M/S Gangotri Enterprises Ltd. Vs Union of India & Ors, on 5th May 2016, Supreme Court of India – Read Judgement

Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.4814 OF 2016

(ARISING OUT OF SLP(C) No. 27052 of 2012)

 

M/s Gangotri Enterprises Ltd. Appellant(s)
VERSUS
Union of India & Ors. Respondent(s)

J U D G M E N T
Abhay Manohar Sapre, J.

1) Leave granted.
2) This appeal is filed against the final judgment and order dated
23.07.2012 of the High Court of Uttar Pradesh Judicature at Allahabad in
F.A.F.O. No. 2930 of 2012 whereby the High Court dismissed the appeal filed
by the appellant herein and upheld the order of District Judge which had
refused to grant an interim injunction restraining encashing of the Bank
Guarantee by the respondents herein.
3) In order to appreciate the issue involved in this appeal, which lies
in a narrow compass, it is necessary to set out the relevant facts in brief
infra.
4) The respondents, i.e., North Central Railway invited tender for doing
“earth work in embankment and cutting including provision of machine
crushed/blended material blanketing layer and construction of RCC Box type
minor bridges at CH-84700M to 114100M”, in connection with laying down of
Agra-Etawah new BG Rail Line. The appellant-a Limited Company applied for
the said tender and its tender being the lowest one was accepted by the
respondents on 14.03.2005 and accordingly the letter of acceptance was
issued in appellant’s favour. The contract agreement No. CE(C) ‘North’
ALD/A-E/Contract/EW-III dated 22.08.2005 was then signed between the
parties. The total value of the contract was Rs.14,62,46,742/-, the date
of commencement of work was 14.03.2005 and the date of completion of work
was 13.03.2007. As the work could not be completed within the prescribed
time, on the request of the appellant-Company, the period of completion of
work was extended twice by the respondents, firstly, from 14.03.2007 to
31.12.2007 and again upto 30.09.2008 without levy of penalty and with price
variation clause benefit.
5) On 14.07.2006, the appellant-Company was granted another work by the
respondents-North Central Railway vide letter No. 74-
W/4/1/347/WA/ANVR/SERd./TCR for construction of New Station Building (G+2)
circulating area, various service buildings, construction of platform
shelters with RCC Column and beam, Underground and Overhead water storage
tanks, water supply pipeline network and other misc. works in connection
with the Development of New Passenger Terminal at Anand Vihar (East Delhi)
[hereinafter referred to as “Anand Vihar works”]. In connection with the
grant of the Anand Vihar works, the appellant-Company submitted a
Bank/Performance Guarantee bearing No. 12/2006 dated 04.08.2006 from its
banker Indian Mercantile Co-operative Bank Ltd., Cantt. Road, Lucknow
(hereinafter referred to as ‘Bank’) for a sum of Rs.1,32,78,820/-.
6) Since the work relating to contract dated 22.08.2005 could not be
completed within the prescribed time/extended time by the appellant due to
non-availability of site because of the agitation of the farmers and non-
supply of the specification or drawing of most of the small bridges by the
respondents, as complained by the appellant, the Agra-Etawah contract dated
22.08.2005 was terminated by the respondents vide its letter dated
30.04.2009. After inviting fresh tenders, the rest of the work was
allocated by the respondents to another Company, namely, M/s Hanu
Infrastructure Pvt. Ltd. Kasganj, Kashiram Nagar for approximately Rs. 11
Crores on 10.06.2011 without giving any information to the appellant-
Company.
7) On 30.09.2010, the appellant got the completion certification from
the respondents for the Anand Vihar works with a defect liability period of
six months, which also came to an end on 30.03.2011. Thus the appellant
became entitled to seek the release of the Bank/Performance Guarantee No.
12/2006 submitted by it for the said work from the respondents.
8) On 27.06.2011, the appellant, therefore, wrote a letter to the
respondents-North Central Railway for return of the Bank/Performance
Guarantee No. 12/2006.
9) On 10.06.2011, the North Central Railway issued an internal circular
to all concerned departments of the Railways for withholding of dues of the
appellant-Company stating therein that the contract of the appellant-
Company dated 22.08.2005 or the New Agra-Etawah BG Line was cancelled and
the same had caused the respondents a loss of Rs.5,58,16,036.33. The said
circular came to the knowledge of the appellant on 18.07.2011.
10) On 30.11.2011, the respondents through their accounts department
wrote a letter to the Bank which had furnished Bank Guarantee No.12/2006
for and on behalf of the appellant for the encashment of the said Bank
Guarantee.
11) On 02.12.2011, the final bill for the Anand Vihar works were cleared
by the respondents and the payment for the same was released by the
respondents.
12) Since the disputes had arisen between the parties in relation to and
arising out of the contract dated 22.08.2005, the appellant invoked Clause
36 read with Clause 64 of the General Conditions of Contract (in short
