OMP No.633/2010 Page 1 of 59 * IN THE HIGH COURT OF DELHI AT NEW DELHI Judgment reserved on: 29.11.2010 % Judgment delivered on: 20.12.2010 + O.M.P. 633/2010 & IA 14210 and 15795/2010 EMAAR MGF CONSTRUCTION PVT LTD ..... Petitioner Through: Mr. P.V. Kapur, Sr. Adv. (S.G. Solicitors)- Mr. Sunil Goel, Dheeraj Singh, Sushil Bhartiya, Aman Anand and Pranav Sapra, Advocates versus DELHI DEVELOPMENT AUTHORITY & ORS ..... Respondent Through: Ms. Indira Jaisingh, ASG with Mr. Ajay Verma and Ms. Sonam Anand, Advocates Mr. U.C. Mittal and Mr. Ankur Mittal for R-3 CORAM: HON’BLE MR. JUSTICE VIPIN SANGHI 1. Whether the Reporters of local papers may be allowed to see the judgment? : Yes 2. To be referred to Reporter or not? : Yes 3. Whether the judgment should be reported in the Digest? : Yes J U D G M E N T VIPIN SANGHI, J. 1. The petitioner has preferred the present petition under Section 9 of the Arbitration and Conciliation Act, 1996 to seek an interim order of injunction against the respondent no.1, DDA to stay OMP No.633/2010 Page 2 of 59 the effect and operation of the notice dated 16.10.2010 issued by it; to restrain the respondent no.1 from giving effect to the demand as raised in the said notice; to restrain the respondent no.1 from taking any steps pursuant to the notice dated 16.10.2010, and; to restrain the respondent No.1/DDA from invoking the three bank guarantees aggregating to ` 183.00 crores , as furnished by respondent No.2 State Bank of Patiala (who have furnished their guarantee for ` 33 crores being BG No. 5079408BG0000654) and respondent no.3, i.e. State Bank of India (who have furnished their Guarantee for ` 150 crores being BG No. 0480308BG0010173), to any extent whatsoever. 2. Corresponding injunction is sought against respondent nos.2 and 3 banks from encashing the aforesaid bank guarantees furnished by them at the behest of the petitioner in favour of respondent no.1, DDA. 3. The petitioner company is a real estate developer and claims to have undertaken various real estate development projects all over the country. The petitioner states that sometime in 2006, the respondent DDA invited bids for development and construction of Commonwealth Games Village on a parcel of land comprising 11 hectares adjacent to Akshardham Temple in NOIDA. The petitioner was shortlisted along with other 11 bidders, and eventually selected as the successful bidder. The construction of residential towers of the Commonwealth Games Village was to be undertaken on Public-Private OMP No.633/2010 Page 3 of 59 Participation (PPP) basis. 4. The parties entered into a Project Development Agreement (PDA) on 14.09.2007. This agreement contains an arbitration agreement in clause 17. The petitioner has filed the present petition under Section 9 of the Act by relying upon the said arbitration clause contained in the Project Development Agreement. 5. The petitioner claims to have made payment of earnest money of ` 80.25 crores and also an amount of ` 120.375 crores towards upfront fee. The petitioner also states that it appointed various consultants and architects to execute the project. 6. Under the terms of the agreement, “Project Completion Date” was defined to mean the date when all residential facility are completely developed in all respects (including landscaping), technically fit to be occupied and ready to use/livable, with no pending construction, unfinished work, construction equipments, debris, construction material etc. on the project site and certified in writing by the Monitory Committee. (Clause 1.1.20). 7. The petitioner, who acted as a project developer, was obliged to completely develop the project by 01.04.2010 (Clause 3.11). The date of completion of the Project is deemed to be the date when all Residential Apartments are completely developed and are technically fit to be occupied, including all other associated facilities and amenities OMP No.633/2010 Page 4 of 59 and a completion / occupancy certificate in this regard has been obtained from NDMC/MCD and DDA. 8. Under clause 3.1, the Project Developer was, inter alia, obliged to develop the residential facility at the project site within the time frames as set out in greater detail in Schedule III to the Agreement. Clause 3.1 reads as follows: “3.1 The Project Developer shall undertake to develop the Project Site and construct such capacity of residential accommodation and meeting such specifications and requirements as are specified in greater detail in Schedule II to this Agreement. The Project Developer shall develop the Residential Facility at the Project Site within the time frames as set out in greater detail in Schedule III to this Agreement.” 