On perusal of the judgment relied upon by the learned
counsel for the respondents in Associate Builders vs. Delhi
Development Authority (supra), it is clear that the Court can set-aside
the award if the award is against justice or morality, discloses patent
illegality, contrary to the terms of the contract and not in accordance
with the substantive law of India. In my view, the petitioners have
made out a case that the award is patently illegal on the face of
record and the learned arbitrator has decided contrary to the terms of
the tender documents and has also decided contrary to the law laid
down by the Supreme Court and this Court and thus this Court has
ample power to set-aside such award under section 34 of the said
Act.
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
ARBITRATION PETITION NO.240 OF 2013
Maharashtra State Electricity
Distribution Company Limited,
V
Vijai Electricals Limited
CORAM : R.D. DHANUKA, J.
PRONOUNCED ON : 4TH FEBRUARY, 2015
Citation:2016 (5) ALLMR74
1. By this petition filed under section 34 of the Arbitration &
Conciliation Act, 1996 (for short the said Act), the petitioners seek to
impugn the arbitral award dated 26th October, 2012 made by the
learned arbitrator allowing the claims made by the respondents.
Some of the relevant facts for the purpose of deciding this petition are
as under :
2. The petitioners were the original respondents before the
learned arbitrator. The respondents herein were the original claimants
before the learned arbitrator.
3. Some time in the year 2011, the petitioners floated 16
tenders for the supply, construction and commissioning of the subtransmission
lines, power transformers etc. for different parts of
Maharashtra. The last date for submission of e-bids was 21st
September, 2011. The respondents submitted the e-bids in respect of
the 3 tenders which were in respect of Amravati Zone, Aurangabad –
Nanded Zone and Baramati Zone on 21st September, 2011 i.e. within
time stipulated for submission of the e-bids. The bids were required to
be submitted in two parts : (a) technical bid and (b) price bid.
4. Under clause 19.1 of the bid conditions, a bidder was
required to furnish as part of its technical proposal, bids securities for
the amount designated in the bid data in each tender. The bid
security could be furnished at the option of the bidder either in the
form of demand draft or an unconditional bank guarantee. The
respondents furnished three bank guarantees of Axis Bank Limited,
Secunderabad (A.B.) for a total sum of Rs.4,48,42,000/-. The said
three bank guarantees were valid upto 31st January, 2012. Clauses
19.4, 19.5 and 19.6 of the bid conditions with reference to the bank
guarantee are extracted as under :-
“19.4 : The bid security of the unsuccessful bidders
will be returned as promptly as possible, after award
and signing of the contract agreement or expiration of
the period of bid validity, whichever is earlier ;
19.5 : The bid security of the successful bidder will
be returned when the bider has signed the contract
agreement and furnished the required security deposit.
19.6 : The bid security may be forfeited ;
c) If the bidder withdraws its bid, except that
written notice of the withdrawal of bid is received by
the employer prior to the deadline for submission of
bids;”
5. A relevant part of one of such bank guarantee is extracted
as under :-
“The Bank binds himself, its successors and assigns
by these presents. This guarantee will be payable at
our branch office at Axis Bank Limited, Credit
Management Centre (CBO), Ground Floor, Bombay
Dyeing Mills Compound, Pandurang Budhkar Marg,
Worli, Mumbai – 400025, SEALED with the Common
Seal of the said Bank this 20th day of September,
2011.
THE CONDITIONS of this obligation are :
(1) if the Bidder withdraws his Bid during the
period of Bid validity specified in the Form of Bid; or
(2) if the Bidder refuses to accept the
correction of errors in his Bid; or
(3) if the Bidder is determined at any time prior
to award of contract to have engaged in corrupt or
fraudulent practices in competing for the contract; or
(4) if the Bidder, having been notified of the
acceptance of his Bid by the Employer during the
period of Bid validity:
(a) fails or refuses to execute the Form of
Contract Agreement in accordance with the
Instructions to Bidders; if required; or
(b) fails or refuses to furnish the Security
deposit, in accordance with the Instructions to
Bidders;
We undertake to pay to the Employer up to the above
amount upon receipt of its first written demand,
without the Employer having to substantiate his
demand, provided that in its demand the Employer will
note that the amount claimed by him is due to him
owing to occurrence of one or all of the above
conditions, specifying the occurred condition or
conditions. This Guarantee will remain in force up to
and including the date 118 days after the deadline for
submission of bids as such deadline is stated in the
Instructions to Bidders or as it may be extended by
the Employer, notice of which extension(s) to the
Bank is hereby waived. Any demand in respect of this
Guarantee should reach the Bank not later than the
above date i.e. upto 31.01.2012.
Notwithstanding anything contained herein above, our
liability is restricted to Rs.1,23,00,000/- (Rupees One
Crore Twenty Three Lakhs Only) in the aggregate.
This Bank Guarantee will remain in force up to
31.01.2012 unless a claim or a demand in writing is
made against the bank in terms of this guarantee on
or before the expiry of 31.01.2012 and all your rights
in the said guarantee shall be forfeited and we shall
be relieved and discharged from all the liability there
under irrespective of whether the original guarantee is
received by us or not.”
6. On 21st September,2011, the technical bids were opened
by the petitioners. Thereafter the evaluation of the technical bids were
done by the concerned department of the petitioners.
7. On 15th October, 2011, the respondents addressed a letter
to the then Engineer of the petitioners informing that the respondents
would like to withdraw from the 3 tenders submitted by it on 21st
September, 2011. The respondents requested the petitioners to
accept the said request and to allow them to withdraw from the
participation in the said 3 tenders. The respondents also mentioned
about their appreciation supported by the petitioners in not taking
steps and encashing the relevant bank guarantees. In the said letter
the respondents requested the petitioners to consider their request
and to return the bank guarantees as early as possible.
8. It is the case of the petitioners that when the technical bids
were opened by the petitioners on 21st September, 2011, the
petitioners asked the concerned evaluation department to submit a
report on 14th October, 2011. On 18th October, 2011, a preliminary
technical evaluation report of 11 bidders was submitted by the
concerned department to the petitioners. It is the case of the
petitioners that in the meantime on 15th October, 2011, the
respondents withdrew their bids and the withdrawal of the bids by the
respondents was in violation of clause 19.6 of the bid conditions.
9. It is the case of the petitioners that on 20th October, 2011,
technical qualified bidders' names were published by the petitioners
on the inter-net. On 24th October, 2011, the price bids of the technical
bids were opened by the petitioners. In the meantime the bank
guarantees furnished by the respondents were extended by the
respondents from time to time at the request of the petitioners and
was extended till 31st March, 2012.
10. It is the case of the petitioners that in the meeting held on
7
th December, 2011, the board of directors of the petitioners decided
that the contents of the letter written by the respondents vide letter
dated 15th October, 2011 amounted to withdrawal of the bids in
violation of clause 19.6(c) and therefore, the board of directors of the
petitioners resolved as per clause 19.6(c) of the tender document,
that the bid securities submitted by the respondents were liable to be
forfeited.
11. On 21st March, 2012, the petitioners invoked the said three
bank guarantees by addressing a letter to the Manager, Axis Bank
Limited. By the said letter, the petitioners called upon the bank to pay
a sum of Rs.4,48,42,000/- in terms of the bank guarantees submitted
by the respondents. The extract of the said letter, which is relevant for
the purpose of deciding this petition is as under :-
“Sir
You are called upon to pay Rs.4,48,42,000/- (in
Rs.Four crores forty eight lakhs forty two thousand
only) in terms of the Bank Guarantee as per below
submitted by M/s.Vijal Electricals Ltd. However,
M/s.Vijal Electricals Ltd. has failed, as per the terms &
conditions of Tender as per Agency has withdrawn the
Bids after the deadline of submission date.
Sr.
No.
Tender
No.
Name of Bank Amount of
Bank
Guarantee
Submitted
by Bidder
Bank
Guarant
ee Date
Bank
Guarant
ee No.
Extende
d last
date of
its
validity
1 R-APDRP
Part
B/T01
Axis Bank Ltd.
Secunderabad
(A.P.) payable at
Mumbai
Rs.191020
00/-
20.09.20
11
0068010
0000182
31.03.20
12
2 R-APDRP
Part
B/T02
“do”
Rs.134400
00/-
“do” 0068010
0000483
“do”
3 R-APDRP
Part
B/T03
“do” Rs.123000
00/-
“do” 0068010
0000484
“do”
The amount has to be transferred within 48 hours on
the A/C as below :
> Account Name – Maharashtra State
Electricity Distribution Co. Ltd.
> Account Number – MSEDCL A/C “A”
No.2004530376 4
> Bank – Bank of Maharashtra, Branch –
Bandra (E), Mumbai -51
> IFSC Code – MAHBOOOO164 & MICR –
400014043
You have agreed unequivocally and unconditionally to
pay the amount at Mumbai as per guarantee clause
failing which it may please be noted that the Bank
Guarantee furnished by your various banks will never
be accepted in future and there shall be no alternative
but to file suit against your Bank and to report the
matter to RBI/Banking Ombudsman.
We hope that you will not allow to take such an
unpleasant action. The original Bank Guarantee will
be handed over after transfer of the above amount on
Maharashtra State Electricity Distribution Co. Ltd.
Account.”
12. On 22nd March, 2012, the respondents filed a Writ Petition
(No.831 of 2012) in this court against the petitioners and obtained an
ad-interim injunction against the petitioners from invoking the bank
guarantees. By an order dated 12th June, 2012, a Division Bench of
this court was pleased to refer the said dispute for invocation of the
bank guarantees to the sole arbitrator, a former Judge of the
Supreme Court of India for adjudication.
13. Pursuant to the directions given by the learned arbitrator,
the respondents filed statement of claim before the learned arbitrator
inter-alia praying for a declaration that the petitioners herein were not
entitled to encash / invoke the bank guarantees and for an order and
direction against the petitioners to forthwith hand over to the
respondents the original three bank guarantees dated 20th
September, 2011 and prayed that the letter of invocation dated 21st
March, 2012 be quashed and set-aside. The respondents also prayed
for an order and direction against the petitioners to pay the entire
amount of commission and other costs, charges and expenses
alleged to have been incurred by the respondents in renewal of the
bank guarantees. The said claims made by the respondents were
resisted by the petitioners by filing the written statement.
14. The learned arbitrator framed 3 points for determination.
By an award dated 26th October, 2012, the learned arbitrator
rendered a finding that the respondents herein were entitled to return
all 3 bank guarantees and held that the petitioners were not entitled
to forfeit the said bank guarantees as extended. The learned
arbitrator accordingly declared that the petitioners were not entitled to
invoke the bank guarantees and directed the petitioners to forthwith
hand over to the respondents the said three original bank guarantees
and all extensions / renewal duly discharged and/or cancelled. The
learned arbitrator declared that Axis Bank Limited was not liable to
make any payments under the said bank guarantees to the
petitioners. The learned arbitrator in the said award, has set-aside the
letter of invocation of the bank guarantees dated 21st March, 2012
and cancelled all three bank guarantees and all extensions thereof.
The learned arbitrator directed the petitioners to pay costs of
Rs,2,50,000/- to the respondents. This award has been impugned by
the petitioners in this petition under section 34 of the said Act.
15. Mr.Setalvad, the learned senior counsel for the petitioners
submits that under clause 19.6 of the instructions to bidders, the bid
securities submitted by the respondents were liable to be forfeited
since the respondents had withdrawn its bid after the deadline for
submission of the bids which was 21st September, 2011. The
respondents had withdrawn its bid on 15th October, 2011.
16. It is submitted that in their letter dated 15th October, 2011,
which was admittedly after expiry of the last date of submission of the
bid i.e. 21st September, 2011, the respondents had requested the
petitioners to return their bank guarantees as early as possible. It is
submitted that though in the said letter the respondents had made a
request to the petitioners to allow it to withdraw from the participation
in the said three tenders, the respondents had appreciated the
support of the petitioners in not taking steps for encashing the three
bank guarantees and had requested to return the said three bank
guarantees as early as possible. The learned senior counsel
submits that before receiving the said letter dated 15th October, 2011,
the technical bids of all the bidders, including the respondents were
opened on 21st Separately, 2011. A preliminary technical evaluation
report of 11 bidders were submitted by the concerned department of
the petitioners to the petitioners on 18th October, 2011. Names of
technically qualified bidders' were published on the inter-net on 20th
October, 2011 and thereafter on 24th October, 2011 the price bids of
technically qualified bidders were opened. The learned senior
counsel submits that since the respondents had withdrawn their bids,
the price bids of the respondents were not opened on 24th October,
2011. It is submitted that even if the respondents would not have
addressed any such letter on 15th October, 2011, the fact remains
that after 21st September, 2011, no bidders could have withdrawn
their bid, which was the last date of submission of the bids and thus
its security bids were liable to be forfeited in terms of clause 19.6(a)
of the instructions to bidders.
17. It is submitted by the learned senior counsel that the
finding of the learned arbitrator that in view of the language of the
letter dated 15th October, 2011, it was indicative of the request made
by the respondents to the petitioners, there was no immediate
withdrawal of the bids is concerned, the said finding of the learned
arbitrator is contrary to the terms of the contract. It is submitted that
the respondents itself had applied for return of the bank guarantees.
No such letter for seeking any permission after the last date of
submission of the bid could have even been addressed by any of the
bidders. The consequences provided under clause 19.6 thus would
automatically follow and the bid securities were liable to be forfeited.
The learned senior counsel submits that if by the said letter dated 15th
October, 2011 the respondents had not applied for permission to
withdraw the bids, the respondents were not required to make any
request to return the bank guarantees.
18. It is submitted by the learned senior counsel hat the
petitioners also acted upon the letter of the respondents of 15th
October, 2011 and accordingly did not open the price bids of the
respondents which were admittedly opened after 15th October, 2011.
The respondents did not dispute these facts. It is submitted by the
learned senior counsel that invocation of the bank guarantees by the
petitioners was absolutely in accordance with the terms and
conditions of the bank guarantees. Once the petitioners had invoked
such bank guarantees in accordance with the terms of the bank
guarantees, the bank was liable to make payment under the said
three bank guarantees to the petitioner unconditionally. It is submitted
that all three bank guarantees were thus unconditional bank
guarantees and the petitioners were entitled to forfeit all three bank
guarantees and to recover the amounts under those three bank
guarantees. The learned senior counsel invited my attention to the
terms of the bank guarantees and also letter of invocation and would
submit that in the letter of invocation the petitioners had notified
categorically that the respondents had withdrawn the bids after expiry
of the deadline of the bid submission date, the invocation of the bank
guarantees thus was in terms of the bank guarantees furnished by
the respondents through Axis Bank Limited.
19. In support of the submissions that the bank guarantees
submitted by the respondents were unconditional bank guarantees
and thus once the bank guarantees were invoked before expiry of
the period of such bank guarantees, neither the bank nor the
respondents could oppose such invocation on any ground
whatsoever, the learned senior counsel placed reliance on the
following judgments :-
1) The judgment of this Court in the case of Karam Chand
Thapar & Bros vs. Hindustan Construction Co. Ltd. in Arbitration
Petition (Lodging) No.606 of 2012 delivered on 4th May, 2012 : (paras
4 and 6) ;
2) The judgment of this Court in the case of Housing
Development & Infrastructure Limited vs. Mumbai International
Airport Pvt. Ltd. & Ors., in Arbitration Petition (Lodging) No.1538 of
2012, delivered on 29th November, 2012 (para 21) ;
3) The judgment of the Supreme Court in the case of
Mahatma Gandhi Sahakra Sakkare Karkhane vs. National Heavy
Engg. Co-op. Ltd. & Anr., (2007) 6 SCC 470. (para 22).
20. It is submitted by the learned senior counsel that on one
hand the learned arbitrator has held that the petitioners had called
upon the bank to pay in terms of the bank guarantees by a letter
dated 21st March, 2012 stating that “ as the agency has withdrawn the
bids after the deadline of bid submission date” and on the other
hand, has held that the condition for releasing the bank guarantee,
which was stated in the letter of the respondents was in fact not
fulfilled. The learned senior counsel submits that there is thus exfacie
inconsistency and contradictions in paragraph 22 of the
impugned award. The learned senior counsel submits that even if it is
held that the bank guarantees could be invoked only on the
conditions mentioned in the bank guarantees, the fact remains that
the petitioners had invoked such bank guarantees in terms of the
bank guarantees by clearly mentioning that “as the agency has
withdrawn the bids after deadline of the bid submission date” the
terms and conditions of the bank guarantees were complied with by
the petitioners. Once the reason for invocation of the bank
guarantees was mentioned in the letter of invocation, which was in
accordance with the terms of the bank guarantees, the conditions of
the bank guarantees were complied with. The respondents as well as
the bank thus could not have opposed the invocation of such bank
guarantees on the ground that the condition for releasing the bank
guarantees was in fact not fulfilled. The learned senior counsel
submits that the finding of the learned arbitrator is thus ex-facie
erroneous and contrary to the provisions of the contract, including the
terms of the bank guarantees.
21. It is submitted by the learned senior counsel that the
finding of the learned arbitrator that since the petitioners had not
suffered any loss by reason of the letter dated 15th October, 2011,
addressed by the respondents in view of the fact that the petitioners
already having awarded the contract to the third parties, who had
presumably furnished the securities to the petitioners and their price
bid was lower than the price bid of the respondents is concerned, it is
submitted that as the bank guarantees furnished by the respondents
were in lieu of earnest money deposit and were furnished for the
purpose of fulfilling their part of the obligation by not withdrawing the
bid after expiry of the validity period, there was no question of proving
any loss / damage for the purpose of invocation of such bank
guarantees. In support of these submissions, the learned senior
counsel placed reliance on the following judgments :-
1) In the case of National Highways Authority of India vs.
Ganga Enterprises & Anr. (2003) 7 SCC 410 (paras 2, 3, 7, 9 and
10)
2) In the case of State of Haryana & Ors. vs. Malik Traders,
(2011) 13 SCC 200 (paras 10 to 12)
3) In the case of Pesticides India vs. State Chemicals &
Pharmaceuticals Corporation of India & Ors., 53(1994) DLT 42
(paras 7 to 9)
4) In the case of R.K. Construction Co. vs. State of Gujarat &
Anr. 111(2013) BC 658 (paras 8 to 10)
5) The judgment of this Court in the case of M/s.ABG Kandla
Container Terminal Ltd. vs. Axis Bank Ltd. & Anr. in Notice of Motion
No.2 of 2013 in Suit No.1 of 2013, dated 12th April, 2013 (paras 20
and 22)
6) The judgment of the Supreme Court in the case of
Hindustan Construction Co. Ltd. vs. State of Bihar & Ors. (1999) 8
SCC 436 (paras 12, 13 and 14).
7) The judgment of the Supreme Court in the case of State of
Maharashtra & Ors. vs. A.P. Paper Mills Ltd. (2006) 4 SCC 209 (para
13).
22. It is submitted by the learned senior counsel that the
finding of the learned arbitrator that since the petitioners had
requested the respondents to extend the bank guarantees beyond
31st January, 2012, there was no reason as to why the petitioners
did not encach the bank guarantees after 7th December, 2011 and
upto 23rd January, 2012 is concerned, it is submitted that merely
because the petitioners asked the respondents to extend the bank
guarantees till 21st March, 2012 that would not preclude the
petitioners from encashing the bank guarantees and to forfeit the bid
securities. It is submitted that the respondents were fully aware about
the decision of the board of directors of the petitioners about the
forfeiture of the security deposit and also of tender conditions. The
respondents had challenged the action on the part of the petitioners
by filing a writ petition in this Court. It is submitted that in view of the
fact that the letter of request by the respondents for permission to
withdraw the bids was admittedly after expiry of the last date of
submission of the bid, whether the decision of the board of directors
to forfeit the security deposit or not was conveyed to the respondents
or not was of no significance.
23. Mr.Andhyarujina, the learned counsel for the respondents
on the other hand submits that the learned arbitrator has rightly
rendered a finding of fact that the letter dated 15th October, 2011 was
only a request for permission to withdraw the bids without bids
security after forfeiture and was not actual withdrawal of the bids. The
learned arbitrator has rightly held that there was no immediate
withdrawal of the bids. This court cannot interfere with such finding of
fact rendered by the learned arbitrator.
24. It is submitted by the learned counsel that the learned
arbitrator has rightly held that the conditions of the bank guarantees
were not fulfilled by the petitioners while invoking the bank
guarantees. It is submitted that the bids of the respondents were
considered by the petitioners even after the alleged withdrawal of the
bids by the respondents. It is submitted by the learned counsel that
in any event since no loss was caused to the petitioners by the
respondents withdrawing the bids, the learned arbitrator has rightly
rendered a finding that unless the loss was suffered by the
petitioners, the bank guarantees could not have been invoked and
forfeited by the petitioners. It is submitted that it was not in dispute
that the petitioners had ultimately awarded the contract to a bidder
whose bid amount was less than the bids amount submitted by the
respondents and thus there was no loss of any nature whatsoever
suffered by the petitioners which could be recovered by the
petitioners by forfeiting the security deposit furnished by the
respondents.
25. It is submitted by the learned counsel that the learned
arbitrator has interpreted the letter dated 15th October, 2011 and has
rightly rendered a finding that the said letter was not a letter
withdrawing the bids and such interpretation is possible and
reasonable interpretation, this court cannot substitute such
interpretation by another interpretation.
26. It is submitted by the learned counsel that the petitioners
themselves have considered the bids of the respondents after
evaluating such bids and had found the respondents technical
qualified and thus could not have forfeited the security deposit. The
petitioners did not convey the decision dated 7th December, 2011 as
to why the name of the respondents was not included in the list of 20th
October, 2011. The petitioners never conveyed the decision of the
petitioners' board of directors and had accepted the request of the
respondents for withdrawal of their bids and that itself would indicate
that the petitioners never considered the letter of 15th October, 2011
of the respondents as letter of withdrawal. In none of the reports, the
petitioners had indicated that the request of the respondents for
withdrawal of the bids was accepted by the petitioners.
27. Mr.Andhyarujina placed reliance on the judgment of the
Supreme Court in the case of State of Rajasthan vs. Botamal
Sachdeva, (1989) 4 SCC 35 and more particularly paragraph 2
thereof.
28. Reliance is also placed on the judgment of the Delhi High
Court in the case of Jainsons Clothing Corporation vs. The State
Trading Corporation of India Ltd. & Anr. (1990) 68 Company Cases
526 and in particular paragraphs 6, 10, 12 and 13, and 18.
29. The learned counsel placed reliance on the judgment of
the Supreme Court in the case of Associate Builders vs. Delhi
Development Authority, 2014 SCC OnLine SC 937 and more
particular in paragraphs 9, 10, 12 to 15, 17 to 22.
30. The learned counsel submits that the judgments relied
upon by the petitioners are clearly distinguishable in the facts of this
case. It is submitted that the bank guarantees furnished by the
respondents were not akin to the earnest money deposit. There was
no guarantee that the contract would be awarded to the respondents.
The amount was only to ensure that the respondents would not
interfere with the bid process. For the purpose of forfeiting the
security deposit, there has to be a breach of contract.
31. It is submitted that even under clause 19(6) of the
instructions to bidders, the right of forfeiture was discretionary. The
petitioners thus having decided not to forfeit security deposit did not
convey its decision to forfeit the security deposit to the respondents.
32. Mr.Setalvad in re-joinder submits that the price bid of the
respondents was never opened and thus the question of
determination of a loss to the petitioners did not arise. The
respondents never produced any material on record or to indicate
that the bids ultimately accepted by the petitioners was lower in
comparison to the bids submitted by the respondents. It is submitted
that insofar as the security bids submitted by the respondents is
concerned, the same was in the nature of earnest money deposit and
was anterior to the award of contract. It is submitted that the
submission of the bank guarantees under the contract was for
sustaining the bid and without furnishing the bank guarantees by the
respondents, the bid could not be demonstrated and/or dealt with by
the petitioners. The respondents themselves did not want to pursue
their bids and had accordingly withdrawn the bids and had requested
the petitioners to return of the bank guarantees.
33. On 24th October, 2011, when the price bids of the
respondents were not opened, the respondents did not bother to
make any enquiry or make any protest against the petitioners for not
opening the price bids of the respondents. The withdrawal of the bids
by the respondents was prior to the date of opening of the price bids
by the petitioners. On 7th December, 2011, the petitioners had taken a
decision to forfeit the security bids. The petitioners had relied upon
the said resolution before the learned arbitrator. It is submitted that if
the bid of the respondents would have been accepted, the
respondents were liable to furnish the security deposit in terms of
clause 41.1 of the contract for the purpose of securing the
performance of the contract. It is submitted that the security bid which
was in the nature of the earnest money deposit was not for the
purpose of securing the performance of the contract and thus the
petitioners were not required to prove any loss suffered, if any, in
view of the respondents withdrawing the bid after expiry period. The
learned senior counsel distinguished the judgments relied upon by
Mr.Andhyarujina, the learned counsel for the respondents.
REASONS AND CONCLUSION :
34. A perusal of the instructions to bidders and in particular
clauses 19.1 to 19.6 clearly indicates that the bidder was required to
furnish the bids security in the form of demand draft or unconditional
bank guarantee from a nationalized bank in favour of the petitioners
in accordance with the sample form of bid security included in section
3 of the said instructions to bidders. Clause 19.4 provides that the bid
security of the unsuccessful bidders would be returned as promptly
as possible, after award and signing of the contract agreement or
expiration of the period of bid validity, whichever is earlier. Clause
19.5 provides that the bid security of the successful bidder will be
returned when the bidder had signed the contract agreement and
furnishes the required security deposit. Clause 19.6 provides that the
bid security may be forfeited on occurrence of any of the
eventualities provided in the said clause including when the bidder
withdraws its bid, except when written notice of the withdrawal of bid
is received by the employer prior to the deadline for submission of
bids.
35. A perusal of the said provision makes it clear that the
submission of the bid security along with the bid by the bidder was
mandatory. It also indicates that when the bidder applies for
withdrawal of the bid prior to the deadline of the submissions of bid,
the employer shall not be entitled to forfeit the security bid but if on
the other hand the bidder would have applied for withdrawal of the bid
after deadline for submissions of the bid, the said bid security was
liable to be forfeited.
36. The question that arose for consideration of the learned
arbitrator was whether the respondents had applied for withdrawal of
their bid and if so what was the consequence thereof. It is not in
dispute that the last date for submission of the bid was 21st
September, 2011. The respondents had submitted their bid along
with the bid security on 21st September, 2011 itself. The technical
bids were opened on 21st September, 2011. On 18th September, a
preliminary technical evaluation report of the 11 bidders was
submitted to the petitioners. It is not in dispute that on 15th October,
2011 the respondents had addressed a letter to the petitioners. A
perusal of the said letter clearly indicates that the respondents had
indicated to withdraw the three bids submitted by them on 21st
September, 2011 and requested to return the bank guarantees as
early as possible. The respondents also appreciated the support of
the petitioners in not taking steps on encashing their bank
guarantees.
37. A perusal of the record indicates that in view of the receipt
of the letter dated 15th October, 2011, the price bids of the
respondents was not opened by the petitioners on 24th October, 2011.
The respondents did not bother to make any enquiry as to why their
price bid was not opened by the petitioners. The board of directors of
the petitioners thereafter in the meeting held on 7th December, 2011
decided that the letter dated 15th October, 2011 of the respondents
would amount to withdrawal of the bids and thus the bids security of
the respondents in terms of clause 19.6(c) of the tender document
was liable to be forfeited. The petitioners thereafter addressed a
letter of invocation of the bank guarantees to the bank.
38. A perusal of the award indicates that the learned arbitrator
has in paragraph 14 of the impugned award held that the letter
dated 15th October, 2011 of the respondents was indicative of a
request made by the respondents in the petition and there was no
immediate withdrawal of the bids. By the said letter the respondents
had sought permission to withdraw from participation in the tenders
without the bank guarantees being invoked by the respondents. The
learned arbitrator also held that if there was a withdrawal of the bids,
the petitioners herein should have forfeited the bank guarantees
straightway. The said bank guarantees were valid till 31st
January,2012 but the petitioners did not encash the said three bank
guarantees. It is held by the learned arbitrator that the petitioners
thereafter considered the bids of the respondents and found that the
respondents are technically qualified. In the list of the technically
qualified bidders released on 20th October, 2011, the name of the
respondents was not listed. The learned arbitrator also held that if the
petitioners had not listed the name of the respondents because the
respondents had withdrawn the bids, it ought to have informed the
respondents accordingly and should have invoked the bank
guarantees. The petitioners however, did not send any
communication to the respondents and therefore, the respondents
legitimately believed that its technical bids were considered by the
petitioners, as technically unqualified bidder.
39. A perusal of the record indicates that the preliminary
technical evaluation report of the 11 bidders were submitted by the
concerned department to the petitioners on 18th October, 2011. In the
meantime, the respondents addressed the said letter dated 15th
October, 2011. It is thus clear that in view of such letter addressed by
the respondents to the petitioners, seeking permission to withdraw
the bids after expiry of validity period, the name of the respondents
was not placed in the list of technically qualified bidders. The
respondents however, did not take any objection. The respondents
also did not bother to make any enquiry. Even when the price bid of
the respondents was not opened subsequently, the respondents did
not lodge any protest or did not make any enquiry.
