The Petitioners and the Respondents entered into two contracts dated 2nd September, 2011 wherein the Petitioners were allotted the work of construction, development and successfully commissioning of a Polyethylene Unit (“PE Unit”) and the Polypropylene Unit (“PP Unit”).
The term of the contracts was 28 months for execution and the Petitioners were under an obligation to produce bank guarantees as under Clause 3.3 and 3.8 of the General Conditions of Contract (“GCC”) of the said contracts. Out of the five bank guarantees, two were advanced bank guarantees to secure mobilization of advance paid by the Respondent and three were performance bank guarantees for execution and performance of the contracts.
The scheduled date of completion of commissioning of both the Units as per the contracts was on or before 2nd October, 2013. But in fact, the two units were commissioned on 14th April, 2017 and 12th February, 2017 respectively. The Petitioners issued arbitration notices in lieu of disputes arising between the parties after attaining the commissioning certificates for the Units.
The Petitioners claimed for damages on account of delay on the part of the Respondents in completing and commissioning of the project. Whereas, the Respondents had filed counter-claims seeking Liquidated Damages for the delay in commissioning both the Units attributable to the Petitioners and also for losses and damages incurred by the Respondents on account of defects and damages discovered in the PE Unit and claim on Performance Guarantee Test Runs (“PGTR”).
The Arbitral Tribunal speaking through majority allowed the claims of the Petitioners and rejected the counter-claims submitted by the Respondent through an award dated 6th January, 2020.
Therefore, the Respondents had challenged the said Award under Section 34 of the Arbitration & Conciliation Act, 1996 (“the Act”) which is pending consideration before the Delhi High Court.
The Respondent invoked the Bank Guarantees during the pendency of the proceedings aggrieved by which the Petitioners approached the Court. The Court directed the Petitioners to extend the validity of the Bank Guarantees for a period of one month.
When the said petition was listed on 23rd March, 2020, the Court on the submissions made by the Respondents, directed that the amount allotted under the Arbitral Award shall be paid by the Respondents to the Petitioners subject to the Petitioners furnishing Bank Guarantees for the said amount which shall sustain till further orders by the Court.
The Petitioner denied extension of the validity of the Bank Guarantees when demanded by the Respondent and therefore, the Respondent through a Letter put forth their decision to invoke them. Aggrieved by the same, the Petitioners approached the Delhi High Court under Section 9 of the Act seeking interim injunction against such invocation of Bank Guarantees.
ISSUES BEFORE THE DELHI HIGH COURT
The following issues were considered by the Delhi High Court:
1. Whether the Respondent who had lost the arbitral proceedings and had all its counter-claims in relation to the performance of the contract rejected by the Arbitral Tribunal, can seek extension of the Bank Guarantees furnished by the Petitioners for the performance of the contracts pending adjudication of the Respondent’s petition underSection 34 of the Act challenging the Award?
2. Whether the Petitioners were able to demonstrate that Bank Guarantees should be injuncted by the Court by meeting the twin test for grant of an injunction restraining the invocation of Bank Guarantees?
The Petitioners submitted the Bank Guarantees were provided to secure performance by the Petitioners for Units which were commissioned back in 2017 and have achieved 100% capacity utilization.
In furtherance of the same, an Arbitral Award directing the Respondents to pay a sum of Rs. 201 Crores to the Petitioners has already been announced. Also, all the counter-claims of the Respondent as regards the performance of the contract were rejected and the Respondent had no live and subsisting claim against the Petitioners.
The Petitioners referred to case of ONGC v. Consortium of SimeDarby Engineering Sdn. Bhd. and Anr. 2018 SCC Online Bom 6034 wherein the Supreme Court held that when a losing party cannot seek an order in a petition under Section 9 of the Act, it cannot seek such an order in a petition under Section 34 of the Act.