“GCC”) which provided for the settlement of dispute by arbitration.
13) After initiation of the arbitration, the appellant, on 04.01.2012,
moved an application under Section 9 of the Arbitration and Conciliation
Act, 1996 (hereinafter referred to as “the Act”) before the District
Judge, Allahabad bearing Arbitration Suit No. 411 of 2011 seeking
injunction on encashment of the Bank Guarantee deposited by it in the Anand
Vihar works, against the respondents. It was inter alia alleged in the
application that the respondents-North Central Railway have no right to
encash the Bank Guarantee No.12/2006 furnished by the appellant in relation
to dispute arising out of another contract dated 22.08.2005. It was
alleged that firstly, Bank Guarantee was not furnished by the appellant in
relation to contract dated 22.08.2005 but was furnished in performance of
another contract dated 14.07.2006 (Anand Vihar works) which is a separate
contract and has nothing to do with the contract dated 22.08.2005.
Secondly, it was alleged that so far as the contract dated 14.07.2006
(Anand Vihar works) is concerned, the work was completed well within time
and also to the satisfaction of the respondents and for which Completion
Certificate was also given to the appellant by the respondents on
30.09.2010. Thirdly, it was alleged that since the Bank Guarantee in
question was in the nature of performance Guarantee for due execution of
contract dated 14.07.2006 (Anand Vihar works) and the same having been
performed by the appellant to the satisfaction of the respondents, the
appellant-Company was entitled to get its Bank Guarantee No.12/2006
released from the respondents. It was further alleged that in these
circumstances, the respondents have no right to encash the Bank Guarantee
in relation to any dues arising out of other contract with the appellant.
It was also alleged that in any event, so long as the disputes arising out
of the contract dated 22.08.2005 are not finally decided by the arbitrator
and liabilities of the parties are not ascertained as to, who has to pay
how much sum by way of damages and whether any one is at all liable to pay,
there is no sum “due” or “payable” either by the appellant to the
respondents or/and vice versa and hence the respondents cannot invoke
Clause 62(1) of GCC for realization of any money/sum by encashing the Bank
Guarantee from the appellant.
14) The respondents resisted the petition and inter alia contended that
Clause 62(1) of GCC empowers the respondents to make recovery of any dues
from the appellant. It was contended that since the respondents have a
claim/dues for payment of a sum of money against the appellant
(contractor), they (respondents) would be entitled to exercise their right
of recovery given to them under Clause 62(1) even if such claim is not for
a “sum due” and “sum payable” and is a claim for “damages” though disputed
by the appellant and remains to be adjudicated upon in a court of law or by
the arbitrator. It was contended that the respondents were, therefore,
entitled to encash the Bank Guarantee in question in relation to dues/claim
made by the respondents against the appellant.
15) By order dated 04.01.2012, the District Judge allowed the application
made by the appellant and restrained the respondents from encashing Bank
Guarantee till appointment of arbitrator or constitution of Arbitral
Tribunal. It may be mentioned here that the respondents did not file any
appeal against this order, which attained finality.
16) By letters dated 20.01.2012 and 29.01.2012, the appellant then
requested the respondents for return of its Bank Guarantee.
17) On 13.03.2012, an arbitration Tribunal was constituted as per Clause
32 read with Clause 64 of the contract between the parties which comprised
of Shri Arun Kumar, CCE/NCR/ALD, Shri A.K. Bijalwan FA&CAO/F&B/NCR/ALD and
Shri R. Rajamani Former CCRS & Member/Arbitrator to look into the claims
and the counter claims of the parties. The arbitration proceedings are
pending.
18) On 21.03.2012, the Deputy Chief General Manager/Const./SE Rd/NDLS
wrote to the Branch Manager of the Indian Mercantile Cooperative Bank for
extension of Bank Guarantee, which was valid upto 13.01.2012. On the
request of the respondents, the Bank extended the period of Bank Guarantee
for another six months, i.e., upto 13.07.2012.
19) On 04.04.2012, the respondents through their accounts office wrote a
letter to the Branch Manager of the Bank to encash the said Bank Guarantee
in their favour.
20) Since the respondents went on insisting for encashment of the Bank
Guarantee again and again saying that order dated 04.01.2012 passed by
District Judge no longer survives as its life was only upto the date of
constitution of arbitral Tribunal and hence the respondents became entitled
to encash the Bank Guarantee, the appellant again filed a petition under
Section 9 of the Act bearing Arbitration Suit No. 216 of 2012 before the
District Judge, Allahabad seeking injunction against the respondents from
encashing the Bank Guarantee.
21) By order dated 12.07.2012, the District Judge dismissed the petition
