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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
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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
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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, Advocates
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
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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, the fact that the respondent No.2 as
on today is struck off as a party from the arbitral
proceedings on the ground that he had not agreed to the
arbitral clause contained in the three agreements which
were entered into between the appellant and the
respondent No.1, the Court can still issue interim orders
binding the respondent No.2 to preserve the outcome of
the arbitral proceedings. The learned counsel argued
that "Start Up" and "Performance Test Run" were the
stipulations which were essential part of the contract
with the respondent No.2 and the three other agreements
entered with the respondent No.1 at the behest of the
respondent No.2 by the appellant. It was submitted that
unless the parameters stipulated in the contract were
achieved, by a positive performance test run, even the
risk did not pass to the appellant. It was submitted
that it was essential to order by way of interim measure
that the performance test run should be conducted by the
respondent No.2, who had undertaken to demonstrate the
performance of the boilers under the agreement, with a
view to enable the appellant to decide finally whether to
reject the boilers or not, and therefore, such an interim
measure cannot be said to be for enforcing any relief of
specific performance of the contract. It was submitted
that, having regard to the nature of the claim before the
Arbitral Tribunal made by the appellant, it was essential
to insist upon such performance test run to be conducted
by the respondents in aid of the outcome of the arbitral
proceedings and therefore, the prayer of the appellant
for such an interim measure cannot be brushed aside on a
plea that interim specific performance cannot be ordered
when it is not finally prayed for. It was submitted that
this essential step of conducting the performance test
run could be insisted upon even on equitable grounds
having regard to the large investment made by the
appellant under these contracts with a view to acquire
three boilers which were supposed to achieve certain
parameters which could be ascertained only by conducting
the performance test run. It was argued that, even if
the respondent No.2 was to be treated as a third party to
the arbitral proceedings, the Court was empowered to
grant an interim relief under section 9 of the Act. It
was argued that, under section 9 of the Act, the Court
was empowered to make orders in the same manner "as it
has for the purpose of, and in relation to, any
proceedings before it", and that the rationale for the
Court being so empowered was that the power of
enforcement did not vest with the Arbitral Tribunal and
that the Court could make orders even against third
parties. It was submitted that the power under section 9
was required to be exercised by applying well accepted
principles governing grant of injunction or interim
relief, and such power should be exercised in connection
with preservation of goods, their inspection or
experimentation which would have relevance on the
questions that may arise during the arbitral proceedings.
It was submitted that the relief prayed for in the
Statement of Claim before the Arbitral Tribunal and in
the Counter-claim as well as the issues framed by the
Tribunal would clearly encompass the prayers made in the
application of the appellant under section 9 of the Act.
It was also argued that the mandatory relief could be
granted where the appellant has a strong case for trial
and with a view to prevent irreparable or serious injury
which cannot be compensated in terms of money. It was
submitted that the trial Court had overlooked the scope
of section 9 of the said Act and the provisions of
sections 23 and 40 of the Specific Relief Act, 1963 in
context of which the appellant was entitled to claim the
interim relief. It was also argued that the Court below
failed to appreciate that there were three multiple
boiler agreements containing entire contractual
obligations and it did not appreciate the commercial
uniqueness of the transaction, that such three boilers
could not be readily obtained from the open market by the
appellant.
7.1 In support of his contentions, the learned Senior
Counsel relied upon the following extracts from the
textbooks, and, the precedents.
[a] From Chitty on Contract (28th Edition), the
learned Senior Counsel referred to paragraph
37-106, which reads thus :
"Performance Obligations : Contracts for
the provision of process plant and
machinery are divided into an initial
construction period, followed by a post
completion period during which the plant
must be operated and performance
demonstrated. The provisions as to
testing are usually accompanied by a
detailed protocol involving stages, such
as an initial period of operation
followed by performance tests over a
prescribed period. The contract may
provided prescribed penalties or
deductions as compensation in respect of
failure to meet required performance.
The detailed performance requirements
will be specific to each item of plant or
machinery, but standard forms exist which
prescribe the basic contract structure.
In addition to performance of
obligations, the contract may require
other services, such as training of
operating personnel, the provision of
spares for the plant, and detailed
operating manuals and instructions."
[b] From Dr. Peter Binder's International Commercial
Arbitration In UNCITRAL Model Law Jurisdictions
(First Edition 2000 Published by Sweet &
Maxwell), the following observations in para
2.056 were referred to;
"Conclusion : In certain circumstances,
especially where the arbitral tribunal
has not yet been established, the
issuance of interim measures by the court
is the only way assets can be saved for a
future arbitration. Otherwise, the
claimant could end up with a worthless
arbitral award due to the fact that the
loosing party has moved his attachable
assets to a "safe" jurisdiction where
they are out of reach of the claimant's
seizure. The importance of such a
provision in an arbitration law is
therefore evident, and a comparison of
the adopting jurisdictions shows that all
jurisdictions include some kind of
provision on the issue, all granting the
parties permission to seek court ordered
interim measures."
[c] From Russel on Arbitration (21st Edition),
reliance was placed on the following
observations;
[d] Interim orders
"5-095 Types and purposes of interim
orders :
Consideration should also be given at a
preliminary stage to whether interim
orders should be made. The term "interim
orders" is not issued in the 1996 Act, is
adopted here to refer to orders or
directions on such matters as security
for court's, interim preservation orders
and injunctions. These orders are often
designed to protect the position of the
parties and / or preserve the status quo
pending the outcome of the reference.
However, they may also be examples of the
tribunal exercising its procedural powers
in relation to evidential matters."
"5-096 From whom to seek interim orders
- The parties are free to agree what
powers the tribunal is to have with
regard to interim orders, but unless the
parties have agreed otherwise in writing
then the tribunal has the powers set out
in sections 38(3) to (6) of the
Arbitration Act, 1996. Interim orders
may also be sought from the court, but in
the ordinary course the parties would be
expected to apply to the tribunal in
those cases where the tribunal has the
power to make them. Applications to
court will also be appropriate where for
example the order is sought against a
third party over whom the tribunal has no
jurisdiction, or where any order by the
tribunal is likely to be ineffective."
"5-099 Preservation of property Section
- Section 38(4) of the Arbitration Act
1996 provides that the tribunal may give
directions in relation to property
subject to two provisos. First, the
property must be the subject-matter of
the reference or property as to which a
question arises in the proceedings.
Secondly, the property must be owned by
or in the possession of a party to the
proceedings. This reflects the
tribunal's inability to enforce its
orders against third parties. Relief may
be sought from the court if the provisos
are not met or for some other reason the
tribunal is unable to act or to act
effectively."
"6.132 Third parties : Further, a
tribunal does not have jurisdiction over
a third party, even though the third
party may hold the money, goods or
property in dispute. The tribunal is
therefore even less able to secure
compliance by a third party with an
injunction it may grant than it is to
secure compliance by the parties to the
arbitration."
[d] Excerpts from The Law and Practice of Commercial
Arbitration in England (Second Edition) Sir
Michael J. Mustill & Stewart C. Boyd, which was
relied upon from pages 330 are re-produced
hereunder :
"An injunction is a powerful weapon,
since it is backed by the powers of the
Court of Equity to act in personam and
these include, in the last resort, orders
for the committal of a recalcitrant
defendant, or that attachment of his
property. In the context of an
arbitration, an interlocutory injunction
will usually fulfill one or other of two
functions. First, to protect the
property in issue from abuse by one of
the parties : for example, to prohibit
the removal of property from the United
Kingdom, the object being to ensure that
any order which the arbitrator may
ultimately make as to the disposition of
the property will not be rendered
academic by the previous removal of the
property. Second, to bring about a kind
of interim specific performance of the
contract. For example, if the issue is
whether a charterparty has been validly
terminated by the respondent, the court
may issue an injunction prohibiting the
respondent from employing the vessel
otherwise than in accordance with the
charter : thus, in many cases, forcing
him to keep the vessel in the service of
the charterer pending the resolution of
the dispute.