40. It is thus clear that even the respondents proceeded on the
premise that its request for withdrawal of the bid beyond the deadline
was accepted by the petitioners subject to tender conditions. In my
view, the finding of the learned arbitrator that the letter dated 15th
October, 2011 was merely a letter indicative of a request and there
was no immediate withdrawal of the bids is totally contrary to the
plain reading of the said letter of 15th October, 2011. By the said
letter, the respondents had not only requested the petitioners to
permit the respondents to withdraw it from participation from the
tender but had categorically applied for return of the bank
guarantees. The learned arbitrator, in my view, has totally overlooked
this aspect in the matter and has rendered erroneous finding that
there was no immediate withdrawal of the bids. The learned
arbitrator also overlooked the subsequent events i.e. declaration of
the list of technical qualified bidders and not opening the price bids of
the respondents by the petitioners. The learned arbitrator also did not
consider the effect of the resolution passed by the petitioners on 7th
October, 2011 resolving to forfeit the security deposit of the
respondents in view of the letter dated 15th October, 2011 addressed
by the respondents to the petitioners.
41. A perusal of the award indicates that the learned arbitrator
has rendered a finding in favour of the respondents merely on the
ground that the petitioners had not communicated its decision to
forfeit the security deposit or that the petitioners had accepted the
request of the respondents to permit the respondents from
withdrawing from participation of the bids. The learned arbitrator was
also impressed with the submission of the respondents that since the
petitioners had not encashed the bank guarantees immediately upon
the receipt of the letter dated 15th October, 2011, it would clearly
indicate that the petitioners had rejected the request of the
respondents and there was no withdrawal of the respondents from
the bids.
42. In my view if according to the respondents, their requests
for withdrawal from participation from the bid which was not accepted
by the petitioners definitely the respondents ought to have taken
action against the petitioners for not displaying the name of the
respondents in the list of the technically qualified bidders and
thereafter for not opening the price bid of the respondents. The
respondents however, did not take any such action in the matter.
Merely because the petitioners did not forfeit the security deposit
immediately upon receipt of the letter dated 15th October, 2011 would
not debar the petitioners from encashing such bank guarantees at the
later date i.e. after opening of the tender of the technically qualified
bidders and after awarding the contract to the successful bidder.
There was no provision in the contract prohibiting the petitioners from
encashing the bank guarantees and/or forfeiting the security deposit
beyond a particular period. The finding of the leaned arbitrator in my
view is thus patently illegal.
43. A perusal of paragraph 22 of the impugned award
indicates that on one hand the learned arbitrator has rendered a
finding that the bank guarantees required the petitioners herein to
state the reason why the bank guarantees were being invoked and
though had described such reason in the letter dated 21st March,
2012 of the petitioners to the bank calling upon the bank to pay in
terms of the bank guarantees i.e. “ as the agency has withdrawn the
bids after the deadline of bid submission date”, on the other hand the
learned arbitrator has held that the condition for invoking the bank
guarantees as set out in the bank guarantee document was in fact
not fulfilled. A perusal of the bank guarantee would indicate that the
bank had agreed and undertaken to pay to the petitioners under the
said three bank guarantees upon receipt of its first written demand
without the petitioners having to substantiate its demand provided
that in its demand the petitioners would note that the amount claimed
by it was due to it owing to occurrence of one or all of the conditions,
specifying the occurred condition or conditions. One of the condition
in the bank guarantee admittedly was “if the bidder withdraws his bid
during the period of bid validity specified in the form of bid”.
44. Though the learned arbitrator has rightly referred to the
said condition in the letter of invocation of the bank guarantees by the
petitioners has erroneously rendered a finding that the terms and
conditions of the bank guarantees were not not fulfilled. The finding of
the learned arbitrator in my view is patently illegal and erroneous
apparent on the face of the award. The petitioners had on the face of
it specified one of the condition which had occurred in its invocation
letter. Once the said condition was specified, which was in
accordance with the terms and conditions of the bank guarantees, the
bank was liable to pay the amount under the said bank guarantees to
the petitioners. Neither the bank nor the respondents could challenge
the letter of invocation dated 21st March, 2012 on the ground that the
conditions for releasing the bank guarantees were not fulfilled. The
bank had categorically undertaken to pay to the petitioners upon
receipt of its first written demand and without substantiating its
demand. The only condition imposed in the said bank guarantees
was that the employer had to note that the amount claimed was due
to the employer owing to occurrence of one or other conditions set
out therein. A perusal of the said letter dated 21st March, 2012 and
summarized by the learned arbitrator in paragraph 22 of the
impugned award clearly indicates that the condition set out in clause
1 of the bank guarantee had been specified by the petitioners as
occurred and once that was notified, the bank was liable to pay to the
employer without asking the employer to substantiate its demand.
The award shows patent illegality on the face of the award.
45. Insofar as the finding of the learned arbitrator in paragraph
26 of the impugned award that since the petitioners had not suffered
any damage by reason of the letter dated 15th October, 2011 and the
petitioners having awarded the said contract to the third parties, who
had presumably furnished the security to the petitioners and their
price bid was lower than the price bid of the respondents is
concerned, in my view, the said finding of the learned arbitrator is
based on no evidence. Since the price bid of the respondents was not
even opened and even otherwise the respondents had not disclosed
the price quoted by the respondents, the question of the petitioners
coming to know whether the bid of the successful bidder was lower
than the bid of the respondents or not did not arise.
46. In my view the finding of the learned arbitrator that the
petitioners could forfeit the bank guarantees given by way of earnest
money deposit only if the petitioners would have suffered losses is
patently illegal. The said finding of the learned arbitrator is contrary to
the terms of clause 19.1 to 19.6 of the instructions to bidders. The
learned arbitrator failed to appreciate that the bank guarantees
furnished by the respondents under clause 19.2 were by way of
earnest money deposit (bid security) which could have been returned
to the respondents only if its bid was rejected by the petitioners as
non-responsive or was found unsuccessful. The petitioners were
required to return the bid security of the successful bidders when the
successful bidder had signed the contract agreement and had
furnished the required security deposit. Under clause 41.1 of the
instructions to bidders, the successful bidder was required to submit
a performance security deposit within 14 days from the date of receipt
of the Letter of Award. In my view, the learned arbitrator has mixed
up the bids security which was in the name of the earnest money
deposit with the security deposit which was required to be submitted
(performance security deposit) by the successful bidder after the
receipt of the Letter of Award. The petitioners were thus not liable to
prove any loss for the purpose of forfeiting such earnest money
deposit upon the respondents withdrawing its bid in breach of clause
19.6 of the instructions to bidders.
47. The Supreme Court in the case of State of Haryana &
Ors. vs. Malik Traders, (2011) 13 SCC 200, has held that since the
bidder who had agreed to keep the bid open for acceptance upto 90
days of the last date of receipt of the bid in terms of the tender and if
had withdrawn its bid before expiry of the period of 90 days, such
bidder was liable to suffer the consequences i.e. forfeiture of full
value of the bid security as agreed under the offer / bid. It is held by
the Supreme Court that right to withdraw an offer before its
acceptance cannot nullify agreement to tender conditions to suffer
any penalty for withdrawal of offer against the terms of the
agreement. Paragraphs 10 to 12 of the said judgment which are
relevant and applicable to the facts of this case read as under :-
“ 10. For allowing the writ petition, the only
reason stated by the High Court is that, since the writ
petitioner (the respondent herein) had withdrawn its
offer before it was accepted, there could be no
acceptance of the offer and there could not be any
consequence of the petitioner not honouring the
commitment. However, we cannot agree with the view
taken by the High Court. It is true that as per Section 5
of the Contract Act, 1872 (hereinafter referred to as
“the Act”), a proposal may be revoked at any time
before the communication of its acceptance is
complete as against the proposer. It is also true that
before receipt of the letter of acceptance dated
26-11-2008, the respondent had sent a letter dated
15-11-2008 withdrawing its offer. However, admittedly,
in Para 8 of the written offer/bid, the respondent had
agreed to keep the bid open for acceptance up to 90
days after the last date of receipt of bid. The
respondent had also agreed that it shall be bound by
the communication of acceptance of the bid
dispatched within the aforesaid period of 90 days.
Hence, the respondent could not have withdrawn the
bid before the expiry of the period of 90 days. It is not
disputed that the acceptance of the respondent’s bid
was communicated to the respondent within the said
period of 90 days. Therefore, the respondent was
bound by the said acceptance of the bid, despite its
withdrawal by the respondent in the meanwhile.
11. In Para 10 of the offer/bid, the respondent
had also agreed that the full value of the bid security
would be forfeited without prejudice to any other right
or remedy available to the Executive Engineer or his
successor in office or his representative, should the
respondent withdraw or modify its offer/bid during the
period of bid validity (90 days) or extended validity
period. Since the respondent withdrew its offer during
the period of bid validity in violation of the
abovementioned agreement in Para 8 of the offer/bid,
the full value of bid security was liable to be forfeited in
terms of the agreement contained in Para 10 of the
offer/bid. Thus, even though under Section 5 of the Act
a proposal may be revoked at any time before the
communication of its acceptance is complete as
against the proposer, the respondent was bound by
the agreement contained in its offer/bid to keep the bid
open for acceptance up to 90 days after the last date
of receipt of bid and if the respondent withdrew its bid
before the expiry of the said period of 90 days the
respondent was liable to suffer the consequence (i.e.
forfeiture of the full value of bid security) as agreed to
by the respondent in Para 10 of the offer/bid. Under
the cover of the provisions contained in Section 5 of
the Act, the respondent cannot escape from the
obligations and liabilities under the agreements
contained in its offer/bid.
12. The right to withdraw an offer before its
acceptance cannot nullify the agreement to suffer any
penalty for the withdrawal of the offer against the
terms of agreement. A person may have a right to
withdraw his offer, but if he has made his offer on a
condition that the bid security amount can be forfeited
in case he withdraws the offer during the period of bid
validity, he has no right to claim that the bid security
should not be forfeited and it should be returned to
him. Forfeiture of such bid security amount does not,
in any way, affect any statutory right under Section 5
of the Act. The bid security was given by the
respondent and taken by the appellants to ensure that
the offer is not withdrawn during the bid validity period
of 90 days and a contract comes into existence. Such
conditions are included to ensure that only genuine
parties make the bids. In the absence of such
conditions, persons who do not have the capacity or
have no intention of entering into the contract will
make bids. The very purpose of such a condition in the
offer/bid will be defeated, if forfeiture is not permitted
when the offer is withdrawn in violation of the
agreement.”
48. The Supreme Court in the case of State of Maharashtra &
Ors. vs. A.P. Paper Mills Ltd. (2006) 4 SCC 209, held in paragraph
13, which is extracted as under :-
“13. An offer under the tender was valid for a
period of 45 days from the date of tender of sale and
in the instant case from 15-7-1987. Stand of the
respondent that the sale results should have been
declared for getting approval of the competent
authority by 14-8-1987 is clearly wrong. If the highest
tender is not considered acceptable the final sale
result was required to be declared within 45 days i.e.
by 29-8-1987. The bid once made remains operative
for a period of 45 days. Therefore, the decision could
be taken on the bid on or before 29-8-1987. The
withdrawal was made before the expiry of the period
i.e. on 15-8-1987. Stand of the learned counsel for the
respondent that another request was made after the
expiry of the 45 days’ period does not change the
situation. Clause 5(v) clearly spells out that once a
tender is tendered the offer shall be considered valid
for a period of 45 days from the date of tender sale in
case of tenders which are under consideration. If this
clause is read with clause 5(iv) the position is clear
that once a tender is tendered no changes can be
made and no tender can be withdrawn. We are not
concerned with a case of consequences after
acceptance of the tender by the successful bidder. In
such a situation loss sustained in the resale and the
amount realised less, shall be recovered from the
bidder while adjusting the amount paid by him
towards earnest money deposit. In this case the
acceptance of the tender was after the validity (sic
expiry) of the period. Therefore, this is not a case
which could authorise the Government to recover the
loss from the respondent. But it is a case of
withdrawal of tender and the effect of it is to be
considered. Since the tender is valid for a period of 45
days and withdrawal is before expiry of the period the
earnest money is to be forfeited. The stand of the
respondent that because of delay in declaration of the
final sale results there was no bar on withdrawal of
the tender is clearly untenable. Once the tender is
withdrawn the result is that the tenderer who
withdraws the tender cannot take the stand that since
the final sale result has not been declared there is no
bar on the withdrawal.”
49. The Supreme Court in the case of National Highways
Authority of India vs. Ganga Enterprises & Anr. (2003) 7 SCC 410
has construed the similar provisions for forfeiture of the security
deposit and has held that the moment the bank guarantee was given
and accepted by the employer the first portion of the offer, regarding
bid security, stood accepted. That did not mean that a completed
contract in respect of the contract in existence has come into
existence. Paragraphs 2, 3, 7 to 10 of the said judgment, which are
relevant and extracted as under :-
“2. Briefly stated, the facts are as follows:
The appellant issued a tender notice calling for
tenders for collection of toll on a portion of the
highway running through Rajasthan. The last date of
submission of bid was 31-7-1997. It was also provided
that toll plazas would be got completed by the
authority and handed over to the selected enterprise.
There were two types of securities to be furnished,
one being a bid security in an amount of Rs 50 lakhs
(Rupees fifty lakhs only); the other was a performance
security by way of a bank guarantee of Rs 2 crores
(Rupees two crores only). Clauses 7.1 to 8 deal with
bid security. They read as under:
“7. Bid security
7.1. The bidder shall furnish, as a part of his bid, a bid
security in an amount of Rs 50 lakhs (Rupees fifty
lakhs only), or an equivalent amount in a freely
convertible currency. The bid security shall, at the
bidder’s option, be in the form of a bank draft, or
guarantee from a bank located in India. The bank
guarantee shall be in the form of bank guarantee for
bid security included herein, valid for 150 days after
the last date for submission of the bid.
7.2. A bid not accompanied by an acceptable bid
security shall be rejected by the National Highways
Authority of India as non-responsive.
7.3. The bid security of unsuccessful bidders will be
returned by the National Highways Authority of India
as promptly as possible but not later than 30 days
after the expiration of the period of bid validity.
7.4. The bid security of the successful bidders will be
returned by the National Highways Authority of India
soon after the bidder has furnished the required
performance security.
7.5. The bid security may be forfeited:
(a) if the bidder withdraws his bid during the period of
bid validity; or
(b) in case the successful bidder fails within the
specified period to
(i) furnish the required performance security; and
(ii) sign the agreement.
8. Bid validity
Bid shall remain valid for a period of 120 days after
the last date of bid submission.”
Thus, it is to be seen that the bid security of Rs 50
lakhs was not for performance of the contract. It was
in essence an earnest to be given to ensure that the
bidder did not withdraw his bid during the period of bid
validity and/or that after acceptance the performance
security is furnished and the agreement signed. The
other terms pertained to the anticipated contract for
collection of toll. It must be mentioned that the bid
validity period was 120 days.
3. In terms of this tender document the
respondent gave his bid or offer. The offer/bid was in
terms of the tender and thus it was also in two parts,
the first part being an offer that the bid would not be
withdrawn during the bid validity period and/or that on
acceptance the performance security would be
furnished and the agreement signed. The second part
of the offer dealt with the terms and conditions
pertaining to the performance of the contract of
collection of tolls, if the offer was accepted. As
earnest/security for performance (of the first part of
the offer), the respondent along with his bid furnished
a bank guarantee in a sum of Rs 50 lakhs as bid
security. The bank guarantee furnished was an “ondemand
guarantee” which specifically provided that
the bank guarantee could be enforced “on demand” if
the bidder withdraws his bid during the period of bid
validity or if the bidder, having been notified of the
acceptance of his bids, fails to furnish the
performance security or fails to sign the agreement.
The amount of the bank guarantee was to be paid by
the bank without demur on a written demand merely
stating that one of these conditions had been fulfilled.
The moment the bank guarantee was given and
accepted by the appellants the first portion of the offer,
regarding bid security, stood accepted. Of course, this
did not mean that a completed contract in respect of
the work of toll collection had come into existence.
7. By the impugned judgment the writ petition
has been allowed. The High Court holds that the offer
was withdrawn before it was accepted and thus no
completed contract had come into existence. The High
Court holds that in law it is always open to a party to
withdraw its offer before its acceptance. To this
proposition there can be no quarrel. We, therefore, did
not permit Mr Dave to cite authorities for the
proposition that an offer can be withdrawn before it is
accepted.
8. The High Court, however, then goes on to
hold as under:
“The statutory right having been so exercised, the
fetter imposed by the clause to the contrary in the
tender documents and the bank guarantee could not
override the provisions of the Indian Contract Act. Any
clause insofar as it is contrary or comes in conflict with
the provisions of the Indian Contract Act is inoperative
and void and cannot be enforced. To have an
enforceable contract there must be an offer and
unconditional acceptance. A person who makes an
offer has the right of withdrawing it before acceptance.
Until the offer is accepted unconditionally it creates no
legal right and the bid can be withdrawn at any time.
Once it is held that there is no completed contract
between the parties no further question can arise.
There can be no breach of contract. There is no
statutory rule or an Act whereunder the security
deposit in the form of a bank guarantee could be
claimed by Respondent 2. The position may, however,
be different if there is a statutory rule having force of
law precluding withdrawal of a bid before its
acceptance. The petitioner was entitled to withdraw
the bid because the prohibition against withdrawal
does not have the force of law and there was no
consideration to bind him down to the condition. In the
present case there was no acceptance by Respondent
2 on the date of withdrawal of the bid by the petitioner.
In the circumstances the invocation and encashment
of the bank guarantee is illegal and void and is liable
to be set aside.”
9. In our view, the High Court fell in error in so
holding. By invoking the bank guarantee and/or
enforcing the bid security, there is no statutory right,
exercise of which was being fettered. There is no term
in the contract which is contrary to the provisions of
the Indian Contract Act. The Indian Contract Act
merely provides that a person can withdraw his offer
before its acceptance. But withdrawal of an offer,
before it is accepted, is a completely different aspect
from forfeiture of earnest/security money which has
been given for a particular purpose. A person may
have a right to withdraw his offer but if he has made
his offer on a condition that some earnest money will
be forfeited for not entering into contract or if some act
is not performed, then even though he may have a
right to withdraw his offer, he has no right to claim that
the earnest/security be returned to him. Forfeiture of
such earnest/security, in no way, affects any statutory
right under the Indian Contract Act. Such
earnest/security is given and taken to ensure that a
contract comes into existence. It would be an
anomalous situation that a person who, by his own
conduct, precludes the coming into existence of the
contract is then given advantage or benefit of his own
wrong by not allowing forfeiture. It must be
remembered that, particularly in government
contracts, such a term is always included in order to
ensure that only a genuine party makes a bid. If such
a term was not there even a person who does not
have the capacity or a person who has no intention of
entering into the contract will make a bid. The whole
purpose of such a clause i.e. to see that only genuine
bids are received would be lost if forfeiture was not
permitted.
10. There is another reason why the impugned
judgment cannot be sustained. It is settled law that a
contract of guarantee is a complete and separate
contract by itself. The law regarding enforcement of an
“on-demand bank guarantee” is very clear. If the
enforcement is in terms of the guarantee, then courts
must not interfere with the enforcement of bank
guarantee. The court can only interfere if the
invocation is against the terms of the guarantee or if
there is any fraud. Courts cannot restrain invocation of
an “on-demand guarantee” in accordance with its
terms by looking at terms of the underlying contract.
The existence or non-existence of an underlying
contract becomes irrelevant when the invocation is in
terms of the bank guarantee. The bank guarantee
stipulated that if the bid was withdrawn within 120
days or if the performance security was not given or if
an agreement was not signed, the guarantee could be
enforced. The bank guarantee was enforced because
the bid was withdrawn within 120 days. Therefore, it
could not be said that the invocation of the bank
guarantee was against the terms of the bank
guarantee. If it was in terms of the bank guarantee,
one fails to understand as to how the High Court could
say that the guarantee could not have been invoked. If
the guarantee was rightly invoked, there was no
question of directing refund as has been done by the
High Court.”
50. The Supreme Court in the case of Hindustan Construction
Co. Ltd. vs. State of Bihar & Ors. (1999) 8 SCC 436 has held that the
bank guarantee represents an independent contract between the
bank and the beneficiary and both parties would be bound by the
terms thereof. The invocation will have to be in accordance with the
terms of the bank guarantee or else the invocation itself would be
bad. Paragraph 9 of the said read as under :-
“9. What is important, therefore, is that the
bank guarantee should be in unequivocal terms,
unconditional and recite that the amount would be
paid without demur or objection and irrespective of
any dispute that might have cropped up or might have
been pending between the beneficiary under the bank
guarantee or the person on whose behalf the
guarantee was furnished. The terms of the bank
guarantee are, therefore, extremely material. Since
the bank guarantee represents an independent
contract between the bank and the beneficiary, both
the parties would be bound by the terms thereof. The
invocation, therefore, will have to be in accordance
with the terms of the bank guarantee, or else, the
invocation itself would be bad.”
51. The Delhi High Court in the case of Pesticides India vs.
State of Chemicals & Pharmaceuticals Corporation of India & Ors. 53
(1994) DLT 42, has after construing the clause, has held that there
was nothing in that clause that the earnest money could be forfeited
only if the employer would have proved the actual loss suffered by
him. Paragraphs 7 to 9 of the judgment, which are relevant for the
purpose of deciding this case are extracted as under :-
“(7) As regard the contention of the learned counsel
for the petitioner that since the respondent did not
prove the actual loss suffered by them, they were not
entitled to forfeit the security deposit and the finding of
the learned arbitrator upholding forfeiture of the
security deposit is illegal, I do not find any merit even
in this contention. In this connection, it will be relevant
to refer to Clause 3 of the terms and conditions, which
reads as under :-
"FORFEITURE of earnest money :-earnest
money given and bank guarantees furnished
are liable to be forfeited in case of any
default/failure on the part of the actual
users/allot tees in complying-with all or any
other terms and conditions prescribed by Opc
in regard to said registration and/or allocation
order that may be issued by CPC."
(8) From the above clause, I find that there is nothing
in this clause that the earnest money can be forfeited
only if the respondent proves the actual loss suffered
by them. In terms of the said clause, earnest money
can be forfeited in case of any default/ failure on the
part of the actual user/allot tee in complying all or any
of the terms and conditions prescribed by CPC. The
learned arbitrator while upholding the forfeiture of the
earnest money has held that it is beyond dispute that
the petitioner had to do the needful three days before
the arrival of the vessel and the vessel concerned
'State of Punjab' arrived on 17.10.79 whereas
petitioner had yet to complete the document seven on
20th October, 1979. He has also observed that it
fulfilled its obligation on 26.10.79 and thus failed to
comply with the terms of contract and the Corporation
was justified in forfeiting the proportionate amount of
earnest money i.e. Rs.2,08,800.00 . Thus there is
relevant and proper evidence to support the
conclusion of the Arbitrator .Here I may refer to a
judgment of the Supreme Court reported in the case
of Indian Oil Corporation Ltd. VS . Indian Carbon Ltd..
: [1988]3SCR426 . In this case it was held that the
Court can set aside the award only if it is apparent
from the award that there is no evidence to support
the conclusion or if the award is based upon any legal
proposition which is erroneous. Accordingly, the
objection raised in respect of the forfeiture of the
earnest money being without any merit is dismissed.
(9) The judgments in the case of Fateh Chand (supra),
Maula Baksh (supra) and Rampur Distillery &
Chemical (supra) are of no assistance to the petitioner
as in the present case there is no term and condition
in the contract between the parties to the effect that
the earnest money can be forfeited only in case the
respondent Corporation proves that it has actually
suffered the loss. In the case of Upper Ganges Valley
Electricity Supply Co. Ltd. (supra) relied upon by the
learned counsel for the petitioner. the Supreme Court
held that an award can be set-aside only if there is an
error of law on the face of record. Since there is no
error of law on the face of record, as explained
hereinabove, the present award cannot be set-aside.”
52. The Division Bench of this court in the case of ABG
Kandla Container Terminal Ltd. vs. Axis Bank Ltd. & Anr. delivered on
th September, 2013 in Appeal (Lodging) No.198 of 2013 has dealt
with the allegations of fraud while dealing with the application for
injunction and has held that there must be evidence clear both as to
the factum of fraud and as regards the knowledge of the bank. It is
held that it must be established that irretrievable injury would be
caused unless an injunction were to be issued. The irretrievable
injury has to be of such a nature as would make it impossible for the
guarantor to reimburse himself if it ultimately succeeds. It is held that
neither the clause of forfeiture was made out by the respondents not
made out any case of irretrievable injury of such a nature that if the
petitioners would have forfeited the bank guarantees, it would have
been impossible for the respondents to recover the said amount from
the petitioners. Paragraph 11 of the said judgment which is relevant
reads thus :-
“11. The interim certificate which is issued by
the independent engineer is clearly reflective of the
fact that the obligations under the contract had not
been fulfilled in their entirety and that a final
completion was still to be certified at a future date. The
Learned Single Judge noted that the bank guarantee
was renewed by the Appellant as required from time to
time which, apart from anything else, provides intrinsic
evidence of the fact that the obligations under the
agreement had remained to be fulfilled in their entirety.
The law on the subject is clear. The invocation of a
bank guarantee can be injuncted only in the case of an
established fraud. The fraud must be a fraud in
connection with the bank guarantee of a nature that
would vitiate the very foundation of the guarantee.
Such a situation can arise when it is proved that the
bank knows that any demand for payment already
made or which may be thereafter made would be
clearly fraudulent. The evidence must be clear both as
to the factum of fraud and as regards the knowledge of
the bank. These principles have been reiterated in the
judgment of the Supreme Court in Himadri Chemicals
Industries Ltd. v. Coal Tar Refining Company.
Moreover, it must be established that irretrievable
injury would be caused unless an injunction were to be
issued. The irretrievable injury has to be of such a
nature as would make it impossible for the guarantor
to reimburse himself if it ultimately succeeds. In the
present case, it is impossible to hold that there is a
case of established fraud or of irretrievable injury of a
nature that whould sustain the issuance of an interim
injunction restraining the invocation or encashment of
a bank guarantee. There is neither any fraud nor a
case of irretrievable injury. “
53. The Gujarat High Court in the case of R.K. Construction
Co. vs. State of Gujarat & Anr., 111(2013) BC 658 has followed the
judgment of the Supreme Court in the case of State of Haryana &
Ors. vs. Malik Traders, (supra) and has held that in view of
withdrawal of the bid prior to the validity period, the employer is
entitled to forfeit the security deposit. In paragraphs 9 and 10 the
Gujarat High Court held as under :-
“9. In State of Haryana and Others v. Malik Traders,
VI (2011) SLT 415 : 2011(13) SCC 200, Hon'ble the
Supreme Court has held and observed in para 12 as
under:
12. The right to withdraw an offer before its
acceptance cannot nullify the agreement to suffer any
penalty for the withdrawal of the offer against the
terms of agreement. A person may have a right to
withdraw his offer, but if he has made his offer on a
condition that the Bid Security amount can be forfeited
in case he withdraws the offer during the period of bid
validity, he has no right to claim that the Bid Security
should not be forfeited and it should be returned to
him. Forfeiture of such Bid Security amount does not,
in any way, affect any statutory right under Section 5
of the Act. The Bid Security was given by the
respondent and taken by the appellants to ensure that
the offer is not withdrawn during the bid validity period
of 90 days and a contract comes into existence. Such
conditions are included to ensure that only genuine
parties make the bids. In the absence of such
conditions, persons who do not have the capacity or
have no intention of entering into the contract will
make bids. The very purpose of such a condition in
the offer/bid will be defeated, if forfeiture is not
permitted when the offer is withdrawn in violation of
the agreement.
10. Thus, as held by Hon'ble the Supreme Court, a
person may have a right to withdraw his offer, but if he
has made his offer on a condition that the Bid Security
amount can be forfeited in case he withdraws the offer
during the period of bid validity, he has no right to
claim that the Bid Security should not be forfeited and
it should be returned to him. The Bid Security was
given by the respondent and taken by the appellants
to ensure that the offer is not withdrawn during the bid
validity period of 90 days and a contract comes into
existence. Such conditions are included to ensure that
only genuine parties make the bids. In the absence of
such conditions, persons who do not have the
capacity or have no intention of entering into the
contract will make bids. The very purpose of such a
condition in the offer/bid will be defeated, if forfeiture is
not permitted when the offer is withdrawn in violation
of the agreement. In light of the above, learned
appellate Judge has rightly held that the respondent
No. 2 was entitled to forfeit the amount of earnest
money deposit even though the offer of the appellant
was revoked before acceptance thereof by the
competent authority. In view of the condition of tender,
as per the law laid down by Hon'ble the Supreme
Court, it can not be said that such forfeiture of the
earnest money deposit amounts to penalty- Therefore,
I do not find that the learned appellate Judge has
committed any error in reversing the judgment and
decree passed by the learned trial Judge. The appeal
is, therefore, required to be dismissed. Hence same is
dismissed.”
I am in agreement with the view expressed by the Gujarat
High Court in the above judgment.
54. A perusal of the above referred judgment of the Supreme
Court and this Court and also of the Gujarat High Court and Delhi
High Court it clearly indicates that the purpose of the earnest money
deposit and the security deposit which is issued for the purpose of
securing the performance of the contract after the award of contract
are for different and distinct purposes. The purpose of obtaining the
earnest money deposit at the time of submission of the bid is to
ensure that only the genuine parties may bid. In the absence of such
conditions, the persons who do not have capacity or have no
intention of entering into contract will make bids. Evey performance of
such a condition in offer / bid will be defeated if forfeiture is not
permitted when offer is withdrawn in violation of the agreement. In my
view the respondents having agreed not to withdraw the bid
otherwise than in accordance with the instructions to bidders and
more particularly recorded under clauses 19.1 to 19.6, the
respondents were liable to face consequences and the petitioners
were entitled to forfeit the security deposit. The earnest money
deposit which was submitted by the respondents, so as to secure the
conditions before award of the contract cannot be mixed up with the
security deposit for securing the performance of the contract which is
submitted after the award of the contract. The question of proving
any loss for the purpose of forfeiting such earnest money deposit by
the employer while the bidder has committed a breach of the terms
and conditions of the tender, did not arise.
