IN THE HIGH COURT OF GUJARAT AT AHMEDABAD FIRST APPEAL No 5252 of 2001 For Approval and Signature: Hon'ble MR.JUSTICE R.K.ABICHANDANI and Hon'ble MR.JUSTICE M.C.PATEL ============================================================ 1. Whether Reporters of Local Papers may be allowed : YES to see the judgements? 2. To be referred to the Reporter or not? : YES 3. Whether Their Lordships wish to see the fair copy : NO of the judgement? 4. Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the concerned : NO Magistrate/Magistrates,Judge/Judges,Tribunal/Tribunals? ======================================================== NIRMA LTD. Versus LENTJES ENGERGY (INDIA) PVT. LTD ---------------------------------------------------------- Appearance: 1. First Appeal No. 5252 of 2001 MR DUSHYANT DAVE, SR. ADVOCATE WITH MR KARTIKEY THAKAR FOR M/S TRIVEDI & GUPTA AND MR RAMESH SINGH, Advoc MR JP SEN FOR MR RS SANJANWALA for Respondent No. 1 MR KS NANAVATI, SR. ADVOCATE WITH MR. R.JAISINGHANI FOR MR JAL SOLI UNWALA for Respondent No. 2 ---------------------------------------------------------- CORAM : MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE M.C.PATEL Date of decision: 26/07/2002 ORAL JUDGEMENT (Per : MR.JUSTICE R.K.ABICHANDANI for the Court) 1. This appeal under section 37 of the Arbitration & Conciliation Act, 1996 is directed against the order dated 31st August 2001 made by the learned Judge, City Civil Court No.11, Ahmedabad in Civil Miscellaneous Application No. 21 of 2001 filed by the appellant against these respondents under section 9 of the said Act. By that application, the appellant sought a direction on the respondents to preserve boilers Nos.1, 2 and 3 contracted to be supplied by them under the agreements dated 12-12-1997, 12-12-1997 and 17-3-1998 at the appellant's plant in Bhavnagar by conducting the "Start-up" and "Performance Test Run" and further to achieve the agreed parameters as per Annexure VI of the contract dated 1-9-1997 between the appellant and the respondent No.2 till the hearing and final disposal of the arbitral proceedings. In the alternative, the appellant sought a direction on the respondents to deposit Rs.6.53 crores with the Court to be released to the appellant so as to enable it to conduct "Start-up" and "Performance Test Run" by engaging any other agency as may be deemed proper by the appellant. A further direction was sought on the respondents that, any payments made by them to any person will be subject to the rights and claims of the appellant for the amounts claimed and that may be ultimately awarded by the Arbitral Tribunal, and that the respondents should accordingly intimate to all those whom they made such payments. A security by way of bank guarantee was also sought from the respondents for a sum of Rs.60,67,18,000=00 said to have been paid by the appellant to operate during the pendency of the arbitral proceedings. A direction was also sought on these respondents that they should not alienate their immovable assets and movables except in ordinary course of business pending the making of the award by the Arbitral Tribunal. 2. For the purpose of this appeal, the facts of the case would be in a narrow compass. The appellant entered into an agreement for purchase of three CFB Boilers of 100 tph each for the purpose of steam generation to be used in the appellant's Soda Ash Plant at Bhavnagar. The respondent No.2 had know-how in respect of such boilers and the agreement dated 1st September 1997 was entered into between the appellant and the respondent No.2, under which the respondent No.2 agreed to provide to the appellant the know-how as was required to fabricate or get fabricated, assembled, erected and commissioned these boilers for power generation and process steam for Soda Ash and Pure Water for Site, as per the agreement. It was also agreed to provide supervision of fabrication, procurement and supply of equipments, components, spares, consumable etc. as may be required for fabrication, assembly, erection and commissioning of the boilers, and to undertake that the boilers once assembled, erected and commissioned will operate in conformity of this agreement as well as other agreements as may be entered by appellant with Engineer, Contractor and Erection Contractor, which were defined in this agreement. The terms of payment were also agreed and certain warranties were given by the respondent No.2, which included a guarantee (Article 7.1 (a) of the agreement), to the effect that the Contractor, Engineer and Erection Contractor shall duly and timely perform their respective obligations with the appellant, as may be provided in their respective contracts. The respondent No.2 also guaranteed fulfillment of the warranties contained in those contracts. In Article 7.1 (c), the respondent No.2 agreed that it would be "the principal guarantor for due performance of the CFB