The Court has power to grant an
interlocutory injunction in respect of
matters which are the subject of an
arbitration. The making of an
interlocutory injunction, or the pendency
of an application for such an injunction,
does not prevent the court from granting
a stay of any action which is brought in
respect of the substantive dispute, the
only purpose of the injunction being to
maintain the status quo pending the
award. In general, the exercise of the
discretion where there is a pending
arbitration is likely to proceed on the
same principles as in relation to an
action in the High Court."
From the same book, the following excerpt was
also referred which is at page 332 :
"(iv) Securing the sum in dispute :
Where the right of a party to a specific
fund is in dispute in a reference, the
court has power to order the fund to be
paid into court or otherwise secured.
The forms of security most likely to be
ordered are the provision of a bank
guarantee or the payment of the fund into
a bank account in the joint names of the
parties or their advisors. It is
probable that the court alone, and not
the arbitrator, has power to make such an
order.
It will be noted that this power does not
enable a party to recover sums on account
of damages in advance of the hearing,
even if liability is undisputed and it is
clear that some monetary award will be
met. The power exists only where an
identified fund is in dispute - as where,
for example, it is alleged that the
respondent is trustee for the claimant in
respect of a specific sum of money."
[e] The decision of the Supreme Court in case of
Sundaram Finance Ltd. v. NEPC India Ltd.,
reported in (1999) 2 SCC 479 was cited for the
proposition that though section 17 gives the
Arbitral Tribunal the power to pass orders, the
same cannot be enforced as orders of a court, and
that it is for this reason that section 9
admittedly gives the court power to pass interim
orders during the arbitration proceedings. It
was held that interim orders can be passed by the
Court under section 9 before or during the
arbitral proceedings, and that, reading the
section as a whole, it appears that the court has
jurisdiction to entertain an application under
section 9 either before arbitral proceedings or
during arbitral proceedings or after the making
of the arbitral award but before it is enforced
in accordance with section 36 of the Act. The
Court approved the observations in Russel on
Arbitration that power to grant an interim
injunction extends to granting of a Mareva
injunction in appropriate cases although the
court will be slow to grant an injunction which
provides a remedy of essentially the same kind as
is ultimately being sought from the Arbitral
Tribunal.
[f] Reliance was placed on the decision of the
Supreme Court in Bhatia International v. Bulk
Trading S.A. and another, reported in (2002) 4
SCC 105 for the proposition that an application
for interim measure can be made to the Courts in
India whether the arbitration takes place in
India before or during the arbitral proceedings.
[g] The decision of the Madhya Pradesh High Court in
case of Nepa Ltd. v. Manoj Kumar Agrawal,
reported in AIR 1999 MP 57 was cited for the
proposition that the provisions of section 9
empower the Civil Court to take interim measures
for preservation and safe custody of the subject
matter in arbitration agreement and for that
purpose, to issue interim injunction. Existence
of an arbitration clause and the necessity of
taking interim measures alone are required to be
considered for issuing necessary directions or
orders. ( See para 17 of the judgement).
[h] The decision of the Supreme Court in case of
Colgate Palmolive (India) Ltd. v. Hindustan
Lever Ltd., reported in (1999) 7 SCC 1 was
referred to point out the considerations which
ought to weigh with the Court hearing an
application for grant of injunction which are
setout in paragraph 4 of the judgement. On the
basis of these considerations, it was argued that
the Court, while dealing with the matter, ought
not to ignore the factum of strength of one
party's case being stronger than the other, and
that the issue is to be looked at from the point
of view as to whether on refusal of the
injunction the plaintiff would suffer irreparable
loss and injury keeping in view the strength of
the party's case.
[i] The decision of the Delhi High Court in case of
Satish Aggarwal v. Subhash Chand Aggarwal,
reported in 2000 (55) DRJ was cited to point out
that, in an application under section 9 for
interim measures, an interim order in terms of
section 37 of the Partnership Act was made.
Reference was made to the decision of the Delhi
High Court in case of Kanshi Ram v. Punjab
National Bank, reported in 2000 (55) DRJ, for the
proposition that in absence of guidelines as to
grant of relief under section 9Iii)(b) of the
Act, the Court has to apply the provisions of
Order 38 Rule 5 of the Code of Civil Procedure.
[j] A decision of the Bombay High Court in case of
Newage Fincorp (India) Ltd. v. Asia Corp.
Securities Ltd., reported in 2000 (3) Arbitration
Law Reporters 687 (Bombay) was cited for the
proposition contained in paragraph 35 of the
judgement that, in granting or refusing to grant
interim measures, the Court has wide discretion
under section 9 of the Act. In that case, the
Court found that it was necessary to preserve the
subject matter of arbitral dispute by granting
interim measures in aid of final reliefs to which
the petitioners may be entitled in the
arbitration proceedings and the respondents were
restrained from transferring the membership card
of the Stock Exchange.
[k] The decision of the Delhi High Court in case of
MMTC Ltd. v. Shyam Singh Chaudhary, reported in
2001 (57) DRJ 743 was cited in support of the
argument that, all the deeds between the
appellant and the respondents were intrinsically
and integrally intertwined, and therefore, the
question of territoriality should be view from
the angle that the dispute may also arise within
the jurisdiction of the Arbitral Tribunal in
Ahmedabad even if it could arise under the
arbitral clause 15 of the agreement with the
respondent No.2 before the ICC - London.
[n] The decision of the Madhya Pradesh High Court in
case of Jabalpur Cable Network Pvt. Ltd. v.
E.S.P.N. Software India Pvt. Ltd., reported in
AIR 1999 MP 271 was cited to point out that, in
respect of the articles which were of special
value and the goods which were not easily
obtainable in the market, it could be presumed
that the breach of contract to transfer the goods
cannot be relieved by payment of money in lieu
thereof. It was held that it would be most
inequitable not to grant relief to the appellant
to transmit information which is of great value
when it is live and looses its importance after
the telecast is over.
[o] The decision of the Supreme Court in case of
Dorab Cawasji Warden v. Coomi Sorab Warden,
reported in AIR 1990 SC 867 was heavily relied
upon for the proposition that the relief of
interlocutory mandatory injunction would be
granted generally to preserve or restore the
status quo. The Supreme Court held that, being
essentially an equitable relief, the grant or
refusal of an interlocutory mandatory injunction
shall ultimately rest in the sound judicial
discretion of the Court to be exercised in the
light of the facts and circumstances of each
case.
[p] The decision of the Rangoon High Court in case of
L. Dawson v. Princess Rounac Zamani Begum,
reported in AIR 1928 Rangoon 268 was cited for
the proposition that a wrong doer cannot insist
the person wronged to accept compensation in lieu
of injunction, and that mandatory injunction is
ordinarily granted unless the injury is small and
capable of being compensated by small money
payment.
[q] The decision of the Madras High Court in case of
Veeramalai Chettiar v. Ramayee Ammal, reported
in AIR 1962 MADRAS 437 was cited for the view
that the provisions of the Civil Procedure Code
will generally apply to the arbitration
proceedings.
