Synopsis
1.
Introduction.
2.
Triangle of three principles.
3.
Building Contract of instant nature.
4.
What are interim measures? Sec. 9 and 17 of the Arbitration and Conciliation
Act, 1996.
5.
Co-relation with I.I.A. from of building contract.
6.
Architect and misuse of Sec. 9.
7.
Performance Bond and Injunctions.
8.
Termination conditions.
9.
Condition No. 56 of I.I.A. form of Contract.
10.
Conclusions.
Introduction
The
subject of interim measures when applied to any field of disputes like
building construction, sale of goods, partnership, family disputes, partitions
etc., specially under Section 9 of the Arbitration and Conciliation Act,
1996 (Arb. Act, 1996) gets wedded to the traits and trappings of the legal
garb in which the solicitors and advocates do possess expertise, whereas
the architects/engineers and arbitrators from any other field except for
legal one, will have no role to play in this field of interim measures.
Inspite of the fact that architect/engineer as arbitrator do not contribute
any expertise in this legal field of building contract and interim measures
circumscribed by Sec. 9 of the Arb. Act, 1996, yet it is necessary for
them to study this topic for two reasons. The first reason is that on dispute
between the contractor and employer making a peep, the contractor usually
ran to an architect/engineer for advice. If the architect/engineer has
audited this subject with case laws, he will advise the contractor not
to undertake the voyage of Sec. 9 of the Act for the Hon. Courts in majority
of the cases, have dismissed the application of the petitioner on one ground
or another. Even if, in the words of lord Benign "there is no default on
the part of the petitioners, and short fall is somewhere else, still the
petitioners are not entitled to relief".
The
second reason for study of this subject by architect/engineer and others
is its usefulness when such person sit as the arbitral tribunal or its
member; for section 17 of the Arb. Act, 1996 confers similar powers on
the arbitral tribunal; agreed that such powers are of low voltage capacity.
Yet, the arbitral tribunal will have to apply same principles which the
courts apply to decide the matter u/s.9. These principles which are three
in number as given below:
Triangle
of three principles
If
the architect/engineer studies this triangle of three principles, the same
will also help him to appreciate the hardships faced by the contractors
as also to appreciate how Sec.9 can be abused by the employer, besides
it forming a mariner's compass to decide whether to issue the orders for
interim measures u/s.17 of the Arb. Act, 1996 or otherwise.
Building
Contract of the Instance Nature no Relief U/S.9
Before
triangle of three principles is put to analysis whereby no chance for petitioner
to get relief, note should be taken of the fact that the building contracts
are of instant nature which form an additional ground for no relief. The
building contract is contract of instant nature because it contains rights
and duties of the parties upon the happening of an event, as also conditions
precedent and subsequent. e.g. Before the employer can claim liquidated
damages, the architect's certificate of delay is a condition precedent,
or work suspended due to war, right to contractor to terminate the contract.
Such instant nature contract had come up before Delhi High Court which
refused relief u/s 9 of the Arb. Act, 1996 as given below:
Building
contract of the instant nature cannot be specifically enforced by granting
interim relief. Contract for construction work - dispute regarding rates
of deviated items-petition for interim relief-Material lying at site used
by respondents - Disputes can be resolved by arbitration Petition dismissed.
HELD-On
a consideration of the facts and circumstances of the case, I am of the
opinion that a building contract of the instant nature cannot be specifically
enforced by granting interim relief under section 9 of the Act. If there
is a breach of such a contract, the appropriate remedy is to compensate
the party damages. That apart, the granting of an injunction in favour
of the petitioner will further delay the construction work considered very
urgent by the respondent No. 3. Thus, the balance of convenience also swings
against the grant of injunction sought by the petitioner.
The
petitioner has also sought an injunction restraining the respondents No.
1 and 2 from using the material lying at the site. It is alleged by the
respondent No. 1 that the aforesaid material belonged to it. There is sufficient
documentary evidence on record to support the said contention of the respondent
No. 1. Moreover, this dispute also can be resolved by the arbitrator in
terms of the arbitration agreement. I, therefore, hold that the petitioner
has failed to make out a prima facie case for grant of the injunction sought
by it.2
Triangle
of Three Principle
The
triangle of three principles had formed barometer to measure the extent
of relief under sec. 41(b) of the old Arbitration Act, 1940, but it also
occupies the same or even higher position u/s 9 of the Arb. Act, 1996 and
at times the courts even frame issues based on that triangle like:
1.
