Gujarat High Court
Datang Technologies And Engineering ... vs Sarjan Construction Pvt Ltd on 20 July, 2022
Author: Sonia Gokani
Bench: Sonia Gokani
C/FA/3391/2021 JUDGMENT DATED: 20/07/2022
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/FIRST APPEAL NO. 3391 of 2021
FOR APPROVAL AND SIGNATURE:
HONOURABLE MS. JUSTICE SONIA GOKANI
and
HONOURABLE MR. JUSTICE HEMANT M. PRACHCHHAK
==========================================================
1 Whether Reporters of Local Papers may be allowed YES
to see the judgment ?
2 To be referred to the Reporter or not ? YES
3 Whether their Lordships wish to see the fair copy NO
of the judgment ?
4 Whether this case involves a substantial question NO
of law as to the interpretation of the Constitution
of India or any order made thereunder ?
==========================================================
DATANG TECHNOLOGIES AND ENGINEERING INDIA PVT LTD
Versus
SARJAN CONSTRUCTION PVT LTD
==========================================================
Appearance:
MR S M DAVE(11268) for the Appellant(s) No. 1
MR. JAIMIN R DAVE(7022) for the Appellant(s) No. 1
MR PS GOGIA(2751) for the Defendant(s) No. 2
PARAS K SUKHWANI(8284) for the Defendant(s) No. 1
==========================================================
CORAM:HONOURABLE MS. JUSTICE SONIA GOKANI
and
HONOURABLE MR. JUSTICE HEMANT M. PRACHCHHAK
Date : 20/07/2022
ORAL JUDGMENT
(PER : HONOURABLE MS. JUSTICE SONIA GOKANI)
1. The appellant is before this Court with this appeal under Section 37(1) of the Arbitration and Conciliation Act, Page 1 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 1996 read with Section 13 of the Commercial Court Act against the order dated 03.09.2021 passed by the learned Additional District Judge, Rajula in Civil Misc. Application No. 08 of 2021 whereby the Court allowed the application of the respondent no.1 under Section 9 of the Arbitration and Conciliation Act, 1996 for stay on invocation of performance bank guarantee till finalization of the public works under the contract.
2. The grievance on the part of the appellant is that the contract between the parties stood terminated and yet the direction had been issued by the Court to complete the public work as agreed in the contract. The facts leading to the present appeal are as follows:-
2.1. The appellant invited the offer for work of Pile Foundations of Wet Limestone Based Flue Gas Desulphurization Plan for GSECL Wanakbori STPS Unit-8 (1*800 MW) FGD Project Construction and Installation, whereby the respondent no.1 submitted his final offer on 01.07.2020. A Letter of Award (for short 'LOA') dated 17.07.2020 was issued by the appellant to the respondent for the Flue Gas Desulphurization Package at Wanakbori for 800 MW Unit. The time of mobilization was within 15 days of Page 2 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 issuance of LOA and for completion of the Pile Foundation Work the period granted was 120 days after mobilization. 2.2. A performance bank guarantee dated 31.07.2020 for the sum of Rs. 1,08,10,900/- vide No. 10050100000132 was submitted by the respondent no.1 and advance bank guarantee for the sum of Rs. 72,07,258/- was tendered which was valid till 30.11.2020.
2.3. It is averred by the appellant that the performance bank guarantee furnished by the respondent no.1 would entitle the appellant to make claims either in full or in part of the guarantee amount on or before 30.11.2022. It was also set out that the Court of Delhi would be the Court of competent jurisdiction and any dispute arising from or in connection with this guarantee shall be submitted to the Indian Council of Arbitration for arbitration to be conducted by a sole arbitrator in accordance with the Commission's Arbitration Rules in effect at the time of applying for arbitration. 2.4. It is further averred by the appellant that the parties executed the contract for Pile Foundation Work of Wet Limestone Based Flue Gas Desulphurization Plant at Wanakbori for 800 MW unit (it would be referred to as 'contract' hereinafter) on 01.09.2020. Under the contract, the Page 3 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 respondent no.1 was required to carry out the work of construction of Pile Foundation for Wet Limestone Based Flue Gas Desulphurization Plant. This obligation was not performed by the respondent no.1 under the contract who committed various defaults as averred by the appellant and the same included the delay in construction of the test piles, delay in submission of the report of test piles which were required to be approved before the construction of working piles and adopting a testing methodology which was not in conformity with the requirements under the contract. 2.5. It also averred that the results of the test piles which were constructed by the respondent no.1 did not meet the design requirement provided under the contract.
Resultantly, the construction of the working piles could not be carried out. The attention of the respondent no.1 was drawn by various communications that the necessary standards were not matched which otherwise were required to be adhered to as per Article 3 read with Article 4 of the contract. These repeated failures, according to the appellant, had delayed the project completion and led to immense losses. 2.6. The appellant had also directed the respondent no.1 to ascertain the causes of failure, conduct soil Page 4 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 investigation test once again, however, the respondent no.1 had made the demands which are alleged to be unreasonable and baseless and in complete breach of the terms of the contract. The grievance is also made that the respondent refused to perform the work which were otherwise its obligations. It also had sought to impose unreasonable conditions contrary to the express terms of the contract as a pre-condition to resume the work. The conditions which were insisted for and which are alleged to be unreasonable are also narrated in the appeal.