55. The finding of the learned arbitrator that the petitioners
having suffered no loss in view of the petitioners having awarded the
contract to some other contractor whose price bid was lower than the
bid of the respondents, is patently illegal and even otherwise based
on no evidence. In my view the said finding of the learned arbitrator
is also contrary to the principles of law laid down by the Supreme
Court in the above referred judgments. The learned arbitrator has
decided contrary to the terms of the tender documents which were
binding on the parties. The learned arbitrator cannot decide contrary
to and in ignorance of the tender conditions. The learned arbitrator
having decided contrary to the terms of the tender conditions and
thus the award is ex-facie in conflict with the public policy and
deserves to be set-aside on this ground also.
56. Insofar as the submission of Mr.Andhyarujina, the learned
counsel for the respondent that the learned arbitrator having
rendered a finding of fact and/or has interpreted the terms of the
contract and the interpretation of the learned arbitrator being possible
interpretation and thus cannot be substituted by any interpretation by
this Court is concerned, in my view there is no substance in this
submission of the learned counsel for the reason that the findings
rendered by the learned arbitrator are perverse and the interpretation
of the learned arbitrator of the provisions of the tender document
being an impossible interpretation, this Court has ample power under
section 34 of the said Act to interfere with such award which
discloses patent illegalities on the face of award.
57. Insofar as the judgment of the Supreme Court in the case
of State of Rajasthan vs. Botamal Sachdeva, (1989) 4 SCC 35 relied
upon by the learned counsel for the respondents is concerned, a
perusal of the said judgment indicates that there was no provision for
forfeiture of the security deposit in the agreement, which was
considered by the Supreme Court in the said judgment. The employer
neither proved the amount of damage incurred by it nor had proved
the extra amount of cost incurred by it for getting the uncompleted
work done departmentally. The amount deducted by the employer
was towards the security deposit for securing the performance. In this
case, there is no such security furnished by the respondents. In this
case there was specific provision allowing the employer to forfeit the
security deposit. The said judgment of the Supreme Court relied upon
by the learned counsel for the respondents therefore, does not assist
the respondents. Paragraphs 1 and 2 of the judgment which are
extracted as under :-
“ 1. This is an appeal on a certificate under
Article 133(1)(a) of the Constitution before its
amendment. The respondent (original plaintiff) was
given a contract by the appellant (original defendant)
for carrying out construction work on a certain project.
According to the appellant, the respondent did not
complete the construction work in time and some part
of it had to be completed departmentally, as a result
of which some excess cost was incurred. The suit
filed by the respondent was decreed by the trial court
in the sum of Rs 15,652.42 only. Both the parties
preferred appeals to the High Court. The High Court
by its impugned judgment, partly allowed the
respondent’s appeal and dismissed the appellant’s
appeal. The decree passed by the trial court was
modified insofar as the principal amount thereof was
raised to Rs 1,16,496.45. We have heard learned
counsel for the appellant at length. He has, however,
not been able to convince us that the High Court has
committed an error in the conclusion at which it
arrived. The only contention urged by learned counsel
for the appellant was that the appellant was entitled to
forfeit the amount kept back by the appellant as
security deposit out of the amount payable to the
respondent for the work done by the respondent as
the respondent did not complete the work within the
stipulated time.
2. We find that there is no term in the
agreement between the parties enabling the appellant
to forfeit the security deposit. The only right given to
the appellant was to deduct out of the security deposit
the amount of loss incurred by the appellant which
was caused to them by reason of non-completion of
the work by the respondent in time and to recover the
extra cost of the work which had to be completed by
the appellant departmentally on account of default of
the respondent, subject to certain limits. The appellant
has neither proved the amount of damage incurred by
it nor has it proved the extra amount of cost incurred
by it for getting the uncompleted work done
departmentally. Thus, the argument that the appellant
was entitled to forfeit the security deposit or any part
of the same, must fail. Moreover, there is no letter
addressed to the respondent stating that the security
deposit has been forfeited. There is no merit in the
appeal. In the result, the appeal fails and is dismissed
with costs.”
58. Insofar as the judgment of the Delhi High Court in the
case of Jainsons Clothing Corporation vs. The State Trading
Corporation of India Ltd. & Anr. (supra) relied upon by the learned
counsel for the respondents is concerned, the Delhi High Court had
considered the terms of the bank guarantee which provided that for
encashing of the bank guarantee, the plaintiff should have committed
a default in performance of the contract and the beneficiary should
submit a certificate to the bank which would be final and conclusive
and binding on the bank. After considering such clause of the bank
guarantee, the Delhi High Court held that the performance of the
bank guarantee was to meet the liability which resulted from a breach
of the contract by the supplier and as it was the case of the
beneficiary itself that there was no loss and there was no claim under
back to back contract by other party, the bank guarantee could not
have been encashed. The clause of the bank guarantee in this case
as well as the tender condition are totally different. The said judgment
of the Delhi High Court is thus not applicable to the facts of this case.
Reliance on the said judgment by the learned counsel for the
respondent is thus totally misplaced.
59. Mr.Andhyarujina, the learned counsel for the respondents
relied upon the judgment of the Supreme Court in the case of
Associate Builders vs. Delhi Development Authority, 2014 SCC
OnLine SC 937 and in particular paragraphs 9, 10, 12 to 15, 17 to
22 which are extracted as under :-
“9. By a judgment dated 3rd April, 2006, the
learned Single Judge of the High Court of Delhi
dismissed the objections of the DDA and upheld the
award. In an appeal filed Under Section 37 of the
Arbitration Act, vide the impugned judgment dated 8th
February, 2012, a Division Bench of the High Court of
Delhi set aside the judgment of the Single Judge on
claims 9, 10, 11 and 15, and negatived these claims in
toto. Further, claims 12 and 13 were scaled down
doing "rough and ready justice". Resultantly, the
awarded amount of Rs. 7,20,000/- was scaled down to
Rs. 5,57,137.50/-.
10. We have heard learned Counsel for the
parties. Shri M.L. Verma, learned Senior Advocate
appearing on behalf of the Appellant, submitted that
the Division Bench has lost sight of the law laid down
by this Hon'ble Court when it comes to challenges
made to arbitral awards Under Section 34 of the Act.
He has submitted that the Division Bench has acted
as if this was a first appeal from the award and has
further submitted that the Division Bench has taken
into account facts which were neither pleaded nor
proved before the learned Arbitrator in order to
negative certain claims. He further submitted that it is
not possible for a Bench hearing an objection against
an arbitral award to do "rough and ready justice"-it is
bound by the law laid down by this Hon'ble Court. In
particular, he argued that the conceded position is that
25 months delay was due to the DDA alone. The
award read as a whole is just, fair and reasonable as
only certain claims have been granted and every claim
granted has been supported with reasons. The
Arbitrator is the sole judge of the quality and quantity
of evidence before him and he has decided on that
evidence. No errors of law arise from the award and
the award has, therefore, been wrongly set aside.
12. In as much as serious objections have
been taken to the Division Bench judgment on the
ground that it has ignored the parameters laid down in
a series of judgments by this Court as to the
limitations which a Judge hearing objections to an
arbitral award Under Section 34 is subject to, we
deem it necessary to state the law on the subject.
Section 34 of the Arbitration and Conciliation Act
reads as follows-
“Application for setting aside arbitral award.--(1)
Recourse to a Court against an arbitral award may be
made only by an application for setting aside such
award in accordance with Sub-section (2) and Subsection
(3).
(2) An arbitral award may be set aside by the Court
only if-
(a) the party making the application furnishes proof
that-
(i) a party was under some incapacity; or
(ii) The arbitration agreement is not valid under the law
to which the parties have subjected it or, failing any
indication thereon, under the law for the time being in
force; or
(iii) the party making the application was not given
proper notice of the appointment of an arbitrator or of
the arbitral proceedings or was otherwise unable to
(iv) the arbitral award deals with a dispute not
contemplated by or not falling within the terms of the
submission to arbitration, or it contains decisions on
matters beyond the scope of the submission to
arbitration:
Provided that, if the decisions on matters submitted to
arbitration can be separated from those not so
submitted, only that part of the arbitral award which
contains decisions on matters not submitted to
arbitration may be set aside; or
(v) the composition of the arbitral tribunal or the
arbitral procedure was not in accordance with the
agreement of the parties, unless such agreement was
in conflict with a provision of this Part from which the
parties cannot derogate, or, failing such agreement,
was not in accordance with this Part; or
(b) the Court finds that-
(i) the subject-matter of the dispute is not capable of
settlement by arbitration under the law for the time
being in force, or
(ii) the arbitral award is in conflict with the public policy
of India.
Explanation.--Without prejudice to the generality of
Sub-clause (ii), it is hereby declared, for the avoidance
of any doubt, that an award is in conflict with the public
policy of India if the making of the award was induced
or affected by fraud or corruption or was in violation of
Section 75 or Section 81.
(3) An application for setting aside may not be made
after three months have elapsed from the date on
which the party making that application had received
the arbitral award or, if a request had been made
Under Section 33, from the date on which that request
had been disposed of by the arbitral tribunal:
Provided that if the Court is satisfied that the applicant
was prevented by sufficient cause from making the
application within the said period of three months it
may entertain the application within a further period of
thirty days, but not thereafter.
(4) On receipt of an application Under Sub-section (1),
the Court may, where it is appropriate and it is so
requested by a party, adjourn the proceedings for a
period of time determined by it in order to give the
arbitral tribunal an opportunity to resume the arbitral
proceedings or to take such other action as in the
opinion of arbitral tribunal will eliminate the grounds for
setting aside the arbitral award.
This Section in conjunction with Section 5 makes it
clear that an arbitration award that is governed by part
I of the Arbitration and Conciliation Act, 1996 can be
set aside only on grounds mentioned Under Section
34(2) and (3), and not otherwise. Section 5 reads as
follows:
5. Extent of judicial intervention.--Notwithstanding
anything contained in any other law for the time being
in force, in matters governed by this Part, no judicial
authority shall intervene except where so provided in
this Part.
It is important to note that the 1996 Act was enacted to
replace the 1940 Arbitration Act in order to provide for
an arbitral procedure which is fair, efficient and
capable of meeting the needs of arbitration; also to
provide that the tribunal gives reasons for an arbitral
award; to ensure that the tribunal remains within the
limits of its jurisdiction; and to minimize the
supervisory roles of courts in the arbitral process.
It will be seen that none of the grounds contained in
Sub-clause 2(a) deal with the merits of the decision
rendered by an arbitral award. It is only when we
come to the award being in conflict with the public
policy of India that the merits of an arbitral award are
to be looked into under certain specified
circumstances.
In Renusagar Power Co. Ltd. v. General Electronic
Co. 1994 Supp (1) SCC 644, the Supreme Court
construed Section 7(1)(b)(ii) of the Foreign Award
(Recognition and Enforcement) Act, 1961.
7. Conditions for enforcement of foreign awards.--
(1) A foreign award may not be enforced under this
Act-
(b) if the Court dealing with the case is satisfied that-
(ii) the enforcement of the award will be contrary to
the public policy.
In construing the expression "public policy" in the
context of a foreign award, the Court held that an
award contrary to
1. The fundamental policy of Indian law
2. The interest of India
3. Justice or morality,
would be set aside on the ground that it would be
contrary to the public policy of India. It went on further
to hold that a contravention of the provisions of the
Foreign Exchange Regulation Act would be contrary to
the public policy of India in that the statute is enacted
for the national economic interest to ensure that the
nation does not lose foreign exchange which is
essential for the economic survival of the nation (see
para 75). Equally, disregarding orders passed by the
superior courts in India could also be a contravention
of the fundamental policy of Indian law, but the
recovery of compound interest on interest, being
contrary to statute only, would not contravene any
fundamental policy of Indian law (see paras 85, 95).
When it came to construing the expression "the public
policy of India" contained in Section 34(2)(b)(ii) of the
Arbitration Act, 1996, this Court in ONGC v. Saw
Pipes 2003 (5) SCC 705, held-
31. Therefore, in our view, the phrase "public policy of
India" used in Section 34 in context is required to be
given a wider meaning. It can be stated that the
concept of public policy connotes some matter which
concerns public good and the public interest. What is
for public good or in public interest or what would be
injurious or harmful to the public good or public
interest has varied from time to time. However, the
award which is, on the face of it, patently in violation
of statutory provisions cannot be said to be in public
interest. Such award/judgment/decision is likely to
adversely affect the administration of justice. Hence,
in our view in addition to narrower meaning given to
the term "public policy" in Renusagar case : 1994
Supp (1) SCC 644] it is required to be held that the
award could be set aside if it is patently illegal. The
result would be--award could be set aside if it is
contrary to:
(a) Fundamental policy of Indian law; or
(b) The interest of India; or
(c) Justice or morality, or
(d) in addition, if it is patently illegal.
Illegality must go to the root of the matter and if the
illegality is of trivial nature it cannot be held that award
is against the public policy. Award could also be set
aside if it is so unfair and unreasonable that it shocks
the conscience of the court. Such award is opposed to
public policy and is required to be adjudged void.
74. In the result, it is held that:
(A) (1) The court can set aside the arbitral award
Under Section 34(2) of the Act if the party making the
application furnishes proof that:
(i) a party was under some incapacity, or
(ii) the arbitration agreement is not valid under the law
to which the parties have subjected it or, failing any
indication thereon, under the law for the time being in
force; or
(iii) the party making the application was not given
proper notice of the appointment of an arbitrator or of
the arbitral proceedings or was otherwise unable to
present his case; or
(iv) the arbitral award deals with a dispute not
contemplated by or not falling within the terms of the
submission to arbitration, or it contains decisions on
matters beyond the scope of the submission to
arbitration.
(2) The court may set aside the award:
(i)(a) if the composition of the Arbitral Tribunal was not
in accordance with the agreement of the parties,
(b) failing such agreement, the composition of the
Arbitral Tribunal was not in accordance with Part I of
the Act.
(ii) if the arbitral procedure was not in accordance
with:
(a) the agreement of the parties, or (b) failing such
agreement, the arbitral procedure was not in
accordance with Part I of the Act.
However, exception for setting aside the award on the
ground of composition of Arbitral Tribunal or illegality
of arbitral procedure is that the agreement should not
be in conflict with the provisions of Part I of the Act
from which parties cannot derogate.
(c) If the award passed by the Arbitral Tribunal is in
contravention of the provisions of the Act or any other
substantive law governing the parties or is against the
terms of the contract.
(3) The award could be set aside if it is against the
public policy of India, that is to say, if it is contrary to:
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality; or
(d) if it is patently illegal.
(4) It could be challenged:
(a) as provided Under Section 13(5); and
(b) Section 16(6) of the Act.
(B)(1) The impugned award requires to be set aside
mainly on the grounds:
(i) there is specific stipulation in the agreement that
the time and date of delivery of the goods was of the
essence of the contract;
(ii) in case of failure to deliver the goods within the
period fixed for such delivery in the schedule, ONGC
was entitled to recover from the contractor liquidated
damages as agreed;
(iii) it was also explicitly understood that the agreed
liquidated damages were genuine pre-estimate of
damages;
(iv) on the request of the Respondent to extend the
time-limit for supply of goods, ONGC informed
specifically that time was extended but stipulated
liquidated damages as agreed would be recovered;
(v) liquidated damages for delay in supply of goods
were to be recovered by paying authorities from the
bills for payment of cost of material supplied by the
contractor;
(vi) there is nothing on record to suggest that
stipulation for recovering liquidated damages was by
way of penalty or that the said sum was in any way
unreasonable.
(vii) In certain contracts, it is impossible to assess the
damages or prove the same. Such situation is taken
care of by Sections 73 and 74 of the Contract Act and
in the present case by specific terms of the contract.
The judgment in ONGC v. Saw Pipes has been
consistently followed till date.
In Hindustan Zinc Ltd. v. Friends Coal
Carbonisation : (2006) 4 SCC 445, this Court held:
14. The High Court did not have the benefit of the
principles laid down in Saw Pipes : (2003) 5 SCC
705], and had proceeded on the assumption that
award cannot be interfered with even if it was contrary
to the terms of the contract. It went to the extent of
holding that contract terms cannot even be looked into
for examining the correctness of the award. This Court
in Saw Pipes : (2003) 5 SCC 705] has made it clear
that it is open to the court to consider whether the
award is against the specific terms of contract and if
so, interfere with it on the ground that it is patently
illegal and opposed to the public policy of India.
In McDermott International Inc. v. Burn Standard
Co. Ltd. : (2006) 11 SCC 181, this Court held:
58. In Renusagar Power Co. Ltd. v. General Electric
Co. : 1994 Supp (1) SCC 644] this Court laid down
that the arbitral award can be set aside if it is contrary
to (a) fundamental policy of Indian law; (b) the
interests of India; or (c) justice or morality. A narrower
meaning to the expression "public policy" was given
therein by confining judicial review of the arbitral
award only on the aforementioned three grounds. An
apparent shift can, however, be noticed from the
decision of this Court in ONGC Ltd. v. Saw Pipes
Ltd. : (2003) 5 SCC 705] (for short "ONGC"). This
Court therein referred to an earlier decision of this
Court in Central Inland Water Transport Corporation
Ltd. v. Brojo Nath Ganguly : (1986) 3 SCC 156 : 1986
SCC (L and S) 429 : (1986) 1 ATC 103] wherein the
applicability of the expression "public policy" on the
touchstone of Section 23 of the Indian Contract Act
and Article 14 of the Constitution of India came to be
considered. This Court therein was dealing with
unequal bargaining power of the workmen and the
employer and came to the conclusion that any term of
the agreement which is patently arbitrary and/or
otherwise arrived at because of the unequal
bargaining power would not only be ultra vires Article
14 of the Constitution of India but also hit by Section
23 of the Indian Contract Act. In ONGC : (2003) 5
SCC 705] this Court, apart from the three grounds
stated in Renusagar : 1994 Supp (1) SCC 644], added
another ground thereto for exercise of the court's
jurisdiction in setting aside the award if it is patently
arbitrary.
59. Such patent illegality, however, must go to the root
of the matter. The public policy violation, indisputably,
should be so unfair and unreasonable as to shock the
conscience of the court. Where the arbitrator,
however, has gone contrary to or beyond the
expressed law of the contract or granted relief in the
matter not in dispute would come within the purview of
Section 34 of the Act. However, we would consider
the applicability of the aforementioned principles while
noticing the merits of the matter.
60. What would constitute public policy is a matter
dependent upon the nature of transaction and nature
of statute. For the said purpose, the pleadings of the
parties and the materials brought on record would be
relevant to enable the court to judge what is in public
good or public interest, and what would otherwise be
injurious to the public good at the relevant point, as
contradistinguished from the policy of a particular
Government. (See State of Rajasthan v. Basant
Nahata : (2005) 12 SCC 77].)
In Centrotrade Minerals and Metals Inc. v.
Hindustan Copper Ltd. : (2006) 11 SCC 245, Sinha,
J., held:
103. Such patent illegality, however, must go to the
root of the matter. The public policy, indisputably,
should be unfair and unreasonable so as to shock the
conscience of the court. Where the arbitrator,
however, has gone contrary to or beyond the
expressed law of the contract or granted relief in the
matter not in dispute would come within the purview of
Section 34 of the Act.
104. What would be a public policy would be a matter
which would again depend upon the nature of
transaction and the nature of statute. For the said
purpose, the pleadings of the parties and the
materials brought on record would be relevant so as
to enable the court to judge the concept of what was a
public good or public interest or what would otherwise
be injurious to the public good at the relevant point as
contradistinguished by the policy of a particular
government. (See State of Rajasthan v. Basant
Nahata : (2005) 12 SCC 77].)
In DDA v. R.S. Sharma and Co. (2008) 13 SCC 80,
the Court summarized the law thus:
21. From the above decisions, the following principles
emerge:
(a) An award, which is
(i) contrary to substantive provisions of law; or
(ii) the provisions of the Arbitration and Conciliation
Act, 1996; or
(iii) against the terms of the respective contract; or
(iv) patently illegal; or
(v) prejudicial to the rights of the parties;
is open to interference by the court Under Section
34(2) of the Act.
(b) The award could be set aside if it is contrary to:
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality.
(c) The award could also be set aside if it is so unfair
and unreasonable that it shocks the conscience of the
court.
(d) It is open to the court to consider whether the
award is against the specific terms of contract and if
so, interfere with it on the ground that it is patently
illegal and opposed to the public policy of India.
With these principles and statutory provisions,
particularly, Section 34(2) of the Act, let us consider
whether the arbitrator as well as the Division Bench of
the High Court were justified in granting the award in
respect of Claims 1 to 3 and Additional Claims 1 to 3
of the claimant or the Appellant DDA has made out a
case for setting aside the award in respect of those
claims with reference to the terms of the agreement
duly executed by both parties.
J.G. Engineers (P) Ltd. v. Union of India (2011) 5
SCC 758, held:
27. Interpreting the said provisions, this Court in
ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705] held
that a court can set aside an award Under Section
34(2)(b)(ii) of the Act, as being in conflict with the
public policy of India, if it is (a) contrary to the
fundamental policy of Indian law; or (b) contrary to the
interests of India; or (c) contrary to justice or morality;
or (d) patently illegal. This Court explained that to hold
an award to be opposed to public policy, the patent
illegality should go to the very root of the matter and
not a trivial illegality. It is also observed that an award
could be set aside if it is so unfair and unreasonable
that it shocks the conscience of the court, as then it
would be opposed to public policy.
Union of India v. Col. L.S.N. Murthy (2012) 1 SCC
718, held:
22. In ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC
705] this Court after examining the grounds on which
an award of the arbitrator can be set aside Under
Section 34 of the Act has said: (SCC p. 727, para 31)
31. ...However, the award which is, on the face of it,
patently in violation of statutory provisions cannot be
said to be in public interest. Such
award/judgment/decision is likely to adversely affect
the administration of justice. Hence, in our view in
addition to narrower meaning given to the term 'public
policy' in Renusagar case [Renusagar Power Co. Ltd.
v. General Electric Co. 1994 Supp (1) SCC 644] it is
required to be held that the award could be set aside if
it is patently illegal.
Fundamental Policy of Indian Law
Coming to each of the heads contained in the Saw
Pipes judgment, we will first deal with the head
"fundamental policy of Indian Law". It has already
been seen from the Renusagar judgment that violation
of the Foreign Exchange Act and disregarding orders
of superior courts in India would be regarded as being
contrary to the fundamental policy of Indian law. To
this it could be added that the binding effect of the
judgment of a superior court being disregarded would
be equally violative of the fundamental policy of Indian
law.
In a recent judgment, ONGC Ltd. v. Western Geco
International Ltd. 2014 (9) SCC 263, this Court
added three other distinct and fundamental juristic
principles which must be understood as a part and
parcel of the fundamental policy of Indian law. The
Court held-
35. What then would constitute the "fundamental
policy of Indian law" is the question. The decision in
ONGC [ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC
705] does not elaborate that aspect. Even so, the
expression must, in our opinion, include all such
fundamental principles as providing a basis for
administration of justice and enforcement of law in this
country. Without meaning to exhaustively enumerate
the purport of the expression "fundamental policy of
Indian law", we may refer to three distinct and
fundamental juristic principles that must necessarily
be understood as a part and parcel of the fundamental
policy of Indian law. The first and foremost is the
principle that in every determination whether by a
court or other authority that affects the rights of a
citizen or leads to any civil consequences, the court or
authority concerned is bound to adopt what is in legal
parlance called a "judicial approach" in the matter.
The duty to adopt a judicial approach arises from the
very nature of the power exercised by the court or the
authority does not have to be separately or
additionally enjoined upon the fora concerned. What
must be remembered is that the importance of a
judicial approach in judicial and quasi-judicial
determination lies in the fact that so long as the court,
tribunal or the authority exercising powers that affect
the rights or obligations of the parties before them
shows fidelity to judicial approach, they cannot act in
an arbitrary, capricious or whimsical manner. Judicial
approach ensures that the authority acts bona fide
and deals with the subject in a fair, reasonable and
objective manner and that its decision is not actuated
by any extraneous consideration. Judicial approach in
that sense acts as a check against flaws and faults
that can render the decision of a court, tribunal or
authority vulnerable to challenge.
38. Equally important and indeed fundamental to the
policy of Indian law is the principle that a court and so
also a quasi-judicial authority must, while determining
the rights and obligations of parties before it, do so in
accordance with the principles of natural justice.
Besides the celebrated audi alteram partem rule one
of the facets of the principles of natural justice is that
the court/authority deciding the matter must apply its
mind to the attendant facts and circumstances while
taking a view one way or the other. Non-application of
mind is a defect that is fatal to any adjudication.
Application of mind is best demonstrated by
disclosure of the mind and disclosure of mind is best
done by recording reasons in support of the decision
which the court or authority is taking. The requirement
that an adjudicatory authority must apply its mind is, in
that view, so deeply embedded in our jurisprudence
that it can be described as a fundamental policy of
Indian law.
39. No less important is the principle now recognised
as a salutary juristic fundamental in administrative law
that a decision which is perverse or so irrational that
no reasonable person would have arrived at the same
will not be sustained in a court of law. Perversity or
irrationality of decisions is tested on the touchstone of
Wednesbury principle [Associated Provincial Picture
Houses Ltd. v. Wednesbury Corporation (1948) 1 KB
223 : (1947) 2 All ER 680 (CA)] of reasonableness.
Decisions that fall short of the standards of
reasonableness are open to challenge in a court of
law often in writ jurisdiction of the superior courts but
no less in statutory processes wherever the same are
available.
40. It is neither necessary nor proper for us to attempt
an exhaustive enumeration of what would constitute
the fundamental policy of Indian law nor is it possible
to place the expression in the straitjacket of a
definition. What is important in the context of the case
at hand is that if on facts proved before them the
arbitrators fail to draw an inference which ought to
have been drawn or if they have drawn an inference
which is on the face of it, untenable resulting in
miscarriage of justice, the adjudication even when
made by an Arbitral Tribunal that enjoys considerable
latitude and play at the joints in making awards will be
open to challenge and may be cast away or modified
depending upon whether the offending part is or is not
severable from the rest.
It is clear that the juristic principle of a "judicial
approach" demands that a decision be fair, reasonable
and objective. On the obverse side, anything arbitrary
and whimsical would obviously not be a determination
which would either be fair, reasonable or objective.
The Audi Alteram Partem principle which undoubtedly
is a fundamental juristic principle in Indian law is also
contained in Sections 18 and 34(2)(a)(iii) of the
Arbitration and Conciliation Act. These Sections read
as follows:
18. Equal treatment of parties.--The parties shall be
treated with equality and each party shall be given a
full opportunity to present his case.
34. Application for setting aside arbitral award.-
(2) An arbitral award may be set aside by the Court
only if-
(a) the party making the application furnishes proof
that-
(iii) the party making the application was not given
proper notice of the appointment of an arbitrator or of
the arbitral proceedings or was otherwise unable to
present his case;
The third juristic principle is that a decision which is
perverse or so irrational that no reasonable person
would have arrived at the same is important and
requires some degree of explanation. It is settled law
that wherea
finding is based on no evidence, or
an arbitral tribunal takes into account something
irrelevant to the decision which it arrives at; or
ignores vital evidence in arriving at its decision,
such decision would necessarily be perverse. A good
working test of perversity is contained in two
judgments. In H.B. Gandhi, Excise and Taxation
Officer-cum-Assessing Authority v. Gopi Nath and
Sons at p. 317, it was held:
7. ...It is, no doubt, true that if a finding of fact is
arrived at by ignoring or excluding relevant material or
by taking into consideration irrelevant material or if the
finding so outrageously defies logic as to suffer from
the vice of irrationality incurring the blame of being
perverse, then, the finding is rendered infirm in law.
In Kuldeep Singh v. Commr. of Police (1999) 2 SCC
10 at para 10, it was held:
10. A broad distinction has, therefore, to be
maintained between the decisions which are perverse
and those which are not. If a decision is arrived at on
no evidence or evidence which is thoroughly
unreliable and no reasonable person would act upon
it, the order would be perverse. But if there is some
evidence on record which is acceptable and which
could be relied upon, howsoever compendious it may
be, the conclusions would not be treated as perverse
and the findings would not be interfered with.
It must clearly be understood that when a court is
applying the "public policy" test to an arbitration
award, it does not act as a court of appeal and
consequently errors of fact cannot be corrected. A
possible view by the arbitrator on facts has necessarily
to pass muster as the arbitrator is the ultimate master
of the quantity and quality of evidence to be relied
upon when he delivers his arbitral award. Thus an
award based on little evidence or on evidence which
does not measure up in quality to a trained legal mind
would not be held to be invalid on this score1
. Once it
is found that the arbitrators approach is not arbitrary or
capricious, then he is the last word on facts. In P.R.
Shah, Shares and Stock Brokers (P) Ltd. v. B.H.H.
