Advani LawExperts Corner


Introduction


Many construction contracts require the contractor to enter into an agreement with a subcontractor for a specialised task of the contractor’s scope of work. The subcontractor can be either selected by the contractor or the employer of the contractor. When the subcontractor is selected and employed solely by the contractor the subcontractor is termed as a domestic subcontractor, however when the subcontractor is selected and employed by the employer, the subcontractor is then termed as a nominated subcontractor. Although the employer has selected the subcontractor, the contractor signs the agreement with the subcontractor and remains responsible for the works done. In simple words, a nominated subcontractor is selected by the employer and imposed on the contractor. However, whether the nominated subcontractors’ defaults and delays place a liability on the employer or the contractor has always been a point of contention.

 

Domestic subcontractors.– The contractor and the employer will shortlist certain number of potential subcontractors for the purpose of issuing the tender but will be finally selected and employed by the contractor. Therefore, the main contractor is solely responsible and liable for that subcontractor. Even though the employer is involved in the selection process of the subcontractor, the contractor is the one that chose the subcontractor for the specialised work and is responsible for the completion of the work without delay.

 

Nominated subcontractors.– The contractor and the employer will shortlist a certain number of potential subcontractors, but it is the employer that negotiates the terms of the contract, selects and employs the subcontractor. However, the contractor is responsible for the completion of the work, the liability of the subcontractor falls in the hands of the employer and the contractor has no cause of action against the employer in respect of any delay or default on the part of the nominated subcontractor.[1]


Development in law


  • Foreign jurisprudence

 

The concept of nominated subcontractors has been more nuanced in English law. As per various authorities, the contractor cannot bear liability of a subcontractor over which it has no control over.

  1. In Young & Marten Ltd. v. McManus Childs Ltd.[2], the Court of Appeal held that the contractor is not liable to the employer for any defects in design, quality of workmanship and materials provided by the subcontractor.
  2. In Gloucestershire County Council v. Richardson[3], the House of Lords held that the main contractor’s liability to the employer was limited to the extent of the nominated supplier’s liability to the main contractor by operation of the terms of the nominated subcontract.
  3. In North West Metropolitan Regional Hospital Board T.A. Bickerton & Son Ltd.[4], the Court held that in the absence of clear language, to make the contractor liable for a nominated subcontractor over whose appointment or activities he has little control is simply unjust.
  4. In Sinclair Woods of Winchester Ltd.,[5] the Court held that the main contractor has no liability for the design under the terms of the main contract, and that he cannot mysteriously acquire that liability merely because he is instructed to enter a subcontract with a nominated subcontractor who is going to do some design work on behalf of the employer.

 

Under JCT Standard Form of Building Contract, 1998, the contractor is entitled to claim an extension of time (EOT) but is not entitled to claim loss and expenses as confirmed in Norwest Holst Construction Ltd. v. Coop. Wholesale Society Ltd.[6] If the subcontractor is nominated, the contractor will be entitled to an extension of time since he had very less control over the subcontractor’s selection and therefore on the performance too (for example under Cl. 25.4.7 of the JCT, 1998). However, things have changed under the JCT 2005 Standard Form nomination which has done away with nomination. Instead the JCT has adopted the “the three persons” scheme which gives the employer the advantage of specifying a competent specialist subcontractor whilst leaving the risk of defective work and delay on the part of the subcontract with the contractor.[7]

Non-performance by the nominated subcontractor, does not entitle the contractor to additional time or expense, according to FIDIC’s Red Book Form of Contract, 1999. Under FIDIC 1999, the employer may appoint the subcontractor, once the subcontractor has accepted the nomination, the employer becomes responsible for the actions of the nominated subcontractor. Therefore, the contractor may not claim for any failures of the nominated subcontractor. The idea that the contractor is liable for the actions of nominated subcontractors is predicated on the fact that the main contractor has the option to object to the employer’s nomination at the outset. The contractor can make a legitimate objection by stating the reasons why the subcontractor chosen by the employer is unsuitable.

