Allowed

Viskons Projects, v. Delhi Metro Rail Corporation

Kerala HC21 Mar 2023WP(C)/8629/2022

Case brief

AI extract

What is this about?

This writ petition challenges the Delhi Metro Rail Corporation's refusal to release the petitioner's performance security (Bank Guarantee) after the Defect Liability Period expired. The Court rejected the respondent's arguments regarding maintainability and arbitration pendency, holding that the action was arbitrary and directed the release of the guarantee within ten days.

What did the court decide?

The writ petition is allowed. The respondents are directed to release the Bank Guarantee of Rs.50,00,375/- within ten days of receipt of a copy of this judgment.

Viskons Projects, Vs Delhi Metro Rail… — Contract and Commercial Disputes | Kerala HC (2023)

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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 V.G.ARUN

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TUESDAY, THE 21^ST DAY OF MARCH 2023 / 30TH PHALGUNA, 1944

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WP(C) NO. 8629 OF 2022

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PETITIONER:

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VISKONS PROJECTS, 50/1002 B (3), IIND FLOOR, CARMEL BUILDINGS, OPP. ST. GEORGE'S HIGH SCHOOL, EDAPPALLY P.O, KOCHI 682 024, REPRESENTED BY ITS MANAGING PARTNER JOSEPH VALAKUZHY EIPE, AGED 59 YEARS, S/O. V.V. EIPE, RESIDING AT VALAKUZHY HOUSE, PRASANTHI NAGAR ROAD NO. 1, EDAPPALLY P.O, KOCHI, ERNAKULAM 682 024.

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BY ADVS. GEORGE VARGHESE(PERUMPALLIKUTTIYIL) A.R.DILEEP P.J.JOE PAUL MANU SRINATH NIMESH THOMAS RAJAN G. GEORGE

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RESPONDENTS:

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1 DELHI METRO RAIL CORPORATION , OPP. INDERLOK METRO STATION, SHAHZAD BAGH, INDERLOK, NEW DELHI 110 035, REPRESENTED BY ITS AUTHORIZED OFFICER. 2 BANK OF INDIA, EDAPALLY BRANCH, MARKET ROAD, NEAR TRAFFIC POLICE STATION, EDAPPALLY, EDAPALLY, ERNAKULAM-682 029, REPRESENTED BY ITS CHIEF MANAGER. BY ADV LATHA ANAND

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THIS WRIT PETITION (CIVIL) HAVING COME UP FOR ADMISSION ON 20.12.2022, THE COURT ON 21.03.2023 DELIVERED THE FOLLOWING:

W.P.(C). 8629/2022

JUDGMENT

Dated this the 21^st day of March, 2023

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The petitioner, a partnership firm, is engaged in construction and development of infrastructure projects. The first respondent issued Notice Inviting Tender for executing the work 'Contract KC32: Construction of combined ASS/TSS building at Muttom Depot, including architectural finishing work of Kochi Metro Rail Project'. The petitioner participated in the tender and was awarded the work for Rs.5,00,03,745.72 and was issued with Ext. P1 Letter of Acceptance dated 29.05.2019. As per Clause 3 of Ext. P1, the petitioner had to submit performance security of Rs.50,00,375/-, equivalent to 10% of the contract value, in the form of Bank Guarantee, within 30 days. The Performance Security was to remain valid up to six months after the Defect Liability Period (DLP) of one year, as mentioned in the Completion Certificate. Accordingly, the petitioner submitted Ext.P2 Bank Guarantee and executed Ext. P4 contract agreement on 19.08.2019. As per the terms of

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the agreement the work was to be completed by 25.11.2019. Although petitioner commenced the construction as per schedule, completion of the project was delayed for various reasons like the floods of 2019 and Covid-19.

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During the course of execution of the work, disputes arose between the petitioner and the first respondent, resulting in the petitioner approaching this Court with an arbitration request. As per the order in A.R. No. 33 of 2020, an Arbitrator was appointed for resolving the dispute. The petitioner completed the work on 11.09.2020 and Ext. P6 Taking Over Certificate was issued on 24.10.2020. Accordingly, the Defect Liability Period ('DLP' for short) was fixed as one year from 11.09.2020 to 10.09.2021. Consequently, the validity period of Ext. P2 Bank Guarantee which was up to 25.06.2021 was extended till 30.03.2022 as per Ext. P3. On expiry of the DLP of one year, the petitioner sent Ext. P7 letter dated 06.10.2021 requesting to issue Performance Certificate and release the Bank Guarantee. To the petitioner's dismay, instead of releasing the Bank Guarantee, first respondent issued Ext. P8 communication to