“According to him, the respondent in its e-mail dated March 07, 2020 did not aver that the extension is being sought in respect of an additional claim the respondent had against the petitioners. It is only later on, on April 10, 2020, the respondent has taken a stand that the bank guarantees are required to be extended as the petitioners failed to perform its obligation under the contracts. That apart, the subsequent invocation of the bank guarantees is egregious case of fraudulent invocation.”
The Petitioner also submitted that the Court vide Order dated 13th March, 2020, had directed the Petitioners to extend the bank guarantees by a period of only one month, within which time, the Respondent was to satisfy the condition of securing ‘appropriate order’ in its petition under Section 34 of the Act, which they failed to secure.
Further, a petition under Section 34 of the Act is only for setting aside an Arbitral Award on the limited grounds provided under Section 34 of the Act. Therefore, the mere pendency of Section 34 proceedings cannot afford a ground for a party to assert that it has a dispute regarding contractual performance.
On the contrary, the Respondents submitted that;
1. The Bank Guarantees were unconditional and irrevocable, out of which four have already been invoked;
2. The instant case was required to be seen and decided on the principles governing grant of injunction, restraining the invocation of the Bank Guarantees on the twin test of egregious fraud or irretrievable harm, which were not satisfied;
3. The invocation of Bank Guarantees was justified as the Respondent had protectable interest related to the performance of the Contract;
4. The Petitioners could not get the relief of return of Bank Guarantees as similar prayer was rejected by the Arbitral Tribunal, more so in a petition under Section 9 of the Act;
5. Alternatively, the Court extend their previous orders which required the Petitioners to extend the validity of the Bank Guarantees and the Respondent shall deposit the charges in the Court till the decision of the petition under Section 34 of the Act is made;
6. All the contracts were still valid during the proceedings before the Court and subsisting and the Petitioners had not been able to discharge their obligations under the contracts;
7. Merely because an Arbitral Award was pronounced against the Respondent did not mean that pending its challenge, the disputes cease to exist; and
8. If the Court set asides the Award in the petition under Section 34 of the Act, the Respondent would automatically be entitled to invoke Bank Guarantees for any breaches / non-performance and recover its liquidated damages in respect of which it is settled law that there is no requirement of an order of Court / Tribunal.
Therefore, the Respondent contended that,
“It was his submission that as the respondent has secured appropriate orders in its Section 34 petition, and the validity of this bank guarantees was expiring, the respondent rightly addressed the communications on April 5, 2020 and April 7, 2020, calling the petitioners to extend the bank guarantees.”
The High Court allowed the petition and restrained the Respondent from invoking and encashing the Bank Guarantees as referred in the prayer clause. It is also directed that the Respondent shall return the said Bank Guarantees to the Petitioners.
The Court stated that the Arbitral Award of the Tribunal endures to the benefit of the Petitioners, being the successful party. It is the successful party who can seek its enforcement under Section 36 of the Act and also secure the Award under Section 9 of the Act and not the Respondent being the losing party.
The Court relied on the Supreme Court judgement of the Dirk India Private Limited vs. MSEGC (2013) 7 Bom. CR 493 wherein it was held that;
“What such a litigating party cannot possibly obtain even upon completion of the proceedings under Section 34, it cannot possibly secure in a petition under Section 9 after the award. The object and purpose of Section 9 is to provide an interim measure that would protect the subject-matter of the arbitral proceedings whether before or during the continuance of the arbitral proceedings and even thereafter upon conclusion of the proceedings until the award is enforced. Once the award has been made and a claim has been rejected as in the present case, even a successful challenge to the award under Section 34 does not result an order decreeing the claim.”
Moreover, by rejecting the Respondents’ first claim, the Court observed that the said judgment shall have no applicability to a litigation under the Insolvency & Bankruptcy Code, 2016.
Further, it rejected the Petitioners’ assertion that the entire Scope of Work under the Contracts was completed as incorrect. It stated that the Petitioners’ entire technical team abandoned the Respondents’ Dahej Plant during the pendency of the arbitration proceedings without any proper intimation to the Respondents without completing the entire Scope of Works including PGTR of the PE Unit and closure of punch points and others. In spite of several requests from the Respondents, the Petitioners flagrantly failed and neglected to supply the complete set of mandatory spares as agreed under the Contracts.