 

  • Indian jurisprudence

Indian law does not make a distinction between domestic subcontractors and nominated subcontractors. The Indian courts have adhered to the rules of privity of contract and have held that the relationship between the employer and the contractor is on one hand and the relationship between the contractor and the subcontractor is on the other hand keeping it distinct and separate as was held in Ircon International Ltd. v. Vinay Heavy Equipments[8]. In order to avoid legal battles on the issue of liability of the subcontractor, careful consideration must be given to drafting the terms and conditions of the subcontract.

 


Conclusion


The English law on nominated subcontractor seems to be more nuanced. The relationship between a subcontractor and the contractor depends upon the construction of the subcontract.[9] Much will be influenced by what the main contractor agreed to with the employer in the contract, and the contract’s provisions are always the launching point for determining the contractor’s liabilities. In the absence of any clause which expressly permits the contractor to claim time or cost, the risk of a nominated subcontractor lies with the contractor.[10]

 

Furthermore, because Indian courts have not dealt with the issue of nominated subcontractor defaults and delays, there is very little jurisprudence on the subject. However, based on the approach taken by English Courts, it is best to conclude that the most important factor in determining the contractor’s liability for defects and delays caused by the nominated subcontractor would be influenced by the selection process, negotiation of the terms of the subcontract, the employment and the subcontract.


† Hiroo Advani, Founder and Chairman, Advani Law.

†† Kanika Arora, Partner, Advani Law.

††† Surbhi Ahuja, Associate, Advani Law.

* Ria Garg, Associate, Advani Law.

[1]North West Metropolitan Regional Hospital Board v. T.A. Bickerton & Son Ltd., (1970) 1 WLR 607 at 615 : (1970) 1 ALL ER 1039.

[2](1969) 1 AC 454 : (1968) 3 WLR 630.

[3](1969) 1 AC 480.

[4](1970) 1 WLR 607 : (1970) 1 ALL ER 1039.

[5] 2006 EWHC 3003.

[6]1998 EWHC Technology 339

[7]JCT Standard Form of Building Contract, 2005, Cl. 3.8.

[8](2015) 13 SCC 680

[9]Calder v. H. Kitson Vickers & Sons (Engineers) Ltd., [1987] EWCA Civ J0730-9

[10]Percy Bilton Ltd. v. Greater London Council, (1982) 1 WLR 794.

Op EdsOP. ED.

I. INTRODUCTION

One of the most frequently raised objections during the course of arbitration proceedings pertain to the inadmissibility of unstamped documents. This objection can generally be raised before the arbitrator under Section 16[1] of the Arbitration and Conciliation Act, 1996 (“the Arbitration Act”) which permits the arbitral tribunal to rule on its own jurisdiction including on the validity of the arbitration agreement.

With the decision of the Supreme Court in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd.[2], such objections have become even more frequent, coupled with the fact that the Court now is obligated to impound and send a document containing an arbitration clause for adjudication to the stamping authorities at the stage of Section 11[3] of the Arbitration Act, prior to appointing an arbitrator, if the document is unstamped or insufficiently stamped.

However, whether a document containing an arbitration clause (or any document for that matter) requires stamping or not becomes a little more complicated while dealing with documents such as tender documents where a particular tender is awarded to a contractor/sub-contractor who is expected to perform a particular component of work in a large project. Examples of such contract may include contracts setting up an industrial plant or a power plant, where a contract is awarded to a particular contractor to install pipelines as per the project specifications or to install drainage lines in an under construction building as per the specifications in a building contract. Such types of contracts are commonly called purchase orders, work orders or “works contract”. The question that arises is whether all such contracts can be termed as works contracts and if so, how are they supposed to be taxed/stamped?

Supposing a contractor is awarded a job to install pipelines or to carry out electrification in a major project with or without purchase and supply of any goods or material for the same, then can this type of job be termed as a works contract and is it thus required to be stamped? Are the supply and sale of goods in any form an essential ingredient of a works contract? And what are the tax implications on such work orders when it comes to stamping?

