In the present matter impugned order was passed in reference to an application moved under Section 17 of the Arbitration and Conciliation Act, 1996 (Act) whereby an injunction was sought against the encashment of bank guarantees in question. The application was dismissed. It was the contented that once the contracts having been duly performed, the bank guarantees cannot be invoked and encashed. The injunction qua encashment of the bank guarantees was sought on the ground of special equities and it was accordingly further contended that the arbitrator could not have passed the impugned order having regard to the fact that the contracts in issue had been performed.
On the contrary the Appellant was alleged of fudging the balance sheet filed, at the time when it had bid for the contract(s). It was alleged that the filing of incorrect balance sheets was deliberate and intended to secure the contracts in issue. By way of the impugned order the Respondent was restrained from encashing the bank guarantees in issue subject to the condition that they would be kept alive.
It was held that in matters of grant of interim injunction, the court, exercises an equitable jurisdiction, and that, jurisdiction extends not only to orders generally passed for interim injunctions but also vis-à-vis those pertaining to bank guarantees. In so far as bank guarantees are concerned, the width and amplitude of power available to the court is narrower. Ordinarily, encashment of an unconditional bank guarantee is not injuncted by a court. In order to obtain an order of injunction, the aggrieved party is required to demonstrate that it is either a case of fraudulent invocation or, one of special equities or in a given case, covered by both exceptions.
The impugned order was accordingly held to be correct.
The impugned order was accordingly held to be correct.
IN THE HIGH COURT OF DELHI AT NEW DELHI
ARB. P. 33/2014
AVINASH EM PROJECTS PVT. LTD.
versus
GAIL (INDIA) LIMITED
CORAM:
HON'BLE MR. JUSTICE RAJIV SHAKDHER
ORDER
10.11.2014
This is an appeal preferred against the order dated 07.11.2014,
passed by the learned arbitrator. By this order, the appellant’s petition
under Section 17 of the Arbitration and Conciliation Act, 1996 (in short the
Act) has been dismissed. The appellant being aggrieved, has preferred the
captioned appeal.
3.
Briefly, the case of the appellant is that, the bank guarantees in issue,
the details of which are set out at pages 443 to 446 of the documents file,
pertain to three contracts, each of which has worked itself out. It is,
therefore, the appellant’s case that the contracts having been duly
performed, the bank guarantees cannot be invoked, and thus, encashed by
the respondent herein.
3.1
At the very outset, Mr. Kakra, who appears for the appellant has
clearly admitted that the principle of fraudulent invocation is not set into
play in this case. It is the appellant’s case that injunction qua encashment
of the bank guarantees in issue was sought on the ground of special
equities, and therefore, in the given circumstances, the learned arbitrator
ought not to have passed the impugned order having regard to the fact that
the contracts in issue had been performed.
4.
On the other hand, Mr. Tripathi, who appears for respondent no.1, on
advance notice, has resisted, the admission of the appeal. Mr. Tripathi has
submitted that the appellant in this case has clearly given up its right to
challenge the termination of the contracts in issue, in another proceedings,
that is, WP (C) 465/2014; instituted in this court. For this purpose, he has
referred to order dated 21.01.2014, passed by the learned Single Judge of
this court. It is Mr. Tripathi’s submission that if, that be the case, surely
there can be no ground for seeking injunction qua the bank guarantees in
issue.
4.1
Furthermore, Mr. Tripathi has also contended that the appellant was
guilty of fudging the balance sheet filed, at the time when it had bid for the
concerned contract(s). It is stated that the balance sheet in issue pertains to
the financial year 2010-2011, and that, the fudged balance sheet was filed
with the bid on 06.09.2010.
Mr. Tripathi says that the appellant had
prepared two different sets of accounts for the same financial year. The
first set was prepared by a Chartered Accountant by the name of Mr. Vishal
Aggarwal, who infact curiously replaced the statutory auditor, one, Mr.
Neeraj Garg. The balance sheet which bore the signatures of Mr. Vishal
Aggarwal, was dated 21.08.2010, whereas the one, which was signed by
the statutory auditor, Mr. Neeraj Garg, was dated 31.08.2010.
