1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION APPEAL LOD.NO.350 OF 2009 IN ARBITRATION PETITION LOD.NO.366 OF 2009 Maytas Infra Limited .. Appellant/ (Orig.Petitioner) Versus Utility Energytech & Engineers Pvt.Ltd. & Anr. .. Respondents (Orig.Respondents) Mr.N.H.Seervai, Senior Advocate with Mr.Firoz Pooniwala i/b. Asha Thakur for appellants Mr.Iqbal Chagla, Senior Advocate with Mr.Naval Agrawal and Mr.D.J.Kakalia i/b. M/s.Mulla & Mulla for respondent No.1 Ms.Rajani Iyer, Senior Advocate with Mr.V.R.Dhond and Mr.Durgesh Khanapurkar i/b. M.K.Ambalal & Co. for respondent No.2 CORAM : SWATANTER KUMAR, C.J & S.C.DHARMADHIKARI, J. Reserved on : 18th July 2009. Pronounced on : 20th August 2009 ORAL JUDGEMENT (Per Dharmadhikari, J):- 1] Appeal admitted. Respondents waive service. 2 2] By consent of parties, heard finally at the stage of admission itself. 3] This appeal under clause 15 of the Letters Patent read with section 37(1)(a) of the Arbitration and Conciliation Act, 1996 is directed against the order of learned Single Judge dated 29th April 2009 in Arbitration Petition Lod.No.366 of 2009. This Arbitration Petition was filed by the Appellant (Original Petitioner) invoking powers of the Learned Single Judge under section 9 of the Arbitration and Conciliation Act (Act for short). 4] From the record it appears that the learned Judge initially granted an ad-interim ex parte order on 17th April 2009 in favour of the appellant original petitioner. This ad-interim order was continued after the respondent No.1 (contesting respondent) appeared and sought time. Thereupon, the Arbitration Petition was placed before the learned Single Judge and he considered the request made by the appellant for continuation of the ad- interim order so also for vacating it made by the first respondent. He delivered the impugned order by holding that the appellant – petitioner is not entitled for to ad-interim reliefs in terms of prayer clauses (f), (g) and (h) of the subject Arbitration Petition. In these circumstances, he declined the 3 request to confirm the ad-interim order and proceeded to vacate the same. This order of the learned Single Judge is challenged in this appeal. 5] It is pertinent to note that at the request of the appellant the ex parte order dated 17th April 2009 came to be continued by the learned Single Judge to enable the appellant to challenge his order. Accordingly, the subject appeal was preferred and it came to be placed before a Division Bench in the summer vacation. The Division Bench passed an order on 15th May 2009 in the following terms:- “1. Heard learned Senior Counsel appearing for the appellant and the learned Senior Counsel appearing for the first rrespondent. The learned Single Judge has declined to grant ad-interim relief as regards invocation of Performance Bank Guarantee. The arbitration petition under section 9 of the Arbitration and ConciliationAct, 1996 is kept pending for final disposal at the admission stage. In the present appeal, the petitioner in the said petition under section 9 has impugned the order of learned Single Judge by which the learned Single 4 Judge declined to grant ad-interim injunction. 2. Considering the controversy involved, till the appeal is placed before the regular bench after vacation, it is necessary to ensure that the amount of bank guarantee is brought before the Court. Place the appeal before the regular Bench after vacation. In the meanwhile, the second respondent (ICICI Bank) is directed to deposit with this Court the guarantee amount within a period of one week from today.” 6] Aggrieved and dis-satisfied with this part of the order, the beneficiary respondent No.1 initially sought review / modification of the order of the Division Bench and subsequently approached the Supreme Court. The Supreme Court passed an order by which, although it did not entertain the Special Leave Petition, it directed this Court to dispose of this appeal by an expeditious day to day hearing. After the order of the Supreme Court was brought to our notice, we proceeded to place the appeal for admission with a clear understanding of the parties that it would be disposed of finally at that 5 stage itself. Both sides agreed to this course of action. Accordingly, with consent of the Counsel on either side, we heard this appeal on the specified dates. We concluded the hearing on 18th July 2009 and reserved the Judgement. 