Securities (P) Ltd. (2012) 1 SCC 594, this Court held:
21. A court does not sit in appeal over the award of an
Arbitral Tribunal by reassessing or reappreciating the
evidence. An award can be challenged only under the
grounds mentioned in Section 34(2) of the Act. The
Arbitral Tribunal has examined the facts and held that
both the second Respondent and the Appellant are
liable. The case as put forward by the first
Respondent has been accepted. Even the minority
view was that the second Respondent was liable as
claimed by the first Respondent, but the Appellant
was not liable only on the ground that the arbitrators
appointed by the Stock Exchange under Bye-law 248,
in a claim against a non-member, had no jurisdiction
to decide a claim against another member. The
finding of the majority is that the Appellant did the
transaction in the name of the second Respondent
and is therefore, liable along with the second
Respondent. Therefore, in the absence of any ground
Under Section 34(2) of the Act, it is not possible to reexamine
the facts to find out whether a different
decision can be arrived at.
It is with this very important caveat that the two
fundamental principles which form part of the
fundamental policy of Indian law (that the arbitrator
must have a judicial approach and that he must not
act perversely) are to be understood.
Interest of India
The next ground on which an award may be set aside
is that it is contrary to the interest of India. Obviously,
this concerns itself with India as a member of the
world community in its relations with foreign powers.
As at present advised, we need not dilate on this
aspect as this ground may need to evolve on a case
by case basis.
Justice
The third ground of public policy is, if an award is
against justice or morality. These are two different
concepts in law. An award can be said to be against
justice only when it shocks the conscience of the
court. An illustration of this can be given. A claimant is
content with restricting his claim, let us say to Rs. 30
lakhs in a statement of claim before the arbitrator and
at no point does he seek to claim anything more. The
arbitral award ultimately awards him 45 lakhs without
any acceptable reason or justification. Obviously, this
would shock the conscience of the court and the
arbitral award would be liable to be set aside on the
ground that it is contrary to "justice".
Morality
The other ground is of "morality". Just as the
expression "public policy" also occurs in Section 23 of
the Indian Contract Act, so does the expression
"morality". Two illustrations to the said section are
interesting for they explain to us the scope of the
expression "morality".
(j) A, who is B's Mukhtar, promises to exercise his
influence, as such, with B in favour of C, and C
promises to pay 1,000 rupees to A. The agreement is
void, because it is immoral.
(k) A agrees to let her daughter to hire to B for
concubinage. The agreement is void, because it is
immoral, though the letting may not be punishable
under the Indian Penal Code (XLV of 1860).
In Gherulal Parekh v. Mahadeo Dass Maiya 1959
Supp (2) SCR 406, this Court explained the concept of
"morality" thusRe.
Point 3-Immorality: The argument under this head
is rather broadly stated by the learned Counsel for the
Appellant. The learned Counsel attempts to draw an
analogy from the Hindu Law relating to the doctrine of
pious obligation of sons to discharge their father's
debts and contends that what the Hindu Law
considers to be immoral in that context may
appropriately be applied to a case under Section 23 of
the Contract Act. Neither any authority is cited nor any
legal basis is suggested for importing the doctrine of
Hindu Law into the domain of contracts. Section 23 of
the Contract Act is inspired by the common law of
England and it would be more useful to refer to the
English Law than to the Hindu Law texts dealing with
a different matter. Anson in his Law of Contracts
states at p. 222 thus:
The only aspect of immorality with which Courts of
Law have dealt is sexual immorality....
Halsbury in his Laws of England, 3rd Edn., Vol. 8,
makes a similar statement, at p. 138:
A contract which is made upon an immoral
consideration or for an immoral purpose is
unenforceable, and there is no distinction in this
respect between immoral and illegal contracts. The
immorality here alluded to is sexual immorality.
In the Law of Contract by Cheshire and Fifoot, 3rd
Edn., it is stated at p. 279:
Although Lord Mansfield laid it down that a contract
contra bonos mores is illegal, the law in this
connection gives no extended meaning to morality,
but concerns itself only with what is sexually
reprehensible.
In the book on the Indian Contract Act by Pollock and
Mulla it is stated at p. 157:
The epithet "immoral" points, in legal usage, to
conduct or purposes which the State, though
disapproving them, is unable, or not advised, to visit
with direct punishment.
The learned authors confined its operation to acts
which are considered to be immoral according to the
standards of immorality approved by Courts. The case
law both in England and India confines the operation
of the doctrine to sexual immorality. To cite only some
instances: settlements in consideration of
concubinage, contracts of sale or hire of things to be
used in a brothel or by a prostitute for purposes
incidental to her profession, agreements to pay money
for future illicit cohabitation, promises in regard to
marriage for consideration, or contracts facilitating
divorce are all held to be void on the ground that the
object is immoral.
The word "immoral" is a very comprehensive word.
Ordinarily it takes in every aspect of personal conduct
deviating from the standard norms of life. It may also
be said that what is repugnant to good conscience is
immoral. Its varying content depends upon time, place
and the stage of civilization of a particular society. In
short, no universal standard can be laid down and any
law based on such fluid concept defeats its own
purpose. The provisions of Section 23 of the Contract
Act indicate the legislative intention to give it a
restricted meaning. Its juxtaposition with an equally
illusive concept, public policy, indicates that it is used
in a restricted sense; otherwise there would be
overlapping of the two concepts. In its wide sense
what is immoral may be against public policy, for
public policy covers political, social and economic
ground of objection. Decided cases and authoritative
text-book writers, therefore, confined it, with every
justification, only to sexual immorality. The other
limitation imposed on the word by the statute, namely,
"the court regards it as immoral", brings out the idea
that it is also a branch of the common law like the
doctrine of public policy, and, therefore, should be
confined to the principles recognized and settled by
Courts. Precedents confine the said concept only to
sexual immorality and no case has been brought to
our notice where it has been applied to any head
other than sexual immorality. In the circumstances, we
cannot evolve a new head so as to bring in wagers
within its fold.
This Court has confined morality to sexual morality so
far as Section 23 of the Contract Act is concerned,
which in the context of an arbitral award would mean
the enforcement of an award say for specific
performance of a contract involving prostitution.
"Morality" would, if it is to go beyond sexual morality
necessarily cover such agreements as are not illegal
but would not be enforced given the prevailing mores
of the day. However, interference on this ground
would also be only if something shocks the court's
conscience.
Patent Illegality
We now come to the fourth head of public policy
namely, patent illegality. It must be remembered that
under the explanation to Section 34(2)(b), an award is
said to be in conflict with the public policy of India if
the making of the award was induced or affected by
fraud or corruption. This ground is perhaps the earliest
ground on which courts in England set aside awards
under English law. Added to this ground (in 1802) is
the ground that an arbitral award would be set aside if
there were an error of law by the arbitrator. This is
explained by Lord Justice Denning in R v.
Northumberland Compensation Appeal Tribunal.
Ex Parte Shaw. at page 130:
Leaving now the statutory tribunals, I turn to the
awards of the arbitrators. The Court of King's Bench
never interfered by certiorari with the award of an
arbitrator, because it was a private tribunal and not
subject to the prerogative writs. If the award was not
made a rule of court, the only course available to an
aggrieved party was to resist an action on the award
or to file a bill in equity. If the award was made a rule
of court, a motion could be made to the court to set it
aside for misconduct of the arbitrator on the ground
that it was procured by corruption or other undue
means: see the statute 9 and 10 Will. III, c. 15. At one
time an award could not be upset on the ground of
error of law by the arbitrator because that could not be
said to be misconduct or undue means, but ultimately
it was held in Kent v. Elstob , that an award could be
set aside for error of law on the face of it. This was
regretted by Williams, J., in Hodgkinson v. Fernie , but
is now well established.
This, in turn, led to the famous principle laid down in
Champsey Bhara Co. v. The Jivraj Balloo Spinning
and Weaving Co. Ltd. AIR 1923 PC 66, where the
Privy Council referred to Hodgkinson and then laid
down:
The law on the subject has never been more clearly
stated than by Williams, J. in the case of Hodgkinson
v. Fernie .
The law has for many years been settled, and remains
so at this day, that, where a cause or matters in
difference are referred to an arbitrator a lawyer or a
layman, he is constituted the sole and final judge of all
questions both of law and of fact ...... The only
exceptions to that rule are cases where the award is
the result of corruption or fraud, and one other, which
though it is to be regretted, is now, I think firmly
established viz., where the question of law necessarily
arises on the face of the award or upon some paper
accompanying and forming part of the award. Though
the propriety of this latter may very well be doubted, I
think it may be considered as established.
Now the regret expressed by Williams, J. in
Hodgkinson v. Fernie has been repeated by more
than one learned Judge, and it is certainly not to be
desired that the exception should be in any way
extended. An error in law on the face of the award
means, in their Lordships' view, that you can find in
the award or a document actually incorporated
thereto, as for instance, a note appended by the
arbitrator stating the reasons for his judgment, some
legal proposition which is the basis of the award and
which you can then say is erroneous. It does not
mean that if in a narrative a reference is made to a
contention of one party that opens the door to seeing
first what that contention is, and then going to the
contract on which the parties' rights depend to see if
that contention is sound. Here it is impossible to say,
from what is shown on the face of the award, what
mistake the arbitrators made. The only way that the
learned judges have arrived at finding what the
mistake was is by saying: "Inasmuch as the
Arbitrators awarded so and so, and inasmuch as the
letter shows that then buyer rejected the cotton, the
arbitrators can only have arrived at that result by
totally misinterpreting Clause 52." But they were
entitled to give their own interpretation to Clause 52 or
any other article, and the award will stand unless, on
the face of it they have tied themselves down to some
special legal proposition which then, when examined,
appears to be unsound. Upon this point, therefore,
their Lordships think that the judgment of Pratt, J was
right and the conclusion of the learned Judges of the
Court of Appeal erroneous.
This judgment has been consistently followed in India
to test awards Under Section 30 of the Arbitration Act,
1940.
In the 1996 Act, this principle is substituted by the
'patent illegality' principle which, in turn, contains three
sub heads-
(a) a contravention of the substantive law of India
would result in the death knell of an arbitral award.
This must be understood in the sense that such
illegality must go to the root of the matter and cannot
be of a trivial nature. This again is a really a
contravention of Section 28(1)(a) of the Act, which
reads as under:
28. Rules applicable to substance of dispute.--(1)
Where the place of arbitration is situated in India,-
(a) in an arbitration other than an international
commercial arbitration, the arbitral tribunal shall
decide the dispute submitted to arbitration in
accordance with the substantive law for the time being
in force in India;
(b) a contravention of the Arbitration Act itself would
be regarded as a patent illegality-for example if an
arbitrator gives no reasons for an award in
contravention of Section 31(3) of the Act, such award
will be liable to be set aside.
(c) Equally, the third sub-head of patent illegality is
really a contravention of Section 28(3) of the
Arbitration Act, which reads as under:
28. Rules applicable to substance of dispute.--(3)
In all cases, the arbitral tribunal shall decide in
accordance with the terms of the contract and shall
take into account the usages of the trade applicable to
the transaction.
This last contravention must be understood with a
caveat. An arbitral tribunal must decide in accordance
with the terms of the contract, but if an arbitrator
construes a term of the contract in a reasonable
manner, it will not mean that the award can be set
aside on this ground. Construction of the terms of a
contract is primarily for an arbitrator to decide unless
the arbitrator construes the contract in such a way that
it could be said to be something that no fair minded or
reasonable person could do.
In McDermott International Inc. v. Burn Standard
Co. Ltd. (2006) 11 SCC 181, this Court held as under:
112. It is trite that the terms of the contract can be
express or implied. The conduct of the parties would
also be a relevant factor in the matter of construction
of a contract. The construction of the contract
agreement is within the jurisdiction of the arbitrators
having regard to the wide nature, scope and ambit of
the arbitration agreement and they cannot be said to
have misdirected themselves in passing the award by
taking into consideration the conduct of the parties. It
is also trite that correspondences exchanged by the
parties are required to be taken into consideration for
the purpose of construction of a contract.
Interpretation of a contract is a matter for the arbitrator
to determine, even if it gives rise to determination of a
question of law. (See Pure Helium India (P) Ltd. v.
ONGC (2003) 8 SCC 593] and D.D. Sharma v. Union
of India (2004) 5 SCC 325]).
113. Once, thus, it is held that the arbitrator had the
jurisdiction, no further question shall be raised and the
court will not exercise its jurisdiction unless it is found
that there exists any bar on the face of the award.
In MSK Projects (I) (JV) Ltd. v. State of Rajasthan
(2011) 10 SCC 573, the Court held:
17. If the arbitrator commits an error in the
construction of the contract, that is an error within his
jurisdiction. But if he wanders outside the contract and
deals with matters not allotted to him, he commits a
jurisdictional error. Extrinsic evidence is admissible in
such cases because the dispute is not something
which arises under or in relation to the contract or
dependent on the construction of the contract or to be
determined within the award. The ambiguity of the
award can, in such cases, be resolved by admitting
extrinsic evidence. The rationale of this rule is that the
nature of the dispute is something which has to be
determined outside and independent of what appears
in the award. Such a jurisdictional error needs to be
proved by evidence extrinsic to the award. (See
Gobardhan Das v. Lachhmi Ram AIR 1954 SC 689],
Thawardas Pherumal v. Union of India AIR 1955 SC
468], Union of India v. Kishorilal Gupta and Bros. AIR
1959 SC 1362], Alopi Parshad and Sons Ltd. v. Union
of India AIR 1960 SC 588], Jivarajbhai Ujamshi Sheth
v. Chintamanrao Balaji AIR 1965 SC 214] and
Renusagar Power Co. Ltd. v. General Electric Co.
(1984) 4 SCC 679 : AIR 1985 SC 1156]).
In Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram
Saran (2012) 5 SCC 306, the Court held:
43. In any case, assuming that Clause 9.3 was
capable of two interpretations, the view taken by the
arbitrator was clearly a possible if not a plausible one.
It is not possible to say that the arbitrator had travelled
outside his jurisdiction, or that the view taken by him
was against the terms of contract. That being the
position, the High Court had no reason to interfere
with the award and substitute its view in place of the
interpretation accepted by the arbitrator.
44. The legal position in this behalf has been
summarised in para 18 of the judgment of this Court in
SAIL v. Gupta Brother Steel Tubes Ltd. (2009) 10
SCC 63 : (2009) 4 SCC (Civ) 16] and which has been
referred to above. Similar view has been taken later in
Sumitomo Heavy Industries Ltd. v. ONGC Ltd. (2010)
11 SCC 296 : (2010) 4 SCC (Civ) 459] to which one of
us (Gokhale, J.) was a party. The observations in para
43 thereof are instructive in this behalf.
45. This para 43 reads as follows: (Sumitomo case
(2010) 11 SCC 296 : (2010) 4 SCC (Civ) 459], SCC p.
313)
43. ...The umpire has considered the fact situation
and placed a construction on the clauses of the
agreement which according to him was the correct
one. One may at the highest say that one would have
preferred another construction of Clause 17.3 but that
cannot make the award in any way perverse. Nor can
one substitute one's own view in such a situation, in
place of the one taken by the umpire, which would
amount to sitting in appeal. As held by this Court in
Kwality Mfg. Corporation v. Central Warehousing
Corporation (2009) 5 SCC 142 : (2009) 2 SCC (Civ)
406] the Court while considering challenge to arbitral
award does not sit in appeal over the findings and
decision of the arbitrator, which is what the High Court
has practically done in this matter. The umpire is
legitimately entitled to take the view which he holds to
be the correct one after considering the material
before him and after interpreting the provisions of the
agreement. If he does so, the decision of the umpire
has to be accepted as final and binding.
13. Applying the tests laid down by this Court, we
have to examine whether the Division Bench has
exceeded its jurisdiction in setting aside the arbitral
award impugned before it.
14. A large part of the judgment is an extract from the
arbitral award. It is important to note that the Division
Bench held:
9. A perusal of the award would reveal, from
the portions extracted herein above, that with
reference to evidence led before him the
learned Arbitrator has held delay attributable
to DDA, a finding of fact which is based on
evidence and rightly conceded to by Sh.
Bhupesh Narula, Advocate who appears for
DDA as being beyond judicial review power
of this Court pertaining to a reasoned award.
But, while awarding Rs. 8,27,960/- the
reasoning adopted by the learned Arbitrator
is questioned as being the result of ignoring
the well-recognized legal principles on the
subject, learned Counsel argued that the
reasoning is the ipse dixit of the learned
Arbitrator.
15. The Division Bench while considering claims 9, 10,
11 and 15 found fault with the application of Hudson's
formula which was set out by the learned Arbitrator in
order to arrive at the claim made under these heads.
The Division Bench said that it was not possible for an
Arbitrator to mechanically apply a certain formula
however well understood in the trade. This itself is
going outside the jurisdiction to set aside an award
Under Section 34 in as much as in McDermott's case
(supra), it was held:
104. It is not in dispute that MII had examined one Mr.
D.J. Parson to prove the said claim. The said witness
calculated the increased overheads and loss of profit
on the basis of the formula laid down in a manual
published by the Mechanical Contractors Association
of America entitled "Change Orders, Overtime,
Productivity" commonly known as the Emden
Formula. The said formula is said to be widely
accepted in construction contracts for computing
increased overheads and loss of profit. Mr. D.J.
Parson is said to have brought out the additional
project management cost at US$ 1,109,500. We may
at this juncture notice the different formulas applicable
in this behalf.
(a) Hudson Formula: In Hudson's Building and
Engineering Contracts, Hudson Formula is stated in
the following terms:
“Contract head office
overhead and profit
percentage
Contract period Period of delay”
In the Hudson Formula, the head office overhead
percentage is taken from the contract. Although the
Hudson Formula has received judicial support in many
cases, it has been criticised principally because it
adopts the head office overhead percentage from the
contract as the factor for calculating the costs, and
this may bear little or no relation to the actual head
office costs of the contractor.
(b) Emden Formula: In Emden's Building Contracts
and Practice, the Emden Formula is stated in the
following terms:
“Head office overhead
and profit
Contract sum Period of delay”
100 Contract period
Using the Emden Formula, the head office overhead
percentage is arrived at by dividing the total overhead
cost and profit of the contractor's organisation as a
whole by the total turnover. This formula has the
advantage of using the contractor's actual head office
overhead and profit percentage rather than those
contained in the contract. This formula has been
widely applied and has received judicial support in a
number of cases including Norwest Holst Construction
Ltd. v. Coop. Wholesale Society Ltd. [Decided on 17-
2-1998, ], Beechwood Development Co. (Scotland)
Ltd. v. Mitchell [Decided on 21-2-2001, ] and Harvey
Shopfitters Ltd. v. Adi Ltd. [Decided on 6-3-2003,
(2004) 2 All ER 982 : [2003] EWCA Civ 1757].
(c) Eichleay Formula: The Eichleay Formula was
evolved in America and derives its name from a case
heard by the Armed Services Board of Contract
Appeals, Eichleay Corporation. It is applied in the
following manner:
Step 1
Contract billings Total overhead for
contract period =
Overhead allocable
to the contract
Total billings for contract
period
Step 2
Allocable overhead = Daily overhead rate
Total days of contract
Step 3
Daily contract overhead
rate
Number of days = of
delay
Amount of
unabsorbed
overhead”
This formula is used where it is not possible to prove
loss of opportunity and the claim is based on actual
cost. It can be seen from the formula that the total
head office overhead during the contract period is first
determined by comparing the value of work carried
out in the contract period for the project with the value
of work carried out by the contractor as a whole for
the contract period. A share of head office overheads
for the contractor is allocated in the same ratio and
expressed as a lump sum to the particular contract.
The amount of head office overhead allocated to the
particular contract is then expressed as a weekly
amount by dividing it by the contract period. The
period of delay is then multiplied by the weekly
amount to give the total sum claimed. The Eichleay
Formula is regarded by the Federal Circuit Courts of
America as the exclusive means for compensating a
contractor for overhead expenses.
105. Before us several American decisions have been
referred to by Mr. Dipankar Gupta in aid of his
submission that the Emden Formula has since been
widely accepted by the American courts being Nicon
Inc. v. United States [Decided on 10-6-2003 (), : ()],
Gladwynne Construction Co. v. Mayor and City
Council of Baltimore [Decided on 25-9-2002, : ] and
Charles G. William Construction Inc. v. White [ : ()].
106. We do not intend to delve deep into the matter as
it is an accepted position that different formulae can
be applied in different circumstances and the question
as to whether damages should be computed by taking
recourse to one or the other formula, having regard to
the facts and circumstances of a particular case,
would eminently fall within the domain of the
arbitrator.
17. The Division Bench then went on to hold:
17. There is admittedly no evidence that the
contractor i.e. the Respondent had a central
establishment. It appears to be a case where
the contractor is petty contractor and the only
expenses incurred are at the site. The claim is
towards hire charges paid for centering and
shuttering, hiring tools, plants and scaffoldings
i.e. the claim is not for the contractor's own
equipment lying idle. There is just no evidence
that the contractor paid charges as claimed by
him. Not a single bill raised by the alleged
person who let on hire the equipment to the
contractor has been filed nor any evidence
adduced for the payment made. Except for
listing a 10 HP Water Pump, 4 number 1 HP
water pump, 3 mixers, 250 scaffolding
bamboos, 150 ballis and 2 vibrators in
Annexure-J to the Statement of Claim, no
document proving hiring the same and brought
at the site has been led. We highlight that the
claim is on account of hire Charges paid and
there is no evidence of said payment. It does
happen that where a work is stopped, the
person who taken an equipment on hire returns
the same and re-hires the same when work
recommences. Thus, Claim No. 9, 10 and 11
cannot be allowed because there is no
evidence to support the claims. Damages on
account of establishment expenses incurred
during period contract got prolonged have
certainly to be recompensed, but we find no
evidence in the form of books of accounts,
vouchers etc. to show payments to the staff or
expenses incurred in maintaining an
establishment at site in the form of a site office.
The wages register, photocopy whereof was
filed before the Arbitrator, pertains to wages
paid to the unskilled, semiskilled and skilled
labour deployed to execute the works. The
pleadings pertaining to the claim would show
that as per the contractor he had deployed one
Executive Officer, one Graduate Engineer, one
Junior Engineer, one Accountant, one
Storekeeper and Supervisor and one Mechanic
at the site and had also deployed watch and
ward. Details of the persons employed have
been listed in Annexure-N to the Statement of
Claim and the documents filed to establish the
same would evidence that the contractor has
filed photocopies of the salary register, which
are available from pages No. 1255 to 1322, but
unfortunately for the contractor, the cat is out of
the bag when we look at the documents. They
pertain to payments made for a site at Mayur
Vihar. We highlight that the contract in question
pertains to flats and houses at Trilokpuri and
not Mayur Vihar. It is apparent that the
contractor has tried to pull the wool on the eyes
of the primary adjudicator of the claim. It is not
the case of the contractor that these persons
were simultaneously supervising the work at
two sites. Assuming this was the case, the
matter would then have been adjudicated with
reference to same number of persons
supervising two sites and the time spent at each
site by them.
18. Thus, the award pertaining to Claim Nos. 9,
10, 11 and 15 is liable to be sent aside and it is
so set aside. We need not therefore take
corrective action on the apparent error i.e. the
learned Arbitrator has worked out the claim on
the original contract value of Rs. 87,66,678/-, of
course by reducing it by 15%, but ignoring that
final work executed was only in sum of Rs.
62,84,845/-.
18. Mr. Verma argued correctly that there is nothing
on record to show that the contractor is a petty
contractor and that the only expenses incurred are at
the site. He has shown us that the contract itself
required execution of the work by a Class-I contractor
and has further shown us that Class-I contractors
require to have certain stipulated numbers of works
worth large amounts before they can apply for the
tender and that their financial soundness has to be
attested too by banker's certificate showing that their
worth is over 10 crores of rupees. Further, he has
pointed out from the statement of claims before the
Arbitrator that there was evidence for claims 9, 10 and
11 laid before the Arbitrator which the Arbitrator has in
fact accepted. Also establishment expenses were set
out in great detail before the Arbitrator and it is only on
this evidence that the Arbitrator ultimately has
awarded these claims. Mr. Verma is also right in
saying that the Division Bench was completely wrong
in stating that the establishment expenses pertained to
payments for a site at Mayur Vihar as opposed to
Trilok Puri which were where the aforesaid houses
were to be constructed. He pointed out that in the
completion certificate dated 30th May, 1997 given by
the DDA to the Appellant, it is clear that the houses
that were, in fact, to be constructed were in Mayur
Vihar, Phase-II, which is part of the Trilok Puri transYamuna
area.
It is most unfortunate that the Division Bench did not
advert to this crucial document at all. This document
shows not only that the Division Bench was wholly
incorrect in its conclusion that the contractor has tried
to pull the wool over the eyes over the DDA but it
should also have realized that the DDA itself has
stated that the work has been carried out generally to
its satisfaction barring some extremely minor defects
which are capable of rectification. It is clear, therefore,
that the Division Bench obviously exceeded its
jurisdiction in interfering with a pure finding of fact
forgetting that the Arbitrator is the sole Judge of the
quantity and quality of evidence before him and
unnecessarily bringing in facts which were neither
pleaded nor proved and ignoring the vital completion
certificate granted by the DDA itself. The Division
Bench also went wrong in stating that as the work
completed was only to the extent of Rs. 62,84,845/-,
Hudson's formula should have been applied taking
this figure into account and not the entire contract
value of Rs. 87,66,678/- into account.
19. Here again, the Division Bench has committed a
grave error. Hudson's formula as is quoted in
McDermott's case is as follows:
(a) Hudson Formula: In Hudson's Building and
Engineering Contracts, Hudson Formula is stated in
the following terms:
“Contract head office
overhead and profit
percentage
Period of Contract
period
delay”
In the Hudson Formula, the head office
overhead percentage is taken from the
contract. Although the Hudson Formula has
received judicial support in many cases, it has
been criticised principally because it adopts
the head office overhead percentage from the
contract as the factor for calculating the costs,
and this may bear little or no relation to the
actual head office costs of the contractor.
20. It is clear that to apply this formula one has to
take into account the contract value that is awarded
and not the work completed. On this score again, the
Division Bench is to be faulted.
21. In dealing with claims 12 and 13, the Division
Bench stated:
19. Pertaining to Claim No. 12 and 13, the
learned Arbitrator has recompensed the
contractor 20% price hike in the cost of
material and labour noting, that there was a
steep hike in the period in question when the
contract got prolonged by 25 months. We
highlight that though the Arbitrator has found
the delay to be 25 months, recompense has
been restricted to only 20 months.
20. As noted herein above, partial
recompense under Clause 10C, has been
granted to the contractor, but the same i.e. the
Clause in question requiring applicability
during contract stipulated period, it is apparent
that the contractor would be entitled to full
recompense for price hike during the extended
25 months period and not the 20 months to
which the learned Arbitrator has restricted the
recompense to.
21. But, for the benefit granted under Clause
10C wherein Rs. 1,62,387/-, Rs. 46,184/- and
Rs. 12,922/- have been awarded under Claim
Nos. 2, 3 and 4, said amounts have to be
adjusted, but not in full, for the reason these
include the amounts payable during the
contract stipulated period.
22. The total of the three sums comes to Rs.
2,21,493/-. We have another problem. Neither
counsel could help us identify the components
thereof i.e. the component relatable to the 9
months during which the work had to be
completed and the 25 months during which
the contract got prolonged. Thus, we apply the
Rule of 'Rough and Ready Justice'. We divide
the sum by 34 to work out the proportionate
increase per month. Rs. 2,21,493/- divided by
34 = Rs. 6,514.50 and multiplying the same
by 25, the figure comes to Rs. 1,62,862.50.
23. Adopting, for the reasons given by the
Arbitrator, that 20% hike in the balance work
done after the contract stipulated period i.e.
benefit to be granted under this head for work
done in sum of Rs. 37,02,066/- and accepting
the sum of Rs. 7,20,000/- being the resultant
figure, subtracting Rs. 1,62,862.50, the figure
arrived at is Rs. 5,57,137.50.
22. Here again, the Division Bench has interfered
wrongly with the arbitral award on several counts. It
had no business to enter into a pure question of fact
to set aside the Arbitrator for having applied a
formula of 20 months instead of 25 months. Though
this would inure in favour of the Appellant, it is clear
that the Appellant did not file any cross objection on
this score. Also, it is extremely curious that the
Division Bench found that an adjustment would have
to be made with claims awarded under claims 2, 3
and 4 which are entirely separate and independent
claims and have nothing to do with claims 12 and 13.
The formula then applied by the Division Bench was
that it would itself do "rough and ready justice". We
are at a complete loss to understand how this can be
done by any court under the jurisdiction exercised
Under Section 34 of the Arbitration Act. As has been
held above, the expression "justice" when it comes to
setting aside an award under the public policy ground
can only mean that an award shocks the conscience
of the court. It cannot possibly include what the court
thinks is unjust on the facts of a case for which it then
seeks to substitute its view for the Arbitrator's view
and does what it considers to be "justice". With great
respect to the Division Bench, the whole approach to
setting aside arbitral awards is incorrect. The Division
Bench has lost sight of the fact that it is not a first
appellate court and cannot interfere with errors of
fact.”
60. On perusal of the judgment relied upon by the learned
counsel for the respondents in Associate Builders vs. Delhi
Development Authority (supra), it is clear that the Court can set-aside
the award if the award is against justice or morality, discloses patent
illegality, contrary to the terms of the contract and not in accordance
with the substantive law of India. In my view, the petitioners have
made out a case that the award is patently illegal on the face of
record and the learned arbitrator has decided contrary to the terms of
the tender documents and has also decided contrary to the law laid
down by the Supreme Court and this Court and thus this Court has
ample power to set-aside such award under section 34 of the said
Act.
61. I therefore, pass the following order :-
i). The arbitration petition is made absolute in terms of prayer
clause (a). The impugned award dated 26th October, 2012 is
set-aside.
ii). There shall be no order as to costs.
(R.D. DHANUKA, J.)
