Delhi High Court
Sharma Enterprises vs National Building Construction ... on 2 December, 1997
Author: D.K.Jain
Bench: D.K. Jain
ORDER D.K.Jain, J.
1. By this petition under Section 20 of the Arbitration Act, 1940 (for short the Act), the petitioner/contractor seeks a direction to the respondent to file the agreement, dated 18 January 1991 between the parties, containing the arbitration clause and appoint a retired Judges of this Court as the sole arbitrator to adjudicate upon the disputes between the parties, as the respondent has failed to appoint an arbitrator in terms of the said clause.
2. The facts relevant to the controversy involved are as under.
3. The Respondent-National Building Construction Corporation Limited (for short the NBCC) had entered into a sub-contract with the Indian Railway Construction Company Limited (herein after referred to as the IRCON), in respect of a contract which had been awarded to it by the City and Industrial Development Corporation (for short CIDCO) for construction of Railway station building-cum-commercial complex at Vashi in New Bombay. For the purpose of execution of the said work, the NBCC, in turn, invited tenders for a part of the aforementioned work namely, "flooring and cladding" at the said Railway station. The petitioner submitted its tender, which was accepted and the affronted agreement was formally executed between the parties on 18 January 1991, though letter of intent was issued on 7 December 1990. The value of the work awarded was Rs.950.74 lacs and the period for execution of the work, so assigned, was two years. It appears that during the course of execution of the said work, some disputes arose between the parties and ultimately, on 22 September 1992, the respondent terminated the contract. Claiming that certain disputes had arisen between the parties, the petitioner, vide its letter dated 20 June 1992, invoked the arbitration clause 62.1 of the general conditions of contract and called upon the respondent to appoint an arbitrator within seven days after obtaining approval of IRCON/CIDCO as per the requirement in the tender. Having failed to get any response to the said notice, the petitioner filed the present petition on 14 September 1992.
4. Not disputing the existence of an arbitration clause in the agreement, the petition is resisted by the respondent mainly on the ground that an arbitrator, namely Mr. Daljit Singh, General Manager of NBCC, having been appointed as the sole arbitrator on 27th January 1993, to adjudicate and decided the alleged disputes, the present petition had been render infructous.
5. The point for consideration is whether the petitioner is entitled to have a independent arbitrator appointed?
6. I have heard Mr. Ashok Bhasin, Advocate for the petitioner and Mr. Mukul Rohtagi, senior counsel for the respondent at some length.
7. Mr. Bhasin, learned counsel for the petitioner has submitted that since the respondent had failed to appoint an arbitrator, in terms of the arbitration clause, for almost six months after the receipt of request by the petitioner, vide its letter dated 20th June 1992, the respondent has forfeited its right to appoint an arbitrator and the petitioner is entitled to invoke the jurisdiction of this court under Section 20(4) of the Act, for appointment of an independent arbitrator. In support, reliance is placed on two divisions of the Supreme Court in G.Ramachandran Reddy & company, Vs. Chief Engineer, Madras, MES, and Nandiyal Co-op. Spinning Mills Limited. Vs. K.V.Mohan Rao, and a decision of the Rajasthan High Court reported as State of Rajasthan and Others Vs. M/s. S.S. Atwal & company, .
8. On the other hand, Mr. Rohatgi, learned counsel for the respondent, while candidly admitted that there has been some negligence on the part of the respondent in not taking prompt action for the appointment of an arbitrator, has contended that mere delay in the nomination of the arbitrator by the respondent cannot clothe the petitioner with the right to wriggle out of the arbitration clause and have an arbitrator of his choice. His submission is that there has to be an endeavour to give full effect to the arbitration agreement, which exists between the parties and the court should not hasten to appoint an independent arbitrator in place of named arbitrator. He has placed reliance on a Full Bench judgment of this Court in Fed Brakes Mistral Vs. Union of India, and a recent decision of this Court, dated 31st March 1997, in the case of M/s. Puri International Pvt. Limited Vs. N.B.C.C. (Suit No.973 A/95).