7] The facts leading to the filing of the petition under section 9 of the Act are few and simple. The appellant is a company incorporated under the Companies Act and engaged, inter alia, in undertaking infrastructure, turn key and construction projects. The first respondent is private limited company incorporated under the provisions of Companies Act, 1956 and inter alia engages itself in procuring engineering and construction work. This in short would be referred to as EPC contract. Second respondent is a bank who issued a performance guarantee in favour of the first respondent and at the instance of the appellant before us. 8] By an agreement dated 19th April 2007, hereinafter referred to as the Concession Agreement, the National Highway Authority of India (NHAI for short) awarded a concession contract to one M/s.SU -TOLL Road Pvt.Ltd, a company incorporated under the Companies Act, 1956. This concession 6 contract was awarded for undertaking the design, engineering, financing, procurement, construction, operation and maintenance of the SALEM – ULUNDURPET Section. (Kms.0.313 to Kms.136.67) of National Highway 68 in the State of Tamil Nadu. The NHAI awarded this contract under the National Highway Development programme on Build, Operate and Transfer basis (BOT). 9] By an agreement dated 31st January 2008 (hereinafter referred to as EPC Agreement), M/s.SU-TOLL in turn awarded work of EPC of the project on a fixed price lumpsum turn key basis to first respondent. The first respondent divided the EPC work in two phasis, i.e. Phase -I (Kms.0.313 to Kms.62.250) and Phase -II (Kms.62.250 to 136.670). 10] Respondent No.1 issued a Letter of Intent (LOI) dated 12th December 2007 in favour of the appellant for procurement and construction of TN-06 Road at an initial contract price of 39,39,90,000/-, with the term sheet attached thereto as Annexure – I. This letter of intent was accepted by the appellants. Pursuant thereto, the appellant and first respondent executed a construction agreement dated 19th February 2008 in respect of Phase – I of 7 the project. This Phase-I for construction of existing carriage way from Kms.0.313 to Kms.62.250 on Salem – Ulundurpet section of National Highway 68 in the State of Tamil Nadu was the contract/ project work. The appellant was termed as construction contractor in the petition under section 9 on the basis of the Clauses in the construction agreement, a copy of which was annexed as Annexure B thereto. Copy of Letter of Intent is Annexure A. 11] It is not necessary to refer to the scope of the work save and except stating that it included performance and execution of the project by the appellant. The procurement, construction and completion of project Highway on Item Rate basis in strict compliance with the design requirement and all the terms and conditions of the agreement in a timely manner and to the complete satisfaction of the first respondent. This obligation is set out in clause 2 of the Construction Contract. Reference is then made to clause 3.5 of the Construction Contract, appointment of Engineering Consultant to undertake and perform the duty, works, service and activities set forth in the concession agreement. It is alleged that the first respondent was to issue a notice to proceed (clause 4) prior to handing over of the project site. In case the first respondent failed to issue notice to 8 proceed, clause 4 provided that the notice shall be implied to have been issued on the 31st day from the date of LOI i.e. 12th January 2008. This was reckoned as project start date. Clause 5 of the Construction contact obliges first respondent to hand over to the appellant, project site in accordance with the project complete schedule or otherwise provided to the SU-TOLL by NHAI under the Concession agreement. Clause 9 provided the contract price. Several clauses of the contract have been referred to in the Arbitration Petition and primarily to support the allegations and averments that the construction contract provides for Force Majeure, Events of Default and Termination clause so also the Arbitration procedure contemplated by clause 45.3 and our attention is invited to clause 48.4 of the construction contract which vests the courts at Mumbai with jurisdiction. It is then stated in the petition that Schedule A to the construction contract prescribed the project highway and details of the project set out in Schedule H of the construction contract, under which contract the site handing over to the appellant is provided for. This was to be immediately upon the first respondent receiving the same from NHAI. Schedule I to the construction contract provides for working drawings. It is then stated that first respondent agreed to advance to the petitioner a sum of Rs.19,69,80,701 on 15th February 2008 9 and identical sum on 25th/26th and 27th June 2008 towards mobilisation advance. It is alleged that both advances were delayed. The terms of contract contemplated two bank guarantees. The petitioners were obliged to furnish them and hence, they furnished the mobilisation advance, bank guarantee to respondent No.1 for an aggregate sum of Rs.39,39,98,000/- and Performance Bank Guarantee. It is common ground that the Mobilisation Advance Bank Guarantee has been encashed. We are concerned with the performance bank guarantee in the abovesaid sum which has been furnished by the second respondent in the aforesaid sum. 11] The principal allegation in the arbitration petition is that despite mobilisation of required