The purpose of this article is to examine these issues by examining the evolution of the law relating to works contracts and then ultimately examining the issue of levy of stamp duty on works contract under the Maharashtra Stamp Act, 1958[4] (“the Maharashtra Stamp Act” or “the said Act”). This article is divided into four parts. In this part, namely, Part I, the author has given his introduction to the article. In Part II, the author will examine the nature, meaning and scope of works contracts through various Supreme Court decisions. Part III of the article will examine when stamp duty can be levied on works contracts under the Maharashtra Stamp Act and in Part IV the author will conclude with concluding comments.

II. NATURE, SCOPE AND MEANING OF WORKS CONTRACTS

1.The most recent decision of the Supreme Court that authoritatively deals with this issue was handed out by the five-Judges Constitution Bench in Kone Elevators India (P) Ltd. State of Tamil Nadu[5] (Kone) delivered prior to the introduction of the GST regime. A reference was made to the Constitution Bench for its consideration on whether manufacture, supply and installation of lifts is to be treated as “sale” or “works contract”.[6]

2. The issue before the Constitution Bench was whether a contract for manufacture, supply and installation of lifts in a building is a “contract for sale of goods” or a “work contract”.[7] While in case of a contract for sale of goods, the State Legislature had the power to levy sales tax or Value Added Tax (VAT) on the entire sale consideration, in case of works contracts, “consideration payable or paid for the labour or service element would have to be excluded from the total consideration received” and sales tax or VAT would be charged on the balance amount.[8]

3. Dipak Misra, J. who delivered the majority judgment analysed the law laid down by the Supreme Court in two phases: (1) prior to the insertion of clause  (29-A) in Article 366 of the Constitution of India, 1950 (“the Constitution”) by the 46th Amendment in 1982 [Article 366(29-A)(b)][9]; and (2) after the 46th[10]

4. One of the decisions referred to in the majority judgment in Kone[11] was delivered in 1958 by a Constitution Bench of the Supreme Court in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.[12] (Dunkerley 1) that set the base of future decisions on the issue. In Dunkerly 1, the issue before the Court concerned a levy faced by an assessee in respect of goods sold in relation to a works contract (building contract) under the Madras General Sales Tax Act, 1939.[13] The Bench in Dunkerley 1 held that in a building contract which was one entire and indivisible contract, there was no sale of goods and it was not within the competence of the Provincial Legislature to impose tax on supply of materials used in such a contract.[14] The other decisions also referred to by the majority included decisions delivered in Carl Still GmbH v. State of Bihar,[15] State of Madras v. Richarson & Cruddas Ltd.,[16] State of Punjab v. Associated Hotels of India Ltd.[17]. All these judgments held that a works contract could not have been liable to be taxed under the State Sales Tax Laws and whether the contract was a works contract or a contract for sale of goods was dependent on the dominant intention as reflected from the terms and conditions of the contract.[18] The Court in Kone[19] observed that as the aforesaid decisions of the Supreme Court were delivered prior to the 46th Amendment, the State Legislatures did not have legislative competence to levy sales tax, Entry 54 List II of the Seventh Schedule to the Constitution on an indivisible contract of sales of goods which had component of labour and service and “it would not be possible for the assessing officer to dissect an indivisible contract to distinguish the sale of goods constituent and labour and service constituent”.[20]

5. To undo the aforesaid decisions, in 1983, Parliament amended the Constitution by the 46th Amendment by inserting clause (29-A) in the definition article of the Constitution, namely, Article 366. As per Article 366(29-A)(b) “tax on the sale or purchase of goods” includes “a tax on the transfer of property, in goods (whether as goods or in some other form) involved in the execution of a works contract” and “such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of goods by the person to whom such transfer, delivery or supply is made.”[21] The constitutional amendment was challenged before the Supreme Court who rejected the challenge in Builders’ Assn. of India v. Union of India (“Builders’ Assn.”).[22]