and declined to grant injunction to the appellant. This time, the District
Judge accepted the stand taken by the respondents and held that Clause
62(1) empowers the respondents to recover any dues/claim from the appellant
and hence the respondents were within their rights to invoke the bank
Guarantee and recover the dues relating to other contract.
22) Aggrieved by the said order, the appellant preferred an appeal
bearing F.A.F.O. No. 2930 of 2012 before the High Court.
23) By impugned judgment dated 23.07.2012, the High Court concurred with
the view taken by the District Judge and dismissed the appellant’s appeal.
24) Challenging the said judgment, the appellant has filed this appeal by
way of special leave.
25) Heard Mr. B. Adinarayan Rao, learned senior counsel for the appellant
and Mr. Atul Chitaley, learned senior counsel for the respondents.
26) Mr. B. Adinarayan Rao, learned senior counsel appearing for the
appellant (Contractor) while assailing the legality and correctness of the
impugned order reiterated the same submissions, which were urged by the
appellant before the two Courts below in support of the application filed
by the appellant under Section 9 of the Act. His submission was that since
the Bank Guarantee in question was in the nature of
performance guarantee furnished by the appellant for due performance of one
contract (Anand Vihar works) dated 14.07.2006 and the same having been
admittedly performed by the appellant to the satisfaction of the
respondents (North Central Railway), as is clear from the completion
certificate dated 30.09.2010 issued by the respondents in appellant’s
favour, the purpose for which the Bank Guarantee had been furnished was
over as soon as the Satisfaction Certification was issued by the
respondents in appellant’s favour. Learned counsel, therefore, contended
that the appellant became entitled to claim release of the Bank Guarantee
in their favour on and after 30.09.2010 without any fetters on their
rights.
27) In the second place, learned counsel urged that the respondents
(North Central Railway) had no right to take recourse to Clause 62 of GCC
for encashing the Bank Guarantee in question because firstly, the
arbitration proceedings which arose out of another contract dated
22.08.2005 were still pending for final adjudication of the liability, if
any, and secondly, so long as the liability as to how much sum was payable
and if so by whom it was payable was not finally determined in accordance
with law in the arbitration proceedings by the arbitrators, there was no
“sum due” and nor any “sum payable” in praesanti by the appellant to the
respondents and vice versa in connection with another contract.
28) In the third place, learned counsel contended that the District
Judge, in the first instance, having rightly granted the injunction to the
appellant vide order dated 4.01.2012 and no appeal having been filed
against this order by the respondents, the said order had become final and
was binding on the parties. It was, therefore, urged that when the
appellant moved the second application for grant of injunction after the
matter was referred to arbitration because of insistence on the part of the
respondents to encash the bank guarantee, the District Judge should have
extended the life of first order dated 04.01.2012 instead of again going
into the merits of the case.
29) Lastly, learned counsel urged that in the light of this legal
position arising in the case, the appellant had made out a prima facie case
for grant of injunction against the respondents (North Central Railway)
from encashing the bank guarantee in question.
30) In reply, learned counsel for the respondents (North Central railway)
supported the impugned order and contended that no case is made out to
interfere in the impugned order and hence it be upheld.
31) Having heard the learned counsel for the parties and on perusal of
the record of the case, we find force in the submissions of the learned
senior counsel for the appellant.
32) In our considered opinion, it may not be necessary for us to go into
more details of the issue because, in our view, the controversy involved in
this case remains no more res integra and stands decided by this Court in
the case of Union of India vs. Raman Iron Foundry, (1974) 2 SCC 231. Since
the issue stands already decided by this Court and hence it is necessary to
examine the facts of the case and law laid down therein in detail and then
apply the same to the facts of the case at hand.
33) The facts of the case of Union of India (DGS&D) (supra) were that
the respondent (Raman Iron Foundry) entered into a contract with the Union
of India (DGS&D)-the appellant for supply of certain quantity of “Foam
compound”. The contract, apart from several other conditions, contained
two clauses, namely, Clauses 18 and 24. Clause 24 provided that in the
event of any dispute arising between the parties in connection with the
contract, the same shall be decided by means of Arbitration. Clause 18 with
which we are concerned provided for “recovery of sums due” which reads as
under :