[r] The decision of the Delhi High Court in case of
Olex Focas Pty. Ltd. v. Skodaexport Co. Ltd.,
reported in 1999 (Supp) Arbitration Law Reported
533 (Delhi) was cited to point out that the Court
held in paragraph 64 of its judgement that,
according to the provisions of the said Act, the
Courts are vested with the jurisdiction and power
to grant interim relief in appropriate cases, and
that the court's power to grant interim relief
would even strengthen the arbitration
proceedings, otherwise, in some cases, the award
may in fact be reduced to only a paper award.
[s] The decision of the Delhi High Court in case of
Niko Resources Ltd. v. Union of India, reported
in 2001(3) Arb. L.R. 196 (Delhi) (DB) was cited
to point out from paragraph 28 of the judgement
that it was held that, if it becomes necessary to
protect the interests of any party and any
interim measures of protection are required,
appropriate directions can always be issued to
the respondent to ensure the protection for the
benefit of the appellant even though the measures
may have an implication on GSPL, which was not a
party before the Court.
[t] The decision of the Delhi High Court in case of
CREF Finance Ltd. v. Puri Construction Ltd. &
ors., reported in 2000(3) Arb. L.R. 331 (Delhi)
was relied upon for the proposition contained in
paragraph 10 of its judgement that the Court had
jurisdiction to pass orders under Section 9,
until the award was submitted for enforcement
under section 36 of the Act.
8. The learned counsel appearing for the respondent
No.1 contended that the appellant had issued mechanical
completion and provisional acceptance certificates in
respect of all the three boilers and thereafter, they are
being used by the appellant for its Soda Ash Plant. It
was argued that the performance test run was rendered
redundant by the conduct of the appellant. We were taken
through the pleadings in detail to point out the grounds
on which, according to the respondent No.1, the
performance test run became redundant. It was further
argued that the bank guarantee of Rs.13 crores was
invoked by the appellant, as against the "non-conduct" of
the performance test run, on 28-7-2000, and that even
though all the three boilers were commissioned and are
being used by the appellant, 25% of the total
consideration is yet to be paid by the appellant to the
respondents. It was submitted that, as per the clauses
contained in all the three agreements, maximum liability
of the respondent No.1 on any count was limited to 15% of
the contracted value, as liquidating damages. It was
also argued that no specific performance was sought in
the arbitral proceedings and therefore, it could not be
granted in the application for interim relief. It was
further argued that no injunction could be issued where
damages would be an adequate remedy. It was contended
that the appellant was in possession of the boilers and
it could not keep the boilers and claim the refund as
well, of the price of these boilers which were not
rejected by the appellant. It was submitted that the
claim for damages made by the appellant was yet to be
decided in the arbitration proceedings and since no
liability for money was outstanding, there was no case
made out for ordering any security deposit in favour of
the appellant.
8.1 The learned Senior Counsel appearing for the
respondent No.2 adopted these contentions and further
argued that the respondent No.2 was not a party to the
arbitration proceedings in Ahmedabad, and that it was not
a party to any of the three agreements entered into
between the appellant and the respondent No.1, and that
no interim orders could be made against the respondent
No.2, especially in view of the fact that the parties to
the Contract i.e. the appellant and the respondent No.2
had chosen the place of arbitration to be London as per
Article 16 of their agreement, which arbitration
proceeding was in fact pending before the International
Court of Arbitration, ICC - London. It was further
argued that the Arbitral Tribunal, at Ahmedabad, had
already made orders dated 17-2-2001 and 4-3-2001 that it
had no jurisdiction to entertain and decide any dispute
between the appellant and the respondent No.2. That
order of the Tribunal dated 7-2-2001 was confirmed by the
City Civil Court by its order dated 31-8-2001 and a
Revision Application being No. 123 of 2002 was filed on
6-2-2002, which is pending in the High Court. Therefore,
as on today, the respondent No.2 was not even a party in
the arbitral proceedings though initially impleaded. It
was submitted that the Court could grant interim relief
under section 9 of the said Act only against the parties
to the arbitration proceedings and therefore, the
respondent No.2 cannot be made liable by any interim
relief to conduct any performance test or to furnish any
security for the claim made by the appellant. It was
also pointed out that the appellant had initially made a
counter-claim before the Arbitral Tribunal at London,
which was withdrawn. It was submitted that, any interim
direction given against the respondent No.2 would amount
to enforcing the liability of the respondent No.2 under
the agreement between it and the appellant, the disputes
under which were required to be arbitrated upon by the
ICC - London. It was also contended that the guarantee
contained in the know-how agreement was no longer valid
and / or enforceable, and that the guarantee was in
respect of performance and not in respect of any
pecuniary or other liability of respondent No.1. Since
the parties to the know-how agreement had consciously
chosen the forum of ICC, London for settling their
disputes, the appellant cannot resile from that agreement
by praying for reliefs in any other forum. It was argued
that the liability of the guarantor was a separate and
distinct from that of the principal debtor, and that the
application for interim relief was wholly unconnected
with the know-how agreement between the appellant and the
respondent No.2. It was also argued that the respondent
No.2 as a holding company cannot be made liable for any
liabilities of its wholly owned subsidiary, the
respondent No.1 and no interim relief could be granted in
favour of the appellant on that ground. Both the learned
counsel for the respondents supported the reasoning of
the trial Judge.
8.2 In support of their contentions, the learned
counsel for the respondents have referred to the
following decisions :
[a] The decision of the Supreme Court in case of
Fateh Chand v. Balkishan Dass, reported in AIR
1963 SC 1405 was cited for the proposition that a
claim for liquidated damages would not lie unless
the plaintiff proves loss or legal injury.
[b] The decision of the Supreme Court in case of
Cotton Corporation of India Ltd. v. United
Industrial Bank Ltd., reported in AIR 1983 SC
1272 and a decision of this Court in case of
Gujarat Electricity Board v. Maheshkumar & Co.,
reported in AIR 1982 Gujarat 289, were cited for
the proposition that interim relief can be
granted only in aid of the final relief.
[c] The decision of the Privy Council in Ardeshir H.
Mama v. Flora Sasoon, reported in AIR 1928 P.C.
208, the decision of the Kerala High Court in
Ayissabi v. Gopala Konar, reported in AIR 1989
KER 134 and the Madras High Court decision in
K.S.Sundaramayyar v. K. Jagadeesan, reported in
AIR 1985 MADRAS 85 were referred to for the
proposition that once a party makes a claim for
damages, he treats the contract as repudiated and
thereafter, cannot seek a specific performance of
a contract.
[d] The decision of the Allahabad High Court in Kashi
Nath v. Municipal Board, reported in AIR 1989
ALh. 375 was cited for the propsition that the
Court will not be justified in granting mandatory
relief by which it is required that a party
should undertake works of considerable extent by
way of improvements and constructions requiring a
good deal of engineering skill besides
considerable amount of money to meet the expense,
because, the Court is not capable of supervising
the works and thus, enforcing the injunction and
because award of damages is certainly an
efficacious remedy in such a case.
[e] The decision of the Delhi High Court in case of
M/s Magnum Films v. Golcha Properties Pvt.
Ltd., reported in AIR 1983 DELHI 392 was cited
for the proposition that the temporary mandatory
injunction can be issued only in case of extreme
hardship and compelling circumstances and mostly
in those cases when status quo existing on the
date of the institution of the suit is to be
restored. For this proposition, reliance was
also placed on the decision of the Calcutta High
Court in Nandan Pictures Ltd. v. Art Pictures
Ltd., reported in AIR 1956 CAL. 428.
[f] The decision of the Delhi High Court in M/s
Global Company Ltd. v. National Fertilizers
Ltd., reported in AIR 1998 DELHI 397 was cited
for the proposition that the principles of Order
39 Rule 5 of the CPC in respect of attachment and
Order 39 of the CPC in respect of injunctions
would apply to applications under section 9 of
the Arbitration act.