machinery, manpower and material at site and making all preparations, the first respondent did not issue the requisite notice to proceed. It is alleged that by a letter dated 25th February 2008, appellants in continuation of the previous correspondence submitted programme for completion of work. The project land required to be made available to the appellant for execution was handed over in discontinuance lengths mostly in bits and pieces spread all over the project length. These facts were placed on record in letters dated 8th September 2008 and 10th November 2008 by the 10 appellants. They placed on record that project assets as well as basis of the work programme has not been handed over. In these circumstances, the appellants were entitled for extension of time and additional payment. 13] It is alleged in para 11 of the Arbitration Petition that by a letter dated 6th December 2008, the first respondent admitted considerable slippage in the original programme submitted by the appellant. The first respondent desired to have realistic programme and requested the appellants to submit revised construction programme for balance works taking into account the tentative dates of 15th January 2009 for drawing to be issued as good for construction and balance land to be handed over. It is alleged that the construction drawings were not provided to the appellants as the first respondent has not furnished finalised and approved data, projects assets, for which the works were to be carried out, were not handed over, principally being the land. 14] Since great emphasis has been placed on Annexure I (letter addressed by M/s.Su-Toll to Project Director, NHAI dated 8th December 2008) to the Arbitration Petition, it would be proper to reproduce the said letter:- 11 “. This refers to the interim application submitted to your office vide letter referred above wherein extension of time, for delays as on 15th May 2008 was requested. The causes for delay were beyond the control of the concessionaire and the concessionaire was unable to overcome such activities despite the exercise of due diligence and reasonable efforts, skill and care and thereby incurring huge expenditure. The said delays have had a Material Adverse Effect on the Project, as in terms of Article 29.1 of Concession Agreement. . Further in continuation to our first interim application, we submit herewith second interim application for extension of time in lieu of delays which have occured beyond 15th May 2008 and till 15th October 2008. These delays are beyond the reasonable control and are not arising out of the fault of the Concessionaire. The complete status of delay events arising from the commencement date can be broadly classified into the following categories:- 12 1] Delay in (a) handing over of Additional land of the Project Highway; (b) clearance of Forest area and (c) appointment of Competent Authority for land acquisition. As provided in the Concession Agreement, the handing over of Additional land should have been done progressively and should have been completed on or before 18th July 2008. The present situation on land acquisition is still in 3D stage and as of now not even a single meter of Additional land has been handed over to us. In the interest of project, extraordinary efforts have been taken by the concessionaire and work has been taken up in some of the Project Highway portions. However, a majority of Additional Land is yet to be made available to the concessionaire. 2] Delay in enabling the shifting/ removal of various utilities. 3] Delay in providing valuation of trees in the existing carriageway and permission to take out the cutwood. 4] Delay in decision on change of scope on the following:- (a)Minor Bridges at Km.88.937 and at Km.129.864; 13 (b)Major Bridge across River Gomukhi at Km. 102.187 (c)Change of alignment near Talaivasal (d)Flyover at Km.136.670 and (e)12 missing culverts. 5] Delay in signing of MoU for the 3 ROBs in the Project Highway and delay in shifting of lever crossing at Chinnasalem ROB; 6] Delay in finalisation of Toll Plaza location 7] Delay in removal of existing structures/ obstructions, shifting of service utilities in the Additional land. 8] Delay in appointment of mobilisation of the independent Consultant 9] Increased quantities of Well Filling found between the toe of proposed embankment and proposed ROW 10] Provision of Granular fill on both sides of pipe culvert for 2m width. All that is stated above has resulted in some futile work in the project highway and the concessionaire is not in a position to proceed ahead with the construction works as per Schedule H of Concession Agreement. This situation 14 shall entail additional construction period for the Project Highway and thereby postponement of the Scheduled Commercial Operations date of the Project. It may be appreciated that the same was not envisaged at the time of entering into the Agreement. The above acts or events protect/deprive of possession