THE INDIAN COUNCIL OF ARBITRATION
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Building Contract and  Interim Measures

Dr. H. Roshan Namavati

 
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.

 
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