Print Page
counsel for the respondents in Associate Builders vs. Delhi
Development Authority (supra), it is clear that the Court can set-aside
the award if the award is against justice or morality, discloses patent
illegality, contrary to the terms of the contract and not in accordance
with the substantive law of India. In my view, the petitioners have
made out a case that the award is patently illegal on the face of
record and the learned arbitrator has decided contrary to the terms of
the tender documents and has also decided contrary to the law laid
down by the Supreme Court and this Court and thus this Court has
ample power to set-aside such award under section 34 of the said
Act.
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
ARBITRATION PETITION NO.240 OF 2013
Maharashtra State Electricity
Distribution Company Limited,
V
Vijai Electricals Limited
CORAM : R.D. DHANUKA, J.
PRONOUNCED ON : 4TH FEBRUARY, 2015
Citation:2016 (5) ALLMR74
1. By this petition filed under section 34 of the Arbitration &
Conciliation Act, 1996 (for short the said Act), the petitioners seek to
impugn the arbitral award dated 26th October, 2012 made by the
learned arbitrator allowing the claims made by the respondents.
Some of the relevant facts for the purpose of deciding this petition are
as under :
2. The petitioners were the original respondents before the
learned arbitrator. The respondents herein were the original claimants
before the learned arbitrator.
3. Some time in the year 2011, the petitioners floated 16
tenders for the supply, construction and commissioning of the subtransmission
lines, power transformers etc. for different parts of
Maharashtra. The last date for submission of e-bids was 21st
September, 2011. The respondents submitted the e-bids in respect of
the 3 tenders which were in respect of Amravati Zone, Aurangabad –
Nanded Zone and Baramati Zone on 21st September, 2011 i.e. within
time stipulated for submission of the e-bids. The bids were required to
be submitted in two parts : (a) technical bid and (b) price bid.
4. Under clause 19.1 of the bid conditions, a bidder was
required to furnish as part of its technical proposal, bids securities for
the amount designated in the bid data in each tender. The bid
security could be furnished at the option of the bidder either in the
form of demand draft or an unconditional bank guarantee. The
respondents furnished three bank guarantees of Axis Bank Limited,
Secunderabad (A.B.) for a total sum of Rs.4,48,42,000/-. The said
three bank guarantees were valid upto 31st January, 2012. Clauses
19.4, 19.5 and 19.6 of the bid conditions with reference to the bank
guarantee are extracted as under :-
“19.4 : The bid security of the unsuccessful bidders
will be returned as promptly as possible, after award
and signing of the contract agreement or expiration of
the period of bid validity, whichever is earlier ;
19.5 : The bid security of the successful bidder will
be returned when the bider has signed the contract
agreement and furnished the required security deposit.
19.6 : The bid security may be forfeited ;
c) If the bidder withdraws its bid, except that
written notice of the withdrawal of bid is received by
the employer prior to the deadline for submission of
bids;”
5. A relevant part of one of such bank guarantee is extracted
as under :-
“The Bank binds himself, its successors and assigns
by these presents. This guarantee will be payable at
our branch office at Axis Bank Limited, Credit
Management Centre (CBO), Ground Floor, Bombay
Dyeing Mills Compound, Pandurang Budhkar Marg,
Worli, Mumbai – 400025, SEALED with the Common
Seal of the said Bank this 20th day of September,
2011.
THE CONDITIONS of this obligation are :
(1) if the Bidder withdraws his Bid during the
period of Bid validity specified in the Form of Bid; or
(2) if the Bidder refuses to accept the
correction of errors in his Bid; or
(3) if the Bidder is determined at any time prior
to award of contract to have engaged in corrupt or
fraudulent practices in competing for the contract; or
(4) if the Bidder, having been notified of the
acceptance of his Bid by the Employer during the
period of Bid validity:
(a) fails or refuses to execute the Form of
Contract Agreement in accordance with the
Instructions to Bidders; if required; or
(b) fails or refuses to furnish the Security
deposit, in accordance with the Instructions to
Bidders;
We undertake to pay to the Employer up to the above
amount upon receipt of its first written demand,
without the Employer having to substantiate his
demand, provided that in its demand the Employer will
note that the amount claimed by him is due to him
owing to occurrence of one or all of the above
conditions, specifying the occurred condition or
conditions. This Guarantee will remain in force up to
and including the date 118 days after the deadline for
submission of bids as such deadline is stated in the
Instructions to Bidders or as it may be extended by
the Employer, notice of which extension(s) to the
Bank is hereby waived. Any demand in respect of this
Guarantee should reach the Bank not later than the
above date i.e. upto 31.01.2012.
Notwithstanding anything contained herein above, our
liability is restricted to Rs.1,23,00,000/- (Rupees One
Crore Twenty Three Lakhs Only) in the aggregate.
This Bank Guarantee will remain in force up to
31.01.2012 unless a claim or a demand in writing is
made against the bank in terms of this guarantee on
or before the expiry of 31.01.2012 and all your rights
in the said guarantee shall be forfeited and we shall
be relieved and discharged from all the liability there
under irrespective of whether the original guarantee is
received by us or not.”
6. On 21st September,2011, the technical bids were opened
by the petitioners. Thereafter the evaluation of the technical bids were
done by the concerned department of the petitioners.
7. On 15th October, 2011, the respondents addressed a letter
to the then Engineer of the petitioners informing that the respondents
would like to withdraw from the 3 tenders submitted by it on 21st
September, 2011. The respondents requested the petitioners to
accept the said request and to allow them to withdraw from the
participation in the said 3 tenders. The respondents also mentioned
about their appreciation supported by the petitioners in not taking
steps and encashing the relevant bank guarantees. In the said letter
the respondents requested the petitioners to consider their request
and to return the bank guarantees as early as possible.
8. It is the case of the petitioners that when the technical bids
were opened by the petitioners on 21st September, 2011, the
petitioners asked the concerned evaluation department to submit a
report on 14th October, 2011. On 18th October, 2011, a preliminary
technical evaluation report of 11 bidders was submitted by the
concerned department to the petitioners. It is the case of the
petitioners that in the meantime on 15th October, 2011, the
respondents withdrew their bids and the withdrawal of the bids by the
respondents was in violation of clause 19.6 of the bid conditions.
9. It is the case of the petitioners that on 20th October, 2011,
technical qualified bidders' names were published by the petitioners
on the inter-net. On 24th October, 2011, the price bids of the technical
bids were opened by the petitioners. In the meantime the bank
guarantees furnished by the respondents were extended by the
respondents from time to time at the request of the petitioners and
was extended till 31st March, 2012.
10. It is the case of the petitioners that in the meeting held on
7
th December, 2011, the board of directors of the petitioners decided
that the contents of the letter written by the respondents vide letter
dated 15th October, 2011 amounted to withdrawal of the bids in
violation of clause 19.6(c) and therefore, the board of directors of the
petitioners resolved as per clause 19.6(c) of the tender document,
that the bid securities submitted by the respondents were liable to be
forfeited.
11. On 21st March, 2012, the petitioners invoked the said three
bank guarantees by addressing a letter to the Manager, Axis Bank
Limited. By the said letter, the petitioners called upon the bank to pay
a sum of Rs.4,48,42,000/- in terms of the bank guarantees submitted
by the respondents. The extract of the said letter, which is relevant for
the purpose of deciding this petition is as under :-
“Sir
You are called upon to pay Rs.4,48,42,000/- (in
Rs.Four crores forty eight lakhs forty two thousand
only) in terms of the Bank Guarantee as per below
submitted by M/s.Vijal Electricals Ltd. However,
M/s.Vijal Electricals Ltd. has failed, as per the terms &
conditions of Tender as per Agency has withdrawn the
Bids after the deadline of submission date.
Sr.
No.
Tender
No.
Name of Bank Amount of
Bank
Guarantee
Submitted
by Bidder
Bank
Guarant
ee Date
Bank
Guarant
ee No.
Extende
d last
date of
its
validity
1 R-APDRP
Part
B/T01
Axis Bank Ltd.
Secunderabad
(A.P.) payable at
Mumbai
Rs.191020
00/-
20.09.20
11
0068010
0000182
31.03.20
12
2 R-APDRP
Part
B/T02
“do”
Rs.134400
00/-
“do” 0068010
0000483
“do”
3 R-APDRP
Part
B/T03
“do” Rs.123000
00/-
“do” 0068010
0000484
“do”
The amount has to be transferred within 48 hours on
the A/C as below :
> Account Name – Maharashtra State
Electricity Distribution Co. Ltd.
> Account Number – MSEDCL A/C “A”
No.2004530376 4
> Bank – Bank of Maharashtra, Branch –
Bandra (E), Mumbai -51
> IFSC Code – MAHBOOOO164 & MICR –
400014043
You have agreed unequivocally and unconditionally to
pay the amount at Mumbai as per guarantee clause
failing which it may please be noted that the Bank
Guarantee furnished by your various banks will never
be accepted in future and there shall be no alternative
but to file suit against your Bank and to report the
matter to RBI/Banking Ombudsman.
We hope that you will not allow to take such an
unpleasant action. The original Bank Guarantee will
be handed over after transfer of the above amount on
Maharashtra State Electricity Distribution Co. Ltd.
Account.”
12. On 22nd March, 2012, the respondents filed a Writ Petition
(No.831 of 2012) in this court against the petitioners and obtained an
ad-interim injunction against the petitioners from invoking the bank
guarantees. By an order dated 12th June, 2012, a Division Bench of
this court was pleased to refer the said dispute for invocation of the
bank guarantees to the sole arbitrator, a former Judge of the
Supreme Court of India for adjudication.
13. Pursuant to the directions given by the learned arbitrator,
the respondents filed statement of claim before the learned arbitrator
inter-alia praying for a declaration that the petitioners herein were not
entitled to encash / invoke the bank guarantees and for an order and
direction against the petitioners to forthwith hand over to the
respondents the original three bank guarantees dated 20th
September, 2011 and prayed that the letter of invocation dated 21st
March, 2012 be quashed and set-aside. The respondents also prayed
for an order and direction against the petitioners to pay the entire
amount of commission and other costs, charges and expenses
alleged to have been incurred by the respondents in renewal of the
bank guarantees. The said claims made by the respondents were
resisted by the petitioners by filing the written statement.
14. The learned arbitrator framed 3 points for determination.
By an award dated 26th October, 2012, the learned arbitrator
rendered a finding that the respondents herein were entitled to return
all 3 bank guarantees and held that the petitioners were not entitled
to forfeit the said bank guarantees as extended. The learned
arbitrator accordingly declared that the petitioners were not entitled to
invoke the bank guarantees and directed the petitioners to forthwith
hand over to the respondents the said three original bank guarantees
and all extensions / renewal duly discharged and/or cancelled. The
learned arbitrator declared that Axis Bank Limited was not liable to
make any payments under the said bank guarantees to the
petitioners. The learned arbitrator in the said award, has set-aside the
letter of invocation of the bank guarantees dated 21st March, 2012
and cancelled all three bank guarantees and all extensions thereof.
The learned arbitrator directed the petitioners to pay costs of
Rs,2,50,000/- to the respondents. This award has been impugned by
the petitioners in this petition under section 34 of the said Act.
15. Mr.Setalvad, the learned senior counsel for the petitioners
submits that under clause 19.6 of the instructions to bidders, the bid
securities submitted by the respondents were liable to be forfeited
since the respondents had withdrawn its bid after the deadline for
submission of the bids which was 21st September, 2011. The
respondents had withdrawn its bid on 15th October, 2011.
16. It is submitted that in their letter dated 15th October, 2011,
which was admittedly after expiry of the last date of submission of the
bid i.e. 21st September, 2011, the respondents had requested the
petitioners to return their bank guarantees as early as possible. It is
submitted that though in the said letter the respondents had made a
request to the petitioners to allow it to withdraw from the participation
in the said three tenders, the respondents had appreciated the
support of the petitioners in not taking steps for encashing the three
bank guarantees and had requested to return the said three bank
guarantees as early as possible. The learned senior counsel
submits that before receiving the said letter dated 15th October, 2011,
the technical bids of all the bidders, including the respondents were
opened on 21st Separately, 2011. A preliminary technical evaluation
report of 11 bidders were submitted by the concerned department of
the petitioners to the petitioners on 18th October, 2011. Names of
technically qualified bidders' were published on the inter-net on 20th
October, 2011 and thereafter on 24th October, 2011 the price bids of
technically qualified bidders were opened. The learned senior
counsel submits that since the respondents had withdrawn their bids,
the price bids of the respondents were not opened on 24th October,
2011. It is submitted that even if the respondents would not have
addressed any such letter on 15th October, 2011, the fact remains
that after 21st September, 2011, no bidders could have withdrawn
their bid, which was the last date of submission of the bids and thus
its security bids were liable to be forfeited in terms of clause 19.6(a)
of the instructions to bidders.
17. It is submitted by the learned senior counsel that the
finding of the learned arbitrator that in view of the language of the
letter dated 15th October, 2011, it was indicative of the request made
by the respondents to the petitioners, there was no immediate
withdrawal of the bids is concerned, the said finding of the learned
arbitrator is contrary to the terms of the contract. It is submitted that
the respondents itself had applied for return of the bank guarantees.
No such letter for seeking any permission after the last date of
submission of the bid could have even been addressed by any of the
bidders. The consequences provided under clause 19.6 thus would
automatically follow and the bid securities were liable to be forfeited.
The learned senior counsel submits that if by the said letter dated 15th
October, 2011 the respondents had not applied for permission to
withdraw the bids, the respondents were not required to make any
request to return the bank guarantees.
18. It is submitted by the learned senior counsel hat the
petitioners also acted upon the letter of the respondents of 15th
October, 2011 and accordingly did not open the price bids of the
respondents which were admittedly opened after 15th October, 2011.
The respondents did not dispute these facts. It is submitted by the
learned senior counsel that invocation of the bank guarantees by the
petitioners was absolutely in accordance with the terms and
conditions of the bank guarantees. Once the petitioners had invoked
such bank guarantees in accordance with the terms of the bank
guarantees, the bank was liable to make payment under the said
three bank guarantees to the petitioner unconditionally. It is submitted
that all three bank guarantees were thus unconditional bank
guarantees and the petitioners were entitled to forfeit all three bank
guarantees and to recover the amounts under those three bank
guarantees. The learned senior counsel invited my attention to the
terms of the bank guarantees and also letter of invocation and would
submit that in the letter of invocation the petitioners had notified
categorically that the respondents had withdrawn the bids after expiry
of the deadline of the bid submission date, the invocation of the bank
guarantees thus was in terms of the bank guarantees furnished by
the respondents through Axis Bank Limited.
19. In support of the submissions that the bank guarantees
submitted by the respondents were unconditional bank guarantees
and thus once the bank guarantees were invoked before expiry of
the period of such bank guarantees, neither the bank nor the
respondents could oppose such invocation on any ground
whatsoever, the learned senior counsel placed reliance on the
following judgments :-
1) The judgment of this Court in the case of Karam Chand
Thapar & Bros vs. Hindustan Construction Co. Ltd. in Arbitration
Petition (Lodging) No.606 of 2012 delivered on 4th May, 2012 : (paras
4 and 6) ;
2) The judgment of this Court in the case of Housing
Development & Infrastructure Limited vs. Mumbai International
Airport Pvt. Ltd. & Ors., in Arbitration Petition (Lodging) No.1538 of
2012, delivered on 29th November, 2012 (para 21) ;
3) The judgment of the Supreme Court in the case of
Mahatma Gandhi Sahakra Sakkare Karkhane vs. National Heavy
Engg. Co-op. Ltd. & Anr., (2007) 6 SCC 470. (para 22).
20. It is submitted by the learned senior counsel that on one
hand the learned arbitrator has held that the petitioners had called
upon the bank to pay in terms of the bank guarantees by a letter
dated 21st March, 2012 stating that “ as the agency has withdrawn the
bids after the deadline of bid submission date” and on the other
hand, has held that the condition for releasing the bank guarantee,
which was stated in the letter of the respondents was in fact not
fulfilled. The learned senior counsel submits that there is thus exfacie
inconsistency and contradictions in paragraph 22 of the
impugned award. The learned senior counsel submits that even if it is
held that the bank guarantees could be invoked only on the
conditions mentioned in the bank guarantees, the fact remains that
the petitioners had invoked such bank guarantees in terms of the
bank guarantees by clearly mentioning that “as the agency has
withdrawn the bids after deadline of the bid submission date” the
terms and conditions of the bank guarantees were complied with by
the petitioners. Once the reason for invocation of the bank
guarantees was mentioned in the letter of invocation, which was in
accordance with the terms of the bank guarantees, the conditions of
the bank guarantees were complied with. The respondents as well as
the bank thus could not have opposed the invocation of such bank
guarantees on the ground that the condition for releasing the bank
guarantees was in fact not fulfilled. The learned senior counsel
submits that the finding of the learned arbitrator is thus ex-facie
erroneous and contrary to the provisions of the contract, including the
terms of the bank guarantees.
21. It is submitted by the learned senior counsel that the
finding of the learned arbitrator that since the petitioners had not
suffered any loss by reason of the letter dated 15th October, 2011,
addressed by the respondents in view of the fact that the petitioners
already having awarded the contract to the third parties, who had
presumably furnished the securities to the petitioners and their price
bid was lower than the price bid of the respondents is concerned, it is
submitted that as the bank guarantees furnished by the respondents
were in lieu of earnest money deposit and were furnished for the
purpose of fulfilling their part of the obligation by not withdrawing the
bid after expiry of the validity period, there was no question of proving
any loss / damage for the purpose of invocation of such bank
guarantees. In support of these submissions, the learned senior
counsel placed reliance on the following judgments :-
1) In the case of National Highways Authority of India vs.
Ganga Enterprises & Anr. (2003) 7 SCC 410 (paras 2, 3, 7, 9 and
10)
2) In the case of State of Haryana & Ors. vs. Malik Traders,
(2011) 13 SCC 200 (paras 10 to 12)
3) In the case of Pesticides India vs. State Chemicals &
Pharmaceuticals Corporation of India & Ors., 53(1994) DLT 42
(paras 7 to 9)
4) In the case of R.K. Construction Co. vs. State of Gujarat &
Anr. 111(2013) BC 658 (paras 8 to 10)
5) The judgment of this Court in the case of M/s.ABG Kandla
Container Terminal Ltd. vs. Axis Bank Ltd. & Anr. in Notice of Motion
No.2 of 2013 in Suit No.1 of 2013, dated 12th April, 2013 (paras 20
and 22)
6) The judgment of the Supreme Court in the case of
Hindustan Construction Co. Ltd. vs. State of Bihar & Ors. (1999) 8
SCC 436 (paras 12, 13 and 14).
7) The judgment of the Supreme Court in the case of State of
Maharashtra & Ors. vs. A.P. Paper Mills Ltd. (2006) 4 SCC 209 (para
13).
22. It is submitted by the learned senior counsel that the
finding of the learned arbitrator that since the petitioners had
requested the respondents to extend the bank guarantees beyond
31st January, 2012, there was no reason as to why the petitioners
did not encach the bank guarantees after 7th December, 2011 and
upto 23rd January, 2012 is concerned, it is submitted that merely
because the petitioners asked the respondents to extend the bank
guarantees till 21st March, 2012 that would not preclude the
petitioners from encashing the bank guarantees and to forfeit the bid
securities. It is submitted that the respondents were fully aware about
the decision of the board of directors of the petitioners about the
forfeiture of the security deposit and also of tender conditions. The
respondents had challenged the action on the part of the petitioners
by filing a writ petition in this Court. It is submitted that in view of the
fact that the letter of request by the respondents for permission to
withdraw the bids was admittedly after expiry of the last date of
submission of the bid, whether the decision of the board of directors
to forfeit the security deposit or not was conveyed to the respondents
or not was of no significance.
23. Mr.Andhyarujina, the learned counsel for the respondents
on the other hand submits that the learned arbitrator has rightly
rendered a finding of fact that the letter dated 15th October, 2011 was
only a request for permission to withdraw the bids without bids
security after forfeiture and was not actual withdrawal of the bids. The
learned arbitrator has rightly held that there was no immediate
withdrawal of the bids. This court cannot interfere with such finding of
fact rendered by the learned arbitrator.
24. It is submitted by the learned counsel that the learned
arbitrator has rightly held that the conditions of the bank guarantees
were not fulfilled by the petitioners while invoking the bank
guarantees. It is submitted that the bids of the respondents were
considered by the petitioners even after the alleged withdrawal of the
bids by the respondents. It is submitted by the learned counsel that
in any event since no loss was caused to the petitioners by the
respondents withdrawing the bids, the learned arbitrator has rightly
rendered a finding that unless the loss was suffered by the
petitioners, the bank guarantees could not have been invoked and
forfeited by the petitioners. It is submitted that it was not in dispute
that the petitioners had ultimately awarded the contract to a bidder
whose bid amount was less than the bids amount submitted by the
respondents and thus there was no loss of any nature whatsoever
suffered by the petitioners which could be recovered by the
petitioners by forfeiting the security deposit furnished by the
respondents.
25. It is submitted by the learned counsel that the learned
arbitrator has interpreted the letter dated 15th October, 2011 and has
rightly rendered a finding that the said letter was not a letter
withdrawing the bids and such interpretation is possible and
reasonable interpretation, this court cannot substitute such
interpretation by another interpretation.
26. It is submitted by the learned counsel that the petitioners
themselves have considered the bids of the respondents after
evaluating such bids and had found the respondents technical
qualified and thus could not have forfeited the security deposit. The
petitioners did not convey the decision dated 7th December, 2011 as
to why the name of the respondents was not included in the list of 20th
October, 2011. The petitioners never conveyed the decision of the
petitioners' board of directors and had accepted the request of the
respondents for withdrawal of their bids and that itself would indicate
that the petitioners never considered the letter of 15th October, 2011
of the respondents as letter of withdrawal. In none of the reports, the
petitioners had indicated that the request of the respondents for
withdrawal of the bids was accepted by the petitioners.
27. Mr.Andhyarujina placed reliance on the judgment of the
Supreme Court in the case of State of Rajasthan vs. Botamal
Sachdeva, (1989) 4 SCC 35 and more particularly paragraph 2
thereof.
28. Reliance is also placed on the judgment of the Delhi High
Court in the case of Jainsons Clothing Corporation vs. The State
Trading Corporation of India Ltd. & Anr. (1990) 68 Company Cases
526 and in particular paragraphs 6, 10, 12 and 13, and 18.
29. The learned counsel placed reliance on the judgment of
the Supreme Court in the case of Associate Builders vs. Delhi
Development Authority, 2014 SCC OnLine SC 937 and more
particular in paragraphs 9, 10, 12 to 15, 17 to 22.
30. The learned counsel submits that the judgments relied
upon by the petitioners are clearly distinguishable in the facts of this
case. It is submitted that the bank guarantees furnished by the
respondents were not akin to the earnest money deposit. There was
no guarantee that the contract would be awarded to the respondents.
The amount was only to ensure that the respondents would not
interfere with the bid process. For the purpose of forfeiting the
security deposit, there has to be a breach of contract.
31. It is submitted that even under clause 19(6) of the
instructions to bidders, the right of forfeiture was discretionary. The
petitioners thus having decided not to forfeit security deposit did not
convey its decision to forfeit the security deposit to the respondents.
32. Mr.Setalvad in re-joinder submits that the price bid of the
respondents was never opened and thus the question of
determination of a loss to the petitioners did not arise. The
respondents never produced any material on record or to indicate
that the bids ultimately accepted by the petitioners was lower in
comparison to the bids submitted by the respondents. It is submitted
that insofar as the security bids submitted by the respondents is
concerned, the same was in the nature of earnest money deposit and
was anterior to the award of contract. It is submitted that the
submission of the bank guarantees under the contract was for
sustaining the bid and without furnishing the bank guarantees by the
respondents, the bid could not be demonstrated and/or dealt with by
the petitioners. The respondents themselves did not want to pursue
their bids and had accordingly withdrawn the bids and had requested
the petitioners to return of the bank guarantees.
33. On 24th October, 2011, when the price bids of the
respondents were not opened, the respondents did not bother to
make any enquiry or make any protest against the petitioners for not
opening the price bids of the respondents. The withdrawal of the bids
by the respondents was prior to the date of opening of the price bids
by the petitioners. On 7th December, 2011, the petitioners had taken a
decision to forfeit the security bids. The petitioners had relied upon
the said resolution before the learned arbitrator. It is submitted that if
the bid of the respondents would have been accepted, the
respondents were liable to furnish the security deposit in terms of
clause 41.1 of the contract for the purpose of securing the
performance of the contract. It is submitted that the security bid which
was in the nature of the earnest money deposit was not for the
purpose of securing the performance of the contract and thus the
petitioners were not required to prove any loss suffered, if any, in
view of the respondents withdrawing the bid after expiry period. The
learned senior counsel distinguished the judgments relied upon by
Mr.Andhyarujina, the learned counsel for the respondents.
REASONS AND CONCLUSION :
34. A perusal of the instructions to bidders and in particular
clauses 19.1 to 19.6 clearly indicates that the bidder was required to
furnish the bids security in the form of demand draft or unconditional
bank guarantee from a nationalized bank in favour of the petitioners
in accordance with the sample form of bid security included in section
3 of the said instructions to bidders. Clause 19.4 provides that the bid
security of the unsuccessful bidders would be returned as promptly
as possible, after award and signing of the contract agreement or
expiration of the period of bid validity, whichever is earlier. Clause
19.5 provides that the bid security of the successful bidder will be
returned when the bidder had signed the contract agreement and
furnishes the required security deposit. Clause 19.6 provides that the
bid security may be forfeited on occurrence of any of the
eventualities provided in the said clause including when the bidder
withdraws its bid, except when written notice of the withdrawal of bid
is received by the employer prior to the deadline for submission of
bids.
35. A perusal of the said provision makes it clear that the
submission of the bid security along with the bid by the bidder was
mandatory. It also indicates that when the bidder applies for
withdrawal of the bid prior to the deadline of the submissions of bid,
the employer shall not be entitled to forfeit the security bid but if on
the other hand the bidder would have applied for withdrawal of the bid
after deadline for submissions of the bid, the said bid security was
liable to be forfeited.
36. The question that arose for consideration of the learned
arbitrator was whether the respondents had applied for withdrawal of
their bid and if so what was the consequence thereof. It is not in
dispute that the last date for submission of the bid was 21st
September, 2011. The respondents had submitted their bid along
with the bid security on 21st September, 2011 itself. The technical
bids were opened on 21st September, 2011. On 18th September, a
preliminary technical evaluation report of the 11 bidders was
submitted to the petitioners. It is not in dispute that on 15th October,
2011 the respondents had addressed a letter to the petitioners. A
perusal of the said letter clearly indicates that the respondents had
indicated to withdraw the three bids submitted by them on 21st
September, 2011 and requested to return the bank guarantees as
early as possible. The respondents also appreciated the support of
the petitioners in not taking steps on encashing their bank
guarantees.
37. A perusal of the record indicates that in view of the receipt
of the letter dated 15th October, 2011, the price bids of the
respondents was not opened by the petitioners on 24th October, 2011.
The respondents did not bother to make any enquiry as to why their
price bid was not opened by the petitioners. The board of directors of
the petitioners thereafter in the meeting held on 7th December, 2011
decided that the letter dated 15th October, 2011 of the respondents
would amount to withdrawal of the bids and thus the bids security of
the respondents in terms of clause 19.6(c) of the tender document
was liable to be forfeited. The petitioners thereafter addressed a
letter of invocation of the bank guarantees to the bank.
38. A perusal of the award indicates that the learned arbitrator
has in paragraph 14 of the impugned award held that the letter
dated 15th October, 2011 of the respondents was indicative of a
request made by the respondents in the petition and there was no
immediate withdrawal of the bids. By the said letter the respondents
had sought permission to withdraw from participation in the tenders
without the bank guarantees being invoked by the respondents. The
learned arbitrator also held that if there was a withdrawal of the bids,
the petitioners herein should have forfeited the bank guarantees
straightway. The said bank guarantees were valid till 31st
January,2012 but the petitioners did not encash the said three bank
guarantees. It is held by the learned arbitrator that the petitioners
thereafter considered the bids of the respondents and found that the
respondents are technically qualified. In the list of the technically
qualified bidders released on 20th October, 2011, the name of the
respondents was not listed. The learned arbitrator also held that if the
petitioners had not listed the name of the respondents because the
respondents had withdrawn the bids, it ought to have informed the
respondents accordingly and should have invoked the bank
guarantees. The petitioners however, did not send any
communication to the respondents and therefore, the respondents
legitimately believed that its technical bids were considered by the
petitioners, as technically unqualified bidder.
39. A perusal of the record indicates that the preliminary
technical evaluation report of the 11 bidders were submitted by the
concerned department to the petitioners on 18th October, 2011. In the
meantime, the respondents addressed the said letter dated 15th
October, 2011. It is thus clear that in view of such letter addressed by
the respondents to the petitioners, seeking permission to withdraw
the bids after expiry of validity period, the name of the respondents
was not placed in the list of technically qualified bidders. The
respondents however, did not take any objection. The respondents
also did not bother to make any enquiry. Even when the price bid of
the respondents was not opened subsequently, the respondents did
not lodge any protest or did not make any enquiry.