“18. Recovery of sums due — whenever any claim for the payment of a sum of
money arises out of or under the contract against the contractor, the
purchaser shall be entitled to recover such sum by appropriating in whole
or in part, the security, if any, deposited by the contractor, and for the
purpose aforesaid, shall be entitled to sell and/or realise securities
forming the whole or part of any such security deposit. In the event of the
security being insufficient, the balance and if no security has been taken
from the contractor, the entire sum recoverable shall be recovered by
appropriating any sum then due or which at any time thereafter may become
due to the contractor under the contract or any other contract with the
purchaser or the Government or any person contracting through the
Secretary, if such sum even be not sufficient to cover the full amount
recoverable, the contractor shall on demand pay to the purchaser the
balance remaining due.”

34) The performance of the contract ran into difficulties and dispute
arose between the parties giving rise to claims by either parties against
the other. The respondent contended that the appellant committed a breach
of the contract and was, therefore, liable to pay to the respondent a sum
of Rs. 2,35,800/- by way of damages suffered by the respondent by reason
of the breach of the contract whereas the appellant, on the other hand,
said that it was the respondent who committed the breach of the contract
and was, therefore, liable to pay to the appellant by way of damages a sum
of Rs. 2,28,900/-. In the meantime, the appellant through Assistant
Director of Supplies sent a letter to the respondent calling upon the
respondent to make payment to them a sum of Rs. 2,28,900/- and threatened
that if the said amount is not paid, it will be recovered from several
respondents’ pending bills in respect of other contracts.
35) The respondent, therefore, filed an application under Section 20 of
the Indian Arbitration Act 1940 in Delhi High Court against the appellant
for filing the arbitration agreement. The respondent also made an
application for an interim injunction restraining the appellant from
recovering the amount of damages claimed by it from several pending bills
of the respondent. The learned Single Judge dismissed the injunction
application on the ground that it could not be proved that there were any
pending bills but at the same time allowed the application made under
Section 20 of the Indian Arbitration Act and referred the matter to
arbitration as per Clause 24 of
GCC. This is how the claim/counter claim of the parties became the subject
matter of the arbitration proceedings.
36) Pending arbitration proceedings, the appellant made attempt to
recover the said amount from the respondent and hence the respondent again
made another interlocutory application under Section 41 read with second
schedule to the Indian Arbitration Act, 1940 and prayed for status quo in
the case. The appellant resisted the application. It was contended that
Clause 18 empowers the appellant to make recovery of any amount from the
respondent. The learned Single Judge allowed the respondent’s application.
He took the view that Clause 18 did not authorize the appellant to
appropriate the amounts of any pending bills of the respondent towards
satisfaction of its claim for damages against the respondent unless such
claim for damages was either admitted by the respondent or adjudicated upon
by the arbitrator or suit in civil court. Accordingly, the injunction, as
prayed for, was granted to the respondent against the appellant. It is this
issue, which was carried by the Union of India to this Court.
37) The questions, which fell for consideration before this Court, were –
first, what is the true interpretation of Clause 18; second what is the
meaning of the words “sum due” and “may become due” under the contract or
any other contract with the purchaser occurring in Clause 18; third,
whether Clause 18 empowered the Union of India to make recovery of amount
claimed by it by way of damages (liquidated or unliquidated) for breach of
contract pending arbitration proceedings from the contractor and lastly,
whether in such case, contractor is entitled to claim injunction against
the Union of India from making recovery of such sum.
38) Justice Bhagwati (as His Lordship then was) speaking for the Bench
examined the issue in great detail in the light of law laid down by English
and Indian Courts. The learned Judge in his distinctive style of writing
after examining the entire case law on the subject held that an expression
“sum due” occurring in Clause 18 would mean a sum for which there is an
existing obligation to pay in praesenti or in other words which is
presently payable and due and, therefore, recovery of only such sums can be
made subject matter of Clause 18 which is presently payable and due. It
was held that a claim, which is neither due and nor payable, cannot be made
subject matter of Clause 18. It was further held that Clause 18 does not
create a lien on other sums due to the contractor or give to the purchaser
a right to retain such sums until his claim against the contractor is
satisfied. It was also held that a claim for damages for breach of contract
is not a claim for a sum presently due and payable and the purchaser is not
entitled in exercise of the right conferred upon it under Clause 18 to
recover the amount of such claim by appropriating other sums due to
contractor.
39) Their Lordships approved the view taken by Chagla C.J. in the case of
Iron and Hardware (India) Co. vs. Firm Shamlal and Bros., AIR 1954 Bom.423
by observing in para 11 as under.