6. In Builders’ Assn. the Court observed that the object of clause (29-A) was to enlarge the scope of tax on sale and purchase of goods to include transfer, delivery or supply of goods.[23] The Court also opined that it was “open to States to segregate works contracts into two separate components or contracts by legal fiction, namely, contract for sale of goods involved in the works contract and for supply of labour and service.”[24] However, all such transfers, deliveries and supplies of goods are subject to the restrictions set out in clauses (1) to (3) of Article 286 of the Constitution[25] [clause (3) has since been omitted by the 101st Amendment to the Constitution[26] in September 2016]. This was once again reiterated by the Supreme Court in Gannon Dunkerley and Co. v. State of Rajasthan[27] (Gannon Dunkerley 2). In Gannon Dunkerley 2, the Court while referring to Builders’ Assn.[28] stated that as a result of the 46th Amendment, a single and indivisible contract has been altered by legal fiction into a contract which is divisible into one for sale of goods and the other for supply of labour and services thereby bringing such an indivisible contract on par with a contract containing two separate agreements.[29]

7. The majority in Kone[30] thereafter referred to the decision of the three-Judges Bench of the Supreme Court in Larsen and Toubro v. State of Karnataka[31] (“Larsen and Toubro”) that has explained the expression “whether as goods or in some other form”[32] used in parenthesis in clause 29-A(b). In Larsen and Toubro, the Court referred to the term “goods” used in Article 366(12) and held that the term is inclusive, has a broader meaning than merchandise and includes all materials, commodities and articles including chattels and movables. The Court then observed that “goods in some other form” in Article 366(29-A)(b) would thus mean “goods which have ceased to be chattels or movables or merchandise and become attached or embedded to earth. In other words, goods which have by incorporation become part of immovable property are deemed as goods.”[33] In Larsen and Toubro[34], the Court further held that the dominant intention of the contract was immaterial and regardless of the dominant intention of the contract, States had the power to levy sales tax on the materials used in a contract.[35]

8. Eventually, the majority in Kone[36] summarised the characteristics and scope of works contracts after the 46th Amendment which are:

“(i) the works contract is an indivisible contract but, by legal fiction, is divided into two parts, one for sale of goods, and the other for supply of labour and services;

(ii) the concept of “dominant nature test” or, for that matter, the “degree of intention test” or “overwhelming component test” for treating a contract as a works contract is not applicable;

(iii) the term “works contract” as used in clause (29-A) of Article 366 of the Constitution takes in its sweep all genre of works contract and is not to be narrowly construed to cover one species of contract to provide for labour and service alone; and

(iv) once the characteristics of works contract are met with in a contract entered into between the parties, any additional obligation incorporated in the contract would not change the nature of the contract.”[37]

III. WHEN CAN STAMP DUTY BE LEVIED ON WORKS CONTACT UNDER THE MAHARASHTRA STAMP ACT?

 1. In the Maharashtra Stamp Act, under Section 30(f-a)[38] of the Act (that was inserted by an amendment in 2015[39]), the stamp duty for instruments of works contract as provided in Article 63 of Schedule I has to be paid by the person receiving the contract. Works Contract under Article 63 would mean, “a contract for works and labour or services involving transfer of property in goods (whether as goods or in some other form) in its execution and includes a sub-contract.”[40] Article 63 of the Act is couched in far broader terms than Article 366(29-A)(b) of the Constitution. It not only includes sub-contracts but also “labour or services involving transfer of property”. Close examination of Article 63 would show that stamp duty has to be paid on contracts for (i) both works and labour or services (ii) involving transfer of property (iii) in goods whether as goods or in some other form. These three conditions have to be satisfied in order for stamp duty to be levied.