2.7. The appellant informed respondent repeatedly the breaches and defaults committed and pointed out in various communications that the same would entitle the appellant to invoke the unconditional bank guarantee provided by the respondent no.1 under the terms of contract to offset its losses. It is further averred that the advance bank guarantee furnished by the respondent no.1 expired on 30.11.2020 which had been issued in contravention to the requirements under the contract as it deviated from the format provided under the contract and reduced the period of encashment by one year. The request on the part of the appellant to extend the bank guarantee within 10 days on 26.02.2021 also was not acceded to. This failure on the part of the respondent to Page 5 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 renew the advance bank guarantee is also termed as a contravention to the express terms of the contract. 2.8. On 22.04.2021, the respondent no.1 issued an email to the appellant requesting that the contract should be foreclosed as both the parties are unable to resolve the disputes which had arisen between them. The respondent no.1 also had shown the readiness to reimburse the advance payment received by them after deducting the amount of actual work done at the site and actual expenses incurred by them at site.
2.9. It is the say of the appellant that respondent no.1 sought to convey its intention to exit from the contract on 22.04.2021 however, they reentered into negotiation for the purpose of attempting to arrive at some solution and eventually, the communications were exchanged between the parties. The Minutes of Meetings (for short 'MoM') were also sought to be unilaterally revised. The revised MoM was also not executed by the respondent no.1 on the ground that the authorized signatory had contracted covid. 2.10. While attempts were on and according to the appellant, there were sincere efforts made for amicably resolving the disputes and resume the performance contract, Page 6 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 the respondent no.1 filed petition under Section 9 of the Arbitration and Conciliation Act before the Bombay High Court on 05.05.2021 seeking the intervention of the Court as also seeking the relief of injunction against the appellant and respondent no.2 from encashment of performance bank guarantee issued for a sum of Rs. 1.08 crores (rounded off) without disclosing the fact that performance bank guarantee was an unconditional and irrevocable bank guarantee. 2.11. As the office of the appellant was not functioning, the service effected by e-mail on the appellant had gone to spam folder of the employee of the appellant. The appellant was unaware of the proceedings initiated against it before the Bombay High Court and hence, was not in a position to appear on the first two hearings. On 27.05.2021, when none was present on behalf of the appellant, the Court granted relief of injunction to the respondent no.1 for a limited period of three weeks which expired on 18.06.2021 and directed the respondent no.1 to serve the appellant again. The appellant became aware of the said petition on receiving the e-mail of the counsel of the respondent. As the parties have agreed on exclusive jurisdiction of the Court at Delhi, the appellant had apprised the Court of the same. The Bombay High Court was not inclined to extend the injunction after the issue of Page 7 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 jurisdiction was brought to its notice and the matter had been posted on 23.06.2021 for passing the order. 2.12. While Section 9 petition was still pending before the Bombay High Court, without taking leave of the High Court, the respondent no.1 approached the District Court at Rajula and filed an application on 21.06.2021 under Section 9 of the Arbitration Act, where also, the similar prayers of injunction against the appellant was sought by the respondent from invoking performance bank guarantee. There also, the two aspects had not been revealed. The appellant had not been served through e-mail but on the office of the appellant the service of summons under Section 9 Petition before the District Court at Rajula. It is averred that the appellant remained unserved and was not aware of the said application preferred by the respondent no.1.
2.13. It is the grievance on the part of the appellant that he was unserved and could not appear before the District Court, Rajula to participate in the proceedings initiated under Section 9 of the Arbitration Act by the respondent no.1. The Court vide its order dated 21.06.2021 passed an order in favour of the respondent no.1 injuncting the appellant from encashment of the performance bank guarantee. Page 8 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022
C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 2.14. On 23.06.2021 when the matter came up before the Bombay High Court, the counsel of the respondent no.1 appeared and withdrew Section 9 Application without mentioning anything about filing of Section 9 Application before the District Court, Rajula or the order dated 21.06.2021 passed by the Court. It is the say of the appellant that Section 9 Application is devoid of any pleadings indicating the presence of any of the special circumstances of fraud, irretrievable injustice or the presence of any special equities to bring within its ambit the matter and the exercise of powers under Section 9 of the Arbitration Act. 2.15. Both the issues have been raised by the appellant; the maintainability of the application and the jurisdiction of the District Court, Rajula with the following prayers:-
"(a) call for the records of the case being Civil Miscellaneous Application No. 08 of 2021;
(b) set aside the Impugned Order dated 03.09.2021 passed by the Hon'ble Additional District Judge at Rajula in Civil Miscellaneous Application No. 08 of 2021;
(c) pass such other/further orders as this Hon'ble Court may deem fit and appropriate in the facts and circumstances of the present case."
3. The appellant also moved Civil Application No. 01 of 2021 for stay of the impugner order dated 03.09.2021 Page 9 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 passed by the Additional District Judge, Rajula in Civil Misc. Application No. 08 of 2021. Reply to the same has been filed by the respondent no.1 denying all allegations and contentions raised in the application.
3.1. According to the respondent, the appellant awarded contract to the third party before terminating the contract of the respondent no.1. The dispute between the parties are referred to Hon'ble Mr. Justice Mohanlal Mehta, Former Judge, High Court of Delhi and the claim statement, statement of defence as well as counter claims and reply to counter claims are filed and the arbitral meeting was held on 10.01.2022 and the parties were directed to file the affidavit of evidence latest by 19.02.2022 and the cross examination of claimant's witness fixed on 03.03.2022 and 05.03.2022 and the cross examination of respondent's witness fixed on 10.03.2022 and 12.03.2022.
3.2. It is further the say of the respondent that the bank is liable to pay till 30.11.2022 and therefore, the interest of the appellant is fully protected and in case the award is not published before 30.11.2022, the respondent undertakes to renew the bank guarantee in question till the disputes are adjudicated and final award is passed.