Whether the petitioner has made out a prima facie case?
2.
Whether the balance of convenience does lie in favour of the petitioner?
3.
Whether irreparable loss or injury will case to the petitioner if it is
not granted?
4.
To what order?3
The
Delhi High Court had examined 39 cases on the subject in the case of Marriot
International and agreed not only to the triangle of three principles but
also two more added like "cannot compel parties to continue the contract"
and resort to arbitration.4
As
already stated here in above that the building contract is of instant nature
and as such the contractor cannot make out a prima facie case for relief
u/s.9 of the Arb. Act, 1996 that the subject matter of dispute will evaporate
or that the employer and specially when the employees are Government agencies
will become bankrupt and that the award will be a nullity. Outstanding
balance of payment is one sided version of the contractor and that cannot
be considered as making out of a prima facie case. Hence the contractor
cannot succeed on the first leg of triangle.
Second
Side of Triangle, Irretrievable Injury:
Irretrievable
injury means damage for which recoupment is not possible which will be
applicable in the rarest of the rare case and fine illustration comes from
the case of Intek corporation5 as quoted by the court in Saw
Pipes Limited case as under:
On
account of the revolution in Iran, the America Government had cancelled
all export contracts to Iran and had blocked all Iranian assets within
the jurisdiction of the United States. Fifty two Americans had been taken
hostages in Iran. In this situation, the court felt that the plaintiff
had no remedy at all and the harm to him would be irreparable. This kind
of a situation is not a likely situation. Thus, there is no case of any
irretrievable injury of the type as held in the case of Itec Corporation
(supra) as there is no difficulty in the judgment of the court being executable
in our country.6
Once
again the contractor will not be able to convince the courts that in refusal
of relief u/s.9 of the Act, he will undergo more hardships as compared
to the employer. If the relief comes u/s.9 of the Act, the construction
work will stop, loss to the employer due to rise in the cost of materials,
cost of watch and ward, loss to the ultimate beneficiaries of the construction
work like the flat owners, the tenants etc., and relatively more hardships
for the employer.
It
is agreed that the relative hardships to the employer will be more as compared
to that of the petitioner, but how about abuse of Sec.9 of the Act by the
employer whereby the contractor is throttled financially. Can there be
no remedy for it?
Yes!
The remedy or the panacea given by the court is:
Invoke
arbitration!
However,
the court has also observed that "however the way in which the proceedings
under the Act are conducted and without an exception has made "Lawyers
laugh legal philosophers weep"7 How to reconcile both the aspects?
What
are Interim Measures?
Interim
measures are suitable action in the interim period of dispute and final
adjudication so that the result does not become nullity. It is provided
u/s 9 of the Arbitration and Conciliation Act, 1996 under two heads like
appointment of guardian for a minor or a person of unsound mind for arbitral
proceedings as also interim measures for preservation, interim custody
or sale of any goods, securing amount in dispute, detention, preservation
or inspection of any property or thing, it could authorise any person to
enter upon any land or building as also authorise samples to be taken or
any observation or experiment to be made, necessary for full information
or evidence.
Under
section 9 the Court has powers to issue interim injunction or appointment
of receiver as also unlimited powers to issue interim measures of protection
as may appear to be just and convenient.
As
compared to court's power u/s9 of the Act, Sec.17 confers on the arbital
tribunal certain powers of low voltage capacity with restrictions given
in sub-sec. (2) in the form of providing appropriate security in connection
with the interim measures ordered under sub-section (1) which deals with
order on interim measures in respect of the subject matter of dispute.
Both
sec.9 and Sec.17 are of discretionary nature and that sec.9 operates in
three times parameter whereas Sec.17 operates in one time parameter.
The
power to grant injunction u/s/9 of the Act is similar to some extent powers
of the court trying a suit under order No. 39, Rule 1 and 2 and order No.
40, Rule 1 of Code of Civil Procedure for which the courts have laid some
principles for grant of injunction similar to triangle of three principles
like the party invoking the jurisdiction of the court has to show that
he himself was not at fault and that he himself was not responsible forbearing
about the state of things complained of and that he was not unfair or inequitable
in his dealings with the part against whom he was seeking relief. His conduct
should be fair and honest.
