HON’BLE SHRI G.S.SINGHVI, THE CHIEF JUSTICE AND HON’BLE SHRI JUSTICE C.V.NAGARNUNA REDDY WRIT APPEAL No.54 OF 2007 Between: National Highways Authority of India, Ministry of Shipping, Road Transport & Highways, New Delhi. Rep by General Manager. … Appellant AND M/s.KMC Constructions Limited, MCH No.555, Arora Colony, Road No.3, Banjara Hills, Hyderabad. And another. … Respondents Counsel for the Appellant : Sri E.Manohar, Senior Counsel Assisted by Smt.Tara Sharma. Counsel for Respondents : Sri K.Ram Murthy, Senior Counsel Assisted by Ms. Uma Devi. : JUDGMENT: Per C.V.Nagarjuna Reddy, J The order dated 29.11.2006 of the learned single Judge in W.P.No.18269 of 2006 is the subject matter of this writ appeal. Respondent No.1 to the writ petition is the appellant in this writ appeal. Shorn of unnecessary details, the facts in brief are narrated hereunder: In response to the tenders invited for the work of widening of four lanes and strengthening of existing two lane carriage ways between K.M.278/000 to K.M.240/000 of Udaypur-Ratanpur-Gandhinagar section of N.H.8, respondent No.1 submitted its bid on 18.6.2001. The appellant issued letter of acceptance dated 22.8.2001 for a value of Rs.164.75 crores. As per the terms and conditions, the first respondent furnished bank guarantee for a sum of Rs.16,47,57,636/- towards due performance of contract. It is stipulated in the bank guarantee that the same shall be valid only for 28 days after the date of issue of Defect Liability Certificate (DLC) (i.e., 12.6.2005 as per the original schedule). On 5.10.2001 an agreement was entered into between the parties whereunder 30.4.2004 was stipulated as the scheduled date of completion. Exercising the option of substituting the retention money with unconditional bank guarantee, the first respondent furnished bank guarantee for Rs.4.12 crores on 16.12.2003, having received the retention money. The work was completed on 26.2.2004 as against the schedule date of completion on 30.4.2004. In terms of clause 48.1 of the contract, the first respondent issued a notice to the Engineer to issue a taking over certificate in respect of the works. On 20.3.2004 the Engineer issued taking over certificate while certifying that the work is completed. It is however mentioned therein that the chainage-wise list of the defects which are required to be rectified immediately is being sent separately. As required under clause 60.10 the first respondent sent the statement of completion well before the expiry of the stipulated time, on 8.5.2004 whereunder details of the work done and value there of were mentioned and it has claimed a sum of Rs.70,51,84,650/- from the appellant. The Engineer vide his letter dated 17.5.2004 raised certain objections to the statement of completion on various aspects including some of the claims raised by the first respondent, quantities relating to earth work, rechecking of original ground levels etc., and returned the same for preparation of the statement afresh keeping in view the said objections and for resubmission. On 30.5.2004 respondent No.1 resubmitted the statement of completion. On 16.2.2005 the Engineer forwarded a certificate to the employer wherein it was certified that a sum of Rs.24,698/- is due to the first respondent for payment. There was no response from the appellant to this letter. The first respondent was called upon by the appellant to extend the validity of the bank guarantee dated 30.9.2001 which was due to expire on 12.6.2005, in view of extension of defect liability period up to 31.5.2005. The case of respondent of course is that the defect liability period expired on 28.2.2005 and that the Engineer never informed respondent No.1 that the defect liability period was extended up to 31.5.2005. There was exchange of correspondence on the extension of bank guarantee, the details of which need not be mentioned here as it is not relevant for the present purpose. Suffice it to state that on 10.2.2006 respondent No.1 extended the validity of the bank guarantee up to 28.5.2006. A few days earlier, i.e., on 6.2.2006 the Engineer in his letter addressed to the appellant stated that total recoveries under refundable and non- refundable heads came to Rs.8,81,70,571/- and that a sum of Rs.2,98,43,202/- which was withheld under refundable head may be released to the first respondent. On 30.3.2006 the appellant wrote to the first respondent to extend the bank guarantee up to 31.7.2006 and in response thereto the first respondent through his letter dated 12.4.2006 stated that the defect liability period expired on 28.2.2006 and that therefore, the bank guarantees have to be released. On 24.5.2006, the Engineer issued the DLC and it is apt to extract the same herein below: “ This is to certify that as on 24th May 2006, all works have been satisfactorily accepted subject to certain defects and recovery of Rs.42,63,034/- (Rupees forty two lakhs sixty three thousand and thirty four