Page 10 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022
C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 3.3. The respondent no. 2 - bank is liable to pay the amount of bank guarantee till 30.11.2022. He has also pointed out various reasons as to why there is a fundamental breach of contract which eventually led to pointing out that appellant is a foreign company and the bank guarantee if is allowed to be encashed without adjudication of the disputes, it would be nearly impossible for the respondent no.1 to recover the amount of bank guarantee.
3.4. It is also the say of the respondent no.1 that the High Court of Judicature at Bombay had concluded that it had no jurisdiction and that is how the respondent no.1 approached the District Court, Rajula under Section 9 of the Arbitration and Conciliation Act. It is further his say that LOA was issued on 17.07.2020 and the completion date was within 120 days after 15 days of mobilization period. The stipulated date of completion was 04.12.2020 and the appellant granted the extension of 25 days upto 29.12.2020, however, the termination of contract on 12.07.2021 is alleged to be wrong and illegal on the part of the appellant. It only had directed the respondent no.1 to stop the further work w.e.f. 24.10.2020.
3.5. The appellant has also filed the counter claim of Rs. Page 11 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022
C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 8,48,40,394/- and the respondent no.1 has filed the claim statement claiming Rs. 1,70,25,867.30/- as the bank guarantee extends till 30.11.2022, the appellant is fully protected till that period.
4. Affidavit-in-rejoinder is also filed along the line of memo which may not require reiteration. Suffice to note that it has adhered to the version given before this Court in the Appeal and also in the Civil Application.
5. There is an additional further affidavit of the Director of respondent no.1 which says that the arbitral tribunal comprising Justice Mohanlal Mehta, Former Judge, Delhi High Court has concluded the arbitral proceedings and the matter is now reserved for the award. One of the disputes before the arbitral tribunal is about the return of performance guarantee which is sought to be invoked by the applicant and the parties will be governed by final award, therefore with a view to avoid multiplicity of the litigation between the parties, hearing of present application be adjourned till final award is passed, even otherwise the bank is liable to pay the amount of bank guarantee till 30.11.2022.
5.1. According to the respondent, the applicant - appellant is a private company in China and their registered Page 12 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 head office is in Mumbai which is closed since long. As the applicant is fully secured about the bank guarantee as it is valid upto 30.11.2022, till date the applicant has not given any payment to the respondent no.1 against the work done at site. The applicant has given 10% advance to the respondent no.1 towards payment which is Rs. 85,04,564/- and respondent no.1 spent Rs. 1,04,01,006/- INR at site which respondent no.1 also has placed before Arbitral Award in submission of statement of defence against counter claim. Many material like steel cages and bentonite powers and other small material lying at site are in complete power of applicant.
6. The affidavit on behalf of the appellant filed on 17.06.2022 indicates that the appellant is a subsidiary of China Datang Technologies & Engineering Co. Ltd. (for short 'CDTE'). The CDTE holds 99.92% shares of the appellant and 0.08% shares are hold by Datang (Beijing) Water Engineering Technology Co. Ltd. of CDTE. The shares of CDTE are held by Datang Environment Industry Group (56% of shares) and another 4 Chinese companies hold the rest 44% shares. The Chinese Government does not directly hold any share of DTEI or CDTE. The appellant also states that it has an active bank account having Account No. 0166000100000164577 at the Mumbai Branch of Industrial and Commercial Bank of China Page 13 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 Limited which is being used for day-to-day operations and expenses incurred by the appellant. The liberty if is granted to the appellant to invoke the performance bank guarantee issued for a sum of Rs. 1.08 crores, the appellant has undertaken to maintain minimum balance of Rs. 1.08 crores (rounded off) in its account with the Industrial and Commercial Bank of China Limited, Mumbai until an award is passed in the arbitral proceedings before the Indian Council of Arbitration by the Sole Arbitrator.
7. The affidavit-in-reply on behalf of the respondent no.1 along the line of reply to interim relief states that the appellant illegally terminated the contract on 12.07.2021 and awarded the contract to the third party before terminating the contract. The appellant has entered into the agreement with the third party on 27.05.2021 and the dispute between the parties are referred to Hon'ble Justice Mohanlal Mehta, former judge, High Court of Delhi where the claim statements as well as the counter claims and reply to the counter claims are filed and the arbitral meeting was held on 10.01.2022 and the parties are directed to file affidavit of evidence latest by 19.02.2022 and the cross examination of claimant's witness also have happen.
Page 14 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 7.1. The arbitral proceedings, when the affidavit-in- reply was filed, was likely to be conclude in April, 2022 and the bank was said to be liable till 30.11.2022. It was the say of the respondent that the appellant is fully protected and in case the award is not published before 30.11.2022 the respondent has undertaken to renew the bank guarantee in question till the disputes are adjudicated and the final award is passed by the Arbitral Tribunal.
7.2. It is further the say of the respondent that the respondent no.2 - bank is liable to pay the amount of bank guarantee till 30.11.2022 and there is no question of the Arbitral Tribunal not finally adjudicating between the parties till that date. It is the grievance that the fundamental breach of contract had been committed by the appellant where neither the drawings nor designs for construction of test piles due had been approved and the work could not be completed and eventually on expiry of time period, the contract was terminated on 12.07.2021. Another grievance is of the appellant being a foreign company and the bank guarantee if is allowed to be encashed without adjudication of the disputes, irretrievable injustice would be caused to the respondent no.1 and hence, it approached the Bombay High Court where the issue of jurisdiction had been raised, Page 15 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 therefore, the Bombay High Court chose not to continue the interim relief and hence, the respondent no.1 approached the District Court at Rajula under Section 9 of the Arbitration and Conciliation Act, 1996.