[g] The decision in Union of India v. Raman Iron
Foundry, reported in 1974 (2) SCC 231 was cited
for the proposition that a claim for damages is
not a liquidated sum.
[h] The decision of the Supreme Court in Colgate
Palmolive (India) Ltd. v. Hindustan Lever Ltd.,
reported in (1999) 7 SCC 1 was relied upon for
the proposition that, in deciding whether an
injunction should be issued, the Court should
determine whether one party's case is stronger
than the other.
9. The trial Court has observed that there was no
satisfactory explanation coming forth from the appellant
as to why it did not first approach the Arbitration
Tribunal under section 17 of the Act before invoking the
Court's discretion to order interim measures under
section 9 of the said Act. Sections 9 and 17 of the Act
which fall for our consideration are re-produced
hereunder:-
"Section - 9 - Interim Measures etc. by Court A
party may, before or during arbitral proceedings
or at any time after the making of the arbitral
award but before it is enforced in accordance
with section 36, apply to a Court -
(i) for the appointment of a guardian for a
minor or a person of unsound mind for the
purposes of arbitral proceedings; or
(ii) for an interim measure of protection in
respect of any of the following matters,
namely :
(a) the preservation, interim custody
or sale of any goods which are
the subject matter of the
arbitration agreement;
(b) securing the amount in dispute in
the arbitration;
(c) the detention, preservation or
inspection of any property or
thing which is the subject matter
of the dispute in arbitration, or
as to which any question may
arise therein and authorizing for
any of the aforesaid purposes any
person to enter upon any land or
building in the possession of any
party, or authorizing any samples
to be taken or any observation to
be made, or experiment to be
tried, which may be necessary or
expedient for the purpose of
obtaining full information or
evidence;
(d) interim injunction or the
appointment of a receiver;
(e) such other interim measure of
protection as may appear to the
Court to be just and convenient,
and the Court shall have the same power for
making orders as it has for the purpose of, and
in relation to, any proceedings before it.
Section - 17 - Interim Measures ordered by
Arbitral Tribunal-
(1) Unless otherwise agreed by the parties,
the arbitral tribunal may, at the request
of a party, order a party to take any
interim measure of protection as the
arbitral tribunal may consider necessary
in respect of the subject matter of the
dispute.
(2) The arbitral tribunal may require a party
to provide appropriate security in
connection with a measure ordered under
sub-section (1)."
9. The expression "Arbitral award" includes an
interim award under section 2(1)(c) of the Act, unless
the context otherwise requires. The Arbitral Tribunal
may, at any time during the arbitral proceedings, make an
interim arbitral award on any matter with respect to
which it may make a final arbitral award, as provided by
section 31(6) of the Act. The Arbitral Tribunal, at the
request of a party, order a party under Section 17 of the
Act to take any interim measure of protection as the
arbitral tribunal may consider necessary in respect of
the subject matter of the dispute, unless otherwise
agreed to by the parties. The provisions of section 17
are identically worded as Article 17 of the UNCITRAL
Model Law.
9.1 Article 26(1) of the UNCITRAL Arbitration Rules,
1976 was a provision similar to the provisions of Article
17 of the Model Law enabling the Arbitral Tribunal to
take any interim measures including measures of
conservation of goods forming the subject matter of the
dispute. Article 26(2) of the Rules of 1976 provided
that such interim measures may be established in the form
of an interim award. Under the said Act, however, an
appeal lies under section 37(1) against the order of
interim measure made under section 17 of the Act. It is,
however, clear that even if the Arbitral Tribunal grants
interim injunction, it cannot be enforced without resort
to the Court. If an Arbitral Tribunal had the power to
effectively order measures of interim relief that the
Court can provide, there would hardly be any need to
provide for court applications for interim measures.
Since the Arbitral Tribunal's jurisdiction is limited,
the assistance of Court is required.
9.2 The basic limitation on the power of the Arbitral
Tribunal lies in the arbitration agreement which binds
only the parties to the agreement. Arbitration clause
cannot bind anyone who is not a party to it. Thus, the
Arbitral Tribunal will have no power to issue interim
orders which can bind third parties over whom it has no
consensual jurisdiction. Moreover, Arbitral Tribunals
have no coercive power to enforce their orders. An
injunction ordered by Arbitral Tribunal would not be
fortified with the threat of contempt of court, but would
only have contractual effect between the parties. It is
therefore evident that access to the court under section
9 of the said Act for certain kinds of interim relief in
arbitration cases, would not only be expedient but
necessary as a provisional remedy to ensure that a just
outcome of the arbitral proceedings does not get defeated
and the Arbitral Tribunal can effectively resolve the
disputes. The range of interim measures that can be
issued under section 9 of the said Act is considerably
wider than that under section 17. The provisions of
sections 9 and 17 modelled on the UNCITRAL Model Law on
International Commercial Arbitration (1985) give an
option of free access to both the court and the arbitral
tribunal for interim relief and give the parties a choice
between Arbitral Tribunal or Court for interim reliefs.
Furthermore, a party to an arbitration agreement could
approach the Court for interim protection measures under
section 9 before or during the arbitration proceedings,
which indicates that the efficacy of court's power to
grant interim relief remains the same even during the
arbitration proceedings. It would therefore not be
proper to relegate a party who approaches the court for
interim relief under section 9, to the Arbitral Tribunal
for an interim measure of protection under section 17.
The view that the Court should not exercise its
discretionary powers under section 9 when a party to the
arbitration agreement can move the Arbitral Tribunal
under section 17 cannot, therefore, be accepted.
10. The contention on behalf of the respondent No.2
that the Court cannot consider the agreement between the
appellant and the respondent No.2, because, that would
amount to enforcing liability of the respondent No.2
which can be done only by the ICC - London, is
misconceived. When the Arbitral Tribunal has
jurisdiction only to decide disputes arising under one
set of contracts, it does not preclude the Arbitral
Tribunal from taking another related contract into
consideration. There is a distinction between giving
effect to another contract by deciding issues under it
and taking that contract into consideration for the
purposes of interpretation and application of the
agreements falling within the jurisdiction of the
Arbitral Tribunal. Therefore, there would be no lack of
jurisdiction to consider the nature of the agreement of
the appellant with the respondent No.2 in context of
three Agreements with the respondent No.1 for a
comprehensive understanding of the nature of the
transaction. Such consideration may become necessary to
ascertain the intention of the parties as to whether they
conceived of various agreements as forming together one
single economic transaction. The Court can, therefore,
always take into consideration the related contracts to
ascertain the nature of the transaction while deciding
the question of interim measures under section 9,
because, a truncated view of the transaction cannot guide
the Court as to what interim measures are required. That
would not amount to enforcing any liability under any
contract for which the Arbitral Tribunal may have no
jurisdiction.
11. Proceeding on the footing that a Court can issue
orders of interim measures of protection as contemplated
by the provision of section 9 of the said Act on the
above reasoning, it would have to be now seen whether
there is a case made out by the appellant for a mandatory
order against the respondent No.2 subject to whose
control its wholly owned subsidiary, the respondent No.1,
which was created for the purpose of the contract in
India (which appears to be the case from the letter of
November 13, 1999, Volume II Page 1 of the appellant's
paperbook, written by the respondent No.2 - Lentges to
the appellant in which the last sentence reads: "Our
recommendation is to sign the outstanding contracts after
foundation of our company in India"). The respondent
No.2 and its subsidiary, the respondent No.1, had entered
into the agreements forming a consortium as can be seen
from the letter dated 11th July 1997 of the respondent
No.2 to the appellant (Annexure I collectively, Volume I
of the Appellant's Paperbook, on page 196-197). The
relevant portion of that letter, reads as follows :-
"Lentjes and the companies A, B, C shall form a
consortium and have a very clear legal agreement
overseen by Lentjes, controlled by Lentjes and
operated by Lentjes. It will be a separate
office at Bombay, team of personnel and
infrastructure for this specific job."