boilers as covered in this agreement and the said guarantee shall be in addition to any guarantees which NIRMA may have from the Contractor, Engineer and Erection Contractor". The respondent No.2 also agreed as principal guarantor to accept the guarantee obligations as mentioned in Appendix VI of the agreement, as also to monetarily or otherwise compensate the appellant for all the obligations covered under Article 7.2. It undertook to demonstrate that the boiler was capable of operating in accordance with the technical specifications by conducting performance test, and it was stipulated that, in case the performance test run is not possible due to reasons not attributable to the respondent No.2 within seven months after provisional acceptance of a boiler or such extended time as agreed upon between the parties, such boiler shall be considered as provisionally accepted and the acceptance certificate shall be issued by the appellant. Stipulation regarding liquidated damages was also made should the respondent fail to fulfill its performance warrantee and the liquidated damages were to be as specified in Annexures to the Agreement. The agreement was to be governed according to the laws of India as provided in Article 16. However, by arbitration clause in Article 15.1, it was agreed between the respondent No.2 and the appellant that the disputes under this agreement will be finally settled by arbitration in accordance with the Rules of conciliation and arbitration of the International Chamber of Commerce and the place of arbitration shall be London. In Article 16.6, it was stipulated that the appellant shall have no claim or demands against the respondent No.2 other than those specified in the Agreement, and that the liabilities of the respondent No.2 to the appellant for all or any claim or demands of the appellant shall be limited to what is provided in the Agreement and shall in the aggregate limited to 15% of the total order value that may be paid to the appellant under the Agreement as well as 15% of the total order value of the agreements to be entered with the Engineer, Contractor and Erection Contractors and such limitation shall not be alterable by decision of arbitration or court. In Appendix VI, the performance guarantees were enumerated and if the guarantees were not complied with even after repairs and replacement, the appellant was entitled to the liquidated damages at the rates which were specifically mentioned. The appellant had a right not to accept the unit or parts thereof in the events enumerated in Appendix VI, which included the event where liquidated damages exceeded 10% of the contract price. In case of such non-acceptance, the appellant was entitled to further use of the unit or the parts under consideration until a suitable replacement is ready for operation, for a period of not longer than two years after written confirmation by the respondent No.2 of non-acceptance and the conditions agreed upon mutually. 2.1 The respondent No.2 founded a wholly owned subsidiary, namely the respondent No.1, which entered into three agreements with the appellant in respect of detailed engineering, fabrication and procurement of components, equipments and apparatus required for the construction of the boilers and erection and commissioning of the boilers. The appellant had to appoint these contractors with the approval of the respondent No.2 and admittedly, the respondent No.1 was appointed as Engineering, Supply and Erection Contractor under the three agreements. 2.2 Of these three agreements, "Agreement for Detailed Engineering" entered into on 12th December 1997 between the appellant and the respondent No.1 and which recorded that the respondent No.2 had approved the appointment of the respondent No.1, was for the purpose of carrying out detailed engineering work on the basic engineering design and know-how of the respondent No.2 required for fabrication, erection and commissioning of the said three boilers matching with the design and know-how of the respondent No.2. In this agreement, the contract was defined so as to mean the agreement dated 1st September 1997 entered into between the appellant and the respondent No.2 for supply of know-how and supervision for three boilers. The terms of consideration and payments were stipulated at various stages and the final payment was to be made against their performance bank guarantee and on completion of performance test of the boilers, as stipulated in para 4.4.8. Warranties and indemnities were stipulated in Article 8 and the arbitration clause was stipulated in Article 11 to the effect that the disputes between the respondent No.1 and the appellant, if any, shall be referred to an arbitration in accordance with the Indian Arbitration and Conciliation Act, 1996 for final settlement and that the arbitration shall be conducted in Ahmedabad (Article 11.1). In this agreement also there was a stipulation in Article 12.4 that the appellant and the respondent No.1 shall not mutually advance claims and demands other than specified in the agreement, and that the compensation and liabilities of the respondent No.2 for all damages etc. shall be limited to what was provided in the Agreement and shall, in the aggregate, limited to 15% of the total consideration of Rs.180 lakhs and such limitation shall not be alterable by a decision of an arbitrator or a court. 