40. It is thus clear that even the respondents proceeded on the
premise that its request for withdrawal of the bid beyond the deadline
was accepted by the petitioners subject to tender conditions. In my
view, the finding of the learned arbitrator that the letter dated 15th
October, 2011 was merely a letter indicative of a request and there
was no immediate withdrawal of the bids is totally contrary to the
plain reading of the said letter of 15th October, 2011. By the said
letter, the respondents had not only requested the petitioners to
permit the respondents to withdraw it from participation from the
tender but had categorically applied for return of the bank
guarantees. The learned arbitrator, in my view, has totally overlooked
this aspect in the matter and has rendered erroneous finding that
there was no immediate withdrawal of the bids. The learned
arbitrator also overlooked the subsequent events i.e. declaration of
the list of technical qualified bidders and not opening the price bids of
the respondents by the petitioners. The learned arbitrator also did not
consider the effect of the resolution passed by the petitioners on 7th
October, 2011 resolving to forfeit the security deposit of the
respondents in view of the letter dated 15th October, 2011 addressed
by the respondents to the petitioners.
41. A perusal of the award indicates that the learned arbitrator
has rendered a finding in favour of the respondents merely on the
ground that the petitioners had not communicated its decision to
forfeit the security deposit or that the petitioners had accepted the
request of the respondents to permit the respondents from
withdrawing from participation of the bids. The learned arbitrator was
also impressed with the submission of the respondents that since the
petitioners had not encashed the bank guarantees immediately upon
the receipt of the letter dated 15th October, 2011, it would clearly
indicate that the petitioners had rejected the request of the
respondents and there was no withdrawal of the respondents from
the bids.
42. In my view if according to the respondents, their requests
for withdrawal from participation from the bid which was not accepted
by the petitioners definitely the respondents ought to have taken
action against the petitioners for not displaying the name of the
respondents in the list of the technically qualified bidders and
thereafter for not opening the price bid of the respondents. The
respondents however, did not take any such action in the matter.
Merely because the petitioners did not forfeit the security deposit
immediately upon receipt of the letter dated 15th October, 2011 would
not debar the petitioners from encashing such bank guarantees at the
later date i.e. after opening of the tender of the technically qualified
bidders and after awarding the contract to the successful bidder.
There was no provision in the contract prohibiting the petitioners from
encashing the bank guarantees and/or forfeiting the security deposit
beyond a particular period. The finding of the leaned arbitrator in my
view is thus patently illegal.
43. A perusal of paragraph 22 of the impugned award
indicates that on one hand the learned arbitrator has rendered a
finding that the bank guarantees required the petitioners herein to
state the reason why the bank guarantees were being invoked and
though had described such reason in the letter dated 21st March,
2012 of the petitioners to the bank calling upon the bank to pay in
terms of the bank guarantees i.e. “ as the agency has withdrawn the
bids after the deadline of bid submission date”, on the other hand the
learned arbitrator has held that the condition for invoking the bank
guarantees as set out in the bank guarantee document was in fact
not fulfilled. A perusal of the bank guarantee would indicate that the
bank had agreed and undertaken to pay to the petitioners under the
said three bank guarantees upon receipt of its first written demand
without the petitioners having to substantiate its demand provided
that in its demand the petitioners would note that the amount claimed
by it was due to it owing to occurrence of one or all of the conditions,
specifying the occurred condition or conditions. One of the condition
in the bank guarantee admittedly was “if the bidder withdraws his bid
during the period of bid validity specified in the form of bid”.
44. Though the learned arbitrator has rightly referred to the
said condition in the letter of invocation of the bank guarantees by the
petitioners has erroneously rendered a finding that the terms and
conditions of the bank guarantees were not not fulfilled. The finding of
the learned arbitrator in my view is patently illegal and erroneous
apparent on the face of the award. The petitioners had on the face of
it specified one of the condition which had occurred in its invocation
letter. Once the said condition was specified, which was in
accordance with the terms and conditions of the bank guarantees, the
bank was liable to pay the amount under the said bank guarantees to
the petitioners. Neither the bank nor the respondents could challenge
the letter of invocation dated 21st March, 2012 on the ground that the
conditions for releasing the bank guarantees were not fulfilled. The
bank had categorically undertaken to pay to the petitioners upon
receipt of its first written demand and without substantiating its
demand. The only condition imposed in the said bank guarantees
was that the employer had to note that the amount claimed was due
to the employer owing to occurrence of one or other conditions set
out therein. A perusal of the said letter dated 21st March, 2012 and
summarized by the learned arbitrator in paragraph 22 of the
impugned award clearly indicates that the condition set out in clause
1 of the bank guarantee had been specified by the petitioners as
occurred and once that was notified, the bank was liable to pay to the
employer without asking the employer to substantiate its demand.
The award shows patent illegality on the face of the award.
45. Insofar as the finding of the learned arbitrator in paragraph
26 of the impugned award that since the petitioners had not suffered
any damage by reason of the letter dated 15th October, 2011 and the
petitioners having awarded the said contract to the third parties, who
had presumably furnished the security to the petitioners and their
price bid was lower than the price bid of the respondents is
concerned, in my view, the said finding of the learned arbitrator is
based on no evidence. Since the price bid of the respondents was not
even opened and even otherwise the respondents had not disclosed
the price quoted by the respondents, the question of the petitioners
coming to know whether the bid of the successful bidder was lower
than the bid of the respondents or not did not arise.
46. In my view the finding of the learned arbitrator that the
petitioners could forfeit the bank guarantees given by way of earnest
money deposit only if the petitioners would have suffered losses is
patently illegal. The said finding of the learned arbitrator is contrary to
the terms of clause 19.1 to 19.6 of the instructions to bidders. The
learned arbitrator failed to appreciate that the bank guarantees
furnished by the respondents under clause 19.2 were by way of
earnest money deposit (bid security) which could have been returned
to the respondents only if its bid was rejected by the petitioners as
non-responsive or was found unsuccessful. The petitioners were
required to return the bid security of the successful bidders when the
successful bidder had signed the contract agreement and had
furnished the required security deposit. Under clause 41.1 of the
instructions to bidders, the successful bidder was required to submit
a performance security deposit within 14 days from the date of receipt
of the Letter of Award. In my view, the learned arbitrator has mixed
up the bids security which was in the name of the earnest money
deposit with the security deposit which was required to be submitted
(performance security deposit) by the successful bidder after the
receipt of the Letter of Award. The petitioners were thus not liable to
prove any loss for the purpose of forfeiting such earnest money
deposit upon the respondents withdrawing its bid in breach of clause
19.6 of the instructions to bidders.
47. The Supreme Court in the case of State of Haryana &
Ors. vs. Malik Traders, (2011) 13 SCC 200, has held that since the
bidder who had agreed to keep the bid open for acceptance upto 90
days of the last date of receipt of the bid in terms of the tender and if
had withdrawn its bid before expiry of the period of 90 days, such
bidder was liable to suffer the consequences i.e. forfeiture of full
value of the bid security as agreed under the offer / bid. It is held by
the Supreme Court that right to withdraw an offer before its
acceptance cannot nullify agreement to tender conditions to suffer
any penalty for withdrawal of offer against the terms of the
agreement. Paragraphs 10 to 12 of the said judgment which are
relevant and applicable to the facts of this case read as under :-
“ 10. For allowing the writ petition, the only
reason stated by the High Court is that, since the writ
petitioner (the respondent herein) had withdrawn its
offer before it was accepted, there could be no
acceptance of the offer and there could not be any
consequence of the petitioner not honouring the
commitment. However, we cannot agree with the view
taken by the High Court. It is true that as per Section 5
of the Contract Act, 1872 (hereinafter referred to as
“the Act”), a proposal may be revoked at any time
before the communication of its acceptance is
complete as against the proposer. It is also true that
before receipt of the letter of acceptance dated
26-11-2008, the respondent had sent a letter dated
15-11-2008 withdrawing its offer. However, admittedly,
in Para 8 of the written offer/bid, the respondent had
agreed to keep the bid open for acceptance up to 90
days after the last date of receipt of bid. The
respondent had also agreed that it shall be bound by
the communication of acceptance of the bid
dispatched within the aforesaid period of 90 days.
Hence, the respondent could not have withdrawn the
bid before the expiry of the period of 90 days. It is not
disputed that the acceptance of the respondent’s bid
was communicated to the respondent within the said
period of 90 days. Therefore, the respondent was
bound by the said acceptance of the bid, despite its
withdrawal by the respondent in the meanwhile.
11. In Para 10 of the offer/bid, the respondent
had also agreed that the full value of the bid security
would be forfeited without prejudice to any other right
or remedy available to the Executive Engineer or his
successor in office or his representative, should the
respondent withdraw or modify its offer/bid during the
period of bid validity (90 days) or extended validity
period. Since the respondent withdrew its offer during
the period of bid validity in violation of the
abovementioned agreement in Para 8 of the offer/bid,
the full value of bid security was liable to be forfeited in
terms of the agreement contained in Para 10 of the
offer/bid. Thus, even though under Section 5 of the Act
a proposal may be revoked at any time before the
communication of its acceptance is complete as
against the proposer, the respondent was bound by
the agreement contained in its offer/bid to keep the bid
open for acceptance up to 90 days after the last date
of receipt of bid and if the respondent withdrew its bid
before the expiry of the said period of 90 days the
respondent was liable to suffer the consequence (i.e.
forfeiture of the full value of bid security) as agreed to
by the respondent in Para 10 of the offer/bid. Under
the cover of the provisions contained in Section 5 of
the Act, the respondent cannot escape from the
obligations and liabilities under the agreements
contained in its offer/bid.
12. The right to withdraw an offer before its
acceptance cannot nullify the agreement to suffer any
penalty for the withdrawal of the offer against the
terms of agreement. A person may have a right to
withdraw his offer, but if he has made his offer on a
condition that the bid security amount can be forfeited
in case he withdraws the offer during the period of bid
validity, he has no right to claim that the bid security
should not be forfeited and it should be returned to
him. Forfeiture of such bid security amount does not,
in any way, affect any statutory right under Section 5
of the Act. The bid security was given by the
respondent and taken by the appellants to ensure that
the offer is not withdrawn during the bid validity period
of 90 days and a contract comes into existence. Such
conditions are included to ensure that only genuine
parties make the bids. In the absence of such
conditions, persons who do not have the capacity or
have no intention of entering into the contract will
make bids. The very purpose of such a condition in the
offer/bid will be defeated, if forfeiture is not permitted
when the offer is withdrawn in violation of the
agreement.”
48. The Supreme Court in the case of State of Maharashtra &
Ors. vs. A.P. Paper Mills Ltd. (2006) 4 SCC 209, held in paragraph
13, which is extracted as under :-
“13. An offer under the tender was valid for a
period of 45 days from the date of tender of sale and
in the instant case from 15-7-1987. Stand of the
respondent that the sale results should have been
declared for getting approval of the competent
authority by 14-8-1987 is clearly wrong. If the highest
tender is not considered acceptable the final sale
result was required to be declared within 45 days i.e.
by 29-8-1987. The bid once made remains operative
for a period of 45 days. Therefore, the decision could
be taken on the bid on or before 29-8-1987. The
withdrawal was made before the expiry of the period
i.e. on 15-8-1987. Stand of the learned counsel for the
respondent that another request was made after the
expiry of the 45 days’ period does not change the
situation. Clause 5(v) clearly spells out that once a
tender is tendered the offer shall be considered valid
for a period of 45 days from the date of tender sale in
case of tenders which are under consideration. If this
clause is read with clause 5(iv) the position is clear
that once a tender is tendered no changes can be
made and no tender can be withdrawn. We are not
concerned with a case of consequences after
acceptance of the tender by the successful bidder. In
such a situation loss sustained in the resale and the
amount realised less, shall be recovered from the
bidder while adjusting the amount paid by him
towards earnest money deposit. In this case the
acceptance of the tender was after the validity (sic
expiry) of the period. Therefore, this is not a case
which could authorise the Government to recover the
loss from the respondent. But it is a case of
withdrawal of tender and the effect of it is to be
considered. Since the tender is valid for a period of 45
days and withdrawal is before expiry of the period the
earnest money is to be forfeited. The stand of the
respondent that because of delay in declaration of the
final sale results there was no bar on withdrawal of
the tender is clearly untenable. Once the tender is
withdrawn the result is that the tenderer who
withdraws the tender cannot take the stand that since
the final sale result has not been declared there is no
bar on the withdrawal.”
49. The Supreme Court in the case of National Highways
Authority of India vs. Ganga Enterprises & Anr. (2003) 7 SCC 410
has construed the similar provisions for forfeiture of the security
deposit and has held that the moment the bank guarantee was given
and accepted by the employer the first portion of the offer, regarding
bid security, stood accepted. That did not mean that a completed
contract in respect of the contract in existence has come into
existence. Paragraphs 2, 3, 7 to 10 of the said judgment, which are
relevant and extracted as under :-
“2. Briefly stated, the facts are as follows:
The appellant issued a tender notice calling for
tenders for collection of toll on a portion of the
highway running through Rajasthan. The last date of
submission of bid was 31-7-1997. It was also provided
that toll plazas would be got completed by the
authority and handed over to the selected enterprise.
There were two types of securities to be furnished,
one being a bid security in an amount of Rs 50 lakhs
(Rupees fifty lakhs only); the other was a performance
security by way of a bank guarantee of Rs 2 crores
(Rupees two crores only). Clauses 7.1 to 8 deal with
bid security. They read as under:
“7. Bid security
7.1. The bidder shall furnish, as a part of his bid, a bid
security in an amount of Rs 50 lakhs (Rupees fifty
lakhs only), or an equivalent amount in a freely
convertible currency. The bid security shall, at the
bidder’s option, be in the form of a bank draft, or
guarantee from a bank located in India. The bank
guarantee shall be in the form of bank guarantee for
bid security included herein, valid for 150 days after
the last date for submission of the bid.
7.2. A bid not accompanied by an acceptable bid
security shall be rejected by the National Highways
Authority of India as non-responsive.
7.3. The bid security of unsuccessful bidders will be
returned by the National Highways Authority of India
as promptly as possible but not later than 30 days
after the expiration of the period of bid validity.
7.4. The bid security of the successful bidders will be
returned by the National Highways Authority of India
soon after the bidder has furnished the required
performance security.
7.5. The bid security may be forfeited:
(a) if the bidder withdraws his bid during the period of
bid validity; or
(b) in case the successful bidder fails within the
specified period to
(i) furnish the required performance security; and
(ii) sign the agreement.
8. Bid validity
Bid shall remain valid for a period of 120 days after
the last date of bid submission.”
Thus, it is to be seen that the bid security of Rs 50
lakhs was not for performance of the contract. It was
in essence an earnest to be given to ensure that the
bidder did not withdraw his bid during the period of bid
validity and/or that after acceptance the performance
security is furnished and the agreement signed. The
other terms pertained to the anticipated contract for
collection of toll. It must be mentioned that the bid
validity period was 120 days.
3. In terms of this tender document the
respondent gave his bid or offer. The offer/bid was in
terms of the tender and thus it was also in two parts,
the first part being an offer that the bid would not be
withdrawn during the bid validity period and/or that on
acceptance the performance security would be
furnished and the agreement signed. The second part
of the offer dealt with the terms and conditions
pertaining to the performance of the contract of
collection of tolls, if the offer was accepted. As
earnest/security for performance (of the first part of
the offer), the respondent along with his bid furnished
a bank guarantee in a sum of Rs 50 lakhs as bid
security. The bank guarantee furnished was an “ondemand
guarantee” which specifically provided that
the bank guarantee could be enforced “on demand” if
the bidder withdraws his bid during the period of bid
validity or if the bidder, having been notified of the
acceptance of his bids, fails to furnish the
performance security or fails to sign the agreement.
The amount of the bank guarantee was to be paid by
the bank without demur on a written demand merely
stating that one of these conditions had been fulfilled.
The moment the bank guarantee was given and
accepted by the appellants the first portion of the offer,
regarding bid security, stood accepted. Of course, this
did not mean that a completed contract in respect of
the work of toll collection had come into existence.
7. By the impugned judgment the writ petition
has been allowed. The High Court holds that the offer
was withdrawn before it was accepted and thus no
completed contract had come into existence. The High
Court holds that in law it is always open to a party to
withdraw its offer before its acceptance. To this
proposition there can be no quarrel. We, therefore, did
not permit Mr Dave to cite authorities for the
proposition that an offer can be withdrawn before it is
accepted.
8. The High Court, however, then goes on to
hold as under:
“The statutory right having been so exercised, the
fetter imposed by the clause to the contrary in the
tender documents and the bank guarantee could not
override the provisions of the Indian Contract Act. Any
clause insofar as it is contrary or comes in conflict with
the provisions of the Indian Contract Act is inoperative
and void and cannot be enforced. To have an
enforceable contract there must be an offer and
unconditional acceptance. A person who makes an
offer has the right of withdrawing it before acceptance.
Until the offer is accepted unconditionally it creates no
legal right and the bid can be withdrawn at any time.
Once it is held that there is no completed contract
between the parties no further question can arise.
There can be no breach of contract. There is no
statutory rule or an Act whereunder the security
deposit in the form of a bank guarantee could be
claimed by Respondent 2. The position may, however,
be different if there is a statutory rule having force of
law precluding withdrawal of a bid before its
acceptance. The petitioner was entitled to withdraw
the bid because the prohibition against withdrawal
does not have the force of law and there was no
consideration to bind him down to the condition. In the
present case there was no acceptance by Respondent
2 on the date of withdrawal of the bid by the petitioner.
In the circumstances the invocation and encashment
of the bank guarantee is illegal and void and is liable
to be set aside.”
9. In our view, the High Court fell in error in so
holding. By invoking the bank guarantee and/or
enforcing the bid security, there is no statutory right,
exercise of which was being fettered. There is no term
in the contract which is contrary to the provisions of
the Indian Contract Act. The Indian Contract Act
merely provides that a person can withdraw his offer
before its acceptance. But withdrawal of an offer,
before it is accepted, is a completely different aspect
from forfeiture of earnest/security money which has
been given for a particular purpose. A person may
have a right to withdraw his offer but if he has made
his offer on a condition that some earnest money will
be forfeited for not entering into contract or if some act
is not performed, then even though he may have a
right to withdraw his offer, he has no right to claim that
the earnest/security be returned to him. Forfeiture of
such earnest/security, in no way, affects any statutory
right under the Indian Contract Act. Such
earnest/security is given and taken to ensure that a
contract comes into existence. It would be an
anomalous situation that a person who, by his own
conduct, precludes the coming into existence of the
contract is then given advantage or benefit of his own
wrong by not allowing forfeiture. It must be
remembered that, particularly in government
contracts, such a term is always included in order to
ensure that only a genuine party makes a bid. If such
a term was not there even a person who does not
have the capacity or a person who has no intention of
entering into the contract will make a bid. The whole
purpose of such a clause i.e. to see that only genuine
bids are received would be lost if forfeiture was not
permitted.
10. There is another reason why the impugned
judgment cannot be sustained. It is settled law that a
contract of guarantee is a complete and separate
contract by itself. The law regarding enforcement of an
“on-demand bank guarantee” is very clear. If the
enforcement is in terms of the guarantee, then courts
must not interfere with the enforcement of bank
guarantee. The court can only interfere if the
invocation is against the terms of the guarantee or if
there is any fraud. Courts cannot restrain invocation of
an “on-demand guarantee” in accordance with its
terms by looking at terms of the underlying contract.
The existence or non-existence of an underlying
contract becomes irrelevant when the invocation is in
terms of the bank guarantee. The bank guarantee
stipulated that if the bid was withdrawn within 120
days or if the performance security was not given or if
an agreement was not signed, the guarantee could be
enforced. The bank guarantee was enforced because
the bid was withdrawn within 120 days. Therefore, it
could not be said that the invocation of the bank
guarantee was against the terms of the bank
guarantee. If it was in terms of the bank guarantee,
one fails to understand as to how the High Court could
say that the guarantee could not have been invoked. If
the guarantee was rightly invoked, there was no
question of directing refund as has been done by the
High Court.”
50. The Supreme Court in the case of Hindustan Construction
Co. Ltd. vs. State of Bihar & Ors. (1999) 8 SCC 436 has held that the
bank guarantee represents an independent contract between the
bank and the beneficiary and both parties would be bound by the
terms thereof. The invocation will have to be in accordance with the
terms of the bank guarantee or else the invocation itself would be
bad. Paragraph 9 of the said read as under :-
“9. What is important, therefore, is that the
bank guarantee should be in unequivocal terms,
unconditional and recite that the amount would be
paid without demur or objection and irrespective of
any dispute that might have cropped up or might have
been pending between the beneficiary under the bank
guarantee or the person on whose behalf the
guarantee was furnished. The terms of the bank
guarantee are, therefore, extremely material. Since
the bank guarantee represents an independent
contract between the bank and the beneficiary, both
the parties would be bound by the terms thereof. The
invocation, therefore, will have to be in accordance
with the terms of the bank guarantee, or else, the
invocation itself would be bad.”
51. The Delhi High Court in the case of Pesticides India vs.
State of Chemicals & Pharmaceuticals Corporation of India & Ors. 53
(1994) DLT 42, has after construing the clause, has held that there
was nothing in that clause that the earnest money could be forfeited
only if the employer would have proved the actual loss suffered by
him. Paragraphs 7 to 9 of the judgment, which are relevant for the
purpose of deciding this case are extracted as under :-
“(7) As regard the contention of the learned counsel
for the petitioner that since the respondent did not
prove the actual loss suffered by them, they were not
entitled to forfeit the security deposit and the finding of
the learned arbitrator upholding forfeiture of the
security deposit is illegal, I do not find any merit even
in this contention. In this connection, it will be relevant
to refer to Clause 3 of the terms and conditions, which
reads as under :-
"FORFEITURE of earnest money :-earnest
money given and bank guarantees furnished
are liable to be forfeited in case of any
default/failure on the part of the actual
users/allot tees in complying-with all or any
other terms and conditions prescribed by Opc
in regard to said registration and/or allocation
order that may be issued by CPC."
(8) From the above clause, I find that there is nothing
in this clause that the earnest money can be forfeited
only if the respondent proves the actual loss suffered
by them. In terms of the said clause, earnest money
can be forfeited in case of any default/ failure on the
part of the actual user/allot tee in complying all or any
of the terms and conditions prescribed by CPC. The
learned arbitrator while upholding the forfeiture of the
earnest money has held that it is beyond dispute that
the petitioner had to do the needful three days before
the arrival of the vessel and the vessel concerned
'State of Punjab' arrived on 17.10.79 whereas
petitioner had yet to complete the document seven on
20th October, 1979. He has also observed that it
fulfilled its obligation on 26.10.79 and thus failed to
comply with the terms of contract and the Corporation
was justified in forfeiting the proportionate amount of
earnest money i.e. Rs.2,08,800.00 . Thus there is
relevant and proper evidence to support the
conclusion of the Arbitrator .Here I may refer to a
judgment of the Supreme Court reported in the case
of Indian Oil Corporation Ltd. VS . Indian Carbon Ltd..
: [1988]3SCR426 . In this case it was held that the
Court can set aside the award only if it is apparent
from the award that there is no evidence to support
the conclusion or if the award is based upon any legal
proposition which is erroneous. Accordingly, the
objection raised in respect of the forfeiture of the
earnest money being without any merit is dismissed.
(9) The judgments in the case of Fateh Chand (supra),
Maula Baksh (supra) and Rampur Distillery &
Chemical (supra) are of no assistance to the petitioner
as in the present case there is no term and condition
in the contract between the parties to the effect that
the earnest money can be forfeited only in case the
respondent Corporation proves that it has actually
suffered the loss. In the case of Upper Ganges Valley
Electricity Supply Co. Ltd. (supra) relied upon by the
learned counsel for the petitioner. the Supreme Court
held that an award can be set-aside only if there is an
error of law on the face of record. Since there is no
error of law on the face of record, as explained
hereinabove, the present award cannot be set-aside.”
52. The Division Bench of this court in the case of ABG
Kandla Container Terminal Ltd. vs. Axis Bank Ltd. & Anr. delivered on
th September, 2013 in Appeal (Lodging) No.198 of 2013 has dealt
with the allegations of fraud while dealing with the application for
injunction and has held that there must be evidence clear both as to
the factum of fraud and as regards the knowledge of the bank. It is
held that it must be established that irretrievable injury would be
caused unless an injunction were to be issued. The irretrievable
injury has to be of such a nature as would make it impossible for the
guarantor to reimburse himself if it ultimately succeeds. It is held that
neither the clause of forfeiture was made out by the respondents not
made out any case of irretrievable injury of such a nature that if the
petitioners would have forfeited the bank guarantees, it would have
been impossible for the respondents to recover the said amount from
the petitioners. Paragraph 11 of the said judgment which is relevant
reads thus :-
“11. The interim certificate which is issued by
the independent engineer is clearly reflective of the
fact that the obligations under the contract had not
been fulfilled in their entirety and that a final
completion was still to be certified at a future date. The
Learned Single Judge noted that the bank guarantee
was renewed by the Appellant as required from time to
time which, apart from anything else, provides intrinsic
evidence of the fact that the obligations under the
agreement had remained to be fulfilled in their entirety.
The law on the subject is clear. The invocation of a
bank guarantee can be injuncted only in the case of an
established fraud. The fraud must be a fraud in
connection with the bank guarantee of a nature that
would vitiate the very foundation of the guarantee.
Such a situation can arise when it is proved that the
bank knows that any demand for payment already
made or which may be thereafter made would be
clearly fraudulent. The evidence must be clear both as
to the factum of fraud and as regards the knowledge of
the bank. These principles have been reiterated in the
judgment of the Supreme Court in Himadri Chemicals
Industries Ltd. v. Coal Tar Refining Company.
Moreover, it must be established that irretrievable
injury would be caused unless an injunction were to be
issued. The irretrievable injury has to be of such a
nature as would make it impossible for the guarantor
to reimburse himself if it ultimately succeeds. In the
present case, it is impossible to hold that there is a
case of established fraud or of irretrievable injury of a
nature that whould sustain the issuance of an interim
injunction restraining the invocation or encashment of
a bank guarantee. There is neither any fraud nor a
case of irretrievable injury. “
53. The Gujarat High Court in the case of R.K. Construction
Co. vs. State of Gujarat & Anr., 111(2013) BC 658 has followed the
judgment of the Supreme Court in the case of State of Haryana &
Ors. vs. Malik Traders, (supra) and has held that in view of
withdrawal of the bid prior to the validity period, the employer is
entitled to forfeit the security deposit. In paragraphs 9 and 10 the
Gujarat High Court held as under :-
“9. In State of Haryana and Others v. Malik Traders,
VI (2011) SLT 415 : 2011(13) SCC 200, Hon'ble the
Supreme Court has held and observed in para 12 as
under:
12. The right to withdraw an offer before its
acceptance cannot nullify the agreement to suffer any
penalty for the withdrawal of the offer against the
terms of agreement. A person may have a right to
withdraw his offer, but if he has made his offer on a
condition that the Bid Security amount can be forfeited
in case he withdraws the offer during the period of bid
validity, he has no right to claim that the Bid Security
should not be forfeited and it should be returned to
him. Forfeiture of such Bid Security amount does not,
in any way, affect any statutory right under Section 5
of the Act. The Bid Security was given by the
respondent and taken by the appellants to ensure that
the offer is not withdrawn during the bid validity period
of 90 days and a contract comes into existence. Such
conditions are included to ensure that only genuine
parties make the bids. In the absence of such
conditions, persons who do not have the capacity or
have no intention of entering into the contract will
make bids. The very purpose of such a condition in
the offer/bid will be defeated, if forfeiture is not
permitted when the offer is withdrawn in violation of
the agreement.
10. Thus, as held by Hon'ble the Supreme Court, a
person may have a right to withdraw his offer, but if he
has made his offer on a condition that the Bid Security
amount can be forfeited in case he withdraws the offer
during the period of bid validity, he has no right to
claim that the Bid Security should not be forfeited and
it should be returned to him. The Bid Security was
given by the respondent and taken by the appellants
to ensure that the offer is not withdrawn during the bid
validity period of 90 days and a contract comes into
existence. Such conditions are included to ensure that
only genuine parties make the bids. In the absence of
such conditions, persons who do not have the
capacity or have no intention of entering into the
contract will make bids. The very purpose of such a
condition in the offer/bid will be defeated, if forfeiture is
not permitted when the offer is withdrawn in violation
of the agreement. In light of the above, learned
appellate Judge has rightly held that the respondent
No. 2 was entitled to forfeit the amount of earnest
money deposit even though the offer of the appellant
was revoked before acceptance thereof by the
competent authority. In view of the condition of tender,
as per the law laid down by Hon'ble the Supreme
Court, it can not be said that such forfeiture of the
earnest money deposit amounts to penalty- Therefore,
I do not find that the learned appellate Judge has
committed any error in reversing the judgment and
decree passed by the learned trial Judge. The appeal
is, therefore, required to be dismissed. Hence same is
dismissed.”
I am in agreement with the view expressed by the Gujarat
High Court in the above judgment.
54. A perusal of the above referred judgment of the Supreme
Court and this Court and also of the Gujarat High Court and Delhi
High Court it clearly indicates that the purpose of the earnest money
deposit and the security deposit which is issued for the purpose of
securing the performance of the contract after the award of contract
are for different and distinct purposes. The purpose of obtaining the
earnest money deposit at the time of submission of the bid is to
ensure that only the genuine parties may bid. In the absence of such
conditions, the persons who do not have capacity or have no
intention of entering into contract will make bids. Evey performance of
such a condition in offer / bid will be defeated if forfeiture is not
permitted when offer is withdrawn in violation of the agreement. In my
view the respondents having agreed not to withdraw the bid
otherwise than in accordance with the instructions to bidders and
more particularly recorded under clauses 19.1 to 19.6, the
respondents were liable to face consequences and the petitioners
were entitled to forfeit the security deposit. The earnest money
deposit which was submitted by the respondents, so as to secure the
conditions before award of the contract cannot be mixed up with the
security deposit for securing the performance of the contract which is
submitted after the award of the contract. The question of proving
any loss for the purpose of forfeiting such earnest money deposit by
the employer while the bidder has committed a breach of the terms
and conditions of the tender, did not arise.
