no fault that can be attached to the action of the Axis Bank in releasing the amount to DLF without seeking a confirmation from or permission of Leighton. This action cannot, therefore, be a reason to grant relief under Section 9 of the A&C Act.
2. Now that the Arbitral Tribunal had been constituted and claims and counter-claims along with applications under Section 17 of the A&C Act have been filed and have to be decided, it would be in the interest of fair play that this Court does not embark into an assessment of material on record to determine who was at fault and whether the BGs have been encashed in terms of the Clauses of the Contract agreement.

Based on the above the court held that it is for the learned Arbitral Tribunal to determine all these issues relating to the illegality of action, entitlement, liability, damages, etc.

The appeal was thus dismissed.

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