2. Strictly for the purpose of this article, in order to analyse the issue further, it would be necessary to examine the meaning of certain words given in other statutes. While, it is true that the author would be committing a cardinal sin of statutory interpretation by referring to one statute to ascertain the meaning of an expression in another statute which is not pari materia to the former (see Bangalore Turf Club Ltd. v. Regional Director, Employees’ State Insurance Corp.[41]), the author is attempting this exercise purely for the academic purposes of this article and not otherwise. This is the only caveat.

3. The Maharashtra Stamp Act does not define “Works Contract”. However, the expression is defined under Section 2(119) of the Central Goods and Services Tax Act, 2017[42] (“the GST Act”) which reads thus,

works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract;”

(emphasis supplied)

4. The commonality in both Article 63 of the Maharashtra Stamp Act and Section 2(119) of the GST Act is the expression “transfer of property in goods”.

5.Black’s Law Dictionary[43], defines the term “transfer” as under,

“TRANSFER, v. To convey or remove from one place, person, etc., to another; pass or hand over from one to another; specif., to make over the possession or control of (as, to transfer a title to land); sell or give.

TRANSFER, n. An act of the parties, or of the law, by which the title to property is conveyed from one person to another.”

(emphasis supplied)

6. “Transfer of property” though not defined in the Maharashtra Stamp Act or the GST Act, is defined in Section 5 of the Transfer of Property Act, 1882 which reads thus,

“ In the following sections “transfer of property” means an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself, [or to himself] and one or more other living persons; and “to transfer property” is to perform such act.

In this section, “living person” includes a company or association or body of individuals, whether incorporated or not, but nothing herein contained shall affect any law for the time being in force relating to transfer of property to or by companies, associations or bodies of individuals.”

(emphasis supplied)

 7. Therefore, from what is mentioned above, it is quite clear that for transfer to take place, there must be “conveyance”. The term conveyance is defined in Section 2(g) of the Maharashtra Stamp Act in the following manner:

(g) “ Conveyance ” includes,—

(i) a conveyance on sale,

(ii) every instrument,

(iii) every decree or final order of any civil court,

(iv) every order made by the High Court under Section 394 of the Companies Act, 1956 or every order made by the National Company Law Tribunal under Sections 230 to 234 of the Companies Act, 2013 or every confirmation issued by the Central Government under sub-section (3) of Section 233 of the Companies Act, 2013, in respect of the amalgamation, merger, demerger, arrangement or reconstruction of companies (including subsidiaries of parent company) ; and every order of  Reserve Bank of India under Section 44-A of the Banking Regulation Act, 1949 in respect of amalgamation or reconstruction of banking companies;  by which property, whether moveable or immoveable, or any estate or interest in any property is transferred to, or vested in, any other person, inter vivos and which is not otherwise specifically provided for by Schedule I ;

Explanation.—An instrument whereby a co-owner of any property transfers his interest to another co-owner of the property and which is not an instrument of partition, shall, for the purposes of this clause, be deemed to be an instrument by which property is transferred inter vivos ;

8. Conveyance is also defined under Section 2(10) of the Stamp Act, 1899:

“conveyance includes a conveyance on sale and every instrument by which property, whether moveable or immovable, is transferred inter vivos and which is not otherwise specifically provided for by schedule I” (emphasis supplied)

9. Both the definitions in the Maharashtra Stamp Act as well as the Stamp Act, 1899 are inclusive and not exhaustive. However, the root word “convey” is not defined in either of the Acts. Assistance may once again be made to Black’s Law Dictionary[44] which defines convey as,

“To pass or transmit the property from one another; to transfer property or the title to property by deed or instrument under seal. Used popularly in sense “assign,” “sale,” or “transfer.” ”

(emphasis supplied)

10. From what is stated above, it can be concluded that for the purpose of Article 63 of the Maharashtra Stamp Act,

a) a Works Contract would be a contract “for works and labour or services” and not only for works “or” only for labour or services. Both work and labour or work and services need to be included in the contract.

b) a Works Contract would attract stamp duty if the contract involves a transfer of property in goods.

and

c) the transfer of property in goods takes place through conveyance which involves a transfer of title in goods.

