04 Jan 2121

Bank guarantee furnished to secure a deposit cannot be used to make recovery of an amount that is subject matter of a different dispute - Delhi High Court

Case : National Highways Authority of India v. Punjab National Bank & Anr O. M. P. (COMM) 442/2020 & I. A. 6166/2020

Court :

Bench : Justice C. Hari Shankar

Decided on : 04 Jan 2121

Relevant Statutes

Section 34 of the Arbitration and Conciliation Act, 1996

Brief Facts and Procedural History

1. National Highways Authority of India invited bids, for construction, operation and maintenance of the Jetpur-Somnath section of NH-8D, spanning 127 km, in Gujarat, on a Design, Build, Finance, Operate and Transfer (DBFOT) basis. The bid of a consortium was accepted, and a letter of award was issued in favour of the said consortium. The consortium, subsequently, incorporated a Special Purpose Vehicle, i.e. Jetpur Somnath Tollways Pvt. Ltd. (Respondent No 2), for executing the contract.

2. A Concession Agreement followed between Jetpur Somnath Tollways Pvt. Ltd and National Highways Authority of India. Article 3.1 of the Concession Agreement granted the exclusive right, licence and authority to construct, operate and maintain the Project Highway to Jetpur Somnath Tollways Pvt. Ltd, for 30 years from the Appointed Date i.e., 31 March 2012.

3. The Project was financed by a consortium of lenders, of which Punjab National Bank (Respondent No. 1) was the lead lender. Accordingly, on 16 August 2011, a tripartite Escrow Agreement was executed among the National Highways Authority of India, Jetpur Somnath Tollways Pvt. Ltd and Punjab National Bank.

4. The dispute arose over delayed construction and due payment. it is alleged, constituted “Concessionaire Default”, within the meaning of Clause 37.1.1(k) of the Concession Agreement, which covered “breach of any of the Project Agreements by Jetpur Somnath Tollways Pvt. Ltd”, which “caused a Material Adverse Effect”

5. On failure, of Jetpur Somnath Tollways Pvt. Ltd to remedy the defaults, and on the part of the Senior Lenders led by Punjab National Bank, to substitute Jetpur Somnath Tollways Pvt. Ltd, National Highways Authority of India terminated the Concession Agreement.

6. On 10 August 2016, the National Highways Authority of India evinced its intention to terminate the project. As per Clause 37.1.3 of the Concession Agreement, a copy of the aforesaid Termination Notice was also sent to the consortium of Senior Lenders to give them an opportunity to substitute Jetpur Somnath Tollways Pvt. Ltd with another Concessionaire. However, the Senior Lenders, including Punjab National Bank, did not take any step to substitute Jetpur Somnath Tollways Pvt. Ltd.

7. On failure of Jetpur Somnath Tollways Pvt. Ltd, to remedy the aforesaid defaults, and on the part of the Senior Lenders, led by Punjab National Bank, to substitute Jetpur Somnath Tollways Pvt. Ltd, National Highways Authority of India terminated the Concession Agreement. Jetpur Somnath Tollways Pvt. Ltd responded with a counter-Termination Notice, also seeking to terminate the Concession Agreement along with various allegations against the National Highways Authority of India.

8. Punjab National Bank and Jetpur Somnath Tollways Pvt. Ltd, however, maintained that the Termination Payment, by the National Highways Authority of India, in the Escrow Account, was not in accordance with Clause 37.3 of the Concession Agreement. The petition before the Single Judge of the High Court. The matter travelled to the Supreme Court, which directed the arbitral proceedings to proceed uninfluenced by the findings of the Single Judge.

9. The learned Single Judge held that, irrespective of whether the termination of the Concession Agreement was on account of a default of National Highways Authority of India, or of Jetpur Somnath Tollways Pvt. Ltd (a matter to be adjudicated in the arbitral proceedings) National Highways Authority of India was bound to pay at least 90% of the Debt Due into the Escrow Account by way of Termination Payment. National Highways Authority of India was not entitled to adjust, from the said payment, any amount allegedly due to it, and that it could only recover any such amount by raising a claim in the arbitral proceedings.