9. It is not in dispute that according to the arbitration clause all disputes/differences of any kind whatever or questions arising out of or in connection with the agreement between the sub-contractor and the NBCC have to be referred to the sole arbitration of an Engineer of the Corporation of NBCC, not below a particular rank, to be appointed by the Chairman-cum-Managing Director of NBCC. As noted above, the demand for appointment of arbitrator was made by the petitioner vide its letter, dated 20th June 1992, to the respondent but no action was taken on it for over six months. Thus, the question for consideration is whether on failure on the part of the Chairman-cum-Managing Director of N.B.C.C. to name an arbitrator, in response to this demand for over six months, the respondent has forfeited its authority to appoint an arbitrator of its choice. At this stage, it would be relevant to extract a portion of the letter dated 27th January 1993 whereby the Chairman-cum-Managing Director of NBCC had appointed the affronted sole arbitrator:
"NOW THEREFORE, I, R.C. KEHAR the Chairman-cum-Managing Director, NBCC Ltd., New Delhi in exercise of the powers conferred on me, do hereby appoint Shri. Daljeet Singh, General Manager, NBCC Ltd., Calcutta as the sole arbitrator to decide and make his Award regarding the disputes/claims mentioned in Annexure Q of the petition bearing Suit No.3446/96, (except the disputes/claims pertaining to the Bank Guarantees and the disputes/claims in respect of which the decision of a particular authority is stated to be as final), and also the counter claims of the respondents, if any, subject however to their admissibility under the terms and conditions of the contract."
10. From a bare reading of the order appointing the sole arbitrator, it is evident that the Chairman-cum-Managing Director of the respondent, initiated action for appointment of an arbitrator only after a notice in the present petition had been issued to the respondent and not when it was demanded by the petitioner in June 1992. No reason is ascribed or indicated in the reply to the petition for inaction by the respondent for a long period to the appointment demanded by the petitioner, which reflects their aversion to the bona fide demand of the petitioner. But for this petition, in all probability, the arbitrator would not have been appointed even till now.
11. In this factual backdrop it is now to be considered whether the procedure as envisaged in Section 20(4) of the Act can be resorted to and an independent Arbitrator appointed, instead of the notified arbitrator in terms of the arbitration clause, because the appointment of Mr.Daljit Singh by the respondent as the sole arbitrator, under the explained circumstances, is not acceptable to the petitioner.
Having considered to the matter in the light of the decision of the Supreme Court in G.Ramchandran Reddy's Case (Supra), I am of the view that the respondent's nonchalant, inexplicable attitude to sit tight and not to act on the letter of the petitioner dated 20 June 1992 for over six months, is indescribable. Agreeing to their highly belated action, practically forced on them by the filing of present petition under Section 20 of the Act, would be to excuse their inaction without a submission for it and increase the malady. In the totality of the circumstances, I am of the view that the respondent has forfeited its right to appoint an arbitrator in terms of the affronted arbitration clause and the petitioner is justified in invoking this court's jurisdiction under section 20 of the Act and seek the appointment of an independent arbitrator.
12. In G.Ramachandran Reddy's case (supra), while dealing with the case where the respondent has failed to appoint an arbitrator in terms of the contract between the parties, the court did observed that every endeavour should be made to give effect to the contract between the parties and the parties would be normally bound by the terms of the contract and the court may not be justified to appoint any arbitrator unless the arbitrator refused or neglected to enter upon the reference etc; but when a notice is given to the opposite contracting party to act upon the terms of the contract and appoint an arbitration in terms of the contract and if no explanation is forthcoming for the long delayed inaction, it must be deemed that the said party contumaciously neglected to act upon the contract, thus giving a right to the other party to invoke the court's jurisdiction under Section 20 of the Act to have an independent arbitrator appointed.
13. I am conscious of the fact that in Union of India Vs. Prafulla Kumar Sangal, , on failure of the persons designate to nominate an arbitrator, the Court, on an application under Section 20(4) of the Act, held that it was competent to appoint an arbitrator, but observed that in doing so it is desirable that the Court should consider the feasibility of appointing an arbitrator according to the terms of the contract. This, however, is not an inflexible rule. With respect, the facts and circumstances of the case in hand do not call for putting premium on inefficiency or recalcitrant attitude of the respondent.
14. Again, the Ved Prakash Mittal's case (Supra), which has been heavily relied upon by learned counsel for the respondent, on failure of the person designate to nominate an arbitrator, the Court held that it was competent to appoint one under Section 20(4) of the Act. While holding that in such a situation, Section 8 of the Act would have no application, and the court would have the power to appoint an arbitrator itself under Section 20(4) of the Act because it would be a case "Where the parties cannot agree upon an arbitrator". The quoted observations squarely apply to the facts in hand. In that case, the Court nominated an arbitrator, but following the observations of the Supreme Court in Union of India Vs. Prafulla Kumar Sangal's case (supra) directed the Chief Engineer to appoint an arbitrator within two months failing which court's nominee was to act. In Ramachandran Reddy's Case (supra), the Supreme Court while notice while noticing Prafulla Kumar Sangal's case (supra) distinguished it on facts and observed that in that case the parties had agreed before the Supreme Court, that the President should be asked to appoint an arbitrator as contemplated in the arbitration clause, within a fixed time, and it was on account of this consent by the parties that the court had expressed the desirability to appoint an arbitrator in terms of the contract, which is not the case here.
15. As noticed above, neither in its letter dated 27th January 1993, appointing Mr. Daljeet Singh as the sole-arbitrator; nor in its reply to the petition the respondent has spelt out or indicated any reason why it could not appoint an arbitrator for over six months. The irresistible conclusion is that they kept completely unconcerned with the matter. The claimant could not be expected to wait indefinitely for the persona-disignata to act on his request for appointment of an arbitrator. The respondent, in the circumstances, cannot be heard to say that after receipt of notice from the Court it got up from its slumber to nominate an arbitrator to ward to Court's notice. I fell that in the circumstances, the Court, acting under Section 20(4) of the Act, is competent and justified to appoint an independent arbitrator.
16. For the foregoing reasons, the petition is allowed. Let the original arbitration agreement be filed in court. Justice G.C.Jain, a retired Judge of this court is appointed as the sole arbitrator to adjudicate upon the following disputes, spelt out in the petition:
1. Whether the respondent is liable to pay the sum of Rs.1,08,47,848.00 (Rupees One Crore Eight Lakhs Forty Seven Thousand Eight Hundred Forty Eight Only) as per break-up given in letter dated 8.9.92 annexed with the petition as annexure ?
2. Whether respondent is liable to pay interest @ 24% p.a. on the said amount from the date the same became due till its realisation?
17. The learned arbitrator will fix his own fees and shall make and publish his award within four months from the date of entering on the reference. A copy of this order alongwith a copy of the letter dated 8, September 1992, annexed with the petition as Annexure Q be sent to the learned arbitrator directly by the office.
IA Nos. 11501/92 & 7327/94.
18. By these two applications, filed under section 41 read with IInd Schedule of the Act, the petitioner seeks to restrain the respondent from encashing the six bank guarantees, each for Rs. 3,96,000/-, totalling Rs.23,76,000/- furnished by it in favour of the respondent and further the discharge of the said bank guarantees. These were furnished by the petitioner to secure mobilishing advance in terms of the contract between the parties, noticed above. In addition thereto the petition also furnished one bank guarantee in the sum of Rs. 19,01,380/- to ensure due performance of the contract. Since, certain disputes had arisen between the parties: the contract had been terminated on 22nd September, 1992; and the affronted petition was filed for appointment of an independent arbitrator for adjudication on the disputes raised, apprehending invocation of the bank guarantee, the petitioner filed these applications.