9. Annex III/Schedule III contains the project milestones which the petitioner was obliged to attain. The same reads as follows: Annex 3 PROJECT MILESTONE A. Following are the Project Milestone to ensure timely completion of the Project. Milestone No. Milestone Time from the date of signing of Project Development Agreement i.e. D- Day (estimated at July 15, 2007) including all holidays/Sundays 1 Foundation Work (including Plinth Level) upto Plinth Level for 50% Blocks and Mock Unit completion D+120 days i.e. November 12, 2007 OMP No.633/2010 Page 5 of 59 2 Structure work upto G+4 level, with associated electrical works + Foundation work including Plinth Level for rest of the books D+240 days i.e. November 12, 2007 3 Structure Work upto terrace level, with associated electrical works and B.W. upto G+4 level D+420 days i.e. September 7, 2008 4 Completion of brick work upto terrace level and internal plaster, flooring, etc. for 5 levels, with associated electrical works D+600 days i.e March 6, 2009 5 Completion of flooring and finishing, with associated electrical works of all blocks all levels upto terrace level D+780 days i.e. September 2, 2009 6 External finish of all blocks and all levels D+840 days i.e. November 1, 2009 7 Completion of all electric work including lifts, E.S.S etc and completion of U.G.R./ Pump Rooms/ Lifts/ Pump Sets etc. D+870 days i.e. December 1, 2009 8 Completion of all development work including landscaping D+900 days i.e. December 31, 2009 9 Project Completion Date April 1, 2010 Note: No exclusions, including time taken by DDA in giving approvals/ notifications, will be allowed to be considered in the calculation of time taken for the achievement of Project Milestone. B. The liquidated damages amount to be paid by the Project Developer to DDA in case of non-achievement of each of the aforesaid Project Milestone shall be calculated as follows: a. Rs.15,00,000 (Rupees Fifteen Lakhs Only) a day for each day of delay for the first fifteen (15) days of delay; OMP No.633/2010 Page 6 of 59 b. Rs.25,00,000 (Rupees Twenty Five Lakhs Only) a day for each day of delay for the next fifteen (15) days of delay; c. Rs.50,00,000 (Rupees Fifty Lakhs Only) a day for each day of delay thereafter till the date of achievement of that Project Milestone or Termination Date, whichever is earlier. I am also informed that the figure of ` 25 lacs set out in para B(b) as liquidated damages, stands reduced to ` 20 lacs, by agreement of parties. 10. Under clause 6 of the agreement, the petitioner was required to submit performance security for ` 400 crores in the form of unconditional bank guarantee(s) in accordance with the format specified in Schedule VI, from scheduled commercial bank acceptable to the respondent, DDA. Clause 6.2 of the agreement, inter alia, provides as follows: “6.2 DDA shall have the rights to invoke the Performance Security as recourse in the Project Developer Event of Default including but not limited to on account of an event of non-compliance to the milestones or persistent delays by the Project Developer in implementing the Project, in accordance with the terms of the Performance Security. Without prejudice to the aforesaid, DDA shall have the right to invoke the Performance Security under the following events: i. In case the Project Developer is unable to deposit the liquidated damages for delay in achieving any Milestone the said Performance Security shall be forfeited for an amount as computed under Schedule III. ii. In case of default by the Project Developer in meeting the defects liability obligations mentioned under Clause 7 below, to the extent of Rs.5,00,00,000/- OMP No.633/2010 Page 7 of 59 (Rupees Five crores only) in case of water-proofing defects and Rs.5,00,00,000/- (Rupees Five crores only) in case of other defects. iii. In case of default by the Project Developer in meeting the deficiency charges obligations mentioned under Clause 8.12.3 to the extent of Rs.5,00,00,000/- (Rupees Five crores only). iv. In case of default by the Project Developer in meeting its obligations mentioned under Clause 8.14.2 below, to the extent of Rs.2,00,00,000/- (Rupees Two crores only). In the event DDA invokes the Performance Security, the Project Developer shall have to furnish a fresh Performance Security for the invoked amount from a scheduled commercial bank, failing which, the DDA shall be entitled to terminate this Agreement. The performance security shall be returned in the following manner: … … …” 11. The admitted position is that in terms of clause 6.2, the respondent/DDA, from time to time, partially returned the bank guarantees furnished as performance security and continued to retain the performance security of ` 183 crores. These performance bank guarantees are valid till 31.12.2010. Performance security of Rs.17 crores, apart from the aforesaid amount of Rs.183 crores, was also retained, to be returned in terms of clauses (d), (e) and (f) of clause 6.2 12. The petitioner states that there is no dispute between the parties that the petitioner achieved milestone nos.1 