10. As an amount of ₹222.03 Crores was already deposited by the National Highways Authority of India in the Escrow Account, the learned Single Judge disposed of the petitions with the following directions to the National Highways Authority of India, Punjab National Bank and Jetpur Somnath Tollways Pvt. Ltd:

11. Jetpur Somnath Tollways Pvt. Ltd shall furnish an unconditional and irrevocable cap bank Guarantee, in favour of the National Highways Authority of India, and pay to National Highways Authority of India an amount not exceeding ₹348.604 Crores [i.e. 90% of 640.86 = 576.774 (minus) 222.03 {already paid} (minus) 6.14 {agreed to be payable by National Highways Authority of India} = 348.604].

12. On deposit of the Bank Guarantee, the National Highways Authority of India shall deposit in the Escrow Account the sum of Rs. 354.744 Crores (i.e. 348.604 + 6.14).

13. The encashment of the Bank Guarantee shall be subject to the final award of the Arbitral Tribunal.

14. Jetpur Somnath Tollways Pvt. Ltd shall keep the bank guarantee alive for unto a period of four months after the making of the final award by the Arbitration Tribunal

15. Parties shall comply with the provisions of Section 9(2) of the Arbitration and Conciliation Act, 1996.

16. National Highways Authority of India unsuccessfully challenged the aforesaid judgement of the learned Single Judge, before the Division Bench of the High Court. National Highways Authority of India carried the matter, further, to the Supreme Court by way of SLP which was disposed of with the following directions: pg 16

17. National Highways Authority of India deposited ₹341,63,19,200/- in the Escrow Account, under compliance with the directions of the Supreme Court.

The impugned Arbitral Proceedings

18. During the pendency of the matter before the Division Bench of the High Court, Jetpur Somnath Tollways Pvt. Ltd invoked arbitration, for the resolution of its disputes with the National Highways Authority of India arising from the Concession Agreement, under Clause 44.3 of the General Conditions of Contract. The arbitral proceedings were pending before a learned Arbitral Tribunal.

19. The arbitral proceedings, from which the present petition emanated, were initiated by Punjab National Bank, under Clause 10.1 of the Escrow Agreement and Clause 8.1 of the Substitution Agreement. Punjab National Bank was, therefore, the claimant before the learned Arbitral Tribunal, whereas the National Highways Authority of India and Jetpur Somnath Tollways Pvt. Ltd were Respondents No. 1 and 2. [Present impugned arbitration]

20. During the pendency of the present arbitral proceedings, Jetpur Somnath Tollways Pvt. Ltd paid, to Punjab National Bank, the balance of 10% of the Debt Due and submitted a Bank Guarantee to the National Highways Authority of India for ₹354.74 Crores. The said Bank Guarantee stood extended by Jetpur Somnath Tollways Pvt. Ltd. The learned Arbitral Tribunal directed the National Highways Authority of India to return the Bank Guarantee to Jetpur Somnath Tollways Pvt. Ltd.

21. The National Highways Authority of India (National Highways Authority of India) challenged the Award of the learned Arbitral Tribunal dated 24 March 2020 under Section 34 of the Arbitration and Conciliation Act, 1996. The Bank Guarantee constitutes the fulcrum of the controversy in the present proceedings.

Issue of the Case

How should the directions of the judgement of the learned Single Judge specifically the expression “final award of (or by) the Arbitral Tribunal” be interpreted?

The Observations of the Court

1. The reliefs claimed by Punjab National Bank in the impugned arbitral proceedings were conditional on the outcome of the first arbitral proceedings. Punjab National Bank sought to secure its entitlement to payment, in the event of Jetpur Somnath Tollways Pvt. Ltd succeeding in the first arbitral proceedings. As against this, the National Highways Authority of India prayed that Punjab National Bank is held to be disentitled to any relief, that its claims be dismissed, and that the amount of ₹3,48,60,40,000/- deposited by National Highways Authority of India in the Escrow Account, be reimbursed to it. Jetpur Somnath Tollways Pvt. Ltd sought an award against National Highways Authority of India for all arbitration costs, legal fees, venue costs, and other expenses, together with interest.