only) therefore, as listed in Appendix to this certificate. The contractor has fulfilled all of its physical and contractual obligations under the above said contract. This Defect Liability Certificate is issued in accordance with sub-clause 62.1 of the General Conditions of Contract.” On 26.5.2006 the first respondent requested the Engineer to release the bank guarantee for Rs.6.12 crores furnished against retention money and authorizing the appellant to make recoveries from any of the bank guarantees furnished against performance security. The Engineer vide his letter dated 29.7.2006 addressed to the appellant stated that the first respondent is liable to pay a sum of Rs.18,16,34,122/- towards both refundable and non-refundable recoveries. The appellant through its letter dated 28.4.2006 addressed to the second respondent (Andhra Bank, Hyderabad) invoked the bank guarantee and requested the bank to remit Rs.16,47,57,636/-. On 25.8.2006 the first respondent wrote to the Chief General Manger of the second respondent not to enforce the bank guarantee. The first respondent along with his letter dated 25.8.2006 while informing the appellant that the validity of the bank guarantee was extended upto 28.2.2007, sent a copy of the extension of the bank guarantee to the Project Director of the appellant while sending the original bank guarantee to the Chief General Manager of National Highways Authority of India, New Delhi. The second respondent also wrote to the appellant about the extension of bank guarantee up to 28.2.2007. The first respondent in its letter dated 25.8.2006 informed the appellant that it will extend the bank guarantee till the completion of arbitration and that if the first respondent is found liable to pay any amount in the arbitrator’s award, it will pay the amounts with interest. It was also informed that the first respondent is going for arbitration on the Engineer’s decision and the appellant was requested not to take drastic action of encashment of bank guarantee. The appellant addressed a letter dated 28.2.2006 to the second respondent wherein the latter was requested to inform whether the first respondent extended the bank guarantee for a period of six months up to 28.2.2007 and that if such an extension was made the second respondent may treat the notice dated 24.8.2006 as withdrawn. The first respondent in their letter dated 26.8.2006 addressed to the appellant disputed the proposed recoveries. In response to the letter dated 30.8.2006 of the appellant calling upon the first respondent to deposit a sum of Rs.6.47 crores, the first respondent sent the demand draft for Rs.42,63,034/- on 31.8.2006 stating that the said amount was due as per the DLC dated 24.5.2006. The first respondent at that stage filed WP.No.18269 of 2006 in this court. On 1.9.2006 the learned Single Judge granted interim injunction against invocation of bank guarantee. On 4.9.2006 the appellant called upon the first respondent to deposit a sum of Rs.16,47,57,636/- and in response thereto the first respondent informed the appellant about the interim order granted by this Court. The appellant then moved this Court for vacating the interim order and after hearing both the parties this Court disposed of the writ petition on 29.11.2006. The learned single Judge while holding that this Court has territorial jurisdiction to entertain the writ petition and decide the same, also held that the writ petition involving dispute relating to contract is also maintainable. The learned Judge further held that clauses 67.1 to 67.4 of general conditions of contract which provide for settlement of disputes by way of arbitration do not operate as a bar for entertaining the writ petition and adjudicating the dispute by this Court on the premise that the bank guarantee dated 13.9.2001 constitutes a separate contract which does not contain an arbitration clause or provide for any other remedy for settlement of disputes. The learned Judge therefore entered into the merits of the dispute relating to the justification or otherwise for invoking the bank guarantee and held that since the first respondent’s obligation under contract were fulfilled and the purpose for which the performance security was furnished was served, the appellants cannot encash the bank guarantee on any other ground including the alleged liability quantified in the revised statement at completion dated 29.7.2006. The learned single judge having taken note of the first respondent invoking the arbitration clause in their letter dated 16.9.2006 to adjudicate its claim for Rs.70,51,81,650/- and the counter claim of the appellant for Rs.18,16,34,122/- held that since those claims are subject matter of arbitration proceedings and are yet to be adjudicated, the appellant is not entitled to take any coercive steps against the first respondent including invocation of bank guarantee for the amounts recoverable from the first respondent. When the writ appeal came up before this Court on 6.2.2007, while posting the case for final arguments we directed the appellant not to encash the bank guarantee furnished by respondent No.1 subject to the condition that within a period of 15 days respondent No.1 shall extend the validity of the bank guarantee till 30.4.2007. The arguments were finally heard on 23.3.2007. Sri E.Manohar, learned Senior counsel assisted by Smt.Tara Sharma argued for the appellant while Sri K.Rama Murthy, learned senior counsel assisted by Miss.V.Uma Devi argued for the first respondent. The main contention advanced by Sri E.Manohar, learned senior counsel for the appellant is that the first respondent having invoked arbitration clause even before filing writ petition before this Court was not entitled to invoke the jurisdiction of this Court. He further submitted that since the subject mater of the dispute raised in the writ petition is also the subject matter of arbitration proceedings which were already commenced with the arbitrators entering on reference, the learned single Judge ought not to have interfered in the matter and interdicted the appellant from encashing the bank guarantee. The learned senior counsel drew our attention to the letter dated 25.8.2006 wherein the first respondent specifically invoked clause 67.3 of Section-III of Conditions of Particular Application of Agreements for reference of disputes for arbitration and submitted that when the subject matter of dispute in the writ petition was already a subject matter of arbitration proceedings, there was no justification for the learned Judge to adjudicate the dispute relating to the encashment of bank guarantee. Sri K.Rama Murthy, learned senior counsel for respondent No.1 contended that the whole action of the appellant is wholly arbitrary. He further submitted that while the claims and counter claims arising under the contract are the subject matters of dispute before the arbitrators, there is no bar on the first respondent to maintain the writ petition in this Court wherein the action of the appellant in unjustly and arbitrarily seeking to encash the bank guarantee even after the issue of DLC is called in question. He also sought to support the finding of the learned single Judge that since the bank guarantee constitutes a separate contract, there is no remedy of arbitration or any other remedy available to the first respondent and that therefore, the writ petition is maintainable. Sri Rama Murthy cited judgment of the Supreme Court i n ABL International Ltd., and Another vs Export Credit Guarantee Corporation of India and Others[1] in support of his contention that the writ petition is maintainable. After hearing the rival contentions, the questions that arise for consideration in this writ appeal are whether it was open to the first respondent to have invoked the jurisdiction of this Court by filing the writ petition having invoked the arbitration proceedings and whether the learned single Judge was justified in granting the relief of restraining the appellant from invoking the bank guarantee till completion of arbitration proceedings? Indeed the issue whether the disputes arising under a commercial contract are amenable to writ jurisdiction is a subject matter of a long debate. In M/s.Radhakrishna Agarwal and Others vs State of Bihar and Others[2] the Supreme Court made a distinction between a dispute arising at the very threshold or at the time of entry into the contract and a dispute arising after entering into contract and held that while in the former case judicial review is permissible and in the latter case the judicial review is not permissible on the ground that even though the State or its agents enter into the field of ordinary contract, they are not governed by the constitutional provisions, unless such contracts are statutory in nature. A similar view was taken by the Supreme Court in Premji Bhai Parmar vs Delhi Development Authority[3], D.F.O. vs Biswanath Tea Company Ltd.,[4] Bareilly Development Authority and Another vs Ajay Pal Singh and Others[5] and State of U.P. and Others vs Bridge and Roof Company (India) Ltd.,[6]. However a different note was struck by the Supreme Court in M/s.Dwarakadas Marfatia and Sons vs Board of Trustees of the Port of Bombay[7]. In that case the Supreme Court while rejecting the argument that in respect of a dispute arising out of a tenancy between Bombay Port Trust and the tenant, judicial review under Article 226 of the Constitution was not available for the tenant, held that the actions of the State are amenable to judicial review only to the extent that the State must act validly for a discernible reason not wholly for any whimsically or for any ulterior purpose and that every action/activity of the Bombay Port Trust which constitutes ‘State’ within Article 12 of the Constitution of India in spite of any right conferred or privilege granted by any statute is subject to Article 14 and