8. Again on merits, lot of challenges have been made in the affidavit-in-reply with regard to the letter of authorization and the completion date etc. which this Court may not choose to enter into. It is in the end again reiterated that the bank guarantee since is to be extended till 30.11.2022, there is not likely to be any prejudice to the right of the appellant. The further extension of this bank guarantee also has been ensured before this Court.
8.1. The rejoinder and sir-rejoinder also have come on record which may not be necessary to be reiterated.
9. This Court has heard extensively learned advocates appearing for the respective parties who have in adherence of their pleadings argued fervently where the issue all round essentially is the jurisdictional aspect. A serious challenge has been made to the aspect of jurisdiction essentially on the ground that the bank guarantee contract also speaks of New Delhi as the venue and therefore, the jurisdiction would lie with Delhi Court and secondly as the Arbitral Tribunal is also Page 16 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 at Delhi and the seat is decided between the parties to be New Delhi and undoubtedly the Court at New Delhi alone would have jurisdiction and not the Rajula Court and the Court in the State of Gujarat.
9.1. This has been resisted by learned advocate Mr. Sukhwani on the ground that the contract of bank guarantee though is for and on behalf of the respondent, that would not strictly bind the respondent so far as the jurisdiction is concerned. He has further urged that as per the default clause in the rules of Indian Council of Arbitration, the seat would be at New Delhi, however, it is not explicit that the seat of arbitration would be at Delhi in exclusion of all other Courts. Moreover, the contract between the parties also would reveal that part of cause of action since has arisen at District Rajula, the respondent's approach at District Rajula cannot be objected to.
10. Having thus heard both the sides and having also closely and meticulously perused the material on record, this Court notices that the initial challenge by the respondent was before the High Court at Bombay where the protection had been made available to the respondent by the Bombay High Court and on appearance of the appellant before the Bombay Page 17 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 High Court, the serious challenge was raised to the aspect of jurisdiction where the interim relief was not continued and while the petition was pending before the Bombay High Court, the respondent had approached the District Court at Rajula seeking the stay of invocation of the bank guarantee at the hands of the present appellant. There, of course, has been a disclosure of the petition pending before the Bombay High Court and assurance to the Court of withdrawal of such petition before the Court proceeded under Section 9 of the Arbitration and Conciliation Act. After hearing both the sides extensively, the trial Court was convinced to grant the stay in favour of the respondent and the invocation of the bank guarantee has been stayed.
10.1. This is in serious challenge by way of present appeal under Section 37(1) of the Arbitration and Conciliation Act, 1996.
11. At the outset, the settled law on the subject of the bank guarantee is to be regarded, reference would be needed that in various case laws it is absolutely made clear reiterating well defined ratio that in exceptional circumstances only, the stay of the bank guarantee can be directed being the economic bloodline of the country. Page 18 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 11.1. The contract of guarantee is defined in India under Section 126 of the Indian Contract Act, 1872. It is a contract to perform the promise or discharge the liability of third person in case of any breach or default by the person. The bank acts as a surety for the creditor. For extension of business, the bank guarantee plays a very vital role and particularly with the increase in globalization as also the international trade, to reduce the risk in the business transactions, the bank guarantee is considered as life blood for the domestic as well as international trade. The person when promises to perform the liability of the third person as a surety and guarantees the principal debtor, such guarantee for and on behalf of a creditor essentially becomes tri-partite agreement. For ensuring the free flow of the trade, the guarantee is ensured by the bank to secure the creditor from the loss and also to help the creditor in claiming the debt without opting for any kind of litigation.
11.2. Ordinarily, against the invocation of the bank guarantee, no injunction is prescribed. There are however limited exceptions to this, and one is fraud. For the injunction to be sought for the party seeking the same, fraud is one ground which can be pleaded while approaching the Court. Page 19 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 Since the fraud vitiates everything, the party who is a prey to the fraud can seek protection against the misuse of this system. The second ground is the irretrievable harm or injustice. If the encashment of bank guarantee is going to affect the customer or the bank and the harm caused is exceptionally irretrievable harm and the third is special equities for the judicial intervention to be warranted. 11.3. The Apex Court has reiteratively held that the Courts ought not to intervene in the bank guarantee except when exceptional circumstances exist and intervention becomes a necessity so as to ensure that a trust in the international and domestic commerce does not get vitiated. There will be always a restrain on the part of the judiciary to intervene as otherwise it would defeat its very purpose. 11.4. The Supreme Court in case of U.P.Cooperative Federation vs. Singh Consultant and Engineering Private Limited, reported in 1988 1 SCC 174 has clearly held that bank guarantee must be honored free from the interference by Courts otherwise, the trust in commerce, internal and international, would be irreparably damaged. Page 20 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022
C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 11.5. In case of Andra Pradesh Pollution Control Board vs. CCL Products (India) Limited, reported in 2019 SCC OnLine SC 985, the Court held thus:-
"The settled legal position which is emerged from the precedents of this Court is that absent a case of fraud, irretrievable injustice and special equities, the Court should not interfere with the invocation of the encashment of the bank guarantee so long as invocation was in terms of bank guarantee."
11.6. It is thus quite clear that when the parties have not pleaded either the fraud, irretrievable injustice or special equities, the Courts are required to honor the bank guarantee and there is nothing to indicate that the bank guarantee cannot be encashed during its validity. Admittedly, there are no allegations of fraud in the instant case, therefore, the other grounds available for the stay of invocation of the bank guarantee would be irretrievable damage and special equities and whether the same are available to the respondent or not, may not be gone into as that concerns essentially merits.