2. The two arbitral proceedings were one way or the other connected to the Concession Agreement and Escrow Agreement. One had concluded, by the passing of the impugned Award, whereas the other is continuing. The impugned Award has directed the return of the Bank Guarantee furnished by Jetpur Somnath Tollways Pvt. Ltd, to it, on the ground, that the arbitral proceedings stood concluded.

3. National Highways Authority of India contended that the directions of the learned Single Judge required the Bank Guarantee to be kept alive till the conclusion of the presently pending arbitral proceedings. Punjab National Bank and Jetpur Somnath Tollways Pvt. Ltd, per contra, contended that the “arbitral proceedings”, to which the directions of the learned Single Judge referred, were the arbitral proceedings which stood concluded by the impugned Award and that, therefore, the learned Arbitral Tribunal was justified in directing the release of the Bank Guarantee.

The impugned Arbitral Proceedings

4. The learned Arbitral Tribunal held that Clause 37.3.1 of the Concession Agreement was plain and unequivocal and clearly required the National Highways Authority of India to pay 90% of the Debt Due, even in the case of default on the part of the Concessionaire. The learned Single Judge, as well as the Division Bench, rationalized this dispensation, as contained in the Concession Agreement, on two grounds, i.e.,

a. That the entire investment, in the Project, was made by Jetpur Somnath Tollways Pvt. Ltd by loans from the lenders (led by Punjab National Bank) and by equity sourcing, with no contribution by National Highways Authority of India and,

b. That once the commissioned work was undertaken, the National Highways Authority of India obtained the full advantage of the constructed Highway, practically free of cost.

5. In any event, whatever be the philosophy behind Clause 37.3.1 of the Concession Agreement, the dispensation contained in it was clear and unambiguous. Even where the Concessionaire, i.e. Jetpur Somnath Tollways Pvt. Ltd herein was at fault, National Highways Authority of India was bound to pay 90% of the Debt Due to less Insurance Cover, as Termination Payment, into the Escrow Account.

6. The learned Arbitral Tribunal held that the National Highways Authority of India was not entitled to deduct any amount from the Debt Due and that it would have to agitate any claim that it had against Jetpur Somnath Tollways Pvt. Ltd, in the first arbitral proceedings. In so holding, the learned Arbitral Tribunal echoed the views of the learned Single Judge and the Division Bench. The Concession Agreement did not permit any deduction from the amounts payable by the National Highways Authority of India under Clause 37.3.1. National Highways Authority of India could not, of its own, tinker with the covenants of the Concession Agreement, to which it was a willing signatory. As a consequence of the termination of the Agreement, whether on account of the breach of National Highways Authority of India or of Jetpur Somnath Tollways Pvt. Ltd, National Highways Authority of India was required to pay at least 90% of the Debt Due, to Punjab National Bank and other lenders. No deductions were permissible.

7. Any deductions, from the amount to be deposited, by the National Highways Authority of India into the Escrow account in terms of Clause 37.3.2 of the Concession Agreement, would infract Clause 3.2 (d) of the Escrow Agreement, which obliges the National Highways Authority of India to deposit into, and/or credit the Escrow Account with, the Termination Payment, as and when due and payable.

8. The alleged recoveries, to which the National Highways Authority of India claimed entitlement from Jetpur Somnath Tollways Pvt. Ltd, were still inchoate, till the first arbitral proceedings reached fruition, is also relevant. No pecuniary liability of Jetpur Somnath Tollways Pvt. Ltd, towards National Highways Authority of India, could be said to have materialized, at any point prior thereto. [Iron and Hardware (India) Co. v. Shamlal & Bros., AIR 1954 Bom 423, Gangotri Enterprises Ltd v. U.O.I., (2016) 11 SCC 720]

9. The debt had been extended, by the lenders, led by Punjab National Bank, to Jetpur Somnath Tollways Pvt. Ltd, for the project forming the subject matter of the Concession Agreement. Once the Concession Agreement itself stood terminated, the loaned amount was required to be returned. The lenders, led by Punjab National Bank, had no concern with the inter se disputes between the National Highways Authority of India and Jetpur Somnath Tollways Pvt. Ltd. The inevitable conclusion to termination of the Concession Agreement was deposit by the National Highways Authority of India, into the Escrow Account, as well as the withdrawal, thereby, by the lenders.