Co-relation
of the Topic of Interim Measures with Building Contract :
Note:
The contract adopted for discussion is the contract published by the Indian
Institute of Architects (I.I.A.)
Interim
measures can have different fields of settlement depending upon the nature
of arbitration like sale of goods, partnership, family partition, building
construction etc. For the subject in question sieving process is limited
to I.I.A. form of contract where the slots susceptible to the influence
of interim measures are:
a.
Condition
No.1 ... "Architect"
b.
Condition
No. 17 ... Performance Bond.
c.
Condition
No. 48 & 49 ... Determination of contract.
d.
Condition
No. 56 ... Arbitration.
Architect
and Misuse of Sec. 9
This
aspect is discussed here to show to what extent misuse of Sec. 9 takes
place due to a number of reasons including architect not receiving proper
legal advice. One of the ground for seeking relief had been the infringement
of copy rights of the places of the architect. The architect ought to have
realised that once he is paid by the owner for the plans prepared by him,
the owner has the right to make use of his plans and there exists no copy
rights to plans used in the same project where the architect has been paid
for his professional services in producing plans question. In the case
of Architectural Innovations -v- Rajasthan Co-op. Group Society8
the employers terminated the contract as also inserted a notice in the
news paper that the services of the architects have been terminated. Though
the contract did contain arbitration clause, yet the architects sought
relief under sec.9 of the Act on the following ground like:
i.
Specific performance of contract.
ii.
Order of the court that the termination of the contract was illegal.
iii.
Temporary injunction against the appointment of new architects, as also
copy rights in plans though work had come upto plinth level, as also for
proceeding with the further work.
However
the above suit was disposed of by the court by giving the following direction
to the parties:
Now
therefore, in terms of the provisions of section 10 and 11 of the Act the
third arbitrator is to be appointed by the two appointed arbitrators who
would function as the presiding arbitrator. Since the parties have taken
recourse to arbitration proceedings in respect of some of the claims arising
out of the contract the disputes raised herein are also required to be
resolved through the process of arbitration in terms of the arbitration
clause and therefore, the parties are directed to resort to arbitration
and the suit stands thus disposed of.
Performance
Bond (Condition No. 17 of I.I.A. Form of Contract) and Sec.9 of the Arb.
Act, 1996.
Condition
17 provides for the contractor to deposit with the architect bank guarantee
of specified amount for due performance of the contract. It is the common
mode of securing payment of money in commercial dealings as the beneficiary,
under the guarantee, is entitled to realise the whole of the amount under
that guarantee in terms thereof irrespective of any pending dispute between
the person on whose behalf the guarantee was given and the beneficiary.
These bank guarantees in construction field are classified depending upon
the purposes for which such guarantees are given like:
i.
Mobilisation advance guarantee for recovery of the whole of part of the
"advance loan", to be recovered in instalments from running bills.
ii.
Mobilisation advance guarantee against advance on plant and machinery.
iii.
Bank guarantee upto 10% of the contract value towards retention fund, also
called performance bond. This bank guarantee can be invoked by the employer
if the contractor has failed to pay liquidated damages and other ascertained
damages in terms of the contract. It is the breach which the contractor
has failed to rectify and hence invocation.
iv.
Labour hut removal bank guarantee.
v.
Consolidated or overall bank guarantee.
Settled
Legal Principles on Bank Guarantees and Grant or Refusal of Injunction:
a.
Bank guarantee is an independent contract.
b.
Payable on demand by the Bank which is not concerned with the dispute between
the beneficiary and the contractor.
c.
No interference in the process of encashment unless there is fraud or irretrievable
injustice.
Shortly
stated:
1.
Except in case of established fraud of an egregious nature as to vitiate
the entire underlying contract, or in case of special equities in the form
of preventing irretrievable injustice between the parties as noticed in
the case of Itek Corporation vs The First National Bank of Boston etc.,
allegations of irretrievable injustice must be genuine and immediate as
well as irreversible.
2.
In case of difficulties; parties be directed to the court for directions.
Settled
Principles for Grant or Refusal of Ad-Interim Injunction for the Encashment
of Bank Guarantee.