2.3 The Agreement for Supply was also entered into on 12th December 1997 between the respondent No.1 and the appellant in context of the main contract between the appellant and the respondent No.2 and it was recorded therein that the respondent No.2 had approved the appointment of respondent No.1 as contractor for procurement, fabrication and supply of the equipment required for erection and commissioning of three boilers matching with the design and know-how of the respondent No.2. Here again, the Contract was defined to mean the agreement dated 1st September 1997 entered into between the appellant and the respondent No.2 for supply of know-how and supervision for three boilers as per the patented design of the respondent No.2. The terms of payment were stipulated and the final payment of 10% of the value of the order was to be paid against Performance Bank Guarantee and on completion of performance test of the boilers by the respondent No.2 (as provided in the Contract) and the Certificate issued by the appellant for successful completion of the Performance Test for Boilers, as stipulated in clause 3.5.9 of this Agreement. In para 8.5, it was stipulated that, as per the contract, parameters of the performance test were to be achieved by the respondent No.2. If, because of defective / poor workmanship of the material delivered by the contractor, performance parameters are not achieved, the appellant was free to encash the Performance Bank Guarantee to be received from the contractor without any further reference / recourse to the contractor, and other suitable action as may be required to be taken by the appellant under the contract. 2.4 The "Agreement for Erection & Commissioning" was executed on 17th March 1998 between the appellant and the respondent No.1 after it was approved by the respondent No.2, for carrying out erection and commissioning of three CFB Boilers of 100 tph each matching with the design and know-how of the respondent No.2 as well as detailed engineering and supplies as may be done by the respondent No.1 (Clause (e) of the Preamble). Under this Agreement, the respondent No.1 undertook and agreed that the services to be rendered by it constituted "the total services required for the Erection testing of the Plant" (Article 2.5). The obligation of the appellant enumerated in Article 3.1 included providing electricity at one point free of cost, and providing open and levelled area for fabrication. The terms of payment were stipulated and as per Article 4.4.4, final payment being 10% of consideration was to be paid against Performance Bank Guarantee and on completion of performance test and Certificate issued by NIRMA for the successful completion of the performance test for boilers. Specimen of performance guarantee is annexed at Annexure 3 to this agreement. Stipulations regarding Mechanical Completion Test after the erection of the Plant was completed, Start-Up and Performance Test Run were made in Articles 7.10, 7.11 and 7.12. If the guaranteed performance was achieved and a certificate was issued to that effect by the appellant (Performance Acceptance Certificate), the respondent No.1 would stand discharged from the contractual obligations in respect of the boiler for which the certificate is issued (Article 7.12.2). Stipulation identical to the one contained in the other agreements by which the aggregate limit of liabilities was fixed to 15% of the total consideration was also adopted in this agreement in Article 11.4. In the arbitration clause in Article 10, it is provided that the arbitration shall be conducted in Ahmedabad. 3. It will be seen from the nature of the aforesaid four agreements that the respondent No.2 had a know-how in respect of the boilers having patented design, and that it had undertaken to give that know-how to the appellant through the contractors of its choice, with whom the appellant entered into agreements after due approval from the respondent No.2. The common element in all the four agreements was that the performance test run of the boilers was to be conducted and the final payment of 10% was to be made against the performance guarantee and a successful performance test. The respondent No.2 had undertaken to carry out the obligations of the respondent No.1 under the three agreements. The arbitration clause in the agreement with the respondent No.2 named London as the place for arbitration, while in the three agreements executed by the respondent No.1, the seat of arbitration was Ahmedabad. 