55. The finding of the learned arbitrator that the petitioners
having suffered no loss in view of the petitioners having awarded the
contract to some other contractor whose price bid was lower than the
bid of the respondents, is patently illegal and even otherwise based
on no evidence. In my view the said finding of the learned arbitrator
is also contrary to the principles of law laid down by the Supreme
Court in the above referred judgments. The learned arbitrator has
decided contrary to the terms of the tender documents which were
binding on the parties. The learned arbitrator cannot decide contrary
to and in ignorance of the tender conditions. The learned arbitrator
having decided contrary to the terms of the tender conditions and
thus the award is ex-facie in conflict with the public policy and
deserves to be set-aside on this ground also.
56. Insofar as the submission of Mr.Andhyarujina, the learned
counsel for the respondent that the learned arbitrator having
rendered a finding of fact and/or has interpreted the terms of the
contract and the interpretation of the learned arbitrator being possible
interpretation and thus cannot be substituted by any interpretation by
this Court is concerned, in my view there is no substance in this
submission of the learned counsel for the reason that the findings
rendered by the learned arbitrator are perverse and the interpretation
of the learned arbitrator of the provisions of the tender document
being an impossible interpretation, this Court has ample power under
section 34 of the said Act to interfere with such award which
discloses patent illegalities on the face of award.
57. Insofar as the judgment of the Supreme Court in the case
of State of Rajasthan vs. Botamal Sachdeva, (1989) 4 SCC 35 relied
upon by the learned counsel for the respondents is concerned, a
perusal of the said judgment indicates that there was no provision for
forfeiture of the security deposit in the agreement, which was
considered by the Supreme Court in the said judgment. The employer
neither proved the amount of damage incurred by it nor had proved
the extra amount of cost incurred by it for getting the uncompleted
work done departmentally. The amount deducted by the employer
was towards the security deposit for securing the performance. In this
case, there is no such security furnished by the respondents. In this
case there was specific provision allowing the employer to forfeit the
security deposit. The said judgment of the Supreme Court relied upon
by the learned counsel for the respondents therefore, does not assist
the respondents. Paragraphs 1 and 2 of the judgment which are
extracted as under :-
“ 1. This is an appeal on a certificate under
Article 133(1)(a) of the Constitution before its
amendment. The respondent (original plaintiff) was
given a contract by the appellant (original defendant)
for carrying out construction work on a certain project.
According to the appellant, the respondent did not
complete the construction work in time and some part
of it had to be completed departmentally, as a result
of which some excess cost was incurred. The suit
filed by the respondent was decreed by the trial court
in the sum of Rs 15,652.42 only. Both the parties
preferred appeals to the High Court. The High Court
by its impugned judgment, partly allowed the
respondent’s appeal and dismissed the appellant’s
appeal. The decree passed by the trial court was
modified insofar as the principal amount thereof was
raised to Rs 1,16,496.45. We have heard learned
counsel for the appellant at length. He has, however,
not been able to convince us that the High Court has
committed an error in the conclusion at which it
arrived. The only contention urged by learned counsel
for the appellant was that the appellant was entitled to
forfeit the amount kept back by the appellant as
security deposit out of the amount payable to the
respondent for the work done by the respondent as
the respondent did not complete the work within the
stipulated time.
2. We find that there is no term in the
agreement between the parties enabling the appellant
to forfeit the security deposit. The only right given to
the appellant was to deduct out of the security deposit
the amount of loss incurred by the appellant which
was caused to them by reason of non-completion of
the work by the respondent in time and to recover the
extra cost of the work which had to be completed by
the appellant departmentally on account of default of
the respondent, subject to certain limits. The appellant
has neither proved the amount of damage incurred by
it nor has it proved the extra amount of cost incurred
by it for getting the uncompleted work done
departmentally. Thus, the argument that the appellant
was entitled to forfeit the security deposit or any part
of the same, must fail. Moreover, there is no letter
addressed to the respondent stating that the security
deposit has been forfeited. There is no merit in the
appeal. In the result, the appeal fails and is dismissed
with costs.”
58. Insofar as the judgment of the Delhi High Court in the
case of Jainsons Clothing Corporation vs. The State Trading
Corporation of India Ltd. & Anr. (supra) relied upon by the learned
counsel for the respondents is concerned, the Delhi High Court had
considered the terms of the bank guarantee which provided that for
encashing of the bank guarantee, the plaintiff should have committed
a default in performance of the contract and the beneficiary should
submit a certificate to the bank which would be final and conclusive
and binding on the bank. After considering such clause of the bank
guarantee, the Delhi High Court held that the performance of the
bank guarantee was to meet the liability which resulted from a breach
of the contract by the supplier and as it was the case of the
beneficiary itself that there was no loss and there was no claim under
back to back contract by other party, the bank guarantee could not
have been encashed. The clause of the bank guarantee in this case
as well as the tender condition are totally different. The said judgment
of the Delhi High Court is thus not applicable to the facts of this case.
Reliance on the said judgment by the learned counsel for the
respondent is thus totally misplaced.
59. Mr.Andhyarujina, the learned counsel for the respondents
relied upon the judgment of the Supreme Court in the case of
Associate Builders vs. Delhi Development Authority, 2014 SCC
OnLine SC 937 and in particular paragraphs 9, 10, 12 to 15, 17 to
22 which are extracted as under :-
“9. By a judgment dated 3rd April, 2006, the
learned Single Judge of the High Court of Delhi
dismissed the objections of the DDA and upheld the
award. In an appeal filed Under Section 37 of the
Arbitration Act, vide the impugned judgment dated 8th
February, 2012, a Division Bench of the High Court of
Delhi set aside the judgment of the Single Judge on
claims 9, 10, 11 and 15, and negatived these claims in
toto. Further, claims 12 and 13 were scaled down
doing "rough and ready justice". Resultantly, the
awarded amount of Rs. 7,20,000/- was scaled down to
Rs. 5,57,137.50/-.
10. We have heard learned Counsel for the
parties. Shri M.L. Verma, learned Senior Advocate
appearing on behalf of the Appellant, submitted that
the Division Bench has lost sight of the law laid down
by this Hon'ble Court when it comes to challenges
made to arbitral awards Under Section 34 of the Act.
He has submitted that the Division Bench has acted
as if this was a first appeal from the award and has
further submitted that the Division Bench has taken
into account facts which were neither pleaded nor
proved before the learned Arbitrator in order to
negative certain claims. He further submitted that it is
not possible for a Bench hearing an objection against
an arbitral award to do "rough and ready justice"-it is
bound by the law laid down by this Hon'ble Court. In
particular, he argued that the conceded position is that
25 months delay was due to the DDA alone. The
award read as a whole is just, fair and reasonable as
only certain claims have been granted and every claim
granted has been supported with reasons. The
Arbitrator is the sole judge of the quality and quantity
of evidence before him and he has decided on that
evidence. No errors of law arise from the award and
the award has, therefore, been wrongly set aside.
12. In as much as serious objections have
been taken to the Division Bench judgment on the
ground that it has ignored the parameters laid down in
a series of judgments by this Court as to the
limitations which a Judge hearing objections to an
arbitral award Under Section 34 is subject to, we
deem it necessary to state the law on the subject.
Section 34 of the Arbitration and Conciliation Act
reads as follows-
“Application for setting aside arbitral award.--(1)
Recourse to a Court against an arbitral award may be
made only by an application for setting aside such
award in accordance with Sub-section (2) and Subsection
(3).
(2) An arbitral award may be set aside by the Court
only if-
(a) the party making the application furnishes proof
that-
(i) a party was under some incapacity; or
(ii) The arbitration agreement is not valid under the law
to which the parties have subjected it or, failing any
indication thereon, under the law for the time being in
force; or
(iii) the party making the application was not given
proper notice of the appointment of an arbitrator or of
the arbitral proceedings or was otherwise unable to
(iv) the arbitral award deals with a dispute not
contemplated by or not falling within the terms of the
submission to arbitration, or it contains decisions on
matters beyond the scope of the submission to
arbitration:
Provided that, if the decisions on matters submitted to
arbitration can be separated from those not so
submitted, only that part of the arbitral award which
contains decisions on matters not submitted to
arbitration may be set aside; or
(v) the composition of the arbitral tribunal or the
arbitral procedure was not in accordance with the
agreement of the parties, unless such agreement was
in conflict with a provision of this Part from which the
parties cannot derogate, or, failing such agreement,
was not in accordance with this Part; or
(b) the Court finds that-
(i) the subject-matter of the dispute is not capable of
settlement by arbitration under the law for the time
being in force, or
(ii) the arbitral award is in conflict with the public policy
of India.
Explanation.--Without prejudice to the generality of
Sub-clause (ii), it is hereby declared, for the avoidance
of any doubt, that an award is in conflict with the public
policy of India if the making of the award was induced
or affected by fraud or corruption or was in violation of
Section 75 or Section 81.
(3) An application for setting aside may not be made
after three months have elapsed from the date on
which the party making that application had received
the arbitral award or, if a request had been made
Under Section 33, from the date on which that request
had been disposed of by the arbitral tribunal:
Provided that if the Court is satisfied that the applicant
was prevented by sufficient cause from making the
application within the said period of three months it
may entertain the application within a further period of
thirty days, but not thereafter.
(4) On receipt of an application Under Sub-section (1),
the Court may, where it is appropriate and it is so
requested by a party, adjourn the proceedings for a
period of time determined by it in order to give the
arbitral tribunal an opportunity to resume the arbitral
proceedings or to take such other action as in the
opinion of arbitral tribunal will eliminate the grounds for
setting aside the arbitral award.
This Section in conjunction with Section 5 makes it
clear that an arbitration award that is governed by part
I of the Arbitration and Conciliation Act, 1996 can be
set aside only on grounds mentioned Under Section
34(2) and (3), and not otherwise. Section 5 reads as
follows:
5. Extent of judicial intervention.--Notwithstanding
anything contained in any other law for the time being
in force, in matters governed by this Part, no judicial
authority shall intervene except where so provided in
this Part.
It is important to note that the 1996 Act was enacted to
replace the 1940 Arbitration Act in order to provide for
an arbitral procedure which is fair, efficient and
capable of meeting the needs of arbitration; also to
provide that the tribunal gives reasons for an arbitral
award; to ensure that the tribunal remains within the
limits of its jurisdiction; and to minimize the
supervisory roles of courts in the arbitral process.
It will be seen that none of the grounds contained in
Sub-clause 2(a) deal with the merits of the decision
rendered by an arbitral award. It is only when we
come to the award being in conflict with the public
policy of India that the merits of an arbitral award are
to be looked into under certain specified
circumstances.
In Renusagar Power Co. Ltd. v. General Electronic
Co. 1994 Supp (1) SCC 644, the Supreme Court
construed Section 7(1)(b)(ii) of the Foreign Award
(Recognition and Enforcement) Act, 1961.
7. Conditions for enforcement of foreign awards.--
(1) A foreign award may not be enforced under this
Act-
(b) if the Court dealing with the case is satisfied that-
(ii) the enforcement of the award will be contrary to
the public policy.
In construing the expression "public policy" in the
context of a foreign award, the Court held that an
award contrary to
1. The fundamental policy of Indian law
2. The interest of India
3. Justice or morality,
would be set aside on the ground that it would be
contrary to the public policy of India. It went on further
to hold that a contravention of the provisions of the
Foreign Exchange Regulation Act would be contrary to
the public policy of India in that the statute is enacted
for the national economic interest to ensure that the
nation does not lose foreign exchange which is
essential for the economic survival of the nation (see
para 75). Equally, disregarding orders passed by the
superior courts in India could also be a contravention
of the fundamental policy of Indian law, but the
recovery of compound interest on interest, being
contrary to statute only, would not contravene any
fundamental policy of Indian law (see paras 85, 95).
When it came to construing the expression "the public
policy of India" contained in Section 34(2)(b)(ii) of the
Arbitration Act, 1996, this Court in ONGC v. Saw
Pipes 2003 (5) SCC 705, held-
31. Therefore, in our view, the phrase "public policy of
India" used in Section 34 in context is required to be
given a wider meaning. It can be stated that the
concept of public policy connotes some matter which
concerns public good and the public interest. What is
for public good or in public interest or what would be
injurious or harmful to the public good or public
interest has varied from time to time. However, the
award which is, on the face of it, patently in violation
of statutory provisions cannot be said to be in public
interest. Such award/judgment/decision is likely to
adversely affect the administration of justice. Hence,
in our view in addition to narrower meaning given to
the term "public policy" in Renusagar case : 1994
Supp (1) SCC 644] it is required to be held that the
award could be set aside if it is patently illegal. The
result would be--award could be set aside if it is
contrary to:
(a) Fundamental policy of Indian law; or
(b) The interest of India; or
(c) Justice or morality, or
(d) in addition, if it is patently illegal.
Illegality must go to the root of the matter and if the
illegality is of trivial nature it cannot be held that award
is against the public policy. Award could also be set
aside if it is so unfair and unreasonable that it shocks
the conscience of the court. Such award is opposed to
public policy and is required to be adjudged void.
74. In the result, it is held that:
(A) (1) The court can set aside the arbitral award
Under Section 34(2) of the Act if the party making the
application furnishes proof that:
(i) a party was under some incapacity, or
(ii) the arbitration agreement is not valid under the law
to which the parties have subjected it or, failing any
indication thereon, under the law for the time being in
force; or
(iii) the party making the application was not given
proper notice of the appointment of an arbitrator or of
the arbitral proceedings or was otherwise unable to
present his case; or
(iv) the arbitral award deals with a dispute not
contemplated by or not falling within the terms of the
submission to arbitration, or it contains decisions on
matters beyond the scope of the submission to
arbitration.
(2) The court may set aside the award:
(i)(a) if the composition of the Arbitral Tribunal was not
in accordance with the agreement of the parties,
(b) failing such agreement, the composition of the
Arbitral Tribunal was not in accordance with Part I of
the Act.
(ii) if the arbitral procedure was not in accordance
with:
(a) the agreement of the parties, or (b) failing such
agreement, the arbitral procedure was not in
accordance with Part I of the Act.
However, exception for setting aside the award on the
ground of composition of Arbitral Tribunal or illegality
of arbitral procedure is that the agreement should not
be in conflict with the provisions of Part I of the Act
from which parties cannot derogate.
(c) If the award passed by the Arbitral Tribunal is in
contravention of the provisions of the Act or any other
substantive law governing the parties or is against the
terms of the contract.
(3) The award could be set aside if it is against the
public policy of India, that is to say, if it is contrary to:
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality; or
(d) if it is patently illegal.
(4) It could be challenged:
(a) as provided Under Section 13(5); and
(b) Section 16(6) of the Act.
(B)(1) The impugned award requires to be set aside
mainly on the grounds:
(i) there is specific stipulation in the agreement that
the time and date of delivery of the goods was of the
essence of the contract;
(ii) in case of failure to deliver the goods within the
period fixed for such delivery in the schedule, ONGC
was entitled to recover from the contractor liquidated
damages as agreed;
(iii) it was also explicitly understood that the agreed
liquidated damages were genuine pre-estimate of
damages;
(iv) on the request of the Respondent to extend the
time-limit for supply of goods, ONGC informed
specifically that time was extended but stipulated
liquidated damages as agreed would be recovered;
(v) liquidated damages for delay in supply of goods
were to be recovered by paying authorities from the
bills for payment of cost of material supplied by the
contractor;
(vi) there is nothing on record to suggest that
stipulation for recovering liquidated damages was by
way of penalty or that the said sum was in any way
unreasonable.
(vii) In certain contracts, it is impossible to assess the
damages or prove the same. Such situation is taken
care of by Sections 73 and 74 of the Contract Act and
in the present case by specific terms of the contract.
The judgment in ONGC v. Saw Pipes has been
consistently followed till date.
In Hindustan Zinc Ltd. v. Friends Coal
Carbonisation : (2006) 4 SCC 445, this Court held:
14. The High Court did not have the benefit of the
principles laid down in Saw Pipes : (2003) 5 SCC
705], and had proceeded on the assumption that
award cannot be interfered with even if it was contrary
to the terms of the contract. It went to the extent of
holding that contract terms cannot even be looked into
for examining the correctness of the award. This Court
in Saw Pipes : (2003) 5 SCC 705] has made it clear
that it is open to the court to consider whether the
award is against the specific terms of contract and if
so, interfere with it on the ground that it is patently
illegal and opposed to the public policy of India.
In McDermott International Inc. v. Burn Standard
Co. Ltd. : (2006) 11 SCC 181, this Court held:
58. In Renusagar Power Co. Ltd. v. General Electric
Co. : 1994 Supp (1) SCC 644] this Court laid down
that the arbitral award can be set aside if it is contrary
to (a) fundamental policy of Indian law; (b) the
interests of India; or (c) justice or morality. A narrower
meaning to the expression "public policy" was given
therein by confining judicial review of the arbitral
award only on the aforementioned three grounds. An
apparent shift can, however, be noticed from the
decision of this Court in ONGC Ltd. v. Saw Pipes
Ltd. : (2003) 5 SCC 705] (for short "ONGC"). This
Court therein referred to an earlier decision of this
Court in Central Inland Water Transport Corporation
Ltd. v. Brojo Nath Ganguly : (1986) 3 SCC 156 : 1986
SCC (L and S) 429 : (1986) 1 ATC 103] wherein the
applicability of the expression "public policy" on the
touchstone of Section 23 of the Indian Contract Act
and Article 14 of the Constitution of India came to be
considered. This Court therein was dealing with
unequal bargaining power of the workmen and the
employer and came to the conclusion that any term of
the agreement which is patently arbitrary and/or
otherwise arrived at because of the unequal
bargaining power would not only be ultra vires Article
14 of the Constitution of India but also hit by Section
23 of the Indian Contract Act. In ONGC : (2003) 5
SCC 705] this Court, apart from the three grounds
stated in Renusagar : 1994 Supp (1) SCC 644], added
another ground thereto for exercise of the court's
jurisdiction in setting aside the award if it is patently
arbitrary.
59. Such patent illegality, however, must go to the root
of the matter. The public policy violation, indisputably,
should be so unfair and unreasonable as to shock the
conscience of the court. Where the arbitrator,
however, has gone contrary to or beyond the
expressed law of the contract or granted relief in the
matter not in dispute would come within the purview of
Section 34 of the Act. However, we would consider
the applicability of the aforementioned principles while
noticing the merits of the matter.
60. What would constitute public policy is a matter
dependent upon the nature of transaction and nature
of statute. For the said purpose, the pleadings of the
parties and the materials brought on record would be
relevant to enable the court to judge what is in public
good or public interest, and what would otherwise be
injurious to the public good at the relevant point, as
contradistinguished from the policy of a particular
Government. (See State of Rajasthan v. Basant
Nahata : (2005) 12 SCC 77].)
In Centrotrade Minerals and Metals Inc. v.
Hindustan Copper Ltd. : (2006) 11 SCC 245, Sinha,
J., held:
103. Such patent illegality, however, must go to the
root of the matter. The public policy, indisputably,
should be unfair and unreasonable so as to shock the
conscience of the court. Where the arbitrator,
however, has gone contrary to or beyond the
expressed law of the contract or granted relief in the
matter not in dispute would come within the purview of
Section 34 of the Act.
104. What would be a public policy would be a matter
which would again depend upon the nature of
transaction and the nature of statute. For the said
purpose, the pleadings of the parties and the
materials brought on record would be relevant so as
to enable the court to judge the concept of what was a
public good or public interest or what would otherwise
be injurious to the public good at the relevant point as
contradistinguished by the policy of a particular
government. (See State of Rajasthan v. Basant
Nahata : (2005) 12 SCC 77].)
In DDA v. R.S. Sharma and Co. (2008) 13 SCC 80,
the Court summarized the law thus:
21. From the above decisions, the following principles
emerge:
(a) An award, which is
(i) contrary to substantive provisions of law; or
(ii) the provisions of the Arbitration and Conciliation
Act, 1996; or
(iii) against the terms of the respective contract; or
(iv) patently illegal; or
(v) prejudicial to the rights of the parties;
is open to interference by the court Under Section
34(2) of the Act.
(b) The award could be set aside if it is contrary to:
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality.
(c) The award could also be set aside if it is so unfair
and unreasonable that it shocks the conscience of the
court.
(d) It is open to the court to consider whether the
award is against the specific terms of contract and if
so, interfere with it on the ground that it is patently
illegal and opposed to the public policy of India.
With these principles and statutory provisions,
particularly, Section 34(2) of the Act, let us consider
whether the arbitrator as well as the Division Bench of
the High Court were justified in granting the award in
respect of Claims 1 to 3 and Additional Claims 1 to 3
of the claimant or the Appellant DDA has made out a
case for setting aside the award in respect of those
claims with reference to the terms of the agreement
duly executed by both parties.
J.G. Engineers (P) Ltd. v. Union of India (2011) 5
SCC 758, held:
27. Interpreting the said provisions, this Court in
ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705] held
that a court can set aside an award Under Section
34(2)(b)(ii) of the Act, as being in conflict with the
public policy of India, if it is (a) contrary to the
fundamental policy of Indian law; or (b) contrary to the
interests of India; or (c) contrary to justice or morality;
or (d) patently illegal. This Court explained that to hold
an award to be opposed to public policy, the patent
illegality should go to the very root of the matter and
not a trivial illegality. It is also observed that an award
could be set aside if it is so unfair and unreasonable
that it shocks the conscience of the court, as then it
would be opposed to public policy.
Union of India v. Col. L.S.N. Murthy (2012) 1 SCC
718, held:
22. In ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC
705] this Court after examining the grounds on which
an award of the arbitrator can be set aside Under
Section 34 of the Act has said: (SCC p. 727, para 31)
31. ...However, the award which is, on the face of it,
patently in violation of statutory provisions cannot be
said to be in public interest. Such
award/judgment/decision is likely to adversely affect
the administration of justice. Hence, in our view in
addition to narrower meaning given to the term 'public
policy' in Renusagar case [Renusagar Power Co. Ltd.
v. General Electric Co. 1994 Supp (1) SCC 644] it is
required to be held that the award could be set aside if
it is patently illegal.
Fundamental Policy of Indian Law
Coming to each of the heads contained in the Saw
Pipes judgment, we will first deal with the head
"fundamental policy of Indian Law". It has already
been seen from the Renusagar judgment that violation
of the Foreign Exchange Act and disregarding orders
of superior courts in India would be regarded as being
contrary to the fundamental policy of Indian law. To
this it could be added that the binding effect of the
judgment of a superior court being disregarded would
be equally violative of the fundamental policy of Indian
law.
In a recent judgment, ONGC Ltd. v. Western Geco
International Ltd. 2014 (9) SCC 263, this Court
added three other distinct and fundamental juristic
principles which must be understood as a part and
parcel of the fundamental policy of Indian law. The
Court held-
35. What then would constitute the "fundamental
policy of Indian law" is the question. The decision in
ONGC [ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC
705] does not elaborate that aspect. Even so, the
expression must, in our opinion, include all such
fundamental principles as providing a basis for
administration of justice and enforcement of law in this
country. Without meaning to exhaustively enumerate
the purport of the expression "fundamental policy of
Indian law", we may refer to three distinct and
fundamental juristic principles that must necessarily
be understood as a part and parcel of the fundamental
policy of Indian law. The first and foremost is the
principle that in every determination whether by a
court or other authority that affects the rights of a
citizen or leads to any civil consequences, the court or
authority concerned is bound to adopt what is in legal
parlance called a "judicial approach" in the matter.
The duty to adopt a judicial approach arises from the
very nature of the power exercised by the court or the
authority does not have to be separately or
additionally enjoined upon the fora concerned. What
must be remembered is that the importance of a
judicial approach in judicial and quasi-judicial
determination lies in the fact that so long as the court,
tribunal or the authority exercising powers that affect
the rights or obligations of the parties before them
shows fidelity to judicial approach, they cannot act in
an arbitrary, capricious or whimsical manner. Judicial
approach ensures that the authority acts bona fide
and deals with the subject in a fair, reasonable and
objective manner and that its decision is not actuated
by any extraneous consideration. Judicial approach in
that sense acts as a check against flaws and faults
that can render the decision of a court, tribunal or
authority vulnerable to challenge.
38. Equally important and indeed fundamental to the
policy of Indian law is the principle that a court and so
also a quasi-judicial authority must, while determining
the rights and obligations of parties before it, do so in
accordance with the principles of natural justice.
Besides the celebrated audi alteram partem rule one
of the facets of the principles of natural justice is that
the court/authority deciding the matter must apply its
mind to the attendant facts and circumstances while
taking a view one way or the other. Non-application of
mind is a defect that is fatal to any adjudication.
Application of mind is best demonstrated by
disclosure of the mind and disclosure of mind is best
done by recording reasons in support of the decision
which the court or authority is taking. The requirement
that an adjudicatory authority must apply its mind is, in
that view, so deeply embedded in our jurisprudence
that it can be described as a fundamental policy of
Indian law.
39. No less important is the principle now recognised
as a salutary juristic fundamental in administrative law
that a decision which is perverse or so irrational that
no reasonable person would have arrived at the same
will not be sustained in a court of law. Perversity or
irrationality of decisions is tested on the touchstone of
Wednesbury principle [Associated Provincial Picture
Houses Ltd. v. Wednesbury Corporation (1948) 1 KB
223 : (1947) 2 All ER 680 (CA)] of reasonableness.
Decisions that fall short of the standards of
reasonableness are open to challenge in a court of
law often in writ jurisdiction of the superior courts but
no less in statutory processes wherever the same are
available.
40. It is neither necessary nor proper for us to attempt
an exhaustive enumeration of what would constitute
the fundamental policy of Indian law nor is it possible
to place the expression in the straitjacket of a
definition. What is important in the context of the case
at hand is that if on facts proved before them the
arbitrators fail to draw an inference which ought to
have been drawn or if they have drawn an inference
which is on the face of it, untenable resulting in
miscarriage of justice, the adjudication even when
made by an Arbitral Tribunal that enjoys considerable
latitude and play at the joints in making awards will be
open to challenge and may be cast away or modified
depending upon whether the offending part is or is not
severable from the rest.
It is clear that the juristic principle of a "judicial
approach" demands that a decision be fair, reasonable
and objective. On the obverse side, anything arbitrary
and whimsical would obviously not be a determination
which would either be fair, reasonable or objective.
The Audi Alteram Partem principle which undoubtedly
is a fundamental juristic principle in Indian law is also
contained in Sections 18 and 34(2)(a)(iii) of the
Arbitration and Conciliation Act. These Sections read
as follows:
18. Equal treatment of parties.--The parties shall be
treated with equality and each party shall be given a
full opportunity to present his case.
34. Application for setting aside arbitral award.-
(2) An arbitral award may be set aside by the Court
only if-
(a) the party making the application furnishes proof
that-
(iii) the party making the application was not given
proper notice of the appointment of an arbitrator or of
the arbitral proceedings or was otherwise unable to
present his case;
The third juristic principle is that a decision which is
perverse or so irrational that no reasonable person
would have arrived at the same is important and
requires some degree of explanation. It is settled law
that wherea
finding is based on no evidence, or
an arbitral tribunal takes into account something
irrelevant to the decision which it arrives at; or
ignores vital evidence in arriving at its decision,
such decision would necessarily be perverse. A good
working test of perversity is contained in two
judgments. In H.B. Gandhi, Excise and Taxation
Officer-cum-Assessing Authority v. Gopi Nath and
Sons at p. 317, it was held:
7. ...It is, no doubt, true that if a finding of fact is
arrived at by ignoring or excluding relevant material or
by taking into consideration irrelevant material or if the
finding so outrageously defies logic as to suffer from
the vice of irrationality incurring the blame of being
perverse, then, the finding is rendered infirm in law.
In Kuldeep Singh v. Commr. of Police (1999) 2 SCC
10 at para 10, it was held:
10. A broad distinction has, therefore, to be
maintained between the decisions which are perverse
and those which are not. If a decision is arrived at on
no evidence or evidence which is thoroughly
unreliable and no reasonable person would act upon
it, the order would be perverse. But if there is some
evidence on record which is acceptable and which
could be relied upon, howsoever compendious it may
be, the conclusions would not be treated as perverse
and the findings would not be interfered with.
It must clearly be understood that when a court is
applying the "public policy" test to an arbitration
award, it does not act as a court of appeal and
consequently errors of fact cannot be corrected. A
possible view by the arbitrator on facts has necessarily
to pass muster as the arbitrator is the ultimate master
of the quantity and quality of evidence to be relied
upon when he delivers his arbitral award. Thus an
award based on little evidence or on evidence which
does not measure up in quality to a trained legal mind
would not be held to be invalid on this score1
. Once it
is found that the arbitrators approach is not arbitrary or
capricious, then he is the last word on facts. In P.R.
Shah, Shares and Stock Brokers (P) Ltd. v. B.H.H.