The
case of United Commercial Bank -v- Bank of India9 is the authority
on the settled principles for grant or refusal of ad-interim injunction
for the encashment of bank guarantees. It has been followed in subsequent
pronouncements by various High Courts and so also the Appex Court in their
subsequent pronouncements since then. In this case the Appex Court clearly
held that "no injunction could be granted under order 39 Rules 1 and 2
of the code unless the plaintiffs establishes that they had a prima facie
case meaning there by that there was benafide contention between the parties
on serious question to be tried in the matter of performance of contractual
obligations arising out of letter of credit or a Bank Guarantee. Further
that the balance of convaniance clearly lies in allowing of normal banking
transaction to go forward. The plaintiffs had failed to establish that
they would be put to irreparable loss if this interim injunction is granted.
Even somewhere in nineties, the Supreme Court after noticing the earlier
decision of the court summed up the position as under:
"......in
case of confirmed bank guarantees/ irrevocable letters of credit, it cannot
be interfered with unless there is fraud and irretrievable injustice involved
in the case and fraud has to be an established fraud...."
"......irretrievable
injustice which was made the basis for grant of injunction really was on
the ground that the guarantees was not encashable on its terms......"
"......there
should be prima facie case of fraud and special equities in the form of
preventing irretrievable injustice between the parties. Mere irretrievable
injustice without prima facie case of established fraud is of no consequence
in restraining the encashment of Bank guarantees.10
This
is being followed by all the courts from time to time.
Strict
rule to be come stricter; can there be no via media?
In
the interest of equity and justice and to prevent abuse of Sec.9 of the
Act can there be not a via media? Foreign courts have adopted different
line of approach as given in the case of Libya Green House case,
Pottan Homes case and Royal Design studio case of Singapore.
Edward
own Engineering Ltd., are doing business of supply of plants for Drip over
Head irrigation system including Green House, at Hampshire. They agreed
to supply the same to Agricultural Development Council of Libya. It is
known as Libyan Customers. The materials to be supplied from England to
Benghazi, contract price £502,030 payable in Libyan Dinars. Payment
by Libyan Govt.:
20%
Advance; 50% on presentation of shipping documents; 10% when materials
on site; 15% on provisional installation and 5% on completion.
The
Libyan Govt. asked Umma Bank (S.B. of Libya) to open an irrevocable documentary
credit in favour of Edward to pay such instalments.
Umma
Bank sent credit note to Edward through Barclays Bank. This credit note
was defective, as it gave power to Libya Govt. to release or not, to the
Bank.
Govt.
refused to make correction in letter of credit. However, some sort of arrangement
was reached whereby:
i.
Contract signed on 9.11.1976
ii.
Performance guarantee on 15.11.1976
iii.
Edward instructed Barclays to give performance guarantee.
iv.
In turn Barclays Bank requested Umma Bank to give performance guarantee
of 10% value.
The
Libyan Govt. terminated the contract and went for encashment. Lord Dinning
M.R.11 observed:
"On
the facts so far known, it appears that the English suppliers had not been
in
default at all. The only person in default were The Libyan customers. They
had not issued the confirmed letter of credit as they should have done.
Yet the Libyan customers appear to have demanded from the Umma Bank on
their guarantee... The long and short of it is that although prima facie
the Libyan customers were in default in not providing the letter of credit
nevertheless they appear to have claimed against Umma Bank on the performance
bond issued by them..."
It
is clear that on the facts before the Court the Libyan customers had repudiated
the contract, but English bank were, nevertheless held liable to pay the
Libyan Bank on the counter indemnity, fraud not having been alleged.
However,
case was decided against Edward own and held payable without going into
contractual position except for fraud, Lord Denning had treated the bond
as promissory note.
However,
both the concept of Lord Denning that court not to look at the contract
as well as treat Bond as promissory note has not been agreed by Eveleing
L.J. in the case of Pottan Homes Ltd. -v- Coleman Contractors (Overseas)
Ltd" (1984) 128 S.J. = Solicitor's Journal).