12. Under the "Know-how supervision agreement" dated
1st September 1997 between the appellant and the
respondent No.2, the respondent No.2 agreed that, "It
will undertake to supervise Engineering / Procurement,
Fabrication, Supply of Erection to be undertaken in a
manner that the boilers meet the guarantees stipulated in
this agreement as if the supply, erection and
commissioning has been done by Lentges (i.e. the
respondent No.2) itself and shall guarantee their
performance", as declared in clause (e) of the Preamble
of the Agreement. The respondent No.2 undertook full
responsibility for the workmanship of the Erection
contractor, Engineer, and Engineering supply contractor
as stipulated in para 1.6, 1.8 and 1.11 of its agreement.
The respondent No.2 undertook in clause 2.1(c) of the
agreement that, "Boilers once assembled, erected and
commissioned will operate in conformity of this agreement
as well as other agreements as may be entered by NIRMA
with Engineer, Contractor & Erection Contractor." The
Contractor / Engineer / Erection Contractor were to be
appointed as per the approval of the respondent No.2 and
the terms and conditions of contract with them (excepting
the commercial and financial terms) were to be previously
approved in writing by the respondent No.2 and then not
to be altered or amended without its previous approval.
This was actually done, because, in each of the three
agreements with the respondent No.1, it was mentioned
that the terms thereof were approved by the respondent
No.2. The respondent No.2 was to depute a Project
Manager to supervise all the stages upto the erection and
commissioning of the plant, as stated in Article VI(1) of
the agreement. The respondent No.2, in Article VII of
the agreement, gave guarantees to the appellant in the
following terms :
"ARTICLE VII : WARRANTIES :
7.1 LENTJES guarantees to NIRMA :-
(a) that the CONTRACTOR, ENGINEER and
ERECTION CONTRACTOR shall duly and timely
perform their respective obligations with
NIRMA as may be provided in their
respective contracts.
(b) the fulfillment of the warranties
contained in the respective contracts
with the CONTRACTOR, ENGINEER and
ERECTION CONTRACTOR.
(c) LENTJES shall 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 ay
guarantee(s) which NIRMA may have from
the CONTRACTOR, ENGINEER and ERECTION
CONTRACTOR. For due fulfillment of
guarantee obligation of LENTJES under
this clause, if need be, NIRMA agrees to
assign guarantee(s) of CONTRACTOR,
ENGINEER and ERECTION CONTRACTOR in
favour of LENTJES.
7.2 LENTJES agrees as principal guarantor to
accept the guarantee obligation as
mentioned in Annexure 6 of this agreement
and also agrees to monetarily or
otherwise compensate NIRMA for all the
obligations covered herein.
7.3 LENTJES' liability under this Article VII
shall, however, not exceed the
liabilities and the respective
liabilities of the ENGINEER, the
CONTRACTOR and / or the ERECTION
CONTRACTOR under this agreement and also
under their respective contracts with
NIRMA."
12.1 The above clauses of the agreement show that the
respondent No.2 had guaranteed, as a principal guarantor,
the due performance of CFB boilers and the obligations
under the respective contracts of the Contractor,
Engineer and Erection Contractor, with the appellant.
The respondent No.2 agreed to compensate the appellant
for all obligations of the Contractor, Engineer and
Erection Contractor under their respective contracts to
the extent of their liabilities. Thus, the respondent
No.2 stood as a guarantor to the appellant for due
performance of the obligations of the respondent No.1
towards the appellant under its three agreements on the
basis of which the arbitration disputes have been
referred to the Domestic Arbitral Tribunal.
12.2 The guarantee obligations mentioned in Appendix
VI of the agreement with the respondent No.2 were in
terms undertaken by the respondent No.2 under Article 7.2
of the agreement. As per these guarantee obligations,
the respondent No.2 had guaranteed "execution of the
order with good workmanship according to the technical
specifications and performance requirements, as handed
over to him". The guarantee period "started with the day
of preliminary passing of title and risk, after
successful completion of test operation", and was for
"10000 operating hours with in a max of 2 years", as per
the guarantee stipulation. If the respondent No.2 did
not comply with the performance guarantees even after
repairs and replacement, the appellant was entitled to
the liquidated damages per boiler unit (percentage of
contract price per boiler unit), as stipulated in the
guarantee obligations under the agreement of the
respondent No.2 (See page 347 of Volume I of the
appellant's paperbook in its Appendix VI).
12.3 Apart from the guarantee rights, the appellant
had a right not to accept the unit or part thereof in the
events enumerated in the guarantee obligations, which
included event of liquidated damages exceeding 10% of the
contract price. The agreement with the respondent No.2
was to be governed according to the laws of India, as
stipulated by Article 16.2 and 16.4. By clause 5 of
Article 16, it was agreed between the respondent No.2 and
the appellant that the appellant "shall have no claim or
demands against LENTJES (i.e. the respondent No.2) other
than those specified in the Agreement", and that the
liabilities of LENTJES to the appellant "shall be limited
to what is provided in the agreement and shall in the
aggregate be limited to 15% of the total order value
..... under this Agreement" as well as "15% of the total
order value of the agreements to be entered with the
Engineer, Contractor and Erection Contractor and such
limitation shall not be alterable by decision of
arbitration or court".
12.4 From the agreement executed by the respondent
No.2, it appears that the respondent No.2 had guaranteed
successful execution of the Work Order retaining its
complete control at all stages of the work to be done
through the respondent No.1 on the terms of the three
agreements executed by the respondent No.1, which was
wholly owned subsidiary of the respondent No.2 specially
founded in India for executing the Work Order,
obligations under which were guaranteed in no uncertain
terms by the respondent No.2. All the four agreements
read together spell out a pattern showing the dominance
of the respondent No.2 who undertook the successful
execution of all the agreements. It would be difficult
for such a principal guarantor to say that he is a
stranger to the three agreements entered into by its
wholly owned subsidiary in furtherance of the main
contract that it entered with the appellant to provide
three Boilers to the appellant.
13. However, the fact remains that the arbitration
clause contained in Article 15 of the agreement with the
respondent No.2 stipulated that if at any time any
question / dispute or difference whatsoever shall arise
between the respondent No.2 and the appellant out of or
in connection with this Agreement, the same shall be
finally settled by arbitration in accordance with the
Rules of Conciliation and Arbitration of the
International Chamber of Commerce. The place of
arbitration shall be London and arbitration proceedings
shall be carried out in England. On the strength of this
clause, the respondent No.2 has taken up a stand that the
Domestic Arbitral Tribunal will have no jurisdiction over
the respondent No.2 and therefore, the interim relief
cannot be issued either by the Arbitral Tribunal or by
the Court under sections 9 and 17 of the Act, even if the
respondent No.2 was to be treated as a guarantor for the
obligations of the respondent No.1 under the three
agreements including the obligation to conduct the
performance tests.