10. The amounts claimed by the National Highways Authority of India from Jetpur Somnath Tollways Pvt. Ltd was the subject matter of the inter se dispute between the National Highways Authority of India and Jetpur Somnath Tollways Pvt. Ltd. The right of the National Highways Authority of India to claim these amounts from Jetpur Somnath Tollways Pvt. Ltd cannot be contradicted. That, however, was rightly made the subject matter of a separate arbitral proceeding, which is presently pending. Whatever be the outcome of the arbitral proceeding, the fact that the Concession Agreement stood terminated and that, thereby, National Highways Authority of India became liable to deposit, into the Escrow Account, at least 90% of the Debt Due.

11. The Bank Guarantee, furnished by Jetpur Somnath Tollways Pvt. Ltd was to secure the said deposit, to be made by the National Highways Authority of India. Once the deposit was made, the liability of the National Highways Authority of India to deposit the said amount, and the entitlement of Punjab National Bank, to withdraw the said amount from the Escrow Account, was confirmed by the learned Arbitral Tribunal. There was no justification to permit the National Highways Authority of India to continue to hold on to the Bank Guarantee furnished by Jetpur Somnath Tollways Pvt. Ltd.

12. The pendency of the first arbitration had no bearing on the said Bank Guarantee, as the Bank Guarantee was never furnished by Jetpur Somnath Tollways Pvt. Ltd to secure the claim of the National Highways Authority of India in the first arbitral proceeding. That constitutes a dispute between the National Highways Authority of India and Jetpur Somnath Tollways Pvt. Ltd regarding the breach of the Concession Agreement. In case the National Highways Authority of India is awarded any amount in the said arbitral proceeding, it would be entitled to recover it from Jetpur Somnath Tollways Pvt. Ltd, but not by invocation or encashment of the Bank Guarantee of ₹348.604 Crores, furnished by Jetpur Somnath Tollways Pvt. Ltd. The furnishing of the Bank Guarantee by Jetpur Somnath Tollways Pvt. Ltd was essentially to counterbalance the deposit, by the National Highways Authority of India, into the Escrow Account, of ₹354.744 Crores. The learned Single Judge enforced Clause 37.3.1 of the Concession Agreement by directing payment by the National Highways Authority of India, into the Escrow Account, and securing the said payment by directing Jetpur Somnath Tollways Pvt. Ltd to furnish an equivalent Bank Guarantee.

13. In directing the return of the Bank Guarantee to Jetpur Somnath Tollways Pvt. Ltd, the learned Arbitral Tribunal had merely effectuated the directions of the learned Single Judge, which also received the unequivocal approval of the Division Bench and, subsequently, of the Supreme Court.

14. The learned Arbitral Tribunal held that it was not possible to award interest, in the impugned arbitral proceedings, to Punjab National Bank, on 100% of the Debt Due. It could, at best, be awarded on 90% of the Debt Due. If National Highways Authority of India failed to pay ₹42 Crores to Punjab National Bank within three months from the passing of the impugned Award, the said amount would carry interest @ 9% per annum.

15. The learned Tribunal held that the cause of action arose, in favour of Punjab National Bank, on 17 November 2016. Section 31(7)(a) Arbitration and Conciliation Act, 1996 empowered the learned Arbitral Tribunal to award interest, to Punjab National Bank, from 17 November 2016 till the date of making of the award

16. The award of interest from the date of award till the date of payment, @ 9% p.a., being 2% above the prevalent ordinary rate of interest on the date of passing of the impugned arbitral award was per Section 31(7)(b) of Arbitration and Conciliation Act, 1996.

