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High Court Of Delhi
RAWLA CONSTRUCTION COMPANY - Appellant
Versus
UNION OF INDIA - Respondent
Suit 300-A of 1976
Decided On : 08/13/1976
ARBITRATION - BANK GUARANTEE - ENCASHMENT - INJUNCTION - BANK GUARANTEE CONSTITUTES AN INDEPENDENT CONTRACT BETWEEN BANK AND GOVERNMENT - BANK HAS ABSOLUTE OBLIGATION TO PAY ON DEMAND - COURT SHOULD NOT INTERFERE WITH ESTABLISHED COMMERCIAL PRACTICE - INJUNCTION GRANTED TO RESTRAIN ENCASHMENT OF BANK GUARANTEE MADE ABSOLUTE TILL ARBITRATION AWARD - BANK GUARANTEE TO BE KEPT ALIVE TILL AWARD AND 3 MONTHS THEREAFTER.
Fact of the Case:
Petitioner entered into a contract with the Union of India for construction of residential accommodation. Petitioner furnished a bank guarantee in lieu of retention money. Petitioner completed the work and final bill was paid. Disputes arose between the parties. Petitioner filed an application under Section 20 of the Arbitration Act, 1940 for filing of arbitration agreement and an order of reference. Petitioner also filed an application under Section 41 read with Second Schedule of the Act for restraining respondents from encashing the bank guarantee.
Finding of the Court:
Arbitration agreement between the parties was filed in the Court. Engineer-in-Chief was directed to appoint an arbitrator within one month. Disputes raised by the petitioner in the letter dated March 12, 1976 were referred to the appointed arbitrator. Petitioner was allowed to raise further disputes/claims before the arbitrator that have since arisen. Union of India was also allowed to raise counter-claims or disputes that have arisen upto date before the appointed arbitrator. Ex parte injunction granted on April 29, 1976 restraining the respondents from encashing the bank guarantee was made absolute till the award is made by the arbitrator. Petitioner was directed to keep the bank guarantee alive till the date of the award and 3 months thereafter by obtaining extension of the bank guarantee from the Grindlays Bank Ltd. within a fortnight from the date of the order.
Issues: Whether the arbitration agreement between the parties should be filed in the Court and an order of reference be made for adjudication of the disputes?
Ratio Decidendi: Bank guarantee constitutes an independent contract between the bank and the Government. Bank has an absolute obligation to pay on demand without any demur. Courts should refrain from interfering with the established commercial practice. Injunction granted to restrain encashment of bank guarantee was made absolute till arbitration award. Bank guarantee to be kept alive till award and 3 months thereafter.
Final Decision: Arbitration agreement was filed in the Court. Engineer-in-Chief was directed to appoint an arbitrator within one month. Disputes raised by the petitioner in the letter dated March 12, 1976 were referred to the appointed arbitrator. Petitioner was allowed to raise further disputes/claims before the arbitrator that have since arisen. Union of India was also allowed to raise counter-claims or disputes that have arisen upto date before the appointed arbitrator. Ex parte injunction granted on April 29, 1976 restraining the respondents from encashing the bank guarantee was made absolute till the award is made by the arbitrator. Petitioner was directed to keep the bank guarantee alive till the date of the award and 3 months thereafter by obtaining extension of the bank guarantee from the Grindlays Bank Ltd. within a fortnight from the date of the order.
( 1 ) THE petitioner entered into a contract with the Union of India for the construction of residential accommodation for certain units at Meerut being agreement No. CENZ/ MRT/e/34 of 1971-72 (hereinafter referred to as Contract agreement ). The contract agreement was subject to General Conditions of Contracts as contained in I. A. F. W. 2249. Under Clause 64 of the said General Conditions of Contracts, the petitioner/contractor was entitled to running payments at intervals of not less than one month. Such running payments were to be made up to the extent of 90% of the value of work executed and the remaining 10% could be retained by the Union of India as a reserve in case of works not exceeding Rs. 5 Lacs; 7% on the next Rs. 5 Lacs and 5% on the balance after the first Rs. 10 Lacs. In one of the provisos to said clause 64 it was provided that the contractor may be paid advance on account to the full value of work executed on the site on his furnishing Guarantee bond (s) from a Scheduled Bank for the amount of the retention money which should otherwise be recoverable from him under the contract, that the said bond shall be executed for a period and on a form as directed by the Accepting Officer and that the Contractor shall further arrange to extend the period of the Guarantee bond or shall furnish fresh Guarantee bond (s) of equal value so as to cover the period till after payment of the final bill. The petitioner in pursuance of the said cl. 64 was asked to furnish a guarantee bond in the sum of Rs. 4 Lakhs only in lieu of the reserve of the retention money applicable to the contract. The petitioner furnished the guarantee bond of National and Grindlays Bank Ltd. and a copy of the same has been placed on the record, as Annexure P-l to the petition. The guarantee bond was renewed from time to time and finally extended upto 30-4- 1976.
( 2 ) THE petitioner completed the entire work on July 14, 1975. The final bill was prepared by the respondents but the petitioner signed the bill only on October 10, 1975 and that also under protest. The final payment was made to the petitioner on April 1, 1976. In the meantime the petitioner raised certain claims/disputes in his letter dated March 12, 1976, copy Annexpure P-6 to the petition alleging that the disputes have arisen under the contract and requested the Engineer-in- Chief to appoint an arbitrator for adjudication of those disputes/claims in accordance with the agreement. The Engineer- in-Chief has not so far appointed any arbitrator.
( 3 ) ON April 22, 1976, the Chief Engineer addressed a letter to the Grindlays Bank Limited pointing out that the bank guarantee bond bearing No. 1204/75/16 dated February 27, 1975 for Rs. 4 Lacs was executed by the bank in favour of M/s. Rawla Construction Company and since certain recoveries against the contractor have arisen, called upon the said bank to afford credit of Rs. 4 Lacs to the revenue deposit of GE (East) Meerut in terms of para 2 of the Bank Guarantee Bond. A copy of this letter was endorsed to the petitioner. It is at that stage that the petitioner filed the present application under Section 20 of the Arbitration Act, 1940 praying to the Court that the arbitration agreement as contained in clause 70 of the General Conditions of Contracts attached to the contract agreement between the parties be filed in the Court and an order of reference in accordance with said Cl. 70 be made for adjudication of the disputes that have been raised by the petitioner. This is registered as Suit No. 300-A of 1976. Along with the petition under S. 20 of the said Act, the petitioner also moved an application, being I. A. 945 of 1976, under S. 41 read with IInd Schedule of the said Act praying that the Court may restrain the respondents from giving effect to their letter dated April 22, 1976 and from encashing the guarantee bond. I. A. 945 of 1976 came up for ex parte hearing before the Court on April 29, 1976 when the Court issued notice to t
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