19. When IA No.11501/92 came up for hearing on 15th September 1992, admittedly the bank guarantees in question had not been invoked, and by an ex parte order the respondent was restrained from enchasing the bank guarantees in question. The said order still continues to be in operation. No interim order has been made in the second application being IA No.7327/94, seeking discharge of the bank guarantees, filed after respondent's reply to the main petition as also to the application seeking interim relief.
20. In the first application (IA 11501/92), it is alleged that:
a) A fraud has been played on the petitioner by the respondent inasmuch as the terms and conditions contained in the letter of intent and the agreement dated 18th January, 1991 were unilaterally, mischievously and surreptitiously altered by the respondent in most fraudulent and illegal manner when the actual work order was issued by it; (b) the change in description of the materials was brought about without the consent of IRCON and without any proper notice in writing or otherwise from the respondent or without any corrigendum to this effect. No fresh averments of significance have been made in the second application (IA 7327/94).
21. Both the applications are opposed by the respondent. The second one principally on the plea that disputes having arisen, the bank guarantees need being kept alive to recover the amounts which may be found due to it by the arbitrator.
22. Mr. Bhasin, in support of his stand that the entire contract is vitiated by fraud has pointedly invited my attention to paras 4, 6, and 8 of the first application, which contain the aforesaid allegations. He contends that this unilateral change in the terms of the agreement amounts to "fraud" at the threshold of the contract and, therefore, the respondent cannot be permitted to take advantage of its own fraudulent act and invoke the bank guarantees in question. Mr. Bhasin has also submitted that the respondent was also not justified even in relating all the six bank guarantees to secure the mobilisation advance as the petitioner was given a mobilisation advance of only Rs. 15 lacs, which sum has already been got adjusted in the running bills. He has also urged that without obtaining the approval of the main agreement from the IRCON the demand to furnish bank guarantees was also fraudulent. In support reliance is placed on a judgment of this court in Nagia Construction (India) Pvt. Limited Vs. NBCC & Ors. 1990 Delhi Lawyer 403. Before opening his arguments on merits, Mr. Bhasin also invited the attention to the court to the reply filed by the respondent in IA 7327/94 to press his point that even the respondent was agreeable to the extension of validity of bank guarantees till the settlement of disputes by arbitration and, therefore, there was no occasion or justification for them to invoke the bank guarantees in question.
23. On the other hand Mr. Rohatgi, has submitted that in view of various judgments of the Supreme Court, particularly in Dwarikesh Sugar Industries Ltd. Vs. Prem Heavy Engineering Works (P) Ltd. U.P.Co-operative Federation Ltd. Vs. Singh Consultants and Engineers (P) Ltd. 1988 (1) SC 174 and Svenska Handelsbanken Vs. Indian Charge Chrome & Ors 1994 (1) SCC 502, the view taken in Nangia Construction's Case (Supra) cannot be said to be good law any longer. He was urged that in so far as back to contract between IRCON and the respondent is concerned it has no relevance insofar as the question of furnishing or invoking the bank guarantees in terms of the agreement between the parties is concerned. Explaining the aforesaid stand of the respondent in its reply to IA 7327/94 he submits that it is implicit in the reply that the said suggestion was subject to the condition that the settlement of disputes through arbitration was to be in terms of the arbitration clause contained in the agreement between the parties, which, on the main petition by the petitioner, has been held to be not binding on him and an independent arbitrator has been appointed by this Court.
24. It is fairly well settled by a catena of judgments of the Supreme Court that bank guarantees are independent contracts whereby the bank undertakes to unconditionally and unequivocally abide by its terms unaffected by the disputes between the parties to the underlying transactions. In U.P. State Cooperative Vs. Sumac International Ltd. , it has been held that existence of any dispute between the parties to the contract is not a ground for issuing an injunction to restrain the enforcement of bank guarantees. There must be fraud in connection with the bank guarantee. This is consistent view expressed by the Supreme Court in its various decisions including he affronted three judgments. In Dwarikesh Sugar Industries Limited's (supra), the latest in the series, while reitering the principles laid down in its earlier judgments, it has been held that the fraud has to be an established fraud. The evidence with regard to the fraud has to be clear, both as to the fact of fraud and as to bank's knowledge.