4.2
Mr. Tripathi has submitted that what makes the conduct of the
appellant worse, is the fact that even though the balance sheet prepared by
the statutory auditor was available as on 31.08.2010, the appellant chose,
not to file that balance sheet with its bid dated 06.09.2010, and instead,
filed the earlier, fudged balance sheet dated 21.08.2010.
4.3
It is the stand of respondent no.1 that the fraud would not have got
unravelled, had the petitioner’s balance sheet (prepared by its statutory
auditor) not got uploaded on the Registrar of Companies (R.O.C.)’s
website. It is stated that it was only on a comparison of the two balance
sheets, and that too by chance, that respondent no.1, discovered the fraud.
The cooking up of the accounts, according to respondent no.1, was clearly
deliberate and intended to secure the contracts in issue. Mr. Tripathi, thus,
submitted that, in these circumstances, no indulgence ought to be granted
to the appellant.
5.
On the aspect of performance vis-a-vis the contracts in issue, it is
Mr. Tripathi’s case that at least two out of the three contracts were not
completely performed and for this purpose, he referred me to the
observations recorded by the learned arbitrator at page 13 (see para 13) of
the impugned order.
5.1
Upon, Mr. Tripathi, being queried as to how the learned arbitrator, in
paragraph 39, at page 40 of the impugned order, had recorded that
respondent no.1 did not dispute that there was no defect in performance or
in the execution of the work by the appellant (i.e., the original claimant),
with regard to the three contracts; it is his say that there is obviously an
Arb. P. 33/2014
Page 3 of 11
error in the learned arbitrator’s reaching such a conclusion which is
apparent from the submissions recorded earlier in paragraph 13, at page 13
of the impugned order. Mr. Tripathi though, does not contest the fact that
appreciation letters dated 03.11.2011 and 30.10.2012, were issued to the
appellant.
5.2
Apart from the above, it is Mr. Tripathi’s contention that there are no
averments in the application filed under Section 9 of the Act (which was
later converted into an application under Section 17 of the Act), pertaining
to fraud or special equities.
6.
As indicated above, Mr. Kakra has conceded that his case does not
pertain to fraudulent invocation, and that, the appellant is confining its
submissions, in the instant case, to one of special equities.
7.
I have heard the learned counsel for the parties. The broad facts,
which are necessary for adjudication of the present appeal, are as follows :-
7.1
Between August 2010 and September 2011, pursuant to tenders
floated by respondent no.1, three contracts were executed inter se the
parties herein. The two contracts pertained to annual rate contracts for
construction of pipelines and associated facilities, to enable supply of gas
to new and existing consumers.
These contracts were numbered as :
8000002119 (in short E-tender 2119) and 8000003564 (E-tender 3564).
7.2
The third contract, which was numbered as : 8000002161 (in short
E-tender 2161) was, in fact, entered into prior in point of time and
pertained to execution of work involving, inter alia, laying, testing,
commissioning of various spurlines and augmentation of existing pipelines
in the Vijaipur-Kota Sector.
7.3
There is no dispute that the appellant was entrusted with the job of
Arb. P. 33/2014
Page 4 of 11
executing the aforementioned contracts. The controversy, really revolves
around respondent no.1’s right to encash the bank guarantees in issue,
which were furnished in consonance with the terms and conditions of the
contract.
7.4
A perusal of the award would show that, respondent no.1 before the
arbitral tribunal took the following stand with regard to the extent of work
completed vis-a-vis each of the aforementioned contracts. In so far as E-
tender 2161 was concerned, it was stated that 60-70% of the work was
completed. As regards, E-tender 3564, it was stated that 90% of the work
was completed. However, with respect to E-tender 2119, it was conveyed
that 100% of the work, was completed.
7.5
There is also no dispute about the fact that upon the alleged fraud
being unravelled, a show cause notice dated 29.07.2013, was issued by
respondent no.1 to the appellant herein. To this show cause notice, a reply
was filed, pursuant to which, respondent no.1, passed a black-listing order
dated 16.01.2014. It was this order which was assailed by the appellant, in
WP (C) 465/2014. As indicated above, the said blacklisting order was set
aside, giving liberty to respondent no.1, to pass a fresh order, and in
passing the order, it was directed to consider all documents, which had
been placed on record by the appellant in that proceeding. Respondent
no.1 was, also directed, to give the appellant due opportunity in that behalf.