“11. ………………………………………………….The same view has also been taken consistently by
different High Courts in India. We may mention only a few of the decisions,
namely, Jabed Sheikh v. Taher Mallik,AIR 1941 Cal 639 S. Milkha Singh v.
N.K. Gopala Krishna Mudaliar, AIR 1956 Punj 174 and Iron and Hardware
(India) Co. v. Firm Shamlal and Bros., AIR 1954 Bom 423. Chagla, C.J. in
the last mentioned case, stated the law in these terms: (at pp. 425-26)

In my opinion it would not be true to say that a person who commits a
breach of the contract incurs any pecuniary liability, nor would it be true
to say that the other party to the contract who complains of the breach has
any amount due to him from the other party.

As already stated, the only right which he has is the right to go to a
Court of law and recover damages. Now, damages are the compensation which a
Court of law gives to a party for the injury which he has sustained. But,
and this is most important to note, he does not get damages or compensation
by reason of any existing obligation on the part of the person who has
committed the breach. He gets compensation as a result of the fiat of the
Court. Therefore, no pecuniary liability arises till the Court has
determined that the party complaining of the breach is entitled to damages.
Therefore, when damages are assessed, it would not be true to say that what
the Court is doing is ascertaining a pecuniary liability which already
existed. The Court in the first place must decide that the defendant is
liable and then it proceeds to assess what that liability is. But till that
determination there is no liability at all upon the defendant.

This statement in our view represents the correct legal position and has
our full concurrence. A claim for damages for breach of contract is,
therefore, not a claim for a sum presently due and payable and the
purchaser is not entitled, in exercise of the right conferred upon it under
clause 18, to recover the amount of such claim by appropriating other sums
due to the contractor. On this view, it is not necessary for us to consider
the other contention raised on behalf of the respondent, namely, that on a
proper construction of clause 18, the purchaser is entitled to exercise the
right conferred under that clause only where the claim for payment of a sum
of money is either admitted by the contractor, or in case of dispute,
adjudicated upon by a court or other adjudicatory authority. We must,
therefore, hold that the appellant had no right or authority under clause
18 to appropriate the amounts of other pending bills of the respondent in
or towards satisfaction of its claim for damages against the respondent and
the learned Judge was justified in issuing an interim injunction
restraining the appellant from doing so.
12. We accordingly dismiss the appeals. The appellant in each appeal will
pay the costs of the respondent all throughout.”