12. First and foremost, the Court shall need to address the aspect of jurisdiction as to whether the Court at Rajula has jurisdiction to be approached by the respondent and for the Court concerned to entertain the petition. Page 21 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022
C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 12.1. One of the terms of the bank guarantee when is looked at for jurisdictional purpose, a specific stipulation is noticed of jurisdiction at New Delhi. Apt would be to refer to the same.
"9. The law which is to apply to this Guarantee and under which this Guarantee is to be construed is Indian Law with the place of jurisdiction in Delhi. Any dispute arising from or in connection with this Guarantee shall be submitted to the Indian Council of Arbitration for arbitration which shall be conducted by a sole arbitrator in accordance with the Commission's arbitration rules in effect at the time of applying for arbitration. The arbitral award is final and binding upon both parties."
12.2. Admittedly, here is a dispute arising in connection with the bank guarantee. The parties, as terms stipulate, have already taken recourse to the process of arbitration under the Indian Council of Arbitration and the matter is pending before the Arbitrator where statement of claim, statement of defence and counter claim were already submitted and the schedule also had been given by the Arbitrator of recording of evidence when the reply was filed. Now it is conveyed that the learned Arbitrator, the Former Judge of Delhi High Court has reserved to publish the award as the entire proceeding has been completed.
13. This Court is conscious that the day on which the Page 22 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 respondent had approached the District Court, Rajula for the purpose of stay of the bank guarantee was 19.07.2021 and the decision which has been challenged before this Court has come on 03.09.2021 when the parties were already before the Arbitral Tribunal. It is quite clear from the order which is in challenge that the territorial jurisdiction of the District Court, Rajula was questioned from the inception by the appellant. This was in relation to the petition under Section 9 and the subject matter of the same is unconditional irretrievable performance of bank guarantee issued by the respondent no.2. As mentioned herein above, the stipulation is quite clear that in relation to the unconditional irretrievable performance of bank guarantee, the Court at Delhi would have the competent jurisdiction.
13.1. Assuming that at the time of preferring such an application, the part of cause of action had arisen within the jurisdiction of District Court, Rajula, as the bank guarantee was issued by the Pipavav Branch which is within the jurisdiction of District Court, Rajula, as mentioned above, by the time the matter proceeded, the parties were already before the Arbitral Tribunal.
13.2. The question then also would be needed to be Page 23 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 addressed by this Court as regards the seat of arbitration and whether the same has been decided by the parties. The e-mail dated 12.08.2021 addressed to the ICA, FICCI by the appellant clearly states that as far as the venue of the arbitration proceedings is concerned, the ICA in the trailing mail had informed that the appellant had suggested Ahmedabad as the venue of the arbitration and in case the appellant is not agreeable to the same, then the venue by default, in terms of ICA rules, shall be New Delhi. The appellant had not agreed to the venue of arbitration to be Ahmedabad and accordingly, the request in terms of ICA rules had been accepted and thus in terms of ICA rules, Delhi was requested to be fixed as the venue of arbitral proceedings. 13.3. There is no dispute to this fact that the seat of arbitration is New Delhi. The learned Arbitrator has continued to not only function from Delhi but then explicitly the parties have chosen the seat of arbitration to be the Delhi. We note particularly that the venues could be different however, the seat once finalized, that will govern the jurisdiction of the Court.
14. Recent decision of the Apex Court rendered in case of BBR (INDIA) Private Limited vs. S.P. Singla Page 24 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 Constructions Private Limited reported in AIR 2022 SC 2673 deserves reference at this stage. The question which has been addressed when fell for the consideration in the appeal before the Apex Court was whether owing to the appointment of a new arbitrator functioning at Delhi would shift the 'jurisdictional seat of arbitration' from Panchkula in Haryana, the place fixed by the first arbitrator to New Delhi for the arbitration proceedings to be challenged? 14.1. The appellant and the respondent had entered into a contract under which the appellant was required to supply, install and undertake stressing of cable strays for the long cable stay bridge being constructed by the respondent over the river Ravi at Basouli, Jammu and Kashmir. Letter of intent issued under the contract had an arbitration clause for resolution of disputes by a sole arbitrator. The arbitration clause in this letter of intent was silent and did not stipulate the seat or venue of arbitration. The contract and letter of intent were executed at Panchkula in Haryana. The corporate office of the respondent was located at Panchkula. However, the registered office of the appellant is located in Bengaluru, Karnataka.
Page 25 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 14.2. The dispute arose between the parties and the matter was referred to arbitration and former judge was appointed as the sole arbitrator. In the first sitting, the arbitral tribunal decided the venue of the proceedings to be held at Panchkula, Haryana. The respondent was not present in the proceedings and made a request for an adjournment and request was accepted. Neither party had objected to the place of arbitration proceedings as fixed by the arbitral tribunal and the proceedings were held at Chandigarh, where the parties were directed to complete the pleadings. For personal reasons thereafter the learned arbitrator recused. The new arbitrator took over and the first procedural order stated that the venue of the proceedings would be Delhi, where appellant was not present.
14.3. The parties had filed the claim petition as per the next order and the statement of defence along with the counterclaim before former arbitrator. The rejoinder had also been filed and the parties were directed to file their evidence by way of affidavits within the timelines fixed. Examination of the witnesses and the arguments were concluded at Delhi and the award was also pronounced at Delhi.
Page 26 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 14.4. Two proceedings were initiated (i) under Section 93 of the Act before the Additional District Judge, Panchkula by the respondent and (ii) the appellant filed a petition under Section 34 of the Act, before the Delhi High Court. Thus, both invoked the jurisdiction of two different courts. The question was with regard to the jurisdictional seat of arbitration as that would assume importance.
