Recently, the Division Bench (DB) of High Court of Delhi in “DLF Ltd. v. Leighton India Contractors (P) Ltd.[1]”, determined that the Court while exercising the jurisdiction under Section 9[2] of the Arbitration and Conciliation Act, 1996 (Arbitration Act), shall not embark into an assessment of material on record to determine who was at fault; whether the bank guarantee (BG) have been encashed in terms of the agreement or illegally and unlawfully and granting interim relief of the nature of a final relief of refunding or restitution of BG and claim.
Background
That Leighton India Contractors Private Ltd. (Leighton) and DLF entered into the contract agreement dated 19-7-2013 (contract), for the development of DLF residential project “The Camellias” in Gurugram. As provided in the contract, Leighton executed six BGs i.e., two for retention money guarantee for worth of INR 78,18,77,583 and four towards performance security guarantee for worth of INR 1,43,87,22,708. On arising of the dispute between the parties, DLF encashed the BGs furnished by Leighton. Thus, Leighton was forced to approach the Court under Section 9 of the Arbitration Act, seeking interim relief to injunct DLF from invoking the submitted BGs or in alternative, seeks restoration of the BGs enchased by DLF.
Single Bench order under Section 9 of the Arbitration Act
That on perusing the exchange of communication between DLF & Leighton, the Court opined that no notice of invocation of bank guarantee or a letter of termination of contract, is issued to the Leighton, before encashment of BGs. In fact, the BGs were invoked before Leighton could have approached the Court. That Leighton was not afforded with the slightest opportunity to avail of its legal remedy in law, against the invocation of the BGs by DLF. Thus, in the opinion of the Court, the manner in which the BGs, have been invoked, is not completely bona fide.
That with the aforesaid observation, the Court passed an order granting interim relief to Leighton, wherein, DLF was directed that the amount credited by the bank to DLF from encashment of BGs, the DLF shall create a fixed deposit for a sum of Rs 1,43,87,22,708 and place the same in an interest-bearing fixed deposit on auto renewal mode. That the same shall be made out in the name of the Registrar General of Delhi Court, until further order of the Court.
Division Bench
The order of Single Bench was challenged in appeal under Section 37[3] of the Arbitration Act. As far as the issue of invocation of BG is concerned, the Court cited several binding precedents of Supreme Court, to say that BG is an independent contract distinct from the main contract. If terms of BG prescribed that it can be invoked unconditionally, being independent from the main contract, bank is bound to honour the demand and transmit the value of the unconditional BG, so invoked by the beneficiary, into the account of such beneficiary account, except if it involves the element of “egregious fraud or special equity”. That the beneficiary, is within its right to invoke the unconditional BG at its instance and whether if it is done rightly or wrongly, is subjected to the decision of the Arbitral Tribunal, a forum which parties have mutually agreed for resolution of their dispute.
(i) Governing principles of Civil Procedure Code is binding on arbitration court
That the Single Bench, directed DLF to deposit a sum of INR 1,43,87,22,708 received from encashment of performance BGs, into a fixed deposit on auto renewal mode, in the name of Registrar General of Delhi High Court. DLF argued that the interim relief granted to Leighton, was analogous to the relief provided under Order 38 Rule 54 CPC “Where defendant may be called upon to furnish security for production of property”, even though the Leighton failed to disclose any grounds that warrants granting a relief under Order 38 Rule 5 CPC.
To adjudicate upon this issue, the Court cited the judgment of Delhi Hight Court in C.V. Rao v. Strategic Port Investments KPC Ltd.5 wherein it was held that while exercising the jurisdiction under Section 9 of the Arbitration Act, the Court cannot ignore that underlying principles which governs the analogous powers conferred under Order 39 Rules 1 and 26 and Order 38 Rule 5 CPC. The power of Section 9 court is to examine the existence of valid arbitration agreement and grant interim relief pertaining to the matters specified under Sections 9(ii)(a) to (e) of the Arbitration Act, for limited purpose of preservation of the property, which is subject-matter of the dispute, till constitution of the Arbitral Tribunal. That the order for specific performance of the contract, exceeds the jurisdiction of the Court under Section 9 of the Arbitration Act.
To further reiterate the governing principle for granting injunction under civil law, the Court referred to the judgment of Supreme Court in Adhunik Steels Ltd. v. Orissa Manganese and Minerals (P) Ltd.7, wherein it was held that grant of interim injunction or mandatory injunction is governed by the settled legal principles, which is equally binding on the court exercising its power under Section 9 of the Arbitration Act. Thus, it would not be possible to keep out the concept of “balance of convenience”, “prima facie case”, “irreparable injury” and the concept of “just and convenient”, while passing interim measures under Section 9 of the Arbitration Act.