to 7 on time. Accordingly, the bank guarantees to the extent of ` 200 crores were returned by the respondent to the petitioner. OMP No.633/2010 Page 8 of 59 13. The petitioner further states that at the Commonwealth Games Village, construction/development activity was being carried out by other agencies/corporations/contractors besides the petitioner, which included respondent no.1 DDA as well. The scope of work of the petitioner under the Project Development Agreement did not include all the construction/development work of the Commonwealth Games Village. Once the milestone no.7 had been achieved by the petitioner, the only thing that remained to be completed, on the part of the petitioner, was external landscaping and connection of intermediaries from the water/sewage lines and electrical connection after the main lines had been laid and completed by the respective agencies including the DDA, DJB, ECIL and BSES. 14. Insofar as the external landscaping work is concerned, the same included hard scape-consisting of road and pathways, and soft scape consisting of trees, shrubs, grass etc. The petitioner states that the external landscaping work could not be completed unless and until all the work of every agency including DJB, BSES, DDA etc. were completed. 15. It is claimed that these agencies were not working in tandem with each other. The petitioner states that under Schedule III, there was a period of only 30 days provided for achieving milestone no.8, after milestone no.7 had been achieved. The same could be achieved only if the other agencies had also completed their respective works. OMP No.633/2010 Page 9 of 59 The petitioner also states that it could not have carried out the landscaping work before the laying of the underground cable, water/sewage lines etc. by third party agencies had been done, as these agencies would otherwise have dug up the work done by the petitioner. 16. The petitioner states that it complied with all its obligations, which it could, for achieving the milestone no.8 by 01.03.2010 and made an application in the prescribed format on 29.03.2010 to the DDA for issuance of the completion certificate. It is stated that the respondent, DDA was also called upon to take over possession of the towers. However, the respondent no.1 failed to take over possession. 17. It is averred that respondent no.1 neither issued the completion certificate to the petitioner, nor refused the same within the specified period of 7 days as provided in the Project Development Agreement. On 03.09.2010, the respondent DDA requested the petitioner to provide certain documents to enable them to process the request of the petitioner for issuance of occupancy certificate. On the same day, without waiting for any further documents from the petitioner, the respondent no.1 issued a temporary occupancy certificate, and on the same day, it also issued the occupancy certificate in relation to the Commonwealth Games Village to the Organising Committee, wherein it was stated that the said occupancy certificate was being issued on the basis of statutory clearances. The OMP No.633/2010 Page 10 of 59 petitioner states that the factum of issuance of the occupancy certificate establishes that the project was completed and fit to be occupied. 18. The respondent no.1, by its letter dated 20.05.2010, alleged that the milestones had not been met by the petitioner within the time granted under the agreement, and threatened to levy liquidated damages on the petitioner on account of the said alleged default. By letter dated 09.06.2010, the DDA demanded liquidated damages of ` 13.45 crores from the petitioner alleging that there were defects and delays. The petitioner disputed the allegations of delays and defects. 19. The petitioner states that the respondent took over the possession of the towers constructed by the petitioner much after the date when they were completed. It is also stated that the respondent coerced the petitioner for extending the validity of the bank guarantees/performance securities. The petitioner claims that there was a lot of negative publicity for the Commonwealth Games Village in the media. However, after the intervention of Prime Minister’s Office, the other agencies completed their respective obligations. The petitioner submits that the Commonwealth Games were held successfully, and the Commonwealth Village was occupied by thousands of athletes and officials without any complaints. The Commonwealth Games Village was highly appreciated by everyone, including the media, and the negative media reports turned positive. OMP No.633/2010 Page 11 of 59 The petitioner also relies on the letter dated 07.10.2010 addressed by the Lt. Governor of Delhi to the Prime Minister in support of its case that the petitioner was not guilty of breach of the agreement. 