11. Therefore, in the author’s view, for the purpose of the Maharashtra Stamp Act, stamp duty can be levied under Article 63 only when a contract for works and labour or services involves a transfer of property and not otherwise. It will not apply for those contracts where solely labour services or other such services are availed.

12. To illustrate, supposing a contractor for a steal fabrication project hires a sub-contractor to lay pipelines for which the contractor will provide all material and the sub-contractor only has to lay and assemble the pipelines, then such a contract would not be a works contract as the sub-contractor does not transfer any property in goods. At the most, such a contract would be a Hiring Agreement or Agreement of Service under Article 34, Schedule I to the Maharashtra Stamp Act for which stamp duty of One Hundred Rupees would be levied under Article 5(B)[45] of the said Act. However, if in a given contract, responsibility is assigned to the sub-contractor to purchase the pipelines and material for the same and then lay such pipelines, this would certainly be a case which includes “labour or services involving transfer of property in goods, whether as goods or in some other form” and therefore the provisions of Article 63 would certainly be attracted.

IV. CONCLUDING COMMENTS

While the Supreme Court has eliminated much of the confusion surrounding the meaning of work orders, it would be advisable for the State Legislature to amend Article 63 of the Maharashtra Stamp Act with an explanation in the article clarifying that contracts solely involving labour or services that do not include transfer of property in goods are not works contract for the purpose of Article 63. Such an explanation/clarification would go a long way in minimising legal challenges to contracts on the grounds of insufficiency or non-payment of stamp duty.

*****************************

* The Author is a practicing Advocate at  Bombay High Court and  National Company Law Tribunal, Mumbai

[1] Section 16. Competence of arbitral tribunal to rule on its jurisdiction

[2] (2019) 9 SCC 209

[3] Section 11. Appointment of Arbitrators

[4] Maharashtra Stamp Act, 1958

[5] (2014) 7 SCC 1.

The majority judgment was delivered by Dipak Misra, J. for himself, R.M. Lodha C.J., A.K. Patnaik and S.J. Mukhopadhaya, JJ. The dissenting opinion was delivered by F.M. Ibrahim Kalifulla, J.

[6] Ibid p. 14 para 2. The order of reference is dated 13th February, 2008 in Kone Elevator (I)(P) Ltd. v. State of T.N., (2010) 14 SCC 788.

[7] Ibid, p. 14 para 3

[8] Ibid

[9] Article 366 (29-A) ―tax on the sale or purchase of goods includes—

(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of goods by the person to whom such transfer, delivery or supply is made

[10] (2014) 7 SCC 1 at p. 21 para 18.

[11] (2014) 7 SCC 1

[12] AIR 1958 SC 560

[13] Ibid

[14] Ibid

[15] AIR 1961 SC 1615

[16] (1968) 21 STC 245 (SC)

[17] (1972) 1 SCC 472

[18] (2014) 7 SCC 1 at pp. 25, 26 para 31

[19] (2014) 7 SCC 1

[20] Ibid

[21] Supra Note 9.

[22] (1989) 2 SCC 645

[23] Ibid pp. 669-670 para 32

[24]  (2014) 7 SCC 1 at p. 27 para 34

[25] 286. Restrictions as to imposition of tax on the sale or purchase of goods.—

(1) No law of a State shall impose, or authorise the imposition of, a tax on the supply of goods or of services or both, where such supply takes place—

(a) outside the State; or

(b) in the course of the import of the goods or services or both into, or export of the goods or services or both out of, the territory of India.

(2) Parliament may by law formulate principles for determining when a supply of goods or of services or both in any of the ways mentioned in clause (1).

[26] Constitution (One Hundred and First Amendment) Act, 2016

[27] (1993) 1 SCC 364

[28] (1989) 2 SCC 645 

[29] (1993) 1 SCC 364  at p. 388 para 35

[30] (2014) 7 SCC 1

[31] (2014) 1 SCC 708

[32] Supra note 9.