7.6
What is required to be noticed, is that, while passing the order dated
21.01.2014, the learned single judge had indicated that the cancellation of
the three contracts referred to above, shall not be open to challenge by the
appellant, and that, any monetary dispute with regard to the said contracts
could be raised by the appellant, in any appropriate forum, in accordance
Arb. P. 33/2014
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with law. The rights and contentions of the parties were, however, left
open by the court.
7.7
In the interregnum, it appears that a series of letters of invocation of
even date i.e., 18.01.2014 were issued by respondent no.1. By these
letters of invocation, respondent no.1 sought to trigger the process of
encashment of the bank guarantees in issue. It is this action, which led the
appellant to institute OMP 83/2014, under Section 9 of the Act.
7.8
By order dated 20.01.2014, an interim order was passed in favour of
the appellant, injuncting thereby, respondent no.1 from encashing the bank
guarantees in issue subject to the condition that they would be kept alive.
7.9
There is no dispute, that an arbitral tribunal was constituted by the
parties herein, in consonance with the terms of the contract.
The
court
having been apprised of the same, on 07.07.2014, disposed of OMP
83/2014, with a direction that the petition under Section 9 of the Act be
treated by the learned arbitrator, as an application filed under Section 17 of
the Act.
The learned arbitrator was requested to dispose of the said
application, at the earliest, preferably within the next 30 days. It was
directed though that in the interregnum, the interim injunction granted on
20.01.2014, would continue to operate.
8.
It is, in this background, that the learned arbitrator, has passed the
impugned order.
9.
Having considered the matter, what emerges from the record, is that,
the learned arbitrator has come to a prima facie conclusion, at least in so far
as the purported fraud is concerned, that the allegation, has some substance.
As a matter of fact, the learned arbitrator has gone to the extent of saying
that misrepresentation employed by the appellant has affected the “due
Arb. P. 33/2014
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performance” of the contracts in issue. The relevant observations made by
the learned arbitrator, in this behalf, are culled out hereinbelow : -
“..The claimant prima facie seems to have procured the contract
work on the strength of fudged documents and therefore the
various acts of commission and omission on the part of the
claimant squarely bring its case in the category of breach in
terms of contract contemplated in the tender documents,
particularly those referred hereto above. This arbitral tribunal is
of the view that performance of a contract procured through
misrepresentation on vital aspects does not qualify for ‘due-
performance’..”.
(emphasis supplied)
10.
Apart from the above, the learned arbitrator has also come to the
conclusion that the encashment of the bank guarantees in issue by the
respondent is towards recovery of liquidated damages (which are
equivalent in value to the amount of the bank guarantees in issue), as
contemplated under clause 4(2) of the Integrity Pact executed between the
parties herein. Thus in sum, the learned arbitrator declined to continue
with the injunction, on the encashment of the bank guarantees in issue, as
according to him, the allegation made by respondent no.1 that the appellant
had indulged in corrupt and fraudulent practices, had prima facie, the right
resonance.
11.
Mr. Kakra, the learned counsel for the appellant though, has sought
to argue that notwithstanding the fact that such an allegation has been
levelled against the appellant, at this stage, it would have no relevance, as
the issue, is yet to be adjudicated upon. According to Mr. Kakra, the
learned arbitrator ought to have continued with the interim order passed by
this court, in view of the fact that the bank guarantees in issue being a
separate and independent contract, the legal validity of their invocation
Arb. P. 33/2014
Page 7 of 11
could not have been made dependent upon the accusation levelled against
the appellant.
11.1 Mr. Kakra submitted that, once, the learned arbitrator had found that
respondent no.1, had taken a stand that the contracts in issue had been
performed, the injunction should have followed as a matter of course, and
therefore, there was no good reason to vacate the injunction in view of the
fact that the matter was under adjudication.
11.2 Furthermore, it is Mr. Kakra’s submission that neither clause 4.2 of
the Integrity Pact nor clause 29.1 of the contracts in issue had any relevance
and / or applicability to the point in issue.
11.3 This apart, Mr. Kakra also assailed the observation made in the
impugned order to the effect that an application under Section 17 of the Act
does not lie against an entity such as the bank which issued the bank
guarantees as it is not a party to the arbitration agreement. Learned counsel
submitted that injunction could have been granted instead against the
respondent herein.
12.
