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This article is written by Yash Kapadia. The Hon’ble Delhi High Court (“this Court”), in Tecnimont Private Limited (“Petitioner”) & Anr. V. ONGC Petro Additions Limited (“Respondent”) dealt with the above question at length and pronounced its judgment on 20th June 2020 amidst the limited functioning of our nation’s courts. 

Facts of the case

A Petrochemical Complex consisting various inter dependable units like Dual Fee Cracker Units (“DFCU”), a Polyethylene Unit (“PE unit”), Polypropylene Unit (“PP unit”), a Pyrolysis Gasoline Hydrogenation Unit, a Benzene Extraction Unit, Butadiene Extraction Unit and various other units for the purpose manufacturing petrochemical and allied products were to be set up at Dehaj (Iran). The Respondent chose the Petitioners as the successful bidder for the purpose of constructing and setting up the PE unit and the PP unit. Thereafter, both the parties entered into two contracts both dated September 02, 2011, for constructing, development and successfully commissioning the PE unit and the PP unit respectively. 

As per the terms of the contract: 

  • The Petitioners were required to construct, develop and successfully commission a PE unit and PP unit within 28 months of the execution of the contract. 
  • The petitioners were also required to furnish bank guarantees (total of 5) under Clause 3.3 and Clause 3.8 of General Conditions of Contract (“GCC”). Two of these bank guarantees were to secure mobilization advance paid by the Respondent to the Petitioners. The remaining three guarantees were performance bank guarantees towards execution of the contract. 
  • The commissioning of both the units was to be completed on or before 2nd October 2013. 

However, the PE Unit was commissioned on 14th April 2017 and the PP Unit on 12th February 2017. Therefore, disputes and differences arose between them and arbitration notices were issued. 

The primary cause of the Petitioners was to claim damages on account of delay on the part of the Respondent in the completion and commissioning of the project. The Respondent on his part filed counterclaims contending that it is entitled to liquidated damages for the delay in commissioning of both PE and PP units and also for the losses and damages incurred by the Respondent on account of defects and damages discovered in the PE unit later on. It was the case of Respondents that the Petitioners were in breach of their obligations to complete the Performance Guarantee Test Runs (“PGTR”) of both the units.

On 6th January 2020, the Arbitral Tribunal rendered its Award (“Award”) according to which the majority of the tribunal awarded an amount of Rs.162 Crores to the Petitioners and dismissed the Respondent’s counter-claim in its entirety. Therefore, the Respondent filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”) challenging the impugned Award following which the Respondent through an e-mail dated 7th March 2020 to the Petitioners, asked them to extend the validity of the bank guarantees on the ground that the disputes between the parties about the obligation under the contracts are pending before the Court under Section 34 of the Act.

However, the Respondent invoked bank guarantees during the pendency of the proceedings. The Petitioners approached this Court wherein an order was passed directing the Petitioners to extend their bank guarantees for a period of one month within which the Respondent can get appropriate orders under its Section 34 petition. On 23rd March 2020, Section 34 petition was heard after which the Court directed the Petitioners to furnish bank guarantees after which the amount to be given as per the Award will be paid by the Respondents. After a period of one month when the Respondent again asked to extend the bank guarantees, the Petitioners stated that the Respondent had failed to obtain any orders regarding further extension of bank guarantees already furnished by the Petitioners. In any event, the Respondents exuded their decision to invoke the bank guarantees. 

Aggrieved by the same the Petitioners filed this petition under Section 9 of the Act before this Court seeking an interim injunction against the invocation/ encashment or extension of the bank guarantees. 

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Issues

The issues before this Court were:

  • Whether the Respondent who lost the arbitral proceedings and had its counterclaims rejected in their entirety by the Arbitral Tribunal could seek an extension of the bank guarantees which were furnished by the Petitioners for the performance of the contracts, pending appropriate order of the Respondent’s admitted petition under Section 34 of the Act challenging the Award.
  • Whether the Petitioners were able to establish that bank guarantees could be injuncted by this Court by meeting the twin test for the grant of an injunction thereby restraining the invocation of bank guarantees?