14.5. The learned Additional District Judge, Panchkula, in respondent's petition under Section 9 of the Act dismissed the same on the ground of lack of territorial jurisdiction recording the jurisdiction to entertain the application vests solely with Delhi High Court where a prior petition under Section 34 of the Act had been filed, and was pending. The petition under Section 9 of the Act, being a subsequent petition would be barred under Section 42 of the Act. 14.6. This order has been set aside by the High Court of Punjab and Haryana with the finding that the courts of Delhi did not have the jurisdiction to entertain the objections under Section 34 of the Act. As the agreement between the parties was silent as to 'the seat' of the arbitration proceedings, and the second arbitrator vide his first order had not determined Delhi to be the 'seat of arbitration'. Thus, Relying on the Page 27 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 decision of this Court in State of West Bengal and Others v. Associated Contractors, reported in 2015 (1) SCC 32 the High Court held that the courts at Panchkula had jurisdiction to deal with the case. The review application filed by the appellant was also dismissed.
14.7. These orders, passed by the High Court of Punjab and Haryana, came to be assailed before Apex Court in this matter.
14.8. Referring to Section 2 (1) (e) of the Act, which defines the term 'court'; Section 20 on the 'place of arbitration'; as well as Section 42, the Apex Court held that the interpretation of the term 'court', as defined in sub-clause
(e) to sub-section (1) of Section 2 of the Act, had come up for consideration before the Constitutional Bench of five Judges in the case of BALCO (supra) where the Court had made the distinction between 'jurisdictional seat' and 'venue' in the context of international arbitration, to hold that the expression 'seat of arbitration' is the centre of gravity in arbitration. However, that would not mean that all arbitration proceedings must take place at 'the seat'. The arbitrators at times may hold meetings at more convenient locations. The Apex Court also held that regarding the expression 'court', Page 28 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 under Section 2(2) of the Act does not make Part-I applicable to arbitrations seated outside India. The expressions used in Section 2(2) of the Act do not permit an interpretation to hold that Part-I would also apply to arbitrations held outside the territory of India. Noticing the said interpretation in case of BGS SGS Soma JV (supra) has observed that the expression 'subject to arbitration' used in clause (e) to sub-section (1) of Section 2 of the Act cannot be confused with the 'subject matter of the suit'. The purpose of the clause is to identify the courts having supervisory control over the judicial proceedings. Hence, the clause refers to a court which would be essentially a court of 'the seat' of the arbitration process. Accordingly, clause (e) to sub-section (1) of Section 2 has to be construed keeping in view the provisions of Section 20 of the Act, which are, in fact, determinative and relevant when we decide the question of 'the seat of an arbitration'. This interpretation recognises the principle of 'party autonomy', which is the edifice of arbitration. The Apex Court held in other words, the term 'court' as defined in clause (e) to sub- section (1) of Section 2, which refers to the 'subject matter of arbitration', is not necessarily used as finally determinative of the court's territorial jurisdiction to entertain proceedings under the Act. In BGS SGS Soma (supra), this Court Page 29 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 observed that any other construction of the provisions would render Section 20 of the Act nugatory. In view of the Court, the legislature had given jurisdiction to two courts: the court which should have jurisdiction where the cause of action is located; and the court where the arbitration takes place. This is necessary as, on some occasions, the agreement may provide the 'seat of arbitration' that would be neutral to both the parties. The courts where the arbitration takes place would be required to exercise supervisory control over the arbitral process. The 'seat of arbitration' need not be the place where any cause of action has arisen, in the sense that the 'seat of arbitration may be different from the place where obligations are/had to be performed under the contract. In such circumstances, both the courts should have jurisdiction, the courts within whose jurisdiction 'the subject matter of the suit' is situated and the courts within whose jurisdiction the dispute resolution forum, that is, where the arbitral tribunal is located.
14.9. The Apex Court thus turning to Section 20 of the Act has held that the parties can agree on the place of arbitration. The autonomy and flexibility is emphasised where the parties enjoy the freedom to agree on a place of arbitration which is unrestricted and need not be confined to Page 30 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 the place where the 'subject matter of the suit' is situated. It also has relied on both the decisions BALCO (supra) and BGS SGS Soma (supra) has emphasised that section (3) of Section 20 refers to 'venue' whereas the 'place' mentioned in sub- section (1) and sub-section (2) refers to the 'jurisdictional seat'.
"21. The Court in BGS SGS Soma (supra) has also dealt with the situation where the parties have not agreed on or have not fixed the jurisdictional 'seat of arbitration', and has laid down the following test to determine the 'seat of arbitration' which would determine the location of the court that would exercise supervisory jurisdiction. The test is simple and reads:
"61. It will thus be seen that wherever there is an express designation of a "venue", and no designation of any alternative place as the "seat", combined with a supranational body of rules governing the arbitration, and no other significant contrary indicia, the inexorable conclusion is that the stated venue is actually the juridical seat of the arbitral proceeding."
For formulating the test reference was made to several Indian and foreign judgments to emphasise that where the parties had failed to choose the 'jurisdictional seat' which would be In Indus Mobile Distribution (P) Ltd., the Court after clearing the air on the meaning of Section 20 of the Arbitration Act, 1996 made it clear that the moment a seat is designated by agreement between the parties, it is akin to an exclusive jurisdiction clause, which would then vest the courts at the "seat" with exclusive jurisdiction for purposes of regulating arbitral proceedings arising out of the agreement between the parties.
