Case Briefs
Truth and Youth (TAY) 2021. All rights reserved.

Andhra Civil Construction Co. Vs Board Of Trustees Of The Port Of Bombay


Author – Aditi Goel, 4th year student at Symbiosis Law School, NOIDA.


Citation –  1992 SCC OnLine Bom 36

Bench –  D Dhanuka

Original Copy – N/A

 

Issues in Question:

  • Whether the defendants have committed breach of contract by not permitting the plaintiffs to use explosives or alternative machinery for carrying out dredging work and not clearing the site for the said purpose?
  • Whether the defendants have wrongfully terminated the contract and are liable to pay damages to the plaintiffs?
  • Whether the defendants are entitled to invoke bank guarantee as per the facts and circumstances of the case or are liable to pay damages for wrongfully inviting bank guarantee?

Background of the Case: 

  • Messrs Andhra Civil Construction Company filed an application against the Board of Trustees of Port of Bombay under Section 20 of the Arbitration Act, 1940, as well as Section 41 of the Arbitration Act, 1940 for an injunction restraining the respondent from encashing the bank guarantee. 

Facts of the Case: 

  • In 1997, the respondent entered into an agreement for construction of quarry wall, ancillary works including dredging and reclamation and so on. The tender was accepted by the respondent and in 1980, a formal contract was formed. The petitioner, however, commenced the work in October 1979. The original time speculated for the work had expired and a PIL was filed in the present court to stop the project. 
  • In 1986, a well known architect made his award in his capacity as an Umpire directing the respondent to pay a sum of Rs. 25,67,000 to the petitioner within six months from the said award, and had to work on the payment of the said amount and complete the work within 15 months. The amount was paid and the period of 15 months also expired. 
  • The petitioner was required to conduct a blasting operation for carrying out the work. There were disputes and differences between the parties regarding the usage of explosives. This resulted in the work not being completed in time, which then led to suspension for another month.
  • The respondent disputed the claim of the petitioner for price hike. Petitioner invoked the clause in respect of some of their claims. The petitioner filed an Arbitration Suit in 1989 in the current court.
  • By an order passed by the present court in March 1989, the claims specified were referred to by an arbitrator who made his award in October 1990 directing the respondent to pay certain amounts which were not filed in the court. Later, the arbitrator expired. The respondent cancelled that contract with a letter dated November 1990.
  • In November 1987, in favor of the respondent, Canara Bank granted the bank guarantee.
  • By the guarantee of the bank, Canara Bank undertook to pay the defendant upon demand, without reference to the petitioner to not exceed the specified amount of Rs. 11,20,320/-.
  • The Bank’s guarantees have now been extended and kept until May 1992.
  • Sometime before submitting the Arbitration Suit, the respondent invoked this bank guarantee.
  • Petitioner invoked the arbitration clause. The respondent was prevented from encroaching upon such a guarantee by an ad interim decision granted in December 1990, on the condition that the petitioner renews it from time to time and maintains the same guarantee as was done. 

Judgement:

  • The court first relied on Clause 18 of the General Conditions of Contract which said that, if any dispute or difference of any kind whatsoever shall arise, it shall be referred to the arbitrator.
  • Court first considered the question of – whether the respondent wrongfully terminated the contract and is liable to pay damages to the petitioner? For this, the court said that it had no power to decide the merits of the claim, as this is very clearly covered in the arbitration clause mentioned above. However, the court directed the petitioner to quantify the amount of damages claimed, resulting from the termination of the contract within four weeks. The arbitrator has to then analyse and arbitrate the claims referred to in the other clauses of Paragraph 20A. 
  • Next, the court took up the contention of the petitioner – whether claim for damages alleged to have been suffered because of non-payment of the amount payable by the defendant? For this, the court said that the claim is meaningless, as the amount awarded to compensate the plaintiff will have the necessary amount of interest. Hence, it rejected this contention. 
  • Canara Bank cannot be compelled to submit to arbitration, as it is not a party to the agreement. Any claim against the bank can be referred to arbitration as the bank is not concerned with the agreement. Arbitrator is entitled to arbitrate the money claim arising between the respondent and the petitioner. Further, the court held that an application of interim injunction stopping the respondent from enforcing the bank guarantee was not maintainable under Section 41 of the Arbitration Act, 1940. 
  • For bank guarantees, the court referred to the case of Tarapore & Co. v V.O. Tractors Export, where it was held that: Both credit as well as bank guarantee have their own genesis in the original contract. A contract of bank guarantee undertaking payment of amount on demand constitutes an independent contract, a contract independent of and under qualified by the contract of sale. 
  • The Supreme Court in such cases has said that the respondent is not without a remedy and his real remedy is to sue the beneficiary of the guarantee for damages. 
  • Court concluded the judgement by passing the following order:
  1. Claim in Paragraph 20A, clauses (a) to (e), the defendants may encash the bank guarantee and claim for damages. 
  2. The arbitrator should arbitrate on clause (e) of Paragraph 20A. The arbitrator shall formulate an award within four months. 
  3. The application of interim injunction is not maintainable, and the said application is dismissed. 
  4. If an order is implemented today, he shall, within two weeks after the award is issued, file with the court the total of Rs. 5,60,160/- for collection of the amount of bank guarantee to be dealt with by this court.

Critical Analysis:

  • An arbitration clause is the one key to an effective and efficient remedy. These clauses settle disputes with confidentiality, cost efficiency, fast tracking issues and, most importantly, with the choice of the parties involved. It is up to the parties of an agreement to choose the arbitrator who will work their case and resolve issues. 
  • Bank guarantee is given by the lender as a surety that any and all liabilities will be covered in case the debtor fails to settle the said bet. 
  • The case in our hand is a combination of these two. It is essential to note that a case of arbitration does not include the bank when it is concerned with the said bank guarantee. The bank becomes a petitioner only then they file the petition themselves. It is the right of the parties to ask banks to honour their bank guarantee because it is mentioned in the contract, not solely on the reason that there is a dispute between the parties. 
  • Overall, a bank guarantee can be implemented or injuncted against, only when deemed necessary, and if the bank guarantee fulfils or does not fulfil the conditions laid down. 

Leave a Reply

Your email address will not be published. Required fields are marked *

Total
0
Share