In
this case the English suppliers of pre-fabricated building units in Libya
received advance payments from English buyers, and in turn provided a bank
unconditional performance guarantee bound for £68,000. The suppliers
later claimed moneys due under their contracts, of which £89,000
was admittedly due and £40,000 disputed. The buyers defended alleging
defects and called on the bond. The trial judge gave judgment with a stay
of execution for £89,000; while holding that he had no power to restrain
a call on the bank or to issue a Marvel injunction, ordered the sums paid
by the Bank to be placed in a joint account. Held, by the Court of Appeal
that, while there was power to grant a Marvel injunction, the facts did
not justify such an order, and there was no other power, since the proceeds
of the bond in this case were the equivalent of cash in hand and must be
paid to the defendants. Per Eveleigh L.J., after considering the position
between the seller and the bank: "As between buyer and seller the underlying
contract cannot be disregarded so readily... Moreover, in principle I do
not think it possible to say that in no circumstances whatsoever, apart
from fraud, will the court restrain the buyer... I do not see why, as between
seller and buyer, the seller should not be able to prevent a call upon
the bond by the mere assertion (of the buyer) that the bond is to be treated
as cash in hand.... For a large construction project the employer may agree
to provide finance (perhaps by way of advance payments) to enable the contractor
to undertake the works. The contractor will almost certainly be asked to
provide a performance bond. If the contractor were unable to perform because
the employer failed to provide the finance, it would seem wrong to me if
the court was not entitled to have regard to the terms of the underlying
contract and could be prevented from considering the question whether or
not to restrain the employer by the mere assertion that a performance bond
is like a letter of credit..... I would wish atleast to leave it open for
consideration how far the bond is to be treated as cash in hand as between
buyer and seller".
Observes
Hudson in Hudson's Building and Engineering contracts, 1995 Ed. p.1556:
"Eveleign L.J.'s illustration of a construction contract in the above passage
is particularly significant, since the facts postulated by him are "effectively
those in the Edward own case. The quoted passage is likely to be of seminal
importance in supporting a potential remedy for debtors where beneficiaries
have abused their rights under unconditional bonds"
Via
media laid down by Thean J.
Thean
J in the case of Royal Design Studio Ltd. -v- Change Development Ltd.12
adopted via media of "status quo" after following both the cases of Libyan
Green House and pottan Homes case.
Construction
owners in Singapore terminated a contract on the ground of delay by the
contractor, at a time when they had considerable fund in hand under the
contract, as well as $1 million personal guarantee, and in addition an
unconditional bank guarantee of $120,000 for due performance by the contractor
The validity of the termination was disputed by the contractors who obtained
an ex part injunction preventing the calling of the bond. Held, by Thean
J., after considering the principal English authorities, and following
the views expressed by Eveleigh L.J. in the Potton Homes case, that none
of the English cases were concerned with disputes between the contracting
parties to the underlying contracts; and that merely because the bond was
like a letter of credit should not inhibit the court from exercising its
equitable jurisdiction to grant an injunction where it was proper to maintain
the status quo:
Abuse
of Sec.9 and court comes to Rescue
It
is a well known fact that Central Government state Government and Govt.
controlled undertakings are the largest employers in construction industry.
They have got crores of rupees in their kitties due to encashment of bank
guarantees even before the disputes have been adjudicated. It creates a
solid impact on the cash flows of the contractors and resulting in throttling
their financial necks. In order to counteract these acts of the employers,
at times the courts come to the rescue of the contractors, but in majority
of the cases, the employers right to encash bank guarantee is not disturbed
inspite of the fact that the building contract is an instrument of unequal
bargaining power which unequal bargaining concept has lost all its efficacious
in modern technological age.
Case
No. 1 Special case due to circumstances:
Where
the plaintiff prima facie makes out a case of utilisation of the entire
mobilisation advance for procuring the material for use on defendant's
building, as per the approved specification, the action of the respondent
to invoke the bank guarantee on cancellation of the contract work is not
justified because of the plaintiff having brought out special circumstance
sufficient to make the case an exceptional one justifying interference
by restraining the defenant from encashing the bank guarantee. As a matter
of fact, having gained knowledge that the plaintiff has procured substantial
material, the invocation of the bank guarantee after oral termination of
the contract appears to be fraudulent. In that view of the matter special
equities are in favour of the plaintiff and if the defendant is allowed
encashment of the bank guarantee, it would amount to irretrievable injustice
to the plaintiff
Case
of part relief u/s/9 of the Act
This
pertains to the case of Nangia construction (India) Ltd. -v- International
Air Port Authority of India,13 which shows to what extent S.9
of the Act can be abused and to what extent part relief can be granted
by the court.
The
case pertains to the repairs to main runway and other pavement work for
Indira Gandhti International Air Port. This involved the following bank
guarantees.
i.
Maintenance period Bank guarantees of ... Rs. 5,00,000
ii.
Mobilisation advance ... Rs. 28,77,191
iii.