The Court stated that the Respondent by invoking the Bank Guarantees intended to secure counter-claims which were earlier rejected by the Arbitral Tribunal, which was clearly impermissible in view of the position of law.
It termed the Respondents’ argument of the Arbitral Award if set aside, the Respondent will be able to invoke the Bank Guarantees to satisfy its claims without resorting to arbitration / Court to be a fallacious argument.
It stated that the even if the Respondent succeeds in its petition filed under Section 34 of the Act, the setting aside of the Arbitral Award does not result in the same being decreed in its favour. It would be open to the Respondent to commence fresh proceedings against the Petitioners.
The Court referred to the case of International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181;
“…Section 34 is found to provide for annulment only on the grounds affecting legitimacy of the process of decision as distinct from substantive correctness of the contents of the decision. A remedy of appeal focuses upon both legitimacy of the process of decision and the substantive correctness of the decision. Annulment, in the case of arbitration focuses not on the correctness of decision but rather more narrowly considers whether, regardless of errors in application of law or determination of facts, the decision resulted from a legitimate process.”
The Court also settled that if a plea to extend the validity of Bank Guarantees was allowed, every party even after losing before the Arbitral Tribunal, on the pretext that the Bank Guarantees cannot be injuncted or it shall deposit the amount in the Court, shall achieve what it could not achieve before the Arbitral Tribunal through its claims / counter-claims.
The Court concluded that;
“72. In the case in hand, the following facts also cumulatively demonstrate special equities in favour of the petitioners:
1. The petitioners have an arbitral Award in its favor;
2. The counter-claims have been dismissed;
3. The respondent did not secure any order with regard to extension of the bank guarantees;
4. It is the case of the petitioners that advance bank guarantees were furnished against mobilization advance given by the respondent which have since been recovered by the respondent through running account bills, the said aspect has not been denied by the respondent in Para 27 and 29 of its reply to the petition;
5. The bank guarantees given during the contract cannot be said to have been given in perpetuity even for the period, after the adjudication of claims / counter-claims, between the parties;
6. There is no sum due in praesenti or sum payable to the respondent;
7. Even if the respondent succeeds in its challenge to the Award under Section 34, it has to resort to fresh arbitration proceedings with regard to the counter-claims and;
8. That after invocation/encashment of the bank guarantees by the respondent, the petitioners have to resort to the process of arbitration to claim the amount.”
The judgment is an extension to the already set jurisprudence on the filings of a petition under Section 34 of the Act. It brings out a novel standard wherein it states and enshrines that the Bank Guarantees given during the Contract cannot be said to have been given in perpetuity even for the period, after the adjudication of claims / counter-claims, between the parties.
The Supreme Court has discussed and settled the twin test for such injunction in the case of Natrip Implementation Society v. IVRCL Limited 2016 SCC Online Del 5023 wherein the Court held that;
“In order for the court to exercise its powers under Order XXXVIII Rule 5 of the CPC, it is necessary that twin conditions be satisfied. First, that the plaintiff establishes a reasonably strong prima facie case for succeeding in the suit; and second, that the court is prima facie satisfied that the defendant is acting in a manner so as to defeat the realisation of the decree that ultimately may be passed. The object of Sections 9(1)(ii)(b) and 17(1)(ii)(b) of the Act is similar to the object of order XXXVIII Rule 5 of the CPC. The Arbitral Tribunal while exercising powers under Section 17(1)(ii)(b) of the Act or the Court while exercising power under Section 9(1)(ii)(b) of the Act must be satisfied that it is necessary to pass order to secure the amount in dispute. Such orders cannot be passed mechanically. Further, the object of the order would be to prevent the party against whom the claim has been made from dispersing its assets or from acting in a manner to so as to frustrate the award that may be passed.”
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