13.1 It was urged in the above background, on behalf
of the appellant that, having regard to the nature of the
transaction, the Court will have power to issue interim
relief even against the respondent No.2 though not a
party to the arbitration proceeding, as on today, and
therefore, the respondent No.2 can be compelled to do
performance test on the three boilers in order to
demonstrate "that the boiler is capable of operating in
accordance with the technical specifications", as was
stipulated by the respondent No.2 under Article 8.2.1 of
the contract. It was argued that the respondent No.1 was
only a "shell" company founded by the respondent No.2 for
the purpose of the contract and the respondent No.1 had
no means to satisfy the claim of the appellant and
therefore, the respondent No.2 should also be asked to
furnish a bank guarantee in the sum claimed by the
appellant who was entitled to get back the entire amount
paid under the contracts from the respondents Nos. 1 and
2, as per the Statement of Claim.
13.2 The respondent No.2 had moved the Tribunal for
holding that it had no jurisdiction over the respondent
No.2 in view of the arbitration clause in Article 15 of
the Agreement, which stipulated that the seat of
arbitration will be at London. This order was confirmed
by the Court in Appeal and a Revision Application is
pending with the High Court, as noted above. Therefore,
as on today, the respondent No.2 is held to be not
amenable to the jurisdiction of the Arbitral tribunal
since it was not a signatory to the arbitral clause
contained in any of the three agreements with the
respondent No.1. However, that aspect is quite distinct
from the power of the court to grant interim measures
under section 9 of the Act, which may extend even against
the third party. These powers are same as those
exercisale for the purpose of and in relation to any
proceeding before it. A surety will not be a stranger to
contract of guarantee since it is a triparte contract
which makes the liability of a surety co-extensive with
that of the principal debtor, though indeed a separate
liability. In contrast to section 17 under which the
interim measures that can be issued by the Arbitral
Tribunal only against the parties to the arbitration
agreement, the Court can in a given case issue interim
measures against the parties not involved in the
arbitration and such measures would be enforceable
through the local judicial system, (See paragraph 4.038
at page 120 of "International Commercial Arbitration in
UNCITRAL Model Law Jurisdiction" by Dr.Peter Binder,
First Edition (2000) published by Sweet & Maxwell). The
applications under section 9 to Court will be appropriate
where the order is sought against the third party over
whom the Tribunal had no jurisdiction or where any order
by the Tribunal is likely to be ineffective. (See para
5.096 at page 205 of Russel on Arbitration, 21st
Edition).
13.3 The Supreme Court in Sundaram Finance Ltd.
(supra) has held that, for construing the provisions of
the said Act, it is more relevant to refer the UNCITRAL
Model Law rather than the Act of 1940. In context of the
powers of the Arbitral Tribunal under section 17 and of
the Court under section 9, it observed in paragraph 11 of
the judgement that, though section 17 gives the Arbitral
Tribunal power to pass orders, the same cannot be
enforced as orders of a Court. It is for this reason
that section 9 gives the Court power to pass interim
orders during arbitration proceedings. It was held that
reading the provisions of section 9 as a whole, it
appears that the Court has jurisdiction to entertain an
application under section 9 either before arbitral
proceedings or during the arbitral proceedings or after
making of the arbitral award but before it is enforced in
accordance with section 36 of the Act.
13.4 In Bhatia International (supra), the Supreme
Court has held that an application for interim measure
can be made to Courts in India, whether or not the
arbitration takes place in India before or during the
arbitral proceedings (see paragraph 28 of the judgement).
It was held that the provisions of Part I of the Act
would apply to all arbitrations and to all proceedings
relating thereto. Where such arbitration is held in
India, the provisions of Part I would compulsorily apply
and the parties are free to deviate only to the extent
permitted by the derogative provision of Part I. In case
of international commercial arbitrations, held out of
India, provisions of Part I would apply unless the
parties by agreement express or implied, exclude all or
any of the provisions. In that case, laws or rules
chosen by the parties would prevail. Any provision in
Part I, which is contrary or excluded by that law or
rules, will not apply.
13.5 In the present case, under Articles 16.2 and 16.4
of the agreement between the appellant and the respondent
No.2, the agreement was to be governed according to the
laws of India which will include the said Act. The
provisions of section 9 of the said Act are not excluded
under that agreement. This Court will, therefore, have
powers under section 9 of the said Act to issue interim
injunction against the respondent No.2 even if
arbitration proceedings on the basis of that agreement
are pending before the ICC, London, while the arbitration
proceedings on the basis of the three agreements of its
subsidiary, the respondent No.1, in respect of which the
obligations have been guaranteed by the respondent No.2
under the contract is pending in the Arbitral Tribunal,
at Ahmedabad.
14. We may therefore now examine whether any case is
made out by the appellant for grant of any interim relief
under section 9 of the said Act against the respondents.
In paragraph 69 of the application made under section 9
of the said Act before the Court, the appellant seeks,
"an appropriate order of interim measure of protection
against the respondents directing them to preserve
boilers Nos. 1, 2 and 3 contracted to be supplied by
them under agreements dated 12-12-97, 12-12-97 and
17-3-98 at the petitioner's plant in Bhavnagar by
conducting the "Start-Up" and "Performance Test Run" and
further achieve the agreed parameters as per Annexure VI
of the contract dated 1-9-1997 between the petitioner and
respondent No.2 till the hearing and final disposal of
the main petition".
14.1 According to the appellant, it has a prima facie
case and balance of convenience is in its favour, and
that if the interim reliefs are not granted, the
appellant will suffer irreparable loss and injury "which
can never be assessed or compensated in terms of money".
14.2 The contract of supply of boilers in respect of
which the respondent No.2 had intellectual property
rights was not a contract to buy goods freely available
across the counter. The nature of the four agreements
and the details given in the Annexures to the agreement
dated 1-9-1997 between the appellant and the respondent
No.2 would show that these Boilers were unique goods, the
installation and operation of which was possible only
with the special know-how of the respondent No.2. This
is why it has been argued by the learned Senior Counsel
appearing for the appellant that the essential part of
the contract, namely, of conducting "Performance Test
Run", which admittedly was not conducted by the
respondents as stipulated in the contract, should be
ordered to be performed with a view to preserve these
three boilers since the special know-how was available
only with the respondent No.2 and the appellant was under
an obligation not to disclose any secrets of the design
and operation of the boilers to any outside agency for
getting the performance test conducted. It was argued
that until such test was done, there was no legal
entrustment of the boilers to the appellant and the risk
remained with the respondents who continued to be bound
under the contract to preserve these boilers. It was
argued that the performance guarantee period of two years
or 10000 operative hours would run only after the
performance test was conducted by the respondents.
Relying on the provisions of section 23 of the specific
Relief Act, the learned Senior Counsel argued that the
liquidation of damages was by itself not a bar to
specific performance in the present case.
14.3 The specific performance of a contract can be
enforced when there exists no standard for ascertaining
the actual damage caused by the non-performance of the
act agreed to be done or when the act agreed to be done
is such that compensation in money for its
non-performance would not afford an adequate relief. In
case of contract of transfer of movable property which is
not an article of commerce, or is of special value or
interest to the plaintiff, or consists of goods which are
not easily obtainable in the market, there would be a
presumption by the Court that the breach of such contract
cannot be adequately relieved by compensation in money.
This is borne out from the provisions of section 10 of
the Specific Relief Act. Such presumption would,
however, be a rebuttable presumption. Section 23 of the
Specific Relief Act, provides that liquidation of damages
named in the contract is not a bar to specific
performance, if such contract is otherwise proper to be
specifically enforced. Therefore, if a contract is of
the type which cannot be specifically enforced, the
provisions of section 23 cannot be pressed into service.