Labour Hut land bank guarantee ... Rs. 1,00,000
Now
against the Bank guarantee of Rs. 28,77,191 (mobilisation advance) there
remained in balance of about Rs. 612,752/- to be recovered and balance
of Rs. 22,64,439/- already recovered. The contractor could not complete
the work in time whereby complete Bank guarantee of mobilisation advance
was encashed.
Held
: Grant of injunction against encashment of B.G. of Rs. 28,77,191 here
as B.G. of Rs. 500,000/- can be encashed.
Part
Relief Case
This
is the case14 wherein the respondent appointed Ranjeet combine
for construction of residential units. There was breach of agreement, for
which the petitioners were not to be blamed.
The
court held here that the conduct of the respondent might be unfair and
dishonest, however, the petitioner would have to stand on his own legs
and prove his bond fides as well as other things to be entitled to the
relief of specific performance. As noticed above, there is long delay in
coming to this court and that would not justify the grant of interim protection
by way of temporary injunction under Sec.9 of the Act in the facts and
circumstances and thereby stopping the raising of further construction.
Such a course will cause more loss and harm to respondent than to the petitioner.
The respondent as owner of the land is entitled to raise construction.
Balance of convenience is also not in favour of the petitioner. Whether
damages or specific performance would be appropriate relief has to be determined
by the Arbitral Tribunal.
Further
held, in the circumstances, I do not find a valid ground for grant of interim
relief as claimed under Section-9 of the Act. However, the construction
of the building shall be subject to the final decision in the arbitral
proceedings and the respondent shall not sell, part with possession or
otherwise create third party interest in the building that may be constructed
or in any part thereof. These applications are accordingly, partly allowed.
Condition
No. 48 and 49 of I.I.A. from of contract
These
conditions deal with rights and duties of the parties on termination of
the contract, which termination can be at the instance of either employer
or the contractor. These also show the circumstances under which party
will be entitled to termination as also procedure to be followed for termination.
The
termination can lead to encashment of bank guarantee by the employer as
also confiscation of plant and machinery by them to set off losses and
expenses.
In
some cases the courts have come to the rescue of the contractors-petitioners
in circumstances like: Owner takes out the contract as per the terms of
contract which also gives right to the owner to sell plant and machinery
towards satisfaction of expenses and losses. Here the court may grant injunction
against sale of plant and machinery till the owner proves that firstly
he has suffered losses and incurred expenses and secondly the owner has
reasonably quantified the same.
In
the case of Wipro Finance which deals with plant and machinery, court did
extend its protective wings to the petitioners, the synopsis of which is
as under:
Arbitration
and Conciliation Act 26 of 1996, Section 9 Lease agreement - Instalment
not paid - Agreement terminated - Petitioner claimed ownership of plant
machinery and entitled to take and seize the same - Respondent disputed
the ownership - clause 21 of the lease agreement - Held, it is just, proper
convenient and expedient in the interest of justice that a receiver should
be appointed to seize and take possession of the plant and machinery ...
... Petition allowed.
Further
held, the lease equipment belongs to the petitioner. The respondent has
no right to retain and use it - If it is allowed to be used by the respondent
without making the payments due, not only the petitioner is deprived of
their property but a valuable security would be lost/destroyed due to its
use and by passage of time. In these circumstances, it is just, proper
convenient and expedient in the interest of justice, that a receiver should
be appointed to seize and take possession of the plant and machinery from
the possession of the respondent wherever it is available.15
Condition
No. 56 of I.I.A. from of contract, the Arbitration Clause can there be
a Misuse?
Section
9 provides period for making an application to the court for interim measures
like:
i.
Before the arbital proceedings
ii.
During the arbitral proceedings
iii.
Or at any time after making award but before it is enforced.
However,
Sec.17 gives power to arbital tribunal to issue interim orders of protection
during one time parameter of "during arbitral proceedings only.
The
court can issue the orders for interim measures even though at the time
when application is made u/s.9 of the Act, the arbitral proceedings have
not commenced.16 However application was made by the party u/s/9
of the Act to restrain the arbitrator from proceeding with the matter,
setting aside the plea, the court observed:
The
words "before or during arbitral proceedings" are required to be given
full effect to. It therefore follows that the provisions of section 9 cannot
be availed of by the party which has no intention to approach the arbitrator
and the provisions of Section 9 cannot be used to do away with the appointment
of the arbitrator, and not to have resort to arbitral tribunal for resolving
the dispute between the parties as provided in the agreement. The interim
protection as envisaged by section 9 is for the persons who are intending
to take resort to arbitration or for those who are already parties to arbitration
proceedings before the arbitral tribunal.17
Conclusion
Part-I
: One is aware of the law settled by the court on the vexed question of
encashment of bank guarantees, specially Loard Dinning's concept of it
being a promissory note but no remedies are available against the misuse
of Sec.9 of the Arbitration and Conciliation Act, 1996 except for arbitration.