That the Single Bench passed an interim order granting relief analogous to Order 38 Rule 5 CPC, on being satisfied of existence of specific equity, without considering that Leighton, never laid out the necessary grounds to satisfy the use of power provided under Order 38 Rule 5 CPC. In the absence of any averments or pleas taken, that satisfy the requirements of Order 38 Rule 5 CPC, no case for an order of attachment before judgment or for furnishing of security was made out. The orders of the learned Single Judge directing furnishing of security had to be founded on Order 38 Rule 5 CPC in the light of the view taken by the Supreme Court and a Division Bench of this Court, which it is not.
(ii) Jurisdiction of Court under Section 9 of the Arbitration Act
That Single Judge, extensively dealt with dispute lies between the parties, ascertaining their rights and liabilities and interpreting the terms of the contract. The Division Bench, held that such a venture by the Court under Section 9 of the Arbitration Act, are not allowed. That dealing with the question of illegality and who is at fault for encashment of BGs, are to be referred and dealt in the arbitrational proceeds by the Arbitration Tribunal. That, in the interest of fair play, Section 9 court should not embark into the assessment of material on record to determine who was at fault and whether the BGs are encashed in terms of the clauses of contract or illegally or unlawfully and further grant a relief of the nature of a final relief of refunding or restituting, as claimed by Leighton.
The Court relied upon the judgment of Delhi High Court in National Highways Authority of India v. Bhubaneswar Expressway (P) Ltd.8 wherein it was opined that Court exercising jurisdiction under Section 9 of the Arbitration Act, if allowed to adjudicate whether there is any legal merit in the said grounds or not, it would mean to adjudicate the dispute, which the parties have agreed to be adjudicated by arbitration, which would leave nothing for the Arbitral Tribunal to decide. Furthermore, it is a common trend that once there is a judicial order on the merit of the dispute relating to interim relief, then the Arbitral Tribunal will hesitate from deciding contrary to the findings returned by the Court on interpretation of the contract.
To ascertain the power of Section 9 court in matter of invocation of BG, the Court relied upon the judgment of Delhi High Court in CRSC Research and Design Institute Group Co. Ltd. v. Dedicated Freight Corridor Corporation of India Ltd.9, wherein it was held that parties seeking interim measure of interference with unequivocal, absolute and unconditional BGs, is required to interpret the clauses of the contract, to form a prima facie opinion that whether the beneficiary involved BGs rightly or wrongly. Such an exercise involves substantive proceedings, to be embarked upon for recovery of money of the BGs, if averred to have wrongly taken by the beneficiary, which falls outside the jurisdiction of court under Section 9 of the Arbitration Act.
That, it would be beyond jurisdiction to direct restitution in proceedings under Section 9 of the Arbitration Act as restitution by its very nature involves a final determination of rival contentions even if it were to appear just and proper to do so. Substantive questions have to be left to be decided in arbitration, the mode of dispute resolution chosen by the parties.
Conclusion
That by setting aside the order of Single Bench, the Division Bench reasserted that the legal principal instrumental for granting a relief available under Civil Procedure Code, 190810 are equally applicable on the court exercising its power under Section 9 of the Arbitration Act, unless exclusion is express or implied. The courts should avoid grating a relief at the interim stage, if party fail to showcase the existing necessary grounds of “balance of convenience”, “prima facie case”, “irreparable injury” and the concept of “just and convenient”, in their favour. Moreover, granting an interim relief, in the nature of the final relief, would not only imply the fear of judicial intervention in the jurisdiction of Arbitral Tribunal, but would defeat the purpose of arbitration between the parties.
Courts under Section 9 of the Arbitration Act should refrain from deciding upon the issues related to rights and liabilities of the parties to the contract; illegality of action, entitlement, liability, damages, etc., as that would amount to sit upon the jurisdiction of the Arbitral Tribunal, who then have nothing left to decided upon. Certainly, an observation can be made by the Court, to justify the fair exercise of judicial discretion of the Court, to grant interim measure at the initial stage, till commencement of the arbitration proceedings. However, the observation to that effect, be limited to the extent of preservation of the property, which is subject-matter of the dispute, till constitution of the Arbitral Tribunal.
† Practicing Advocate of the Delhi High Court and Supreme Court of India.
[2] <http://www.scconline.com/DocumentLink/8p216XFz>.
[3] <http://www.scconline.com/DocumentLink/0Vi7sQsH>.
4 <http://www.scconline.com/DocumentLink/B63wAYb4>.