of the Project Highway and rights of the Concessionaire or of the Contractors in performing their obligations as per Article 29.1 of Concession Agreement. As per Article 29.12 of Concession Agreement, the Concessionaire has reported details of nature and extent of each Force Majure event. The concessionaire has also provided estimated duration and probable effect on performance of its obligations under this Concession Agreement regularly. Further, the Concessionaire has through Monthly Progress Reports provided, to NHAI, details regarding measures being taken to alleviate the impact periodically. The detailed explanatory note on all the above events have been given in the Annexure for your ready reference. The quantum of delay is to the tune of 9 months as on 15th October 2008 and some of these delays are of continuing nature. The same shall further affect the Project completion schedule adversely for which the concessionaire reserves its right to claim extension of time and further extension (if any) along with associated cost/ compensation for delays caused for reasons which are beyond the reasonable control and not arising out of the fault of the Concessionaire. We continue to notify to you that due to the above mentioned reasons and circumstances, additional time would be required to complete the project works. Thus pursuant to 15 Article 14.5 (d) of Concession Agreement and considering the postponement/ deferment of construction works for the reasons not attributable to the Concessionaire, NHAI shall extend the Project Completion Schedule, the Scheduled Project Completion Date and the Concession Period. This application is interim in nature as the aforementioned delays are having a continuing effect. Therefore, the Concessionaire reserves its right to submit further extension of time until actual delay is ascertained. Therefore in terms of the Concession Agreement and as per the enclosed annexure, the concessionaire hereby requests to kindly make an interim extension of Appointed Date by a period of 9 months thereby extending the same to 15th October 2008, which will further result in extension of Scheduled Project Completion date to 15th October 201. Similarly the Concession period will also have to be extended to a date beyond 15th October 2033 (direct delay) as shall be intimated shortly after calculating the imact of the said delay on NPV (Net Project Value) of the Project. 15] It is then alleged that by letter dated 15th December 2008 in response to several letters from the first respondent, the status of several works and problems were placed on record. It is alleged that all problems are attributable to the first respondent as the appellant petitioner has carried out all its obligations. The first respondent’s letter dated 15th December 2008 has also been referred to and it is contended that the code was finally provided by a letter dated 9th December 2008 by the first respondent and 16 they requested he petitioner appellants to take early action in that regard. After making reference to this letter, it is contended in the petition that the appellants have repeatedly placed on record that there has been enormous delay and time lapse to settle the problems which is affecting completion of the project, the appellants suggested that the land dispute issues between them and the first respondent be referred to arbitration. The sequence of events have been recorded in a letter dated 28th February 2009, 7th March 2009 and 31st March 2009. Thereafter, reference is made to meetings held on 2nd April 2009. it appears that the first respondent addressed a letter dated 3rd April 2009 and issued “GOOD FOR CONSTRUCTION” drawings for projects at three locations. It is undisputed that the appellants have since the construction contract raised several bills and received payments, details of which are set out in Annexure R. The first respondent granted approval of bar bending schedule for box culverts at four locations. 16] However, it is alleged that suddenly the first respondent invoked the mobilisation bank guarantee and encashed it without adjusting the amounts already recovered from the appellants. Thereafter, a letter was addressed by the first respondent alleging lapse on the part of the appellant. Thereafter, 17 the first respondent proceeded to issue a termination notice and ultimately, apprehending that the performance bank guarantee would also be invoked that the Arbitration Petition was filed. 