20. After the completion of the Commonwealth Games, the petitioner received a letter dated 16.10.2010 from the DDA on 20.10.2010. In this communication, the DDA alleged that the project had not been completed even till 16.10.2010. The DDA by this letter demanded liquidated damages amounting to ` 83.70 crores on account of the alleged delay in achieving of milestone nos.8 and 9. The DDA also threatened that, in case the said amount is not deposited by the petitioner, the performance bank guarantees submitted by the petitioner would be encashed to the extent of the aforesaid amount. 21. The petitioner sent a reply dated 20.10.2010 to the DDA denying that there was any delay in the achieving of any milestones and repudiated its liability. It was also alleged that the DDA was seeking to unjustly enrich itself, and that it was acting in an illegal manner. 22. The respondent DDA invoked the performance bank guarantees of the petitioner on 23.10.2010 for the entire amount of ` 183 crores, i.e. ` 150 crores from the State Bank of India and ` 33 crores from the State Bank of Patiala. The petitioner submits that, even without waiting for a week from the date of receipt of the letter OMP No.633/2010 Page 12 of 59 dated 16.10.2010 (which was received by the petitioner on 20.10.2010), the said bank guarantees have been invoked. 23. The petitioner submits that the respondent/DDA has played a fraud of an egregious nature on the petitioner by invoking the said bank guarantees, in as much as, even though nothing was lacking from the side of the petitioner, and the petitioner has fulfilled all its contractual obligations within the stipulated time, the two bank guarantees have been invoked by the DDA. This is despite the fact that it is respondent No.1/DDA and other agencies, who have not fulfilled their obligations within the stipulated time. The petitioner states that due to the delays and defaults of the DDA and the other agencies involved in the development work, “the entire landscaping work, dependent on such performance by respondent No.1 and its other agencies, could not be completed in time”. It is further submitted that respondent No.1, for its own breach, cannot levy any liquidated damages on the petitioner. It is yet to be determined as to who is in breach and in default. It is submitted that respondent No.1 has no right to invoke the bank guarantees for recovery of liquidated damages. 24. It is further submitted by the petitioner that the Occupancy Certificate in terms of the Delhi Building Bye-laws has been issued by the respondent/DDA. Therefore, it is not open to the DDA to contend that the project, or any part of it, is not complete. The petitioner OMP No.633/2010 Page 13 of 59 submits that respondent No.1 is entitled to retain the bank guarantees in the sum of ` 17 crores in terms of clause 6.2(d) (e) and (f) of the Project Development Agreement, including a guarantee of ` 5 crores towards performance security for rectification of defects. The petitioner submits that, even if there are any so-called defects in the works done by the petitioner, the same would not justify the invocation of the performance bank guarantees for the amount of ` 183 crores. 25. It is further argued that the invocation of the bank guarantees by the respondent/DDA has been done at the behest of the Ministry of Urban Development, Government of India. The petitioner has placed on record a letter dated 20th October, 2010 issued by the Ministry of Urban Development, Government of India to the Vice Chairman, DDA stating that the DDA may, inter alia, proceed to invoke the bank guarantees furnished at the instance of the petitioner. The petitioner submits that the DDA is an independent entity and it is the DDA which is a party to the Project Development Agreement. The Ministry of Urban Development, Government of India has no role to play in the matter and the invocation of the bank guarantees has been done, not on account of an independent application of mind by the DDA but, under the influence of the Ministry of Urban Development. It is argued that this also shows that the invocation of the bank guarantees is not bona fide but is fraudulent. 26. Learned Senior Counsel for the petitioner Mr.P.V.Kapur in his OMP No.633/2010 Page 14 of 59 submissions has argued that in their communication dated 16th October, 2010 the respondent/DDA had primarily made complaints of “defects” allegedly existing at the site. He submits that the respondent/DDA had sought to quantify the liquidated damages on account of the alleged non-completion of milestone Nos.8 and 9, and quantified the sum at ` 83.70 crores. In this communication, the demand made by the respondent/DDA was for deposit of ` 83.70 crores only, and it was stated that in case the amount is not deposited within seven days, “the amount shall be realized after encashing the performance guarantee equal to the above amount.” He, therefore, submits