must be reasonable. It was further held that where there is arbitrariness in State action, Article 14 springs in and judicial review strikes such an action down; that whatever be the activity of the public authority it should meet the test of Article 14. I n Mahabir Auto Stores and Others vs Indian Oil Corporation and Others[8] the Supreme Court held that every action of the State government authority must be subject to rule of law and must be informed by reason and whatever be the activity of the public authority it should meet the test of Article 14 of the Constitution of India. However the Supreme Court cautioned by saying that Article 14 of the Constitution cannot and has not been construed as a charter for judicial review of State action after the contract has been entered into and existence of power of judicial review however depends upon the nature of and the rights involved in the facts and circumstances of the particular case. In ABL International Ltd., case (1 supra) the Supreme Court held in para-23 as under: “ It is clear from the above observations of this Court once the State or an instrumentality of the State is a party of the contract, it has an obligation in law to act fairly , justly and reasonably which is the requirement of Article 14 of the Constitution of India. Therefore, if by the impugned repudiation of the claim of the appellants the first respondent as an instrumentality of the State has acted in contravention of the above said requirement of Article 14, then we have no hesitation in holding that a writ court can issue suitable directions to set right the arbitrary actions of the first respondent.” In para-27 the Supreme Court summarized the legal principles as under: “ (a) In a proper case the writ petition as against the state or an instrumentality of a state arising out of a contractual obligation is maintainable. (b) Merely because some disputed questions of fact arise for consideration, the same cannot be a ground to refuse to entertain a writ petition in all cases as matter of rule. © Writ petition involving a consequential relief of monetary claim is also maintainable.” In view of the law as crystallized in the last mentioned judgment the writ petition filed by the first respondent is maintainable and the learned Judge justifiably entertained the same. However, Sri E.Manohar, learned counsel pointed out that in ABL International Ltd., case (1 supra) it was held that where the parties agreed for arbitration, the writ petition under article 226 of the Constitution is not maintainable. Sri Rama Murthy, learned counsel contended that as held by the learned Single Judge that since bank guarantee constitutes a separate contract and the said instrument did not contain an arbitration clause there is no bar to invoke the jurisdiction of this Court. We have carefully gone through the contents of the bank guarantee issued by the second respondent bank on 13.9.2001. The relevant portion of the bank guarantee reads as under: “ Whereas M/s.KMC Constructions Limited, MCH No.555, Arora Colony, Road No.3, Banjara Hills, Hyderabad – 500034 (hereinafter called “ the contractor”) has undertaken, in pursuance of contract No. dated to execute “widening to 4-lanes and Strengthening of the existing 2-lane carriageway of Udaipur-Ratanpur-Gandhinagar section of National Highway No.8 UG-I from Km 278.000 to Km 340.000 in the state of Rajasthan” ( hereinafter called “the contract”). And whereas it has been stipulated by you in the said contract that the contractor shall furnish you with a Bank Guarantee by a recognized bank for the sum specified therein as security for compliance with his obligations in accordance with the contract.” A reading of the aforementioned clauses clearly shows that the first respondent furnished the bank guarantee in pursuance of the contract for execution of the work in dispute as a security for performing the obligations arising under the said contract. Thus the main contract for execution of the work between the parties is incorporated by a reference in the deed of bank guarantee. Further it is relevant to consider clauses 67.1 and 67.3, which for the sake of convenience are extracted herein below: “ Sub-Clause 67.1: First para of this sub-clause shall read as under: That if a dispute arise between the employer and the contractor in connection with or arising out of the works, whether during the execution of the works or after their completion and whether before or after repudiation or other termination of the contract, including any disagreement by either party with any action, inaction, opinion, instruction, determination, certificate or valuation of the Engineer, the matter in dispute shall, in the first place, be referred in writing to the Engineer, with a copy to the other party. Such reference shall state that it is made pursuance to this clause. No later than eighty fourth day on which he received such reference, the Engineer shall