17. BGS SGS Soma (supra) case also examines and explains case law where the courts have held that so Page 31 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 called 'seat' mentioned in the agreement is convenient 'venue' an aspect with which we are not concerned in the present case governing the arbitral proceedings, the proceedings must be considered at any rate prima facie as being governed and subject to jurisdiction of the court where the arbitration is being held, on the ground that the said court is most likely to be connected with the proceedings.18 Accordingly, in BGS SGS Soma (supra), the law as applicable, where the parties by agreement have not fixed the jurisdictional 'seat', is crystallised as under:
"82. On a conspectus of the aforesaid judgments, it may be concluded that whenever there is the designation of a place of arbitration in an arbitration clause as being the "venue" of the arbitration proceedings, the expression "arbitration proceedings" would make it clear that the "venue" is really the "seat" of the arbitral proceedings, as the aforesaid expression does not include just one or more individual or particular hearing, but the arbitration proceedings as a whole, including the making of an award at that place. This language has to be contrasted with language such as "tribunals are to meet or have witnesses, experts or the parties"
where only hearings are to take place in the "venue", which may lead to the conclusion, other things being equal, that the venue so stated is not the "seat" of arbitral proceedings, but only a convenient place of meeting.
Further, the fact that the arbitral proceedings "shall be held" at a particular venue would also indicate that the parties intended to anchor arbitral proceedings to a particular place, signifying thereby, that that place is the seat of the arbitral proceedings. This, coupled with there being no other significant contrary indicia that the stated venue is merely a "venue" and not the "seat" of the arbitral proceedings, would then conclusively show that such a clause designates a "seat" of the arbitral proceedings. In an international context, if a supranational body of rules is to govern the arbitration, this would further be an indicia that "the venue", so stated, would be the seat of the arbitral proceedings. In a national context, this would be 18 Page 32 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 See the principle culled out by Dicey and Morris on the Conflict of Laws, replaced by the Arbitration Act, 1996 as applying to the "stated venue", which then becomes the "seat" for the purposes of arbitration."
22. BGS SGS Soma (supra) also refers to decision of this Court in Union of India v. Hardy Exploration and Production (India) Inc.,19 which had held that the choice of the venue of arbitration did not imply that it had become the 'seat of arbitration' and that the venue could not by itself assume the status of 'the seat'; instead a venue could become 'the seat' only if "something else is added to it as a concomitant". According to BGS SGS Soma (supra), the reasoning given in Hardy Exploration (supra) is per incuriam as it contradicts the ratio and law laid down in BALCO (supra). Hence, BGS SGS Soma (supra) holds that it would be correct to hold that while exercising jurisdiction under sub-section (2) of Section 20 of the Act, an arbitrator is not to pass a detailed or a considered decision. The place where the arbitral tribunal holds the arbitration proceedings would, by default, be the venue of arbitration and consequently the 'seat of arbitration'.
23. When we turn to the facts of the present case, if the arbitration proceedings were held throughout in Panchkula, there would have been no difficulty in holding that Delhi is not the jurisdictional 'seat'. In this case the parties had not chosen the seat of arbitration and the arbitral tribunal had also not determined the seat of arbitration. Therefore it was held that the choice of Kuala Lumpur as the venue of arbitration did not imply that Kuala Lumpur had become the seat of arbitration. But that was not to be, as on recusal of Mr. Justice (Retd.) N.C. Jain and post the appointment of Mr. Justice (Retd.) T.S.Doabia arbitration proceedings were held at Delhi. In the context of the present case and noticing the first order passed by the arbitral tribunal on 5th August 2014 stipulating that the place of the proceedings would be Panchkula in Haryana and in the absence of other significant indica on application of Section 20(2) of the Act, the city of Panchkula in Page 33 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 Haryana would be the jurisdictional 'seat' of arbitration. As 'the seat' was fixed vide the order dated 5 th August, 2014, the courts in Delhi would not have jurisdiction.
24. The appellant, however, contends that on the appointment of the new arbitrator, namely, Mr. Justice (Retd.) T.S. Doabia, and thereupon the venue being fixed at Delhi, the jurisdictional 'seat of arbitration' had changed from Panchkula in Haryana to Delhi. Reliance in this regard is placed upon the decision of this Court in Inox Renewables Ltd v. Jayesh Electricals Ltd.,20 in which the 'seat of arbitration' fixed by the parties was Jaipur, but the courts at Ahmedabad had entertained the challenge to the award. The appellant submits that the courts at Ahmedabad had exercised jurisdiction, which was upheld on the ground that the arbitration proceedings were conducted in Ahmedabad. Thus the 'seat of arbitration' changed and had got relocated from Jaipur to Ahmedabad. This, in the context of the decision in Inox Renewables Ltd (supra), is undoubtedly correct, but the aforesaid decision cannot be read as a precept in cases governed by sub- section (2) of Section 20 of the Act. Inox Renewables (supra) was a case governed under sub- section (1) of Section 20 of the Act, that is, where parties by the agreement had fixed the jurisdictional 'seat' at Jaipur, Rajasthan, but thereafter, by mutual consent, had decided to change the venue of proceedings to Ahmedabad prior to the commencement of the arbitration. This evidently resulted in the decision of this Court accepting that the jurisdictional 'seat of arbitration' was Ahmedabad. This decision would apply in case the parties, by consent, agree mutually that the 'seat of arbitration' would be located at a particular place. The said exercise would be in terms of sub-section (1) of Section 20 of the Act, which endorses and emphasises on party autonomy and choice that determines the 'seat of arbitration'. It would not apply when the arbitrator fixes 'the seat' in terms of sub-section (2) of Section 20 of the Act. Once the arbitrator fixes 'the seat' in terms of sub- section (2) of Section 20 of the Act, the arbitrator cannot change Page 34 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 'the seat' of the arbitration, except when and if the parties mutually agree and state that the 'seat of arbitration' should be changed to another location, which is not so in the present case.