40) In our considered opinion, the case at hand being somewhat identical
to this case has to be decided keeping in view the law laid down by this
Court in the case of Union of India (DGS&D) (supra).
41) Coming now to the facts of the case at hand, we find that wordings of
Clause 62 of the contract in question with which we are concerned is
identical to that of Clause 18 of Union of India (DGS&D) (supra). Clause
62 of GCC provides for determination of contract owing to default of
contractor. The relevant portion of Clause 62 reads as under:
“The amounts thus to be forfeited or recovered may be deducted from any
moneys then due or which at any time thereafter may become due to the
Contractor by the Railway under this or any other contract or otherwise.”

42) On perusal of the record of the case, we find that firstly,
arbitration proceedings in relation to the contract dated 22.08.2005 are
still pending. Secondly, the sum claimed by the respondents from the
appellant does not relate to the contract for which the Bank Guarantee had
been furnished but it relates to another contract dated 22.08.2005 for
which no bank guarantee had been furnished. Thirdly, the sum claimed by the
respondents from the appellant is in the nature of damages, which is not
yet adjudicated upon in arbitration proceedings. Fourthly, the sum claimed
is neither a sum due in praesenti nor a sum payable. In other words, the
sum claimed by the respondents is neither an admitted sum and nor a sum
which stood adjudicated by any Court of law in any judicial proceedings but
it is a disputed sum and lastly, the Bank Guarantee in question being in
the nature of a performance guarantee furnished for execution work of
contract dated 14.07.2006 (Anand Vihar works) and the work having been
completed to the satisfaction of the respondents, they had no right to
encash the Bank Guarantee.
43) We have, therefore, no hesitation in holding that both the courts
below erred in dismissing the appellant’s application for grant of
injunction. We are indeed constrained to observe that both the courts
committed jurisdictional error when they failed to take note of the law
laid down by this Court in Union of India (DGS&D) (supra) which governed
the controversy and instead placed reliance on Himadri Chemicals Industries
Ltd. vs. Coal Tar Refining Company, AIR 2007 SC 2798 and U.P. State Sugar
Corporation vs. Sumac
International Ltd., (1997) 1 SCC 568, which laid down
general principle relating to Bank Guarantee. There can be no quarrel to
the proposition laid down in those cases. However, every case has to be
decided with reference to the facts of the case involved therein. The case
at hand was similar on facts with that of the case of Union of India
(DGS&D) (supra) and hence the law laid down in that case was applicable to
this case. Even in this Court, both the learned counsel did not bring to
our notice the law laid down in Union of India (DGS&D) case (supra).
44) We are also of the view that the District Judge having decided the
injunction application in the first instance in appellant’s favour vide
order dated 04.01.2012 erred in rejecting the application made by the
appellant second time vide order dated 12.07.2012. It is not in dispute
that the respondents despite having suffered the injunction order dated
04.01.2012 did not file any appeal against this order. Such order thus
attained finality and was, therefore, binding on the parties.
45) In the light of foregoing discussion, we hold that the appellants
have made out a prima facie case in their favour for grant of injunction
against the respondents so also they have made out a case of balance of
convenience and irreparable loss in their favour as was held by this Court
in the case of Union of India (DGS&D) (supra). They are, therefore,
entitled to claim injunction against the respondent in relation to
encashment of Bank Guarantee no. 12/2006 dated 04.08.2006.
46) We, accordingly, allow the appeal, set aside the impugned order and
in consequence allow the injunction application made by the appellant under
Section 9 of the Act in Arbitration Suit no. 411/2011 in District Court,
Allahabad and grant injunction in appellant’s favour by restraining the
respondents jointly and severally from encashing Bank Guarantee no. 12/2006
dated 04.08.2006 furnished by the appellant in connection with Anand Vihar
Works. No costs.

……………………J.[J. CHELAMESWAR]

…………………….J.[ABHAY MANOHAR SAPRE]

New Delhi,
May 05, 2016.


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