given notice of this decision to the employer and the contractor and such decision shall state that it is pursuant to this clause.” Sub-Clause 67.3: Arbitration “ This sub-clause shall read as below: Any dispute in respect of which the decision, if any, of the Engineer has not become final and binding pursuant to sub- clause 67.1, shall be finally settled as set forth below: i) The dispute with the contractor, whether Indian or foreigner, shall be finally settled by arbitration in accordance with the Indian Arbitration and Conciliation Act 1996, or any statutory amendment thereof. The arbitration tribunal shall consist of three arbitrators, one each to be appointed by the Employer and the Contractor, the third arbitrator shall be chosen by the two Arbitrators so appointed by the parties and shall act as presiding Arbitrator. In case of failure of the two arbitrators appointed by the parties, to reach upon a consensus within a period of 28 days from the appointment of the Arbitrator appointed subsequently, the Presiding Arbitrator shall be appointed by the President, Indian Road Congress. For the purpose of this sub-clause, the term “Indian Contractor” means a Contractor who is registered in India and is a juristic person created under Indian Law as well as a joint venture between such a contractor and a foreign contractor. ii) Neither party shall be limited in the proceedings before such arbitrators to the evidence or arguments already put before the Engineer, for the purpose of obtaining his said decision. No such decision shall disqualify the Engineer from being called as a witness and giving evidence before the Arbitrators or any matter whatsoever relevant to the dispute. iii) The reference to arbitration may proceed notwithstanding that the works shall not then be or be alleged to be complete, provided always that the obligations of the employer, the Engineer and the Contractor shall not be altered by the reason of the arbitration being conducted during the progress of the works. Neither party shall be entitled to suspend the works, and payment to the contractor shall be continued to be made as provided by the contract. iv) If one of the parties fails to appoint its arbitrator in pursuanc3e of sub-para (i) above, within 60 days after receipt of the notice of the appointment of its arbitrator by the other party, the President, Indian Road Congress shall appoint the arbitrator. A certified copy of the President, Indian Road Congress’s order, as the case may be making such an appointment shall be furnished to both the parties. v) Arbitration proceedings shall be held at New Delhi, India and the language of the arbitration proceedings and that of all documents and communications between the parties shall be English. vi) The decision of the majority of arbitrators shall be final and binding upon both parties. The fees and expenses of the arbitrators and expenses of the arbitration proceedings as determined by the arbitrators shall be shared equally by the Employer and the Contractor. However, the expenses incurred by each party in connection withy the preparation, presentation, etc., of its case prior to, during and after the arbitration proceedings shall be borne by each party itself. vii) All arbitration awards shall be in writing and shall state the reasons for the award.” From the afore extracted clauses it is clear that they are of widest amplitude taking into their fold disputes of any kind whatsoever arising between the employer and the contractor in connection with or arising out of the contract or the execution of the works, whether during the execution of work or after their completion and whether before or after repudiation or on the termination of contract. As already discussed hereinabove the bank guarantee in question was given towards due performance of the contract and therefore a dispute relating to its invocation is certainly a dispute which arises in connection with the main contract and in our opinion such a dispute certainly falls within the scope of clauses 67.1, 67.2 and 67.3 of the general conditions of contract. The terms of the bank guarantee cannot be read in isolation since the bank guarantee has come into existence as a sequel to main contract entered into between the appellant and the first respondent and therefore the dispute pertaining to the invocation of bank guarantee under the said contract cannot be treated as a dispute unconnected with or unrelated to the main contract. We therefore do not agree with the order of the learned Single Judge to the extent it is held that the bank guarantee furnished by the second respondent bank constitutes a separate and distinct contract, independent from the main contract and that therefore, the remedy of arbitration as contained in clause 67.1 to 67.4 is not available to the first respondent. But the question which still remains is whether this Court cannot entertain the writ petition merely because an