In a contract for building or engineering works since a
Court has no means of supervising, it will not usually
grant remedy of specific performance. Moreover, remedy
of specific performance has to be sought by the plaintiff
to enable the Court to consider whether it may be
granted. If the plaintiff does not, as in the instant
case, pray for specific performance, but instead claims
damages for breach of contract, the plaintiff disentitles
itself, on account of his own election to treat the
contract as breached, from claiming specific performance
of the same contract. The appellant has admittedly not
prayed for specific performance of the terms of contract
under which the respondent No.2 was expected to conduct
the performance test run. This is evident from the
prayer clauses 73(A) and (B) of the Statement of Claim
dated 12-11-2000 filed by the appellant before the
Arbitral Tribunal (a copy of which is at Volume III of
the appellant's paperbook, Annexure ZE, page 255 to 297),
in which a declaration is sought that, "the respondent
No.1 has failed to perform its obligations under the
Agreements dated 12-12-1997, 12-12-1997 and 17-3-1998",
and repayment of Rs.60,67,18,000=00 is claimed from the
first respondent on account of its failure to perform its
obligations". It was prayed in clause (m) that the
"declarations as prayed for above be directed to be
passed against the respondents 1 and 2 jointly and
severally."
14.4 In none of the prayers made by the appellant in
the Statement of Claim before the Arbitral Tribunal, did
the appellant claim specific performance of any part of
the contract. There was no request made for any
direction on the respondents to conduct performance test.
The claim of the appellant was on the footing that there
was a breach of contract committed by the respondents and
it was made "on account of failure on the part of the
respondents to supply boilers of agreed parameters" (See
para 68(1) of the Statement of Claim). Since the
appellant did not pray for specific performance of the
terms of contract which required the respondents to
conduct performance test run, but claimed for a
declaration of breach of contract and repayment of
amounts paid to the respondent No.1 and made other money
claims for damages for breach of contract, the appellant
disentitled itself, on account of its own election of the
remedy of claiming compensation for breach allegedly
committed by the respondents, to claim specific
performance. The appellant did not even claim, "specific
performance with compensation". Therefore, the prayer in
the application under section 9 claiming specific
performance of the terms of contract requiring
performance test run to be conducted by the respondents
is not at all warranted and cannot be granted as an
interim measure of protection.
15. That takes us to the alternative prayer in para
69(b) of the application, in which the appellant seeks an
interim measure of protection directing the respondents
to deposit a sum of Rs.6,53,00,000=00 to be released to
the appellant so as to enable the appellant "to conduct
the Start-Up and Performance Test Run by engaging any
other agency, as may be deemed appropriate" by the
appellant till the final disposal of the petition. A
direction is also sought in para 69(d) on the respondents
to secure by way of a bank guarantee a sum of
Rs.60,67,18,000=00 paid by the appellant, subject to the
award that may be passed by the Arbitration Tribunal.
15.1 The learned Senior Counsel for the appellant, in
support of these prayers submitted that the appellant was
entitled to reject the boiler units and claim the entire
amount paid, because, the boilers were not as per the
parameters agreed. He argued that since the appellant
cannot be expected to bring the entire Soda Ash Plant to
a standstill, it was as per the Contract entitled to
continue to use these boilers, till it could procure
"suitable replacement" as contemplated by the terms of
guarantee obligations mentioned in Appendix VI of the
contract dated 1-9-1997 executed by the respondent No.2.
He also submitted that since the respondent No.1 was only
a "shell" company, wholly owned by the respondent No.2 in
order to ensure that the award that may be made in favour
of the appellant may not be frustrated, the respondents
should be ordered to furnish security as prayed for in
the application.
15.2 There is no dispute over the fact that the
Appellant has not paid the last 10% of the total
consideration, being the final amount payable under the
contracts on "completion of Performance Test Run" as
contemplated by all the agreements. There is also no
dispute over the fact that the Performance Test Run was
not conducted; but the rival parties have blamed each
other for the test not being conducted.
15.3 We have been taken through a mass of documentary
evidence with a fervour of original side advocacy by the
learned counsel appearing for both the sides in their tug
of war to show the respective strength of their cases for
and against the grant of an interim relief. The fact
that emerges without much dispute is that the appellant
has not till now rejected any of the boilers and has been
in fact using them for its Soda Ash Plant after being
handed over the boilers, and that it has not paid the
final payment of 10% of the total consideration under any
of the contracts which was payable against performance
bank guarantee as well as on completion of the
performance test run and further that the appellant
invoked the bank guarantee of Rs.13 crores which were
advanced to the respondent No.1 due to "the default in
commissioning the three boilers in accordance with the
agreed schedule", as stated in para 6 of the appellant's
letter dated July 29, 2000 addressed to the respondent
No.1 (Copy at Annexure ZB in Volume II of the appellant's
paperbook at page 241 - 246).
15.4 Certificate of mechanical completion was to be
given in respect of each boiler in respect of which
positive result was achieved at the conclusion of the
mechanical completion, as contemplated by Article 7.10.3
of the Agreement for Erection and Commissioning,
reproduced hereunder :
"7.10.3 If at the conclusion of Mechanical
Completion test of each Boiler, positive
result is achieved, then in that event
ERECTION CONTRACTOR shall prepare and
NIRMA shall sign the Provisional
Acceptance Certificate for that Boiler.
The issue of Acceptance Certificate shall
not absolve ERECTION CONTRACTOR from
rectifying minor or unsubstantial defects
in the boiler.
7.10.4 In case a successful Mechanical
Completion Test should not be possible
due to reasons not attributable to
ERECTION CONTRACTOR within 7 months after
the Mechanical Completion date, or such
extended time as agreed upon between the
parties, such boiler shall be considered
as accepted and a Provisional Acceptance
Certificate shall be issued by NIRMA.
7.10.5 During the Mechanical Completion Test if
it is observed that some minor
rectifications are required or
unsubstantial defects are noticed,
ERECTION CONTRACTOR shall rectify the
same as its own cost."
15.5 The expression "Mechanical Completion" and
"Mechanical Completion Certificate" are defined in
Articles 1.8 and 1.9 as follows :
"1.8 "Mechanical Completion" shall mean that
an individual boiler has been completed
in all respect to enable preparation for
start up under normal conditions without
danger to the personnel and equipment
according to the provisions of Article 7.
1.9 "Mechanical Completion Certificate" shall
mean certificate certifying that all
items required for normal operation of an
individual boiler has been duly
assembled, erected and commissioned in
accordance with the technical
specification."
15.6 Admittedly, "Mechanical Completion Certificate
and Provisional Acceptance Certificate" were issued in
respect of all the three boilers by the appellant subject
to the "punch list" attached to them (See Annexure ZE of
Volume III of the appellant's paperbook on pages
255-297).
15.7 The performance test run was to be conducted as
contemplated by clause 7.12 of the Agreement for Erection
and Commissioning to find out whether at the conclusion
of such test, the guarantee performance as setout in the
contract with the respondent No.2 was achieved for the
boiler. If it was so achieved, the appellant was
required to sign the performance acceptance certificate
for that boiler, as per clause 7.12.2, reproduced below :
"7.12.2 At the conclusion of performance test of
each Boiler, the guaranteed performance
as set out in CONTRACT hereto are
achieved for that Boiler then in that
event ERECTION CONTRACTOR shall prepare
and NIRMA shall sign the Performance
Acceptance Certificate for that Boiler.
Such certificate shall state that
ERECTION CONTRACTOR has duly fulfilled
its contractual obligations and is
discharged therefrom in respect of that
boiler. The issue of Acceptance
Certificate shall not absolve ERECTION
CONTRACTOR from rectifying minor or
unsubstantial defects in the boiler."