This advice of arbitration is available to the contractors but not to the
employers, who can encash the bank guarantees at their own sweet will.
The circumstances given below will bring out the points clearly:
A performance
guarantee is given to secure performance of the work as per the contract,
but how about the lapses on the part of the employer who prevents completion
of work by act of omissions and commissions on his part like:
a.
After first bill, work stopped - contractor spent mobilisation fund in
infra-structure. No fault of contractor still owner encashed bank guarantee.
b.
In a number of cases the authority encash bank guarantee wrongly putting
a lot of pressure on the contractor. What is remedy? No protection U/S.9.
c.
How about delay caused by the facts beyond the control of any one and also
in the case of Force Majeure. Here also the contractor has to stand at
the mercy of the owner.
Part-II
Guarantee
for Mobilisation Advance:
The
contractor has been paid the mobilisation advance, which has been utilised
by him for mobilisation at site of work. The agreement provides for recovery
of advance during the pendency of contract. Due to certain fundamental
breaches of obligations by the employer, the contractor is not able to
execute the work properly and as a result, at the end of the contract period,
practically the whole of the advance remains unsecured from the work bills.
In
the said situation the contractor is already at a dis-advantage as all
the mobilisation done by him remains under-utilised and he fails to get
reasonable returns on his own investments, and also losses on mobilisation
advance as he has to pay interest on the same without getting adequate
returns. He also suffers further losses due to infructuous overhead and
supervision expenses. However, even in such a situation, the bank is required
to make payment in terms of the bank guarantee provided the demand is make
in terms of the guarantee.
No
doubt, in the light of the recent judgment of the Delhi High Court, the
liability would be to the extent of the unrecorded part of the advance,
but still the contractor stands to lose substantially and could well be
crippled or ruined financially. At such a time, the proposition that he
is always free to seek legal redressal of his grievances by claiming damages
will be a consolation only.
Part-III
Plant
and machinery
As
provided in the agreement, the contractor had furnished requisite bank
guarantees towards advance received by him against plant and machinery
brought by him, and in addition he had also pledged/hypothecated the said
plant and equipment against which advance had been drawn in favour of the
owner. For a number of reasons, attributable to failures by both the owner
and contractor in fulfilling some of their obligations and also due to
reasons beyond control of the contractor including force majeure, the work
could not be executed as planned and at the end of initial contract period,
work could not be completed and the advance could not be recovered at all/partially
recovered.
In
such a situation, the contractor is already at a dis-advantage, as the
mobilisation done by him remains under-utilised as discussed in detail
in the case of mobilisation advance and he also suffers further losses.
However,
even in such a case the bank would be required to honour the bank guarantee
if encashment was sought by the owner in terms of the guarantee. In such
a case, the contractor is at a double disadvantage, as the investments
made for plant and machinery remained under-utilised and the guarantees
were encashed and in addition to the plant and machinery continue to remain
hypothecated/pledged to the owner, which can be taken over by the owner
in case of termination of contract or similar situation.
Hence
it is suggested that some safeguards are required to be made so as to discourage
misuse of Sec.9 of the Act, like:
1.
Status Quo be maintained, which is well shown by case of Royal Design Studio
-v- change Development Ltd. (1991) 2 MLJ 229 (p.1556 of Hudson).
2.
Amount of bank guarantee be weighed against balance of liability and be
considered.
3.
Detailed survey of the work, plant and machinery on site, materials on
site etc., be done by the architect as commissioner before grant or refusal
of interim injunction.
4.
Wrong encashment of bank guarantee be accompanied with return of amount
at 1.15 times of it with interest thereof , or the employer to give a counter
bank guarantee which will discourage the employer from an unjustified encashment
of bank guarantee of the contractor.
5.
The amount of bank guarantee be invested to the credit of arbitration proceedings
and find its destination based on result of the award so that plus one
position of the employers as also throtteng of the contractors could be
prevented.