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the second respondent Bank informing that, if the validity period of the Bank Guarantee is not extended in advance of the expiry date, the Bank Guarantee should be processed and encashed. The first respondent also issued Ext. P9 letter, requesting the petitioner to extend the validity of the Bank Guarantee. This writ petition is filed aggrieved by the refusal to release the Bank Guarantee and the compulsion to extend its validity period. By interim order dated 16.03.2022, the first respondent was directed not to invoke the Bank Guarantee on condition of the petitioner extending the Bank Guarantee. The interim order is still in force.

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Learned Counsel for the petitioner contended that the first respondent's refusal to release the Bank Guarantee, in spite of the DLP being over, is patently illegal, irrational and arbitrary. Attention is drawn to Clause 4.2.3 of Ext. P5 General Conditions of Contract which mandates refund of one half of the performance security on issue of Taking Over Certificate by the Engineer and release of the balance amount, on the contractor signing the Performance Certificate, after expiry of the DLP. In the petitioner's case, the DLP being

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over on 10.09.2021, the first respondent is bound to release the Bank Guarantee.

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Learned Standing Counsel for the first respondent challenged the maintainability of the writ petition on the ground that a contractual dispute is sought to be resolved under Article 226 and no public law element is involved. In support of the challenge, reliance is placed on the decision of the Apex Court in State of U.P. v. Bridge and Roof Company (India) Ltd. (AIR 1996 SC 3515) and KSEB v. Kurian E. Kalathil (AIR 2000 SC 2573). On merits, it is contended that, as per Clause 4.2.3.(ii) of the General conditions of Contract, the obligation to release performance security would arise only on signing of the Performance Certificate in accordance with Clause 10.9, as per which the work shall not be considered as complete until the Performance Certificate is signed by the Engineer and delivered to the contractor. It is submitted that, certain pending issues were raised by the structure owning agency, Kochi Metro Rail Limited ('KMRL' for short), within the DLP. The petitioner failed to complete the rectification works

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pointed out by the KMRL even after six months had elapsed from the last date of the DLP. Hence a joint site visit was carried out and Ext. R1(a) letter issued by the KMRL pointing out certain defects. Without rectification of those issues, the Performance Certificate will not be issued, without which the the balance performance security amount cannot be released. Finally it is also contended that, having resorted to arbitration, the petitioner cannot simultaneously approach this Court seeking release of the amounts.

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Replying to the challenge on maintainability, learned counsel for the petitioner submitted that the first respondent is executing the delegated function of installing and constructing metro rail system for the KMRL, which is an instrumentality of State and a wholly owned Government Company. Therefore, the functions discharged by the first respondent are not merely contractual in nature and does not fall under the realm of private law. Placing reliance on the decision of this Court in

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Kenny Manuel v. Kerala Police Housing and Construction

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Ltd. (2002 KHC 452) and that of the Apex Court in Union of

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India and Another v. Millenium Delhi Broadcast LLP and

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Others [(2022) 7 SCC 67), it is contended that challenge against invocation of Bank Guarantee based on a fictitious liability is amenable to writ jurisdiction.

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As regards the contention that the petitioner has resorted to arbitration, it is submitted that the arbitration proceedings is with respect to the dishonour of certain claims raised by the petitioner in connection with the execution of the work and has nothing to do with the release of the performance security. Moreover, the first respondent has not raised any counter claim therein.

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To refute the contention that the petitioner failed to rectify the defects pointed out by the KMRL in Ext. R1(a), reliance is placed on Ext.P10 Joint Inspection Note dated 20.11.2021, wherein the parties have acknowledged rectification of three out of the six defects. Further, two of the defects were beyond the scope of the inspection and the remaining defects was decided to be discussed as the fixation was found to be in accordance with the drawing.

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Indisputably the first respondent is a public authority and a delegate of the KMRL, an instrumentality of the State.

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Being so, it will be profitable to refer the erudite discussion by the Apex Court on the maintainability of writ petitions under Article 226 in contractual matters in Unitec Limited and

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Others v. Telangana State Industrial Infrastructure Corporation (TSIIC) and Others [(2021) SCC OnLine SC 99]. Being contextually relevant, paragraphs 38 to 41 of the judgment is extracted hereunder;

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“ 38. … