Allowed

Engineering Projects (India)Ltd v. M/S Hll Life Care Ltd.

Kerala HC27 Mar 2017WP(C)/6600/2017

Case brief

AI extract

What is this about?

This writ petition challenged the termination of a construction contract and subsequent encashment of bank guarantees by a Central Public Sector Enterprise. The Court ruled that disputes between such enterprises must be referred to the Permanent Machinery of Arbitration as per Government Office Memorandum, quashing the termination order and directing a reference.

What did the court decide?

The impugned termination order (Ext.P8) is quashed. The 1st respondent is directed to refer the dispute to the Permanent Machinery of Arbitration. Invocation of bank guarantees is stayed pending PMA d

Engineering Projects (India)Ltd Vs M/S Hll Life Care Ltd. — Company and Corporate | Kerala HC (2017)

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IN THE HIGH COURT OF KERALA AT ERNAKULAM

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PRESENT:

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THE HONOURABLE MR. JUSTICE SHAJI P.CHALY

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MONDAY, THE 27TH DAY OF MARCH 2017/6TH CHAITHRA, 1939

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WP(C).No. 6600 of 2017 (Y)

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PETITIONER(S):

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ENGINEERING PROJECTS (INDIA)LTD (A GOVERNMENT OF INDIA ENTERPRISE) 3D, EC CHAMBERS 92 GN CHETTY ROAD, T NAGAR, CHENNAI PIN-600017. REPRESENTED BY ITS GENERAL MANAGER.

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BY ADVS.SRI.S.RAMESH BABU (SR.) SRI.P.SHANES METHAR

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RESPONDENT(S):

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1. M/S HLL LIFE CARE LTD (A GOVERNMENT OF INDIA ENTERPRISE) HLL BHAVAN "ADHARSH" T.C 6/1718(1), VETTAMUKKU THIRUMALA PO., THIRUVANANTHAPURAM, PIN-695006

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2. MINISTRY OF HEALTH & FAMILY WELFARE NIRMAN BHAVAN, NEW DELHI 110108 REPRESENTED BY ITS SECRETARY

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3. INDIAN OVERSEAS BANK PALIKA BHAWAN, R.K.PURAM, SECTOR-13, NEW DELHI-110066, REPRESENTED BY ITS CHIEF MANAGER.

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4. DEPARTMENT OF PUBLIC ENTERPRISES NO# 20, NEW MOTI BAH, NEW DELHI 110023, REPRESENTED BY ITS SECRETARY

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R2&R4 BY SRI.K.SHRI HARI RAO, CGC

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SRI.N.NAGARESH, ASSISTANT SOLICITOR GENERAL R1 BY ADVS. SRI.V.KRISHNA MENON

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SMT.P.VIJAYAMMA SMT.J.SURYA R3 BY SRI.SUNIL SHANKAR, SC, INDIAN OVERSEAS BANK

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THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 27-03-2017, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

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WP(C).No. 6600 of 2017 (Y)

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APPENDIX

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PETITIONER(S)' EXHIBITS

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EXHIBIT P1: TRUE COPY OF THE CONTRACT AGREEMENT NO.PMSSYII/HLL/ID/MMC/505/2013-14 DATED 18.02.2014

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EXHIBIT P2: TRUE COPY OF THE EXTENDED BANK GUARANTEE NO.LG NO.408/IOB/LGI/040871114000038 DATED 17.02.2014

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EXHIBTI P2(A): TRUE COPY OF THE EXTENDED AND AMENDED BANK GUARANTEE NO. LG NO.408/IOB/LGI/64/2014 DATED 27.03.2014(28-09-2016

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EXHIBIT P3: TRUE COPY OF THE SHOWCAUSE NOTICE DATED 9.11.2016 ISSUED BY THE 1ST RESPONDENT

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EXHIBIT P4: TRUE COPY OF THE REPLY LETTER NO.SRO/SITE/712/001/793 DATED 30.11.2016 SUBMITTED BY THE PETITIONER

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EXHIBIT P5: TRUE COPY OF THE MINUTES OF MEETING DATED 27.12.2016

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EXHIBIT P6: TRUE COPY OF THE LETTER NO.Z-28016/20/08-SSH(VOL.II) FTS-143674) OF THE 2ND RESPONDENT

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EXHIBIT P7: TRUE COPY OF THE REVISED SCHEDULE SUBMITTED BY THE PETITIONER

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EXHIBIT P8: TRUE COPY OF THE LETTER NO.HLL/ID/PCE/2016-17/3730 ISSUED BY THE 1ST RESPONDENT

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EXHIBIT P9: TRUE COPY OF THE OFFICE MEMORANDUM NO.4(1)/2011-DPE(PMA)GL DATED 12.06.2013 ISSUED BY GOVERNMENT OF INDIA EXHIBIT P10: TRUE COPY OF THE E-MAIL DATED 26.02.1017 OF THE PETITIONER

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EXHIBIT P11: TRUE COPY OF THE SITE STATUS AS ON 24.02.2017 TOGETHER WITH PHOTOGRAPHS

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RESPONDENT(S)' EXHIBITS

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EXHIBIT R1(a):	TRUE COPY OF THE LETTER DATED 18.1.2017
EXHIBIT R1(b):	TRUE COPY OF THE RELEVANT PAGES OF THE TECHNICAL SPECIFICATIONS
EXHIBIT R1(c):	TRUE COPY OF THE LETTER OF INTENT DATED 9.11.2015 ISSUED BY THE PETITIONER
EXHIBIT R1(d):	TRUE COPY OF THE LETTER DATED 16.11.2015 SENT BY THE PETITIONER TO THE FIRST RESPONDENT

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WP(C).No. 6600 of 2017 (Y)

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EXHIBIT R1(e):	TRUE COPY OF THE LETTER DATED 6.1.2017 OF FIRST RESPONDENT
EXHIBIT R1(f):	TRUE COPY OF THE LETTER DATED 19.1.2017 OF FIRST RESPONDENT
EXHIBIT R1(g):	TRUE COPY OF THE LETTER DATED 31.1.2017 OF FIRST RESPONDENT
EXHIBIT R1(h):	TRUE COPY OF THE LETTER DATED 16.2.2017 OF FIRST RESPONDENT
EXHIBIT R1(i):	TRUE COPY OF THE RELEVANT PAGE OF THE GCC
EXHIBIT R1(j):	TRUE COPY OF THE LETTER DATED 2.2.2017 ISSUED BY THE PETITIONER
EXHIBIT R1(k):	TRUE COPY OF THE LETTER DATED 15.2.2017 SENT BY THE PETITIONER TO THIS RESPONDENT
EXHIBIT R1(l):	TRUE COPY OF THE LETTER DATED 10.2.2017 OF THE RESPONDENT

//TRUE COPY//

P.A. TO JUDGE

dlk

SHAJI P. CHALY, J.

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W.P.(C) No.6600 of 2017

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Dated this the 27^th day of March, 2017

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JUDGMENT

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Petitioner is a Government of India undertaking engaged in construction activities with 'Mini Ratna' status. This writ petition is filed by the petitioner seeking to quash Ext.P8 order, whereby the contract entered into by and between the petitioner and the 1st respondent, yet another Government of India Enterprise, was decided to be determined and upon which, earnest money deposit and security deposit already recovered, and Performance Guarantee absolutely forfeited to the 2nd respondent and is made at the disposal of the 2nd respondent, and inflicted with other related consequences. Material facts for the disposal of the writ petition are as follows:

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The 1st respondent being the consultant on behalf of the 2nd respondent, invited national competitive bidding for the construction of Super Specialty Hospital for the Government, with an estimated PAC of Rs.89,14,99,192/-. Petitioner who

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quoted 9.08% below the PAC, became the successful bidder for

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W.P.(C) No.6600 of 2017 2

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the work. Petitioner submitted Exts.P2 and P2(a) bank guarantees with the 1st respondent as per performance security and mobilization advance security.

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The original time of completion of Ext.P1 work was 18 months from the date of handing over the site, which was subsequently extended. According to the petitioner, the subject work could not be executed in the manner envisaged in Ext.P1 agreement for no fault of the petitioner. However, it is submitted that in spite of all adverse circumstances, petitioner completed the work apart from finishing works, such as, filling, painting etc.

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The 2nd respondent convened a meeting on 27.12.2016 with the representatives of respondents 1 and 2 and the petitioner, to sort out the issue and complete the work in a time bound manner. In the meeting so held, it was decided that petitioner shall complete and hand over the ground floor to the 1st respondent by 28.02.2017, as such, petitioner engaged more than 280 labourers per day, for finishing work alone and the work was progressing in a warfooting basis. But, to the surprise of the petitioner, 1st respondent issued Ext.P8 termination letter, overlooking

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W.P.(C) No.6600 of 2017

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Ext.P9 issued by the 4th respondent. The 1st respondent has also communicated Ext.P8 to 3rd respondent to encash Exts.P2 and P2(a) bank guarantees. According to the petitioner, a perusal of Ext.P11 will establish the present stage of Ext.P1 work. Though Ext.P10 was submitted by the petitioner highlighting the illegality in issuing Ext.P8, the same is left unattended. Petitioner and the 1st respondent being Central Public Sector establishments, the procedure prescribed by law is recourse to Permanent Machinery of Arbitration (PMA). These are the background facts projected to secure the reliefs sought for in the writ petition.

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First respondent has filed a counter affidavit controverting the allegations and claims and demands raised by the petitioner. That apart, it is contended that, the super specialty hospital was planned with financial assistance from the 2nd respondent and is a dream project for the Madurai Medical College. As per the contract, the project should have been completed within 18 months from the date of handing over of the site. The site was handed over to the petitioner on 24.02.2014 and accordingly, the completion date was 23.08.2015. Petitioner was allowed 159 days time against

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W.P.(C) No.6600 of 2017

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admissible hindrances as per letter dated 18.01.2016 and considering this, the project should have been completed on or before 29.01.2017, evident from Ext.R1(a). However, owing to the failures in planning and organizing the resources and executing the work, physical progress of the work is only 48% as on 23.02.2017. Hence, the action taken by the respondent in terminating the contract is lawful.

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It is also submitted that, as regards settlement of disputes and Arbitration, clause 25 of the GCC clearly stipulates the procedure for the same. In this regard, clause 25(2) states that “Dispute or differences shall be referred for adjudication through arbitration by a sole arbitrator appointed by the Chairman and Managing Director of the 1st respondent. Therefore, the contention of the petitioner that settlement of dispute is to be referred to Permanent Machinery of Arbitration, is beyond the terms and conditions of contract and contrary to the provisions of the contract. The importance of timely completion of the project being developed with public money requires special attention and consideration in deciding the merits of the complaint filed by the petitioner. The statement of the petitioner that the subject work could not be

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W.P.(C) No.6600 of 2017

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executed in the manner envisaged in Ext.P1 for no fault of the petitioner, is denied and contentions are raised to canvass for the proposition that there was no delay or laches on the part of the respondents.

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According to the 1st respondent, all the necessary papers and plans were provided to the petitioner in time. However, the initial submission of the designs were received from the petitioner only on 15.12.2015, i.e. 4 months after the intended date for completion of the works, which shows the lack of commitment and professionalism with which the petitioner handled the project. It is also stated that the milestone penalty for poor progress or works had been imposed on RA bills passed for payment in September, 2015, February, 2016 and April, 2016, and the petitioner had not raised any objections against the recovery of milestone penalty, which only goes to prove their admission of failure in achieving the desired progress of works. Other contentions are also raised with respect to the alleged lethargy on the part of the petitioner in carrying out the work in accordance with the terms of the agreement.

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W.P.(C) No.6600 of 2017

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A reply affidavit is filed by the petitioner refuting the contentions raised in the counter affidavit filed by the 1st respondent and reiterating the stand adopted in the writ petition.

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Heard learned Senior Counsel for the petitioner, learned Standing Counsel appearing for the 1st respondent, learned CGC appearing for respondents 2 and 4 and the learned Standing Counsel appearing for the 3rd respondent. Perused the documents on record and the pleadings put forth by the respective parties.

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The prime contention advanced by learned Senior Counsel for the petitioner is that, Ext.P1 agreement was entered into by the petitioner and the 1st respondent on 18.02.2014. As per Ext.P9 Office Memorandum issued by the Government of India dated 12.06.2013, Permanent Machinery of Arbitrators is created with a view to expedite the settlement of disputes relating to commercial contracts between Central Public Sector Enterprises per se, and also between Central Public Sector Enterprises and Government Departments. Learned Senior Counsel has invited my attention to Clause V of Ext.P9, which read thus:

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W.P.(C) No.6600 of 2017

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“ V. REFERENCE

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(i) As far as possible parties should try to resolve as many points of dispute as they can, amicably by mutual consultation and only those points stating the amount involved be referred to the PMA that could not be settled mutually despite best efforts from both sides. To ensure prompt disposal of dispute(s) by the PMA, both the CPSEs and the Government Departments shall refer the existing dispute(s) to the PMA at the earliest and not later than two months of arising of dispute. If any arbitrator has already been appointed in any dispute that should immediately be cancelled. Both the parties will also ensure inclusion of an Arbitration Clause (if not already done so) in favour of PMA (as given in Annexure) in all the existing and future contracts/supply orders between the parties. PMA shall not entertain the disputes referred to it without proper Arbitration Clause.