that, in any event, the invocation of the bank guarantees to the tune of ` 183 crores is wholly unjustified and fraudulent. He submits that a party who is aware of the fact that he is not entitled to recover the entire amount for which the bank guarantee has been furnished, but still proceeds to invoke the bank guarantee for the entire amount, acts fraudulently. He refers to the reply filed by the respondent/DDA in support of this submission. In their reply the DDA has given a “preliminary estimate” of the amount that the petitioner is allegedly liable to pay. The said “preliminary estimate” reads as follows:- i. Liquidated damages upto 15.10.10 Rs.83.70 crores ii. Liquidated damages from 16.10.10 till 15.11.10 (filing of this Reply) (@ Rs.20 lakhs per day x 2) Rs. 12.40 crores OMP No.633/2010 Page 15 of 59 iii. Liquidated damages from 16.11.10 @ Rs.20 lakhs per day x 2 till the completion of the project iv. Amount spent by Answering Respondent as payment to various authorities for different permissions/ services, which were otherwise the sole liability of Petitioner (provisional) Rs. 49.11 crores v. Amount spent by Answering Respondent to make the Project area operational for the Commonwealth Games (Provisional) Rs.20.80 crores v. Damages for loss of goodwill and reputation of Answering Respondent due to the acts, omissions and breaches of Petitioner. Being determined vi. Other damages and losses Being determined 27. He submits that the aforesaid estimate shows that as on the date of invocation of bank guarantees, i.e. 23rd October, 2010, admittedly, the amount of ` 183 crores was not due as liquidated damages, even if the computation made by the respondent DDA were to be accepted for the sake of arguments. He submits that even if the specific figures stated in the aforesaid tabulation are added up, the same fall short of ` 183 crores. He further submits that the Heads (v) and (vi) above are not even covered by the performance bank guarantees furnished at the behest of the petitioner. 28. Mr. Kapur submits that the Monitoring Committee constituted in terms of the agreement is the authority empowered to certify the completion of the works under the Project. Till date, the Monitoring OMP No.633/2010 Page 16 of 59 Committee has not returned a finding that there has been a delay on the part of the petitioner in achieving milestone Nos.8 and 9. In this regard, he refers to the minutes of the 31st meeting of the Monitoring Committee held on 6th May, 2010. In this meeting, the Monitoring Committee constituted a Sub Committee for assisting it in recording the Completion Certificate as per Clause 3.11 of the Agreement. This Sub-Committee has two representatives of the DDA and two representatives of the petitioner. He also refers to the minutes of the 32nd meeting of the Monitoring Committee held on 31st July, 2010. The Monitoring Committee clarified that the Sub Committee constituted, as aforesaid, had been formed to submit the report of completion on milestones 8 and 9 and not for recording completion certificate under Clause 3.11 of the Project Development Agreement. He also refers to the minutes of the 33rd meeting held on 25th October, 2010 to submit that the Sub-Committee did not meet due to preoccupation of the officers of the DDA. He submits that the 1st meeting of the Sub- Committee constituted, as aforesaid, was held on 28th October, 2010. Even on that date, the meeting remained inconclusive. By reference to letter dated 10th November, 2010 stated to have been issued by the petitioner to the respondent/DDA, the petitioner submits that it is the officers of the DDA who did not turn up for the meeting of the Sub Committee scheduled for 9th November, 2010. The submission of Mr.Kapur is that until and unless the date of achievement of milestone Nos.8 and 9 is finalized, it cannot be said that the petitioner has not OMP No.633/2010 Page 17 of 59 achieved the said milestones in time. Consequentially, respondent/DDA cannot invoke the performance bank guarantees as done by it. 29. Mr. Kapur submits that the respondent/DDA has never demanded any damages for loss of goodwill or loss of reputation or on any other account. No notice in this regard was issued to the petitioner prior to invocation of the bank guarantees. He, therefore, submits that the aforesaid tabulation prepared by the respondent is an afterthought to somehow come as close to figure of ` 183 crores as it could. 30. Mr. Kapur submits that the petitioner communicated the fraud being played upon by the respondent/DDA to respondent Nos. 2 and 3 banks on 23rd October, 2010. (I may note that the said communication is contained in the compilation of documents tendered in Court during the course of arguments). He, therefore, submits that the respondent Banks had notice of the fraud sought to be played by the respondent DDA upon the petitioners.