Encashment of BG of contractor against disputed damages claim not permitted unless adjudicated by Court -Supreme Court

Encashment of Bank Guarantee of contractor against disputed claim of damages not permitted unless adjudicated by Court of law in judicial proceedings -Supreme Court

Case Law Details:
Civil Apeal No. 4814 of 2016
M/s Gangotri Enterprises Ltd. Appellant(s) VERSUS Union of India & Ors. Respondent(s)

Date of Judgment: 05/05/2016
Coram: Justice J. Chelameswar and Justice Abhay Manohar Sapre

Important Case Laws Referred:
Union of India vs. Raman Iron Foundry, (1974) 2 SCC 231
Iron and Hardware (India) Co. vs. Firm Shamlal and Bros., AIR 1954 Bom.423

Brief Facts of the Case:
This appellant company had filed this appeal against the judgment of the Allahabad High Court whereby it dismissed the appeal of the appellant company upholding the order of District Judge refusing grant of interim injunction restraining respondent encashing of the Bank Guarantee.

The appellant had procured a tender from North Central Railway (the respondents) in connection with laying down of Agra-Etawah new BG Rail Line (Agra-Etawah Work). As per the accepted terms, the date of commencement of work was 14.03.2005 and the date of completion of work was 13.03.2007. However, on the request of the appellant-Company, the period of completion of work was extended twice by the respondents (last time on 30.09.2008).

On 14.07.2006, the appellant-Company was granted another work by the respondents in connection with the Development of New Passenger Terminal at Anand Vihar Delhi (Anand Vihar works). A Bank/Performance Guarantee was also furnished the appellant company for a sum of Rs.1,32,78,820/-.

Due to non completion of completed of the Agra-Etawah work within the prescribed /extended time by the appellant its contract  dated 22.08.2005 was terminated by the respondents and the work was allocated by the respondents to another Company on 10.06.2011 without giving any information to the appellant-Company.

On 30.09.2010, the appellant company got the completion certification from the respondents for the Anand Vihar works and the defect liability period of six months also ended on 30.03.2011. The appellant being becoming entitled to the release of Bank/Performance Guarantee, wrote a letter dated 27.06.2011, the appellant, therefore, to the respondents-North Central Railway for return of the Bank/Performance Guarantee. However, the respondent by an internal circular withheld dues of the appellant-Company stating that the contract dated 22.08.2005 for Agra-Etawah work was cancelled and the same had caused the respondents a loss of Rs.5,58,16,036.33. On 30.11.2011, the respondents wrote a letter to the Bank of the appellant for the encashment of the said Bank Guarantee. However, irrespective to above, 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.

To settle the dispute related to Agra-Etawah work, the appellant invoked arbitration clause and moved an application under Section 9 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) before the District Judge, Allahabad seeking injunction on encashment of the Bank Guarantee deposited by it in the Anand Vihar works, against the respondents. By order dated 04.01.2012, the District Judge allowed the application and restrained the respondents from encashing Bank Guarantee till appointment of arbitrator or constitution of Arbitral Tribunal.

On 13.03.2012, an arbitration Tribunal was constituted which were still pending till the date of this judgment. On 04.04.2012, the respondents again wrote a letter to the Bank to encash the said Bank Guarantee in their favour on the plea that the injunction passed by District Judge no longer survived as the arbitral Tribunal was constituted. Hence, the appellant again filed a petition before the District Judge, Allahabad seeking injunction against the respondents from encashing the Bank Guarantee. The District Judge dismissed the petition and accepted the respondent’s pleas that Clause 62(1) of the contract dated 22.08.2005 for Agra-Etawah work empowered respondents to recover any dues/claim from the appellant.

Against the order of the District Judge, the appellant preferred an appeal before the Allahabad High Court but the High Court concurred with the view taken by the District Judge and dismissed the appellant’s appeal.

This is how the matter traveled to the Apex Court.

Contentions of the Appellant:

It was submitted that since the Bank Guarantee in question was in the nature of performance guarantee furnished for due performance of one contract (Anand Vihar works) and the same having been admittedly performed successfully by the appellant to the satisfaction of the respondents, the purpose of the Bank Guarantee was over as soon as the Satisfaction Certification was issued by the respondents in appellant’s favour.

It was also contended that the arbitration proceedings were still pending for final adjudication of the liability, if any. Therefore, 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.

Since the respondents had not appealed against the order of the District Judge in granting the injunction to the appellant vide order dated 4.01.2012, the said order had become final 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.

The Apex Court observed that facts of the case were almost identical with DGS&D case (supra) case in which it was held that damages are the compensation which a Court of law gives to a party for the injury which he has sustained and no pecuniary liability arises till the Court has determined that the party complaining of the breach is entitled to damages. The Court further observed that the clause 18 of the contract in DGS&D case was similar to clause 62(1) of the contract in question.

Important Excerpts from The Judgment:

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 (DGS&D) vs. Raman Iron Foundry, (1974) 2 SCC 231.

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.

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.”

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.

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