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(ii) After entering upon the reference, the Arbitrator will call for the papers, comments/statements from the parties and will hear the parties in person as and when he deems necessary. The Arbitrator shall ordinarily fix the meeting in Delhi unless, for reasons to be recorded in writing, he decides otherwise. No outside lawyers shall be allowed to appear on behalf of the parties to argue their cases before the Arbitrator, but the parties can take the help of their own full time Law officers (Subject to the aforesaid, the Arbitrator, and the Law Secretary will determine the procedure as the case may be).

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(iii) The Arbitrator will also submit a quarterly report to the Secretary (DPE) on the number of cases registered, awards published, fee received and general progress of cases.”

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Therefore, it is contended that, instead of trying to

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resolve the dispute amicably, as per the settlement provided under Ext.P9, the 1st respondent has abruptly terminated the contract which is against the provisions contained under Ext.P9

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Government Order, which is specifically referred to above. That apart, learned Senior Counsel has invited my attention to Clauses VII and VIII of Ext.P9, wherein stipulations are contained with respect to any compromise by and between the parties and the nature of award to be passed, whereby a condition is prescribed to pass the award within six months after entering upon reference and after having been called

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upon to act by notice in writing from any party to the arbitration agreement or within such extended time as the parties may allow. My attention was also invited to Clause XII of Ext.P9, which deals with Bank Guarantee, which read thus:

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“ XII. BANK GUARANTEE

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In commercial transactions sometimes a CPSE has to stand Bank guarantee. All CPSEs should effect encashment of bank guarantee only as a last resort when efforts to resolve the differences/dispute fail and that too, after giving due notice/information to the concerned Public Sector Enterprise. In such situations, all CPSEs should refer the dispute to this Department and cooperate with the Arbitrator of PMA for early settlement.

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2. All the administrative Ministries/Departments concerned with management of Central Public Sector Enterprises/Banks/Port Trusts etc. are requested bring these guidelines to the notice of all concerned organizations under their administrative control for strict compliance. It is also requested that they may ensure and monitor the implementation of the award of the Arbitrator by the parties as per his/her directions. Presidential directives as per Annexure referred to in paragraph IV(i) above, may be issued to incorporate the provisions in the Articles of Association or other

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W.P.(C) No.6600 of 2017

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relevant regulations of concerned organization(s) at the earliest.”

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According to the learned Senior Counsel, 1st respondent has given a total go-by to the imperative conditions contained under Ext.P9 and abruptly issued Ext.P8 terminating the contract, without providing sufficient opportunity to the petitioner to put forth its case and contest the proceedings.

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Therefore, according to the learned Senior Counsel, there is a remedy available to the petitioner, whenever there arose a dispute by and between the parties. However, the 1st respondent has not cared to refer the dispute in accordance with the terms of Ext.P9 Office Memorandum. Therefore, the entire action of the 1st respondent in terminating the contract is illegal, arbitrary and unfair and seeks intervention of this Court, invoking the writ jurisdiction.

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On the contrary, learned counsel appearing for the 1st respondent contended that in Ext.P1 agreement, there is no reference to Dispute Resolution Mechanism provided under Ext.P9. Therefore, according to the learned counsel, there is no terms entered into by and between the parties to settle any disputes by resorting to the provisions contained under Ext.P9.

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Learned counsel has specifically invited my attention to the last sentence of sub-clause (i) of Clause V quoted above, which read thus: “Both the parties will also ensure inclusion of an Arbitration Clause (if not already done so) in favour of PMA (as given in Annexure) in all the existing and future contracts/supply orders between the parties. PMA shall not entertain the disputes referred to it without proper Arbitration Clause”. Therefore, it is the contention of the learned counsel for the 1st respondent that, since there is no arbitration clause contained under Ext.P1, petitioner is not entitled to get resolution of the disputes by resorting to the mechanism provided under Ext.P9 Office Memorandum of the Government of India. According to the learned counsel, no manner of interference is warranted to Ext.P8 order of termination passed by the 1st respondent. Other factual aspects relating to the lethargy on the part of the petitioner was also put forth to justify the action initiated by providing the contract awarded to the petitioner.