17. Costs were awarded by the learned Arbitral Tribunal as per Section 31(8) read with Section 31A of Arbitration and Conciliation Act, 1996. The extent of costs to be awarded is essentially a matter of discretion of the learned Arbitral Tribunal and, if it is sought to be challenged, the challenger has to make out a case of erroneous exercise of discretion that would merit interference by the Court in the exercise of the jurisdiction vested in it by Section 34. No effort to make out such a case was expended by National Highways Authority of India.

18. The scope of interference, by Courts, under Section 34 of the Arbitration and Conciliation Act, 1996 is extremely limited.

19. The High Court culled out the following principles from Ssangyong Engineering and Construction Co. Ltd v. N.H.A.I., (2019) 15 SCC 131 to govern the scope of interference by Courts with arbitral awards, under Section 34, after its amendment by the Arbitration and Conciliation (Amendment) Act, 2016:

a. The expression “public policy of India” would have to be understood as the “fundamental policy of Indian Law.

b. The Court cannot interfere with an Award on the ground that the arbitrator has not adopted a judicial approach, as that would amount to intervention on the merits of the award, which was not permissible post the amendment of Section 34.

c. Violation of the principles of natural justice constitutes a legitimate ground to challenge an award.

d. In understanding whether an award conflicted with the “most basic notions of morality or justice”, the Court would have to be guided by Associate Builders v. D.D.A., (2015) 3 SCC 49 wherein it was held that violation of the Foreign Exchange Act and disregarding orders of superior courts in India would be regarded as being contrary to the fundamental policy of Indian law. To this, it could be added that the binding effect of the judgment of a superior court being disregarded would be equally violative of the fundamental policy of Indian law.”

e. ‘Patent illegality’ appearing on the face of the award refers to such illegality as goes to the root of the matter, but which does not amount to be an erroneous application of the law. As such, contravention of a statute not linked to public policy or the public interest, cannot be said to amount to patent illegality. Mere contravention of the substantive law of India is no longer a ground available to set aside an arbitral award.

f. Under Section 34 court cannot re-appreciate evidence, even on the ground of patent illegality.

g. The absence of reasons is, however, a ground to set aside an award, as it would violate Section 31(3) of the Arbitration and Conciliation Act, 1996.

h. Construction of the terms of the contract is primarily for the arbitrator to decide. Unless the arbitrator construes the contract “in a manner that no fair-minded or reasonable person would; in short, the view of the arbitrator is not even a possible view to take”, interference is not warranted.

i. If the arbitrator wanders outside the contract and deals with matters not allotted to him, he commits an error of jurisdiction, on which ground the award could be set aside under Section 34 (2-A). “Where an Arbitral Tribunal has rendered an award which decides matters either beyond the scope of the arbitration agreement or beyond the disputes referred to the Arbitral Tribunal, as understood in State of Goa v. Praveen Enterprises, (2012) 12 SCC 581, the arbitral award could be said to have dealt with decisions on matters beyond the scope of the submission to arbitration”.

j. Perversity in an award, though not a ground to challenge the award as being contrary to the “public policy of India”, certainly amounts to patent illegality appearing on the face of the award. “Thus, a finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent illegality.” “A finding based on documents taken behind the back of the parties by the arbitrator would also qualify as a decision based on no evidence since such decision is not based on evidence led by the parties, and therefore, would also have to be characterized as perverse.”

k. Failure, by an Arbitral Tribunal to deal with every issue referred to it will not ordinarily render its arbitral award liable to be set aside. The crucial question in every case is whether there has been real or actual prejudice to either (or both) of the parties to the dispute.

20. Anglo American Metallurgical Coal Pty Ltd v. MMTC Ltd, 2020 SCC OnLine SC 1030 reiterated the same.

21. Thus the High Court found no reason to interfere with the impugned arbitral award.

The Decision Held by the Court

The High Court of Delhi dismissed the petition subject to the modification that the period of 90 days, granted by the learned Arbitral Tribunal, to the National Highways Authority of India, to make payment of ₹42.96 Crores shall stand reckoned from the date of receipt, by the National Highways Authority of India, or the learned Counsel who represented National Highways Authority of India in the present proceedings.

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