Submissions by Petitioners

  • The Petitioners submitted that the return of the bank guarantees sought for by them were those, which the Petitioners provided to the Respondent during the performance of the two contracts for constructing PP and PE units which the Petitioners admittedly performed in 2017. It was also admitted by both parties that the plants were commissioned in 2017 and had achieved 100% capacity utilization. 
  • Adding to their submissions, an Arbitral Award directing the Respondent to pay a sum of Rs. 201 Crores to the Petitioners had already been passed on 6th January 2020 and all the counterclaims of the Respondent pertaining to the performance of the contract were rejected and that the Respondent had no subsisting claim.
  • The Petitioners also submitted that the first issue before this Court was no longer res Integra and that the same had been settled law.  He put forth that a losing party in, arbitration cannot seek an extension of contractual Bank Guarantees or even invoke them once the party has been given an Award. It was further submitted that if a losing party failed to seek an order under Section 9 petition, it cannot further seek any order under a Section 34 petition. In this regard, reliance was laid on ONGC v. Consortium of SimeDarby Engineering Sdn. Bhd. and Anr.1, Dirk India Private Limited vs. MSEGC2 (Dirk Judgment). It was also submitted that the Respondent had been demanding extension of the bank guarantees on the grounds of a purported challenge to the final arbitral award. It was only later that the Respondent had taken a stand that the bank guarantees were required to be extended as the Petitioners failed to perform its obligations. The Petitioners stated that  “the subsequent invocation of the bank guarantees is an egregious case of the fraudulent invocation”
  • The Court vide order dated March 13, 2020, had directed the Petitioners to extend the bank guarantees by a period of only one month, within which time, the Respondent was to satisfy the condition of securing ‘appropriate order’ in its Section 34 petition, which they failed to secure. In fact, the Petitioner submitted that the stay application did not refer at all to the subject of bank guarantees. 
  • The Petitioner qualified his submissions by stating that a petition under Section 34 of the Act was only for the purpose of setting aside an arbitral award on the limited grounds provided under Section 34 of the Act. Therefore, if the Respondent’s position was considered for the sake of argument, the final award could be set aside but in any case, the Respondent’s counterclaims would be disallowed in a Section 34 petition.
  • The Petitioner further stated that the claims regarding PGTR were already adjudicated and dealt by the Arbitral Tribunal in paragraphs 336 to 339 of the Award and had been rejected and that the Respondent had not submitted any claims in relation to any defects in PP unit. Furthermore, with regards to the two advance bank guarantees, their invocation was on its outset, fraudulent as the entire mobilization advance had been recovered and no claim as such was made before the Arbitral Tribunal by the Respondent. 
  • The Petitioners ended their submissions by stating that separate arbitration proceedings would have to be initiated to recover the monies paid out to the Respondent under the bank guarantees and therefore the special equities are in their favour.

Submissions by the Respondent 

In brief, the Respondent made the following submissions:

  • The bank guarantees were in actual fact unconditional and irrevocable and four out of the total of five bank guarantees had already been invoked 
  • This Petition needed to be seen and decided on the principles governing grant of injunction and restraining the invocation of the bank guarantees on the twin test of egregious fraud or irretrievable harm, which were not fulfilled; 
  • The invocation of bank guarantees was justified as the Respondent had a protectable interest pursuant to the performance of the contract; 
  • The Petitioners could not get the relief of returning of bank guarantees as a similar prayer was rejected by the Arbitral Tribunal and in a petition under Section 9 of the Act; 
  • This Court must extend the orders dated March 13, 2020, and April 15, 2020, which required the Petitioners to extend the validity of their bank guarantees and the Respondent would deposit the charges in the Court till the decision of Section 34 Petition; 
  • To opine that all the contracts are still valid and subsisting and the Petitioners have not been able to discharge their obligations under the contracts; 
  • An arbitral award pronounced against the Respondent does not mean that pending its challenge, the disputes between parties cease to exist; and 
  • Lastly, if the Court would set aside the Award in the Section 34 Petition, the Respondent would automatically be entitled to invoke bank guarantees for any breaches / non-performance and recover its liquidated damages in respect of which it is settled law that there is no prerequisite of an order of Court/Tribunal.

Judgment

The Hon’ble was of the view that

  • Relying on the arbitral Award it is palpable that the Petitioners are a successful party. It is the successful party who can seek its enforcement under Section 36 of the Act and also secure the Award under Section 9 of the Act and not the Respondent being the losing party. This position of law was well settled by the Bombay High Court and then upheld by the Supreme Court in the Dirk Judgment. 

It was held by the Hon’ble Supreme Court that “To hold that a petition under Section 9 would be maintainable after the passing of an arbitral award at the behest of DIPL whose claim has been rejected would result in a perversion of the object and purpose underlying Section 9 of the Arbitration and Conciliation Act, 1996. DIPL’s application under Section 9, if allowed, would result in the grant of interim specific performance of a contract in the teeth of the findings recorded in the arbitral award. What such a litigating party cannot possibly obtain even upon completion of the proceedings under Section 34, it cannot possibly secure in a petition under Section 9 after the award. The object and purpose of Section 9 are to provide an interim measure that would protect the subject-matter of the arbitral proceedings whether before or during the continuance of the arbitral proceedings and even thereafter upon conclusion of the proceedings until the award is enforced.” The Court, therefore, held that the losing party i.e. the Respondent, in this case, cannot seek enforcement under Section 36 of the Act and secure an Award under Section 9 of the Act 