In my opinion, apart from anything else, in matters of grant
of
interim injunction, the court, exercises an equitable jurisdiction, and that,
jurisdiction extends not only to orders generally passed for interim
injunctions but also vis-a-vis those pertaining to bank guarantees. In so far
as bank guarantees are concerned, the width and amplitude of power
available to the court is narrower.
Ordinarily, encashment of an
unconditional bank guarantee is not injuncted by a court. In order to obtain
an order of injunction, the aggrieved party is required to demonstrate that it
is either a case of fraudulent invocation or, one of special equities or in a
given case, covered by both exceptions.
Arb. P. 33/2014
Page 8 of 11
12.1 As indicated above, the appellant has taken a stand that it does not
plead fraud. Whether the circumstances articulated by the appellant fall
within the exception of special equities is, the only aspect, that I need to
examine in this case.
12.2 The circumstances set forth by the appellant would not, in my view,
place the instant matter in the category of special equities as this is not case
where irretrievable injustice would be caused to the appellant, in the event
of the bank guarantees in issue are encashed. Respondent no.1, is a public
sector undertaking, which is good for its money and, in case the appellant,
were to finally succeed, the money so paid by it can be easily retrieved.
This apart, as indicted above, in this particular case, the prima facie finding
returned by the learned arbitrator, that the appellant had indulged in corrupt
practices, persuades me, to decline, the appellant’s request for staying the
impugned order.
12.3 I had put to Mr. Kakra, as to whether the two balance sheets, to
which reference was made by Mr. Tripathi had infact been prepared and
brought into play. I had specifically, put to Mr. Kakra, as to whether the
balance sheet prepared by Mr. Vishal Aggarwal, was used at the stage of
filing the bid, with the respondent. Mr. Kakra, did not deny this aspect of
the matter, though, he tried to portray that the balance sheet prepared by
Mr. Vishal Aggarwal contained a clerical error. In my view, prima facie,
this cannot be a clerical error for the reason, on being queried further, Mr.
Kakra, accepted the fact that the eligibility criteria for a bidder to enter the
fray was that it should have the working capital of at least Rs.4.85 Crores.
Mr. Kakra conceded that the balance sheet authenticated by the statutory
auditor did not reflect that figure, while the balance sheet prepared, on the
Arb. P. 33/2014
Page 9 of 11
other hand, by Mr. Vishal Aggarwal, did reflect the appellant’s working
capital, at a figure
much higher than that required for fulfilling the
eligibility criteria. What made matters worse is the fact, that though the
audited balance sheet prepared by Mr. Neeraj Garg was available, it was
not filed at the time of filing of the bid. The bid was accompanied by an
inaccurate balance sheet prepared at an earlier point in time. As indicated
above, none of these facts were refuted by Mr. Kakra. Therefore, prima
facie, in my opinion, a fraud was perpetrated by the appellant. Whether or
not it will finally impact the claims which the appellant has preferred, is a
matter, which is pending adjudication before the learned arbitrator.
This
aspect, therefore, firms up my resolve to decline any relief in the appeal.
13.
In any case, in matters of appeal, the ground available to the
appellate court for interference, that too, qua interim orders would be
limited to perversity or to a case where the view taken in the order-in-
original is one which no reasonable or prudent person could have taken,
having regard to the provisions of the contract or the state of the law. I do
not find that the view taken by the learned arbitrator in the facts and
circumstances of the case is either perverse or unreasonable. (See Wander
Ltd. and Anr. Vs. Antox India P. Ltd., 1990 (Supp) SCC 727).
13.1 Before I conclude though I must state that Mr. Kakra was right in his
submission that an injunction under Section 17 of the Act could have been
granted by the learned arbitrator against the respondent herein if not qua the
concerned bank. Injunction is an order which acts in personam. The
arbitrator, if otherwise inclined, could have granted an injunction vis-a-vis
the respondent. Having said so, this will not help the cause of the appellant
for the reasons recorded above.
Arb. P. 33/2014
Page 10 of 11
14.
The appeal and the pending application are, accordingly, dismissed.
Needless to say, any observations made hereinabove will not affect the
merits of the case pending adjudication before the arbitral tribunal.
RAJIV SHAKDHER, J
NOVEMBER 10, 2014
yg
Arb. P. 33/2014
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