25. There are good reasons why we feel that subsequent hearings or proceedings at a different location other than the place fixed by the arbitrator as the 'seat of arbitration' should not be regarded and treated as a change or relocation of jurisdictional 'seat'. This would, in our opinion, lead to uncertainty and confusion resulting in avoidable esoteric and hermetic litigation as to the jurisdictional 'seat of arbitration'. 'The seat' once fixed by the arbitral tribunal under Section 20(2), should remain static and fixed, whereas the 'venue' of arbitration can change and move from 'the seat' to a new location. Venue is not constant and stationary and can move and change in terms of sub-section (3) to Section 20 of the Act. Change of venue does not result in change or relocation of the 'seat of arbitration'.
26. It is highly desirable in commercial matters, in fact in all cases, that there should be certainty as to the court that should exercise jurisdiction. We do not think the law of arbitration visualises repeated or constant shifting of the 'seat of arbitration'. In fact, sub-section (3) of Section 20 specifically states and draws a distinction between the venue of arbitration and the 'seat of arbitration' by stating that for convenience and other reasons, the arbitration proceedings may be held at a place different than the 'seat of arbitration', which location is referred to the venue of arbitration. If we accept this contention of the appellant, we would, as observed in the case of C v. D (supra), create a recipe for litigation and (what is worse) confusion which was not intended by the Act. The place of jurisdiction or 'the seat' must be certain and static and not vague or changeable, as the parties should not be in doubt as to the jurisdiction of the courts for availing of judicial remedies. Further, there would be a risk of parties rushing to the courts to get first hearing or conflicting decisions that the law does not contemplate and is to be avoided. Page 35 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022
27. A secondary contention to support the said plea on the ground that the courts where arbitration proceedings are being conducted should be given supervisory powers, on in-depth consideration, must be rejected as feeble when we juxtapose the unacceptable practicable consequences that emerge. Exercise of supervisory jurisdiction by the courts where the arbitration proceedings are being conducted is a relevant consideration, but not a conclusive and determinative factor when the venue is not 'the seat'. 'The seat' determines the jurisdiction of the courts. There would be situations where the venue of arbitration in terms of sub-section (3) of Section 20 would be different from the place of the jurisdictional 'seat', and it is equally possible majority or most of the hearing may have taken place at a venue which is different from the 'seat of arbitration'. Further, on balance, we find that the aspect of certainty as to the court's jurisdiction must be given and accorded priority over the contention that the supervisory courts located at the place akin to the venue where the arbitration proceedings were conducted or substantially conducted should be preferred."
15. As held by the Apex Court in all commercial matters it is highly desirable that there should be certainty as to the court that should exercise the jurisdiction. The Court has also frowned upon the constant shifting of the 'seat of arbitration'. Sub-section (3) of Section 20 draws a distinction between the venue of arbitration and the 'seat of arbitration' by stating that for convenience and other reasons, the arbitration proceedings may be held at a different place other than the 'seat of arbitration', and such location is to be referred to as the venue of arbitration. However, the place of Page 36 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 jurisdiction of the seat must be certain and static and not vague or changeable and the parties should not be having doubt as to the jurisdiction of the court for availing the judicial remedies. The Court also said that there would be a risk of the parties rushing to the Courts to get first hearing or conflicting decisions that the law does not contemplate and the same needs to be avoided. Again, since the Courts where the arbitration proceedings are being conducted should be given supervisory powers, on in-depth consideration, the Court while saying that what is relevant, conclusive and determinative factor is the seat and not the venue, the seat determines the jurisdiction of the Court.
16. In the instant case, the legal question that is to be answered by this Court objectively is whether the parties have decided the seat of arbitral tribunal and if yes, that clarity and consequential fall out should be that the exercise of jurisdiction should be within that particular seat. The seat of arbitration, as agreed by the parties or determined by the arbitrator or the ICA rules being Delhi, the territorial jurisdiction would be of the Court at Delhi. The District Court, Rajula ought to have considered this aspect at the time of grant of relief of stay of irrevocable bank guarantee. Page 37 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022
C/FA/3391/2021 JUDGMENT DATED: 20/07/2022
17. As the law is very clear that where the seat is designated in the agreement or when the parties choose such seat or the arbitrator decides such seat, that Court's seat alone would have jurisdiction, on that count alone, this Court needs to uphold the contention raised before this Court by the appellant and the appeal needs to succeed without entering into the merit of the matter.
18. For the foregoing reasons and facts as are emerged, order of Rajula Court dated 03.09.2021 deserves interference on the ground of jurisdiction. 18.1. At this stage, it needs to be also mentioned that the parties are awaiting the declaration of award within one week as conveyed to this Court. They have both participated wholeheartedly before the arbitrator which has concluded the final hearing and now, in a very near future, the award is going to be published. Once this Court has chosen not to entertain on the ground of jurisdiction, respondent needs to be availed the opportunity before the Court of competent jurisdiction. Presently the arbitral award is awaited and the bank guarantee is valid till 30.11.2022 18.2. Learned advocate Mr. Jaimin Dave on instruction has fairly submitted before this Court that for fifteen (15) days Page 38 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022 C/FA/3391/2021 JUDGMENT DATED: 20/07/2022 from the receipt of copy, there shall be no encashment of the bank guarantee. With that, no further direction at the end of this Court is desirable in that respect and appeal is allowed in the above terms.
19. In view of the main appeal having been disposed of, the connected civil application if any, stands disposed of accordingly.
(SONIA GOKANI, J) (HEMANT M. PRACHCHHAK,J) Bhoomi Page 39 of 39 Downloaded on : Sat Dec 24 21:32:43 IST 2022