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Taking note of the contention put forth by the respective counsel across the Bar, the question to be considered is whether in the absence of a specific clause in

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W.P.(C) No.6600 of 2017

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Ext.P1 agreement, to resolve the disputes by resorting to the mechanism provided under Ext.P9, petitioner is entitled to get the benefit of the said provisions. As I have pointed out earlier, Ext.P1 agreement is dated 18.02.2014. Ext.P9 Office Memorandum is issued by the Government of India on 12.06.2013, which thus means, while Ext.P1 agreement was executed by and between the parties, Ext.P9 O.M. was in force and therefore, the 1st respondent was duty bound to incorporate the clause in Ext.P1 agreement since the intention of Ext.P9 was to expedite the settlement of disputes relating to commercial contracts between the Central Public Sector Enterprises per se. Looking at the intention behind Ext.P9, it is categoric and clear, even if there is no clause added to Ext.P1 agreement, Ext.P9 will come into play, which can be termed as an imperative Government Order issued for the purpose of resolving the disputes by and between the Central Public Sector Undertakings in an amicable manner. It is true, learned counsel for the 1st respondent has a contention that if the clause is not included in the arbitration agreement, the PMA is not bound to entertain the dispute. But, on a reading of Clause V of Ext.P9, what I could gather is that, it specifically

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deals with a situation where an agreement executed is in vogue at the time of issuance of Ext.P1, and thereby cautioning respective undertakings to incorporate such clauses. Merely because such a clause is contained in Clause V, that will not take away the liability created on the Central Public Sector Enterprises to have the clause in the contract. In my considered opinion, Ext.P9 Government Order is a general conditions of contract which are to be followed by all the Central Public Sector Enterprises while entering into contracts. Therefore, the mere omission on the part of the petitioner and the 1st respondent to incorporate the same specifically into the agreement will not take away the liability created under Ext.P9 by the Government of India. Moreover, all the officers of the Public Sector Enterprises are functioning under the instructions issued by the Government of India, and therefore, it cannot overlook any of the Government Orders issued and existing in the subject matter.

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Moreover, learned Senior Counsel has also put forth a case in respect of the invocation of the Bank Guarantees, resorting to Clause XII of Ext.P9. According to the learned counsel, Clause XII is independent of other provisions of

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W.P.(C) No.6600 of 2017

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Ext.P9. On a reading of Clause XII, what is discernible is that all Central Public Sector Enterprises should effect encashment of bank guarantee only as a last resort when efforts to resolve the differences/dispute fail and that too, after giving due notice or information to the concerned Public Sector Enterprise. It further includes a condition that, in such situations, all Central Public Sector Enterprises should refer the dispute to the Department and cooperate with the Arbitrator of PMA for early settlement. Therefore, I find force in the contention put forth by the learned Senior Counsel that the said clause is independent to other provisions of Ext.P9. Anyhow, assimilating the entire situations contained under Ext.P9, I am of the considered opinion that when a dispute arose in respect of the work executed by the petitioner by virtue of the provisions contained under Ext.P9, 1st respondent instead of deciding it, should have referred the matter to the PMA. That apart, Clause III of Ext.P9 makes it abundantly clear that, seeking reference for arbitration is entitlement of the parties. Therefore, the intention of the Central Government to settle disputes by and between two public sector enterprises by resorting to alternative dispute resolution mechanism is clear

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and absolute from Ext.P9. Therefore, predominance as per Ext.P9 is for settlement of any disputes amicably by and between Central Public Sector Enterprises.

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In that view of the matter, I have no hesitation to hold that Ext.P8 issued by the 1st respondent, terminating the contract is not in accordance with the provisions contained under Ext.P9 and therefore, transform itself into an arbitrary, illegal and unfair decision on the part of the 1st respondent. Therefore, I quash the same and direct the 1st respondent to refer the dispute to the PMA at the earliest possible, and the PMA shall also attain finality to the same in accordance with Clause VIII of Ext.P9. Till such time any orders are passed under the provisions of the Arbitration and Conciliation Act, 1996 or a decision is taken, interim order granted by this Court against invocation of Bank guarantees on the basis of Ext.P8 order will continue.

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The writ petition is allowed accordingly.

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Sd/- SHAJI P. CHALY JUDGE

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St/29.03.2017

Engineering Projects (India)Ltd v. M/S Hll Life Care Ltd.

Case brief

What is this about?

What did the court decide?

Engineering Projects (India)Ltd v. M/S Hll Life Care Ltd.

Case brief

What is this about?

What did the court decide?

What the court decided

A compact analysis

Issues for consideration

Parties & counsel

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