25. Applying the above principles on the facts of the present case, I find it difficult to hold that the contract between the parties is vitiated by fraud much less an established fraud in securing the guarantees, as alleged by the petitioner.
26. On a pointed query whether on receipt of the agreement dated 18th January 1991 the petitioner had protested about the change in its terms, learned counsel has relied upon a letter dated 21th January 1991. The relevant portion of the letter reads as follows:
"We have signed the documents in good faith. To our surprise it was found in page No.30/76 item no.10, 31/76, vi, vii, 32/76, 11; 34/76, 15; 41/76, 30 the nomenclature has been completely changed to 'Fine hand dressed mathai granite' instead of 'rough granite' as specified in our original tender quoted by us. Please incorporate necessary corrections in the same. In the case the same affected by an amendment, the same shall form a part of the agreement".
27. Though in the light of the said letter, it could be said that the petitioner lodged its protest to the variation in terms of the agreement, which is alleged to have been changed without its consent, but the fact remains that despite all this it ontinued to execute the work under the same agreement for well over one year till the respondent finally terminated the same on 22nd September 1992, possibly on account of non-performance on the part of the petitioner. Thus, even assuming that the terms of the contract were changed by the respondent unilaterally after settling the same, the petitioner could, at the threshold withdraw its offer and the guarantees but the mere fact that the aggrieved petitioner continued to execute the work under the same agreement by itself shows that the change in the terms of agreement was not taken with any seriousness. It is too late in the day for the petitioner now to allege that the entire agreement/contract is vitiated by fraud. Similarly, the ground that since the respondent had not taken the approval, of the IRCON, the entire agreement is fraudulent, in my view, is specious and cannot be accepted. No such plea was raised during the subsistence of the contract. In the light of the affronted judgments of the Supreme Court, it is unnecessary to deal with the decision of this court in Nagia Construction's case (Supra), which is otherwise distinguishable on facts.
28. As regards the arguments of Ld. counsel for the petitioner, based on the reply of the respondent in IA No.7327/94, it seems clear that the said concession was made under the belief that the petitioner has still been willing to go in for arbitration in terms of the arbitration agreement and not by an independent arbitrator and does not stop the respondent from opposing the prayer for stay of invocation of the bank guarantees.
29. Mr. Mukul Rohatgi, learned senior counsel for the respondent, states that against the six bank guarantees in the total sum of Rs. 23,76,000/-, which were initially furnished by the petitioner only a sum of Rs. 15,00,000/- was disbursed to the petitioner and even after the release of one of the bank guarantees' in the sum of Rs. 3.96 lacs (No.32/228 dated 16th January, 1991), the bank guarantees still available with the respondent are in the total sum of Rs.19.80 lacs and, therefore, the respondent is ready and willing to reimburse to the petitioner the balance sum of Rs. 4.80, in case the bank guarantees in question are allowed to be encashed. This is a fair concession and undertaking.
30. For the aforesaid reasons, I am of the view that the petitioner has failed to make out a prim facie case in its favour for grant of ad interim injunction, restraining the respondent from encashing the bank guarantees in question. The balance of convenience also does not lie in its favour. The question of irretrievable injustice to the etitioner also does not arise as the disputes have already been referred to an independent arbitrator for adjudication and therefore, it cannot be said that there is no possibility of recovery of the amounts, which may be realised by the respondent under the bank guarantees in question.
Consequently both the applications are dismissed and interim order dated 15th September, 1992 is vacated subject to the condition that as and when the bank guarantees are invoked and encashed, the respondent shall, as undertaken, forthwith reimburse a sum of Rs.4.80 lacs to the petitioner.
It is pointed out by learned counsel for the respondent that original letters extending the bank guarantees have not been furnished by the petitioner. The same shall be furnished by the petitioner to the respondent within five days.
The suit and the application stands disposed of with no order as to costs.