15.8 The performance bank guarantee given by the
respondent No.1 could be encashed if parameters of the
performance test were not achieved because of defective /
poor workmanship. However, the maximum liability on
account of non-performance was stipulated to be 10% of
the order value as agreed under Article 7.12.3 of the
Agreement for Erection and Commissioning, and clause 4(b)
of the specific conditions of Work Order annexed thereto,
which read as under :
"7.12.3 As per the CONTRACT, parameters of the
performance test are to be achieved.
Because of defective/poor workmanship
delivered by the ERECTION CONTRACTOR,
performance parameters negatively deviate
from the guaranteed figure, ERECTION
CONTRACTOR shall be liable for liquidated
damages and, NIRMA shall be free to
encash the Performance Bank Guarantee to
be received from the ERECTION CONTRACTOR,
without any further reference/recourse to
the ERECTION CONTRACTOR, and other
suitable action as may be required to be
taken by NIRMA under the Agreement as
well as the CONTRACT. However, the
maximum liability on account of
non-performance shall be 10% of the Order
Value."
"4(b). FOR NON PERFORMANCE:
The 3 nos. of CFB Boilers of 100 tph
each after their erection and
commissioning shall perform as per the
guarantee parameters. Because of the
defective poor workmanship delivered by
LENTJES ENERGY (INDIA) LTD. performance
parameters negatively deviate from the
guaranteed figure, you shall be liable
for liquidated damages and Nirma shall be
free to encash the Performance Bank
Guarantee to be received from you without
any further recourse to you. However the
maximum liability of non-performance
shall be 10% of the total order value."
Thus, a ceiling of liability was fixed for
failure of performance test run at 10% of the total order
value.
15.9 Admittedly, since no performance test was carried
out for the blames attributed by the parties to each
other, final payment of 10% of consideration stipulated
in the terms of payment in all the agreements to be paid
against a performance bank guarantee and completion of
performance test and certificate issued by the appellant,
was in fact not paid, and on that count, the appellant,
therefore, has withheld final payment of 10% of the
entire consideration payable under all the agreements.
(See Article 3.2.3, 3.2.6 and 3.2.10 of the contract
executed by the respondent No.2, and Article 4.4.8 of the
Engineering Contract, Article 3.5.9 of the Supply
Contract and Article 4.4.4 of the Erection and
Commissioning Contract).
16. Apart from withholding 10% of the total
consideration due to the respondent No.2 not conducting
the performance test, the appellant had invoked the
performance bank guarantee which was stipulated in
Article 4.4.4 of the Agreement for Erection and
Commissioning. The appellant had by letter dated
28-7-2000 (at Annexure ZA in Volume II of the appellant's
paperbook on page 240) invoked the bank guarantee dated
22-9-1999 for a sum of Rs.13 crores. In paragraphs 6 and
7, reproduced below, of its letter dated 29-7-2000
(Annexure ZB of the said Volume II) addressed to the
respondent No.1, the appellant informed the respondent
No.1 that it had invoked the bank guarantee owing to
"defaults and a history of failure".
"6. You had repeatedly requested us to bail
you out of your purported financial
difficulties. Pursuant to such request,
with a view to maintain a cordial
business relationship, we agreed to
advance you a sum of Rs.
13,00,00,000/(Rupees thirteen crores
only) contingent on your promise that you
would meet the revised schedule for full
and formal commissioning of the three
boilers. In order to secure the
aforesaid advance of Rs. 13 crores, you
had executed an irrevocable and
unconditional bank guarantee for the said
sum of Rs. 13 crores. It was also
mutually agreed between us in the event
of any failure, or default in
commissioning the three boilers in
accordance with our agreed schedules,
Nirma would be free to invoke the bank
guarantee and take back the said advance
of Rs. 13 crores.
7. This is to inform you that owing to
repeated defaults and a chronic history
of failure in meeting contracted
deadline, Nirma has now been constrained
to invoke the aforesaid bank guarantee in
order to protect its interests of its
shareholders."
16.1 The above guarantee, a copy of which was mutually
made available by the learned counsel to the Court on
inquiring about it during the arguments, referred to the
fact that the respondents Nos. 1 and 2 were required
under the boiler agreement to provide the appellant "with
performance guarantees for the performance of all the
three CFB Boilers, after each of the three boilers is
installed and commissioned". It also mentions; "The
value of performance guarantees of Lentjes India
amounting to Rs.65,332,356/- [Rupees sixty five million
three hundred thirty two thousand three hundred fifty six
only], for these three CFB Boilers is included in this
value of Bank Guarantee of Rs.130,000,000/- [Rupees one
hundred and thirty million only]". It further records
that, "Lentjes (i.e. the respondent No.2) has requested
the Bank to provide the Bank Guarantee as required, and
the Bank has agreed to do so ......". The relevant
covenant showing that the guarantee was in respect of the
performance guarantees of both the respondents Nos. 1
and 2 contained in the said deed reads as follows :
"AND THE BANK DOES FURTHER COVENANT AND DECLARE
that this Guarantee is absolute, unconditional
and irrevocable and shall remain in force upto
31.03.2000 or upto and inclusive of the date on
which Lentjes and Lentjes India execute all the
Performance Guarantees in favour of Nirma as
required of them in terms of their respective
agreements with Nirma, whichever is earlier. The
Bank shall be discharged from its liabilities
arising out of this Deed of Guarantee only when
Nirma or Lentjes or Lentjes India submits to the
Bank Performance Guarantee Certificates signed by
Nirma's duly authorised official confirming
successful completion of Performance Test as per
the Performance Guarantee Parameters provided in
the Boiler Agreements and receipt of the said
Performance Guarantees. If Nirma is not able to
submit to the Bank both these Certificates before
31.03.2000, then this Bank Guarantee shall
automatically be renewed on the same terms and
conditions for a period upto 31.12.2000."
16.3 When the said bank guarantee was invoked by the
appellant, the effect was that the appellant received
thirteen crores of rupees from the bank since performance
test run was not done and consequential performance
guarantee certificate which would have been issued by the
appellant, had the test been duly conducted with positive
result, could not be submitted by the respondent No.1 to
the bank for the discharge of the bank's liability. This
amount of Rs.13 crores included the value of the
performance guarantees of the respondent No.1 amounting
to Rs.65,332,356/- as stated in the deed of guarantee.
Over and above getting the amount of Rs.13 crores by
invoking the bank guarantee which included the value of
the performance guarantees of the respondent No.1, the
appellant also had admittedly withheld 10% of the total
consideration payable under the agreements as final
payment against the performance bank guarantees and the
performance test run.
17. Thus, in sum, the result is that -
[a] The appellant is in possession of the three
boilers in respect of which it had issued
mechanical completion and provisional acceptance
certificates.
[b] These boilers are admittedly being put to actual
commercial use by the appellant.
[c] The final payment amount which was 10% of the
total consideration i.e. Rs.6.53 crores was
withheld by the appellant since the performance
test against which the said final payment was to
be made, was not conducted.
[d] The appellant has already invoked the performance
bank guarantee of Rs.13 crores on the ground that
the performance test was not done and the boilers
were faulty.
18. On the above facts, we are of the opinion that no
further security is called for by issuing any interim
measure under section 9 of the Act, and that the
appellant has already taken steps to substantially
safeguard its own interest. Having regard to the
aggregate ceiling of all damages stipulated between the
parties in para 11.4 of the agreement also, there is no
need for any interim measure to be ordered by the Court
under section 9 of the Act. Denial of interim relief by
the trial Court was, therefore, perfectly justified in
the facts of the case. The appeal is, therefore,
dismissed with costs.
[R.K.ABICHANDANI, J.]
[M.C.PATEL, J.]
parmar*
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