17] The only allegations material for the purpose of the present controversy are to be found in paras 29 and 30 of the Arbitration Petition, which read thus:- “29. The petitioners state and submit that the construction contract stipulates and provides for the circumstance in which the respondent No.1 can exercise their rights in respect of the mobilisation advance, bank guarantee and/or the performance guarantee. The respondent No.1 has in contravention of and in contrary to the said terms and conditions have encashed the mobilisation advance bank guarantee. The petitioners submit that the acts and conduct of the respondent No.1 is fraudulent. The invocation and encashment of the mobilisation advance bank guarantees by the respondent No.1 is contrary to the terms of the construction 18 agreement and the mobilisation advance bank guarantee. It is further submitted that the respondent No.1 have no right to invoke and/or encash the performance bank guarantee and any such act on their part would be fraudulent, contrary to the terms and conditions under the construction contract and the performance bank guarantee as also cause irretrievable injustice to the petitioners. The petitioners state and submit that there are special equities in favour of the petitioners.” “30. The petitioners state and submit that ex parte ad- interim orders restraining the respondent No.1 from invoking and receiving any monies under the performance bank guarantee ought to be passed by this Court, as any notice given to the respondent No.1 would result in them continuing with the fraudulent and dishonest conduct by invoking the performance bank guarantee before the present petition is taken up for hearing of ad-interim reliefs. The respondent No.1 have behaved fraudulently, illegally and unlawfully in the past and there is every likelihood that they would fraudulently and 19 dishonestly invoke the bank guarantee thereby taking steps to render the present petition infructuous. Thus, this Court be pleased to pass orders as prayed for without notice to the respondent No.1.” 18] It is this arbitration petition, which was placed before the learned Single Judge for urgent ex-parte reliefs and the events recorded above have taken place, resulting in the impugned order being passed and refusing appellant’s request of restraint on encashing the performance bank guarantee issued in favour of first respondent beneficiary. It is worthwhile noting that no reply was filed by the first respondent to the Arbitration Petition and the matter proceeded merely on denials. The impugned order proceeds on the basis that the pleas raised by the appellants pertain to the disputes under the Parent/ Underlying contract. These are matters which can be raised during the arbitral proceedings and they were not relevant as far as the request made by the appellant is concerned. Learned Judge has held in para 12 of the impugned order that the contractual clauses cannot be read into the bank guarantee. Both documents are independent, though such bank guarantees are issued after execution of the contract in question. Learned Judge held 20 that the parties fully understood the clauses of the contract and furnished the bank guarantees which are unconditional and irrevocable so also on demand. They are binding on parties and, therefore, the first respondent is entitled to invoke the bank guarantee. Learned Judge held that the delay in handing over the site or drawings or compliance on the part of the first respondent cannot be gone into at this stage. He has referred to the contentions in that behalf. Learned Judge has held that invocation of bank guarantee cannot be restrained as the appellant petitioner has not made out a case of any fraud and irretrievable injustice so also special equities. Both the contracts are independent. The performance bank guarantee which is unconditional and irrevocable, therefore, can be invoked. 19] It is this conclusion, which is subject matter of challenge in this appeal. 20] Mr.Seervai, learned Senior Counsel appearing for appellant contended that the impugned order is erroneous and illegal. He submits that the learned Judge has not held that no prima facie case is made out by the appellant nor has he held that the balance of convenience is not in favour of the appellant. 21 Learned Judge has also not expressed any view with regard to irreparable loss and injury. Mr.Seervai submits that this case is distinguishable from the other cases and decisions which have been referred by the learned Judge. Mr.Seervai submits that in this case, invocation of bank guarantee was fraudulent. He submits that fraud is apparent because the bank guarantee in question is a performance bank guarantee. That is issued and furnished to guarantee due performance of the terms and conditions of the Parent Contract. The bank guarantee itself refers to due performance of the contractual terms and conditions. Therefore, it is not correct to hold that this bank guarantee is distinct and independent of the underlying contract between the parties. He submits that if the bank guarantee itself refers to all the three contracts executed for the subject project and makes it clear that the first respondent was to make available the stretches of land for construction of the Highway and only thereupon the work commences, then, there is no question of the performance bank guarantee being invoked. This invocation, even before the work could really commence