[33] (1989) 2 SCC 645  at pp 744-745, para 56

[34] (2014) 1 SCC 708

[35] (1989) 2 SCC 645  at p. 746, para 60

[36] (2014) 7 SCC 1

[37] (2014) 7 SCC 1 at  p. 32 para 46

[38] Section 30. Duties by whom payable. —In the absence of an agreement to the contrary, the expense of providing the proper stamp shall be borne,—

(f-a) in case of instruments of works contract as provided in Article 63 of Schedule I, by the person receiving the contract

[39] Maharashtra Stamp (Amendment) Act, 2015, Maharashtra Act No. XX of 2015 dated 24th April, 2015

[40] 63. Works contract, that is to say, a contract for works and labour or services involving transfer of property in goods (whether as goods or in some other form) in its execution and includes a sub-contract,—

(a) where the amount or value set forth in such contract does not exceed rupees ten lakh – Five Hundred Rupees;

(b) where it exceed rupees ten lakh -five hundred rupees plus 0.1 per cent of the amount above rupees ten lakh subject to maximum of rupees twenty-five lakhs.

[41] (2014) 9 SCC 657

[42] Central Goods and Services Tax Act, 2017 

[43] Black’s Law Dictionary, Revised Fourth Edn., p. 1669

[44] Ibid, p. 402

[45] 5. Agreement or its records or Memorandum of an Agreement—

(B) if not otherwise provided for – One Hundred Rupees

Case BriefsHigh Courts

Delhi High Court: While deciding a crucial matter relating to work contracts and  bank guarantee the Division Bench comprising of Sanjeev Sachdeva and B.D. Ahmed JJ., observed that invocation of a bank guarantee cannot be restrained unless fraud, irretrievable injury/injustice or special equities is proved. In the present case, the petitioner had issued a letter of intent to the respondent no. 1 for construction of a power project. The respondent no. 1 in response gave a bank guarantee. The petitioner had invoked the bank guarantee alleging the respondent no. 1 failed to act according to terms of the contract. The Single Judge had restrained encashment of this bank guarantee under Section 9 of the Arbitration and Conciliation Act, 1996 as per a plea filed by the respondent no. 1. The order of restraint was challenged in front the High Court in view of the settled legal principles governing bank guarantees.

The Court observed ‘The petition under section 9 was filed after the Bank Guarantee was invoked and as such, the contract of guarantee had come into operation. The Respondent no. 1 in the petition under Section 9 of the Act has not even raised a plea of fraud leave alone aver facts to establish the plea of fraud. There is not even the plea of “irretrievable injury” or “irretrievable injustice”. The respondent no. 1 has not even pleaded “special equities”. The respondent no. 1 apart from raising disputes on merits has merely stated that “the petitioner would be highly prejudiced if the Bank Guarantee is invoked and the properties are alienated as the petitioner has a prima facie case and is likely to succeed in the Arbitration” and “that the petitioner would in fact, suffer irreparable loss, in case the reliefs prayed for are not granted”. Since none of the three mandatory pleas, fraud, irretrievable injury/injustice or special equities has been pleaded, the respondent no. 1 is not entitled to any order of restraint from invocation of bank guarantee. The unconditional bank guarantee has been provided in the course of commercial dealings. The appellant is entitled to realize the bank guarantee in terms thereof irrespective of any pending dispute. The respondent no. 2/bank is bound to honour the bank guarantee as per its terms irrespective of any dispute raised by its customer/the respondent no. 1. Otherwise, the very purpose of giving such a bank guarantee would be defeated. The existence of any dispute between the appellant and respondent no. 1 with regard to the underlying contract cannot be a ground for issuing an injunction to restrain the enforcement of the bank guarantee.’ [Zillion Infra Projects (P) Ltd. v. Fab-Tech Works & Constructions Pvt. Ltd.,   2015 SCC OnLine Del 13163decided on 2-11-2015]