4. The dispute arose between the parties leading to a reference being made before the Arbitral Tribunal at Ahmedabad in respect of the three arbitration agreements entered between the appellant and the respondent No.1 and a reference made to the Arbitral Tribunal of the International Court of Commerce, at London in respect of the main agreement which is described as the Contract in the other agreements, between the appellant and the respondent No.2. 5. In the Statement of Claim dated 12-11-2000 made by the appellant before the Arbitral Tribunal at Ahmedabad (a copy of which is at Volume III of the Paper Book of the appellant, at Annexure "ZE" at page 255 to 297), the appellant - claimant prayed for a declaration that the respondent No.1 had failed to perform its obligations under the said three agreements, and that the claimant was entitled to be re-paid Rs.60,67,18,000=00 paid to the respondent No.1 under these agreements on account of its failure to perform its obligations together with interest at 18% per annum from the date of payment till realisation of the amount. In the alternative, it was prayed that the claimant be awarded a sum of Rs.8,20,50,000=00 which according to the appellant was paid in excess to the respondent No.1 together with interest at 18% per annum. A further sum of Rs.66,08,32,000=00 was claimed as the amount of "idle charges" on account of idle charges of labour, fixed cost, interest charges etc. for the period between 1-9-1999 till 29-2-2000, as stated in paragraph 68(3) of the statement. Other sums of Rs.33,47,14,000=00 (on account of compensation for loss and damage caused by diverse breaches of contract), Rs.14,65,84,000=00 (on account of insufficient boiler operation), Rs.2,06,80,000=00 (on account of use of an incorrect primer, namely, red oxide primer instead of zinc silicate primer), Rs.1,60,05,000=00 (towards reimbursement of material costs), Rs.2,95,14,000=00 (towards reimbursement of services carried on behalf of the respondent No.1) and Rs.1,29,19,000=00 were claimed under various heads enumerated in the claims put up in paragraph 68 of the statement. 5.1 On the disputes arising between the parties, the appellant invoked the arbitration clause under each of the three agreements by issuing notice dated 29-7-2001 (Annexure "ZB") to the respondent No.1. The respondent No.1 refuted the claim made by the appellant by its letter (at Annexure "ZC"). On invocation of the arbitration clause, the Arbitral Tribunal was constituted and it entered upon the reference on 8-10-2000. The petitioner filed statement of claim and the respondents filed the written statement as per the directions of the Tribunal. Thereafter, the petitioner filed the application under section 9 of the said Act on 9th January 2001 for the reliefs referred to earlier. 6. The learned City Civil Judge noted that, though the Arbitral Tribunal had entered upon reference on 8-10-2000, the application under section 9 was made on 9-1-2001 and no interim relief was at any point of time sought from the Arbitral Tribunal. It was held that there was no concrete reason placed on record to point out as to what were the reasonable grounds requiring the court to exercise its powers for grant of interim measures, especially in view of the fact that both the sides have made allegations and counter allegations before the Arbitral Tribunal as well as the before the ICC, London. The trial Court observed that the issues regarding obligation to conduct "Start Up and Performance Test" in respect of these boilers were pending before the Arbitral Tribunal and the Court was not required to go into the merits of those disputes. Dealing with the contention that the Arbitral Tribunal did not enjoy wide powers of a court for granting interim measures, the court observed that it was not pointed out as to how the powers of Arbitral Tribunal under the Act were limited. It held that this submission was not acceptable in absence of any cogent reason for not moving the Arbitral Tribunal for any interim measure under section 17 of the Act. The Court held that there was absolutely no question of the maintainability of the application, because, that aspect was decided in M/s Sundaram Finance Ltd. v. M/s NEPC India Ltd., reported in JT 1999 (1) SC 49, in which it was held that the Court was empowered to pass interim order before or during the arbitral proceedings under section 9 of the Act. After holding that the Court had the power, under section 9 of the Act, to issue orders of interim measures, it was held that there was no justification in the appellant not moving the Arbitral Tribunal for getting interim measures, and therefore, it was not desirable to intervene and grant the interim relief. 