  • The Court rejected the Respondent’s first claim by relying on the judgment passed in Mobilox Innovations Private Limited v. Kirusa Software Private Limited3 and held that this judgment would have no applicability in the facts and circumstances of this case as it does not relate to, in any context, litigation under the Insolvency and Bankruptcy Code, 2016.
  • The Court held that the Petitioners’ assertion about the entire scope of work being completed is incorrect. It was stated that the Petitioners’ entire technical team had abandoned the Respondent’s plant during the pendency of the arbitration proceedings without any proper intimation. The Petitioners also blatantly neglected to supply the complete set of mandatory spares as agreed under the Contracts.
  • The Court viewed the Respondent’s invoking of the said bank guarantees as impermissible as it was apparent that the Respondent intended to secure its counterclaims which were already rejected in its entirety by the Arbitral Tribunal. 
  • The plea by the Respondent that if the Arbitral Award was set aside, the Respondent could invoke the Bank Guarantees to satisfy its claims without resorting to arbitration / Court was held to be a fallacious argument.
  • By relying on International Inc. v. Burn Standard Co. Ltd4 the Respondent would have to commence fresh proceedings against the Petitioners even if the Respondent succeeds in its Section 34 petition, setting aside of the arbitral award would not result in the same being decreed in its favour. 
  • The Coordinate Bench judgment of this Court in M/s. Mukti Credits Pvt. Ltd. (supra) was relied on, wherein the Court had restrained the Respondent therein from invoking a bank guarantee, post an arbitral award on the ground that no sum was due to the Respondent and the objections of both the parties to an arbitral award under Section 34 were pending.
  • The Hon’ble Court concluded that the following facts demonstrated special equities in favour of the petitioners:
  1. The Petitioners had an arbitral award in their favour. 
  2. The counterclaims of the Respondent were rejected in its entirety. 
  3. The Respondent failed to secure any order in its favour to extend the bank guarantees 
  4. The advance bank guarantees which were furnished towards mobilization advanced towards Respondents were recovered by them through running account bills and the same was not denied by the Respondents. 
  5. There is no sum payable to the Respondent. 
  6. Even if the Respondent succeeded in its challenge to the Award under Section 34, it would have to resort to fresh arbitration proceedings with regards to the counter-claims.
  7. The Petitioners would have to resort to the process of arbitration to claim the amount if the Respondent would invoke/encash the bank guarantees.

Conclusion

The Delhi High Court allowed the petition and not only restrained the Respondent from invoking or encashing any bank guarantees but also directed them to be returned to the Petitioners. 

This case acts as another precedent on the filings of petitions under Section 34 of the Arbitration & Conciliation Act, 1996.  It has been made crystal clear that bank guarantees given during a contract cannot be said to have been given for perpetuity even for the period after the adjudication of claims / counter-claims, between the disputing parties.

The Court has been extremely firm in its decision about the first issue when the Respondent had stated that the Petitioners be directed to continue to extend the validity of the bank guarantees along with levying relevant charges or in the alternative, the Respondent be allowed to invoke the bank guarantees and deposit the money in this Court. This submission was held to be inequitable given the facts and circumstances of the case. The Hon’ble Court sets a strong precedent because if such a plea was allowed, every party even after losing before an Arbitral Tribunal, on the alleged reason that the bank guarantees cannot be injuncted or it would deposit the amount in the Court, would be achieving what it could not achieve before the Arbitral Tribunal, through their claim or counter-claims as in the case of the Respondent herein. 

The Delhi High Court also sets another precedent relying on Standard Chartered Bank v. Heavy Engineering Cooperation Limited5  wherein the Hon’ble Supreme Court held that where “special equities” exist, the court is empowered, in a given set of facts and circumstances, to injunct invocation, or encashment, of a bank guarantee. Where such special circumstances do exist, no occasion arises, to revert to the general principle regarding the contractually binding nature of a bank guarantee, or the legal obligation of the bank to honour the bank guarantee, these special circumstances having, in all cases, be treated as exceptions to this general principle.” 

 The issue of twin test for an injunction for the court to exercise its powers under Order XXXVIII Rule 5 of the Civil Procedure Code, 1908 (“CPC”) has been settled by the Hon’ble Supreme Court in the case of Natrip Implementation Society v. IVRCL Limited6 wherein it has been held that the object of Sections 9(1)(ii)(b) and 17(1)(ii)(b) of the Act is similar to the object of Order XXXVIII Rule 5 of the CPC. Therefore, the Court while exercising power under Section 9(1)(ii)(b) of the Act must be satisfied that it is necessary to pass an order to secure the amount in dispute. Such orders cannot be paused mechanically. “Further, the object of the order would be to prevent the party against whom the claim has been made from dispersing its assets or from acting in a manner to so as to frustrate the award that may be passed.”

Taking the whole shebang into account, this judgment is an extension to an already set jurisprudence that a losing party of the arbitral award cannot seek an order under Section 34 of the Arbitration and Conciliation Act, 1996.

References

  1. 2018 SCC Online Bom 6034

2. 7 Bom. CR 493

3. (2018) 1 SCC 353

4. (2006) 11 SCC 181

5. SCC Online SC 1638

6. 2016 SCC Online Del 5023 


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