Securities (P) Ltd. (2012) 1 SCC 594, this Court held:
21. A court does not sit in appeal over the award of an
Arbitral Tribunal by reassessing or reappreciating the
evidence. An award can be challenged only under the
grounds mentioned in Section 34(2) of the Act. The
Arbitral Tribunal has examined the facts and held that
both the second Respondent and the Appellant are
liable. The case as put forward by the first
Respondent has been accepted. Even the minority
view was that the second Respondent was liable as
claimed by the first Respondent, but the Appellant
was not liable only on the ground that the arbitrators
appointed by the Stock Exchange under Bye-law 248,
in a claim against a non-member, had no jurisdiction
to decide a claim against another member. The
finding of the majority is that the Appellant did the
transaction in the name of the second Respondent
and is therefore, liable along with the second
Respondent. Therefore, in the absence of any ground
Under Section 34(2) of the Act, it is not possible to reexamine
the facts to find out whether a different
decision can be arrived at.
It is with this very important caveat that the two
fundamental principles which form part of the
fundamental policy of Indian law (that the arbitrator
must have a judicial approach and that he must not
act perversely) are to be understood.
Interest of India
The next ground on which an award may be set aside
is that it is contrary to the interest of India. Obviously,
this concerns itself with India as a member of the
world community in its relations with foreign powers.
As at present advised, we need not dilate on this
aspect as this ground may need to evolve on a case
by case basis.
Justice
The third ground of public policy is, if an award is
against justice or morality. These are two different
concepts in law. An award can be said to be against
justice only when it shocks the conscience of the
court. An illustration of this can be given. A claimant is
content with restricting his claim, let us say to Rs. 30
lakhs in a statement of claim before the arbitrator and
at no point does he seek to claim anything more. The
arbitral award ultimately awards him 45 lakhs without
any acceptable reason or justification. Obviously, this
would shock the conscience of the court and the
arbitral award would be liable to be set aside on the
ground that it is contrary to "justice".
Morality
The other ground is of "morality". Just as the
expression "public policy" also occurs in Section 23 of
the Indian Contract Act, so does the expression
"morality". Two illustrations to the said section are
interesting for they explain to us the scope of the
expression "morality".
(j) A, who is B's Mukhtar, promises to exercise his
influence, as such, with B in favour of C, and C
promises to pay 1,000 rupees to A. The agreement is
void, because it is immoral.
(k) A agrees to let her daughter to hire to B for
concubinage. The agreement is void, because it is
immoral, though the letting may not be punishable
under the Indian Penal Code (XLV of 1860).
In Gherulal Parekh v. Mahadeo Dass Maiya 1959
Supp (2) SCR 406, this Court explained the concept of
"morality" thusRe.
Point 3-Immorality: The argument under this head
is rather broadly stated by the learned Counsel for the
Appellant. The learned Counsel attempts to draw an
analogy from the Hindu Law relating to the doctrine of
pious obligation of sons to discharge their father's
debts and contends that what the Hindu Law
considers to be immoral in that context may
appropriately be applied to a case under Section 23 of
the Contract Act. Neither any authority is cited nor any
legal basis is suggested for importing the doctrine of
Hindu Law into the domain of contracts. Section 23 of
the Contract Act is inspired by the common law of
England and it would be more useful to refer to the
English Law than to the Hindu Law texts dealing with
a different matter. Anson in his Law of Contracts
states at p. 222 thus:
The only aspect of immorality with which Courts of
Law have dealt is sexual immorality....
Halsbury in his Laws of England, 3rd Edn., Vol. 8,
makes a similar statement, at p. 138:
A contract which is made upon an immoral
consideration or for an immoral purpose is
unenforceable, and there is no distinction in this
respect between immoral and illegal contracts. The
immorality here alluded to is sexual immorality.
In the Law of Contract by Cheshire and Fifoot, 3rd
Edn., it is stated at p. 279:
Although Lord Mansfield laid it down that a contract
contra bonos mores is illegal, the law in this
connection gives no extended meaning to morality,
but concerns itself only with what is sexually
reprehensible.
In the book on the Indian Contract Act by Pollock and
Mulla it is stated at p. 157:
The epithet "immoral" points, in legal usage, to
conduct or purposes which the State, though
disapproving them, is unable, or not advised, to visit
with direct punishment.
The learned authors confined its operation to acts
which are considered to be immoral according to the
standards of immorality approved by Courts. The case
law both in England and India confines the operation
of the doctrine to sexual immorality. To cite only some
instances: settlements in consideration of
concubinage, contracts of sale or hire of things to be
used in a brothel or by a prostitute for purposes
incidental to her profession, agreements to pay money
for future illicit cohabitation, promises in regard to
marriage for consideration, or contracts facilitating
divorce are all held to be void on the ground that the
object is immoral.
The word "immoral" is a very comprehensive word.
Ordinarily it takes in every aspect of personal conduct
deviating from the standard norms of life. It may also
be said that what is repugnant to good conscience is
immoral. Its varying content depends upon time, place
and the stage of civilization of a particular society. In
short, no universal standard can be laid down and any
law based on such fluid concept defeats its own
purpose. The provisions of Section 23 of the Contract
Act indicate the legislative intention to give it a
restricted meaning. Its juxtaposition with an equally
illusive concept, public policy, indicates that it is used
in a restricted sense; otherwise there would be
overlapping of the two concepts. In its wide sense
what is immoral may be against public policy, for
public policy covers political, social and economic
ground of objection. Decided cases and authoritative
text-book writers, therefore, confined it, with every
justification, only to sexual immorality. The other
limitation imposed on the word by the statute, namely,
"the court regards it as immoral", brings out the idea
that it is also a branch of the common law like the
doctrine of public policy, and, therefore, should be
confined to the principles recognized and settled by
Courts. Precedents confine the said concept only to
sexual immorality and no case has been brought to
our notice where it has been applied to any head
other than sexual immorality. In the circumstances, we
cannot evolve a new head so as to bring in wagers
within its fold.
This Court has confined morality to sexual morality so
far as Section 23 of the Contract Act is concerned,
which in the context of an arbitral award would mean
the enforcement of an award say for specific
performance of a contract involving prostitution.
"Morality" would, if it is to go beyond sexual morality
necessarily cover such agreements as are not illegal
but would not be enforced given the prevailing mores
of the day. However, interference on this ground
would also be only if something shocks the court's
conscience.
Patent Illegality
We now come to the fourth head of public policy
namely, patent illegality. It must be remembered that
under the explanation to Section 34(2)(b), an award is
said to be in conflict with the public policy of India if
the making of the award was induced or affected by
fraud or corruption. This ground is perhaps the earliest
ground on which courts in England set aside awards
under English law. Added to this ground (in 1802) is
the ground that an arbitral award would be set aside if
there were an error of law by the arbitrator. This is
explained by Lord Justice Denning in R v.
Northumberland Compensation Appeal Tribunal.
Ex Parte Shaw. at page 130:
Leaving now the statutory tribunals, I turn to the
awards of the arbitrators. The Court of King's Bench
never interfered by certiorari with the award of an
arbitrator, because it was a private tribunal and not
subject to the prerogative writs. If the award was not
made a rule of court, the only course available to an
aggrieved party was to resist an action on the award
or to file a bill in equity. If the award was made a rule
of court, a motion could be made to the court to set it
aside for misconduct of the arbitrator on the ground
that it was procured by corruption or other undue
means: see the statute 9 and 10 Will. III, c. 15. At one
time an award could not be upset on the ground of
error of law by the arbitrator because that could not be
said to be misconduct or undue means, but ultimately
it was held in Kent v. Elstob , that an award could be
set aside for error of law on the face of it. This was
regretted by Williams, J., in Hodgkinson v. Fernie , but
is now well established.
This, in turn, led to the famous principle laid down in
Champsey Bhara Co. v. The Jivraj Balloo Spinning
and Weaving Co. Ltd. AIR 1923 PC 66, where the
Privy Council referred to Hodgkinson and then laid
down:
The law on the subject has never been more clearly
stated than by Williams, J. in the case of Hodgkinson
v. Fernie .
The law has for many years been settled, and remains
so at this day, that, where a cause or matters in
difference are referred to an arbitrator a lawyer or a
layman, he is constituted the sole and final judge of all
questions both of law and of fact ...... The only
exceptions to that rule are cases where the award is
the result of corruption or fraud, and one other, which
though it is to be regretted, is now, I think firmly
established viz., where the question of law necessarily
arises on the face of the award or upon some paper
accompanying and forming part of the award. Though
the propriety of this latter may very well be doubted, I
think it may be considered as established.
Now the regret expressed by Williams, J. in
Hodgkinson v. Fernie has been repeated by more
than one learned Judge, and it is certainly not to be
desired that the exception should be in any way
extended. An error in law on the face of the award
means, in their Lordships' view, that you can find in
the award or a document actually incorporated
thereto, as for instance, a note appended by the
arbitrator stating the reasons for his judgment, some
legal proposition which is the basis of the award and
which you can then say is erroneous. It does not
mean that if in a narrative a reference is made to a
contention of one party that opens the door to seeing
first what that contention is, and then going to the
contract on which the parties' rights depend to see if
that contention is sound. Here it is impossible to say,
from what is shown on the face of the award, what
mistake the arbitrators made. The only way that the
learned judges have arrived at finding what the
mistake was is by saying: "Inasmuch as the
Arbitrators awarded so and so, and inasmuch as the
letter shows that then buyer rejected the cotton, the
arbitrators can only have arrived at that result by
totally misinterpreting Clause 52." But they were
entitled to give their own interpretation to Clause 52 or
any other article, and the award will stand unless, on
the face of it they have tied themselves down to some
special legal proposition which then, when examined,
appears to be unsound. Upon this point, therefore,
their Lordships think that the judgment of Pratt, J was
right and the conclusion of the learned Judges of the
Court of Appeal erroneous.
This judgment has been consistently followed in India
to test awards Under Section 30 of the Arbitration Act,
1940.
In the 1996 Act, this principle is substituted by the
'patent illegality' principle which, in turn, contains three
sub heads-
(a) a contravention of the substantive law of India
would result in the death knell of an arbitral award.
This must be understood in the sense that such
illegality must go to the root of the matter and cannot
be of a trivial nature. This again is a really a
contravention of Section 28(1)(a) of the Act, which
reads as under:
28. Rules applicable to substance of dispute.--(1)
Where the place of arbitration is situated in India,-
(a) in an arbitration other than an international
commercial arbitration, the arbitral tribunal shall
decide the dispute submitted to arbitration in
accordance with the substantive law for the time being
in force in India;
(b) a contravention of the Arbitration Act itself would
be regarded as a patent illegality-for example if an
arbitrator gives no reasons for an award in
contravention of Section 31(3) of the Act, such award
will be liable to be set aside.
(c) Equally, the third sub-head of patent illegality is
really a contravention of Section 28(3) of the
Arbitration Act, which reads as under:
28. Rules applicable to substance of dispute.--(3)
In all cases, the arbitral tribunal shall decide in
accordance with the terms of the contract and shall
take into account the usages of the trade applicable to
the transaction.
This last contravention must be understood with a
caveat. An arbitral tribunal must decide in accordance
with the terms of the contract, but if an arbitrator
construes a term of the contract in a reasonable
manner, it will not mean that the award can be set
aside on this ground. Construction of the terms of a
contract is primarily for an arbitrator to decide unless
the arbitrator construes the contract in such a way that
it could be said to be something that no fair minded or
reasonable person could do.
In McDermott International Inc. v. Burn Standard
Co. Ltd. (2006) 11 SCC 181, this Court held as under:
112. It is trite that the terms of the contract can be
express or implied. The conduct of the parties would
also be a relevant factor in the matter of construction
of a contract. The construction of the contract
agreement is within the jurisdiction of the arbitrators
having regard to the wide nature, scope and ambit of
the arbitration agreement and they cannot be said to
have misdirected themselves in passing the award by
taking into consideration the conduct of the parties. It
is also trite that correspondences exchanged by the
parties are required to be taken into consideration for
the purpose of construction of a contract.
Interpretation of a contract is a matter for the arbitrator
to determine, even if it gives rise to determination of a
question of law. (See Pure Helium India (P) Ltd. v.
ONGC (2003) 8 SCC 593] and D.D. Sharma v. Union
of India (2004) 5 SCC 325]).
113. Once, thus, it is held that the arbitrator had the
jurisdiction, no further question shall be raised and the
court will not exercise its jurisdiction unless it is found
that there exists any bar on the face of the award.
In MSK Projects (I) (JV) Ltd. v. State of Rajasthan
(2011) 10 SCC 573, the Court held:
17. If the arbitrator commits an error in the
construction of the contract, that is an error within his
jurisdiction. But if he wanders outside the contract and
deals with matters not allotted to him, he commits a
jurisdictional error. Extrinsic evidence is admissible in
such cases because the dispute is not something
which arises under or in relation to the contract or
dependent on the construction of the contract or to be
determined within the award. The ambiguity of the
award can, in such cases, be resolved by admitting
extrinsic evidence. The rationale of this rule is that the
nature of the dispute is something which has to be
determined outside and independent of what appears
in the award. Such a jurisdictional error needs to be
proved by evidence extrinsic to the award. (See
Gobardhan Das v. Lachhmi Ram AIR 1954 SC 689],
Thawardas Pherumal v. Union of India AIR 1955 SC
468], Union of India v. Kishorilal Gupta and Bros. AIR
1959 SC 1362], Alopi Parshad and Sons Ltd. v. Union
of India AIR 1960 SC 588], Jivarajbhai Ujamshi Sheth
v. Chintamanrao Balaji AIR 1965 SC 214] and
Renusagar Power Co. Ltd. v. General Electric Co.
(1984) 4 SCC 679 : AIR 1985 SC 1156]).
In Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram
Saran (2012) 5 SCC 306, the Court held:
43. In any case, assuming that Clause 9.3 was
capable of two interpretations, the view taken by the
arbitrator was clearly a possible if not a plausible one.
It is not possible to say that the arbitrator had travelled
outside his jurisdiction, or that the view taken by him
was against the terms of contract. That being the
position, the High Court had no reason to interfere
with the award and substitute its view in place of the
interpretation accepted by the arbitrator.
44. The legal position in this behalf has been
summarised in para 18 of the judgment of this Court in
SAIL v. Gupta Brother Steel Tubes Ltd. (2009) 10
SCC 63 : (2009) 4 SCC (Civ) 16] and which has been
referred to above. Similar view has been taken later in
Sumitomo Heavy Industries Ltd. v. ONGC Ltd. (2010)
11 SCC 296 : (2010) 4 SCC (Civ) 459] to which one of
us (Gokhale, J.) was a party. The observations in para
43 thereof are instructive in this behalf.
45. This para 43 reads as follows: (Sumitomo case
(2010) 11 SCC 296 : (2010) 4 SCC (Civ) 459], SCC p.
313)
43. ...The umpire has considered the fact situation
and placed a construction on the clauses of the
agreement which according to him was the correct
one. One may at the highest say that one would have
preferred another construction of Clause 17.3 but that
cannot make the award in any way perverse. Nor can
one substitute one's own view in such a situation, in
place of the one taken by the umpire, which would
amount to sitting in appeal. As held by this Court in
Kwality Mfg. Corporation v. Central Warehousing
Corporation (2009) 5 SCC 142 : (2009) 2 SCC (Civ)
406] the Court while considering challenge to arbitral
award does not sit in appeal over the findings and
decision of the arbitrator, which is what the High Court
has practically done in this matter. The umpire is
legitimately entitled to take the view which he holds to
be the correct one after considering the material
before him and after interpreting the provisions of the
agreement. If he does so, the decision of the umpire
has to be accepted as final and binding.
13. Applying the tests laid down by this Court, we
have to examine whether the Division Bench has
exceeded its jurisdiction in setting aside the arbitral
award impugned before it.
14. A large part of the judgment is an extract from the
arbitral award. It is important to note that the Division
Bench held:
9. A perusal of the award would reveal, from
the portions extracted herein above, that with
reference to evidence led before him the
learned Arbitrator has held delay attributable
to DDA, a finding of fact which is based on
evidence and rightly conceded to by Sh.
Bhupesh Narula, Advocate who appears for
DDA as being beyond judicial review power
of this Court pertaining to a reasoned award.
But, while awarding Rs. 8,27,960/- the
reasoning adopted by the learned Arbitrator
is questioned as being the result of ignoring
the well-recognized legal principles on the
subject, learned Counsel argued that the
reasoning is the ipse dixit of the learned
Arbitrator.
15. The Division Bench while considering claims 9, 10,
11 and 15 found fault with the application of Hudson's
formula which was set out by the learned Arbitrator in
order to arrive at the claim made under these heads.
The Division Bench said that it was not possible for an
Arbitrator to mechanically apply a certain formula
however well understood in the trade. This itself is
going outside the jurisdiction to set aside an award
Under Section 34 in as much as in McDermott's case
(supra), it was held:
104. It is not in dispute that MII had examined one Mr.
D.J. Parson to prove the said claim. The said witness
calculated the increased overheads and loss of profit
on the basis of the formula laid down in a manual
published by the Mechanical Contractors Association
of America entitled "Change Orders, Overtime,
Productivity" commonly known as the Emden
Formula. The said formula is said to be widely
accepted in construction contracts for computing
increased overheads and loss of profit. Mr. D.J.
Parson is said to have brought out the additional
project management cost at US$ 1,109,500. We may
at this juncture notice the different formulas applicable
in this behalf.
(a) Hudson Formula: In Hudson's Building and
Engineering Contracts, Hudson Formula is stated in
the following terms:
“Contract head office
overhead and profit
percentage
Contract period Period of delay”
In the Hudson Formula, the head office overhead
percentage is taken from the contract. Although the
Hudson Formula has received judicial support in many
cases, it has been criticised principally because it
adopts the head office overhead percentage from the
contract as the factor for calculating the costs, and
this may bear little or no relation to the actual head
office costs of the contractor.
(b) Emden Formula: In Emden's Building Contracts
and Practice, the Emden Formula is stated in the
following terms:
“Head office overhead
and profit
Contract sum Period of delay”
100 Contract period
Using the Emden Formula, the head office overhead
percentage is arrived at by dividing the total overhead
cost and profit of the contractor's organisation as a
whole by the total turnover. This formula has the
advantage of using the contractor's actual head office
overhead and profit percentage rather than those
contained in the contract. This formula has been
widely applied and has received judicial support in a
number of cases including Norwest Holst Construction
Ltd. v. Coop. Wholesale Society Ltd. [Decided on 17-
2-1998, ], Beechwood Development Co. (Scotland)
Ltd. v. Mitchell [Decided on 21-2-2001, ] and Harvey
Shopfitters Ltd. v. Adi Ltd. [Decided on 6-3-2003,
(2004) 2 All ER 982 : [2003] EWCA Civ 1757].
(c) Eichleay Formula: The Eichleay Formula was
evolved in America and derives its name from a case
heard by the Armed Services Board of Contract
Appeals, Eichleay Corporation. It is applied in the
following manner:
Step 1
Contract billings Total overhead for
contract period =
Overhead allocable
to the contract
Total billings for contract
period
Step 2
Allocable overhead = Daily overhead rate
Total days of contract
Step 3
Daily contract overhead
rate
Number of days = of
delay
Amount of
unabsorbed
overhead”
This formula is used where it is not possible to prove
loss of opportunity and the claim is based on actual
cost. It can be seen from the formula that the total
head office overhead during the contract period is first
determined by comparing the value of work carried
out in the contract period for the project with the value
of work carried out by the contractor as a whole for
the contract period. A share of head office overheads
for the contractor is allocated in the same ratio and
expressed as a lump sum to the particular contract.
The amount of head office overhead allocated to the
particular contract is then expressed as a weekly
amount by dividing it by the contract period. The
period of delay is then multiplied by the weekly
amount to give the total sum claimed. The Eichleay
Formula is regarded by the Federal Circuit Courts of
America as the exclusive means for compensating a
contractor for overhead expenses.
105. Before us several American decisions have been
referred to by Mr. Dipankar Gupta in aid of his
submission that the Emden Formula has since been
widely accepted by the American courts being Nicon
Inc. v. United States [Decided on 10-6-2003 (), : ()],
Gladwynne Construction Co. v. Mayor and City
Council of Baltimore [Decided on 25-9-2002, : ] and
Charles G. William Construction Inc. v. White [ : ()].
106. We do not intend to delve deep into the matter as
it is an accepted position that different formulae can
be applied in different circumstances and the question
as to whether damages should be computed by taking
recourse to one or the other formula, having regard to
the facts and circumstances of a particular case,
would eminently fall within the domain of the
arbitrator.
17. The Division Bench then went on to hold:
17. There is admittedly no evidence that the
contractor i.e. the Respondent had a central
establishment. It appears to be a case where
the contractor is petty contractor and the only
expenses incurred are at the site. The claim is
towards hire charges paid for centering and
shuttering, hiring tools, plants and scaffoldings
i.e. the claim is not for the contractor's own
equipment lying idle. There is just no evidence
that the contractor paid charges as claimed by
him. Not a single bill raised by the alleged
person who let on hire the equipment to the
contractor has been filed nor any evidence
adduced for the payment made. Except for
listing a 10 HP Water Pump, 4 number 1 HP
water pump, 3 mixers, 250 scaffolding
bamboos, 150 ballis and 2 vibrators in
Annexure-J to the Statement of Claim, no
document proving hiring the same and brought
at the site has been led. We highlight that the
claim is on account of hire Charges paid and
there is no evidence of said payment. It does
happen that where a work is stopped, the
person who taken an equipment on hire returns
the same and re-hires the same when work
recommences. Thus, Claim No. 9, 10 and 11
cannot be allowed because there is no
evidence to support the claims. Damages on
account of establishment expenses incurred
during period contract got prolonged have
certainly to be recompensed, but we find no
evidence in the form of books of accounts,
vouchers etc. to show payments to the staff or
expenses incurred in maintaining an
establishment at site in the form of a site office.
The wages register, photocopy whereof was
filed before the Arbitrator, pertains to wages
paid to the unskilled, semiskilled and skilled
labour deployed to execute the works. The
pleadings pertaining to the claim would show
that as per the contractor he had deployed one
Executive Officer, one Graduate Engineer, one
Junior Engineer, one Accountant, one
Storekeeper and Supervisor and one Mechanic
at the site and had also deployed watch and
ward. Details of the persons employed have
been listed in Annexure-N to the Statement of
Claim and the documents filed to establish the
same would evidence that the contractor has
filed photocopies of the salary register, which
are available from pages No. 1255 to 1322, but
unfortunately for the contractor, the cat is out of
the bag when we look at the documents. They
pertain to payments made for a site at Mayur
Vihar. We highlight that the contract in question
pertains to flats and houses at Trilokpuri and
not Mayur Vihar. It is apparent that the
contractor has tried to pull the wool on the eyes
of the primary adjudicator of the claim. It is not
the case of the contractor that these persons
were simultaneously supervising the work at
two sites. Assuming this was the case, the
matter would then have been adjudicated with
reference to same number of persons
supervising two sites and the time spent at each
site by them.
18. Thus, the award pertaining to Claim Nos. 9,
10, 11 and 15 is liable to be sent aside and it is
so set aside. We need not therefore take
corrective action on the apparent error i.e. the
learned Arbitrator has worked out the claim on
the original contract value of Rs. 87,66,678/-, of
course by reducing it by 15%, but ignoring that
final work executed was only in sum of Rs.
62,84,845/-.
18. Mr. Verma argued correctly that there is nothing
on record to show that the contractor is a petty
contractor and that the only expenses incurred are at
the site. He has shown us that the contract itself
required execution of the work by a Class-I contractor
and has further shown us that Class-I contractors
require to have certain stipulated numbers of works
worth large amounts before they can apply for the
tender and that their financial soundness has to be
attested too by banker's certificate showing that their
worth is over 10 crores of rupees. Further, he has
pointed out from the statement of claims before the
Arbitrator that there was evidence for claims 9, 10 and
11 laid before the Arbitrator which the Arbitrator has in
fact accepted. Also establishment expenses were set
out in great detail before the Arbitrator and it is only on
this evidence that the Arbitrator ultimately has
awarded these claims. Mr. Verma is also right in
saying that the Division Bench was completely wrong
in stating that the establishment expenses pertained to
payments for a site at Mayur Vihar as opposed to
Trilok Puri which were where the aforesaid houses
were to be constructed. He pointed out that in the
completion certificate dated 30th May, 1997 given by
the DDA to the Appellant, it is clear that the houses
that were, in fact, to be constructed were in Mayur
Vihar, Phase-II, which is part of the Trilok Puri transYamuna
area.
It is most unfortunate that the Division Bench did not
advert to this crucial document at all. This document
shows not only that the Division Bench was wholly
incorrect in its conclusion that the contractor has tried
to pull the wool over the eyes over the DDA but it
should also have realized that the DDA itself has
stated that the work has been carried out generally to
its satisfaction barring some extremely minor defects
which are capable of rectification. It is clear, therefore,
that the Division Bench obviously exceeded its
jurisdiction in interfering with a pure finding of fact
forgetting that the Arbitrator is the sole Judge of the
quantity and quality of evidence before him and
unnecessarily bringing in facts which were neither
pleaded nor proved and ignoring the vital completion
certificate granted by the DDA itself. The Division
Bench also went wrong in stating that as the work
completed was only to the extent of Rs. 62,84,845/-,
Hudson's formula should have been applied taking
this figure into account and not the entire contract
value of Rs. 87,66,678/- into account.
19. Here again, the Division Bench has committed a
grave error. Hudson's formula as is quoted in
McDermott's case is as follows:
(a) Hudson Formula: In Hudson's Building and
Engineering Contracts, Hudson Formula is stated in
the following terms:
“Contract head office
overhead and profit
percentage
Period of Contract
period
delay”
In the Hudson Formula, the head office
overhead percentage is taken from the
contract. Although the Hudson Formula has
received judicial support in many cases, it has
been criticised principally because it adopts
the head office overhead percentage from the
contract as the factor for calculating the costs,
and this may bear little or no relation to the
actual head office costs of the contractor.
20. It is clear that to apply this formula one has to
take into account the contract value that is awarded
and not the work completed. On this score again, the
Division Bench is to be faulted.
21. In dealing with claims 12 and 13, the Division
Bench stated:
19. Pertaining to Claim No. 12 and 13, the
learned Arbitrator has recompensed the
contractor 20% price hike in the cost of
material and labour noting, that there was a
steep hike in the period in question when the
contract got prolonged by 25 months. We
highlight that though the Arbitrator has found
the delay to be 25 months, recompense has
been restricted to only 20 months.
20. As noted herein above, partial
recompense under Clause 10C, has been
granted to the contractor, but the same i.e. the
Clause in question requiring applicability
during contract stipulated period, it is apparent
that the contractor would be entitled to full
recompense for price hike during the extended
25 months period and not the 20 months to
which the learned Arbitrator has restricted the
recompense to.
21. But, for the benefit granted under Clause
10C wherein Rs. 1,62,387/-, Rs. 46,184/- and
Rs. 12,922/- have been awarded under Claim
Nos. 2, 3 and 4, said amounts have to be
adjusted, but not in full, for the reason these
include the amounts payable during the
contract stipulated period.
22. The total of the three sums comes to Rs.
2,21,493/-. We have another problem. Neither
counsel could help us identify the components
thereof i.e. the component relatable to the 9
months during which the work had to be
completed and the 25 months during which
the contract got prolonged. Thus, we apply the
Rule of 'Rough and Ready Justice'. We divide
the sum by 34 to work out the proportionate
increase per month. Rs. 2,21,493/- divided by
34 = Rs. 6,514.50 and multiplying the same
by 25, the figure comes to Rs. 1,62,862.50.
23. Adopting, for the reasons given by the
Arbitrator, that 20% hike in the balance work
done after the contract stipulated period i.e.
benefit to be granted under this head for work
done in sum of Rs. 37,02,066/- and accepting
the sum of Rs. 7,20,000/- being the resultant
figure, subtracting Rs. 1,62,862.50, the figure
arrived at is Rs. 5,57,137.50.
22. Here again, the Division Bench has interfered
wrongly with the arbitral award on several counts. It
had no business to enter into a pure question of fact
to set aside the Arbitrator for having applied a
formula of 20 months instead of 25 months. Though
this would inure in favour of the Appellant, it is clear
that the Appellant did not file any cross objection on
this score. Also, it is extremely curious that the
Division Bench found that an adjustment would have
to be made with claims awarded under claims 2, 3
and 4 which are entirely separate and independent
claims and have nothing to do with claims 12 and 13.
The formula then applied by the Division Bench was
that it would itself do "rough and ready justice". We
are at a complete loss to understand how this can be
done by any court under the jurisdiction exercised
Under Section 34 of the Arbitration Act. As has been
held above, the expression "justice" when it comes to
setting aside an award under the public policy ground
can only mean that an award shocks the conscience
of the court. It cannot possibly include what the court
thinks is unjust on the facts of a case for which it then
seeks to substitute its view for the Arbitrator's view
and does what it considers to be "justice". With great
respect to the Division Bench, the whole approach to
setting aside arbitral awards is incorrect. The Division
Bench has lost sight of the fact that it is not a first
appellate court and cannot interfere with errors of
fact.”
60. On perusal of the judgment relied upon by the learned
counsel for the respondents in Associate Builders vs. Delhi
Development Authority (supra), it is clear that the Court can set-aside
the award if the award is against justice or morality, discloses patent
illegality, contrary to the terms of the contract and not in accordance
with the substantive law of India. In my view, the petitioners have
made out a case that the award is patently illegal on the face of
record and the learned arbitrator has decided contrary to the terms of
the tender documents and has also decided contrary to the law laid
down by the Supreme Court and this Court and thus this Court has
ample power to set-aside such award under section 34 of the said
Act.
61. I therefore, pass the following order :-
i). The arbitration petition is made absolute in terms of prayer
clause (a). The impugned award dated 26th October, 2012 is
set-aside.
ii). There shall be no order as to costs.
(R.D. DHANUKA, J.)
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