6.1 On merits, it was held that, prima facie, in view of the annual report of the appellant regarding the completion of the commissioning of the boilers and the same being fully operational, there did not appear to be any defect or failures to have come on the record and all the suppositions or the possibilities of failures attempted to be the basis for getting the relief of specific performance appeared to be hypothetical apprehensions. It was held that the Arbitral Tribunal was going to decide as to whether the boilers supplied were defective, and whether the appellant had prevented the respondent from fulfilling its part of the contract. It was noted that the Arbitral Tribunal was also required to decide whether the respondent No.1 proved that the boilers suffered damage after installation due to their being operated by the appellant, or whether the appellant was guilty of delay. The Court found that the appellant had not made out any prima facie case, and that the issues urged before the Court could not be decided by it at prima facie stage for granting interim measures like specific performance or attachment sought by the appellant. The Court also held that the appellant itself had quantified the compensation in terms of damages and therefore, no question arose for granting injunction. It was further held that the directions in form of specific performance would tantamount to the Court concluding, before the Arbitral Tribunal arbitrates, upon the facts in issue before it. Referring to the ratio of the decision of the Apex Court in Colgate Palmolive (India) Ltd. reported in (1999) 7 SCC 1, it was held that the appellant was not entitled to any interim relief on the basis of any of the criteria set out in the said decision. It was noted that there was a strong ground operating in favour of the respondent No.1, having relevance on the aspect of balance of convenience, that the three boilers were in fact erected and commissioned and the completion of the project was shown in the annual report of Company ending on 31st March 2000, which stated that the project was completed ahead of time for the amount which was less than the stipulated amount and that self-sufficiency in generating steam for the Soda Ash plant of the appellant was achieved. It was also noted that the appellant had invoked the bank guarantee given by the respondent No.1 and that there was also a counter-claim of the respondent to make good the outstanding dues being part of the consideration of the three agreements. It was also observed that there was no existing pecuniary liability, making it obligatory for the respondents to furnish a guarantee, and that the relief of recovery of damages in contract was not a debt or any outstanding pecuniary liability. Referring to the provisions of sections 40 and 41 of the Specific Relief Act, the Court held that it cannot grant injunction in a case where the non-performance can be duly compensated. It was held that the grant of interim relief prayed for by the appellant may amount to granting of specific performance of the contract which was not permissible in view of the damages sought for by the appellant. On the basis of the ratio of the decision of the Supreme Court in Cotton Corporation of India Ltd. v. United Industrial Bank Ltd., reported in AIR 1983 SC 1272, it was held that since no final relief in terms of specific performance was available, temporary relief of the same nature cannot be availed of by the appellant. Referring to the Commentaries on Russell on arbitration and Dr. Peter Binder, which were cited before it, the Court held that; " Even if interim measures against the parties not involved in arbitration can be enforced through legal judicial system as commented by Dr. Peter Binder and relied upon by the petitioner, no cause is made out to do so, in light of the facts and circumstances in the matter". It was held that though the Court had jurisdiction under Section 9 to grant interim measures, there was no case made out either for the mandatory relief or for any other interim measure to enable to the petitioner to get the relief claimed and that there was no evidence to hold, prima facie, that the respondents were stripping itself of its assets so as to warrant grant of Mareva injunction. The Court, thus, by its detailed order, rejected the application for interim measures under section 9 of the Act. 7. The learned Senior Counsel for the appellant argued that the approach of the trial Court that the Court should not exercise its jurisdiction under section 9 of the said Act when the appellant can move the Arbitral tribunal for interim measures under section 17 of the Act, was erroneous and not warranted by the provisions of the said Act and the decisions of the Apex Court. It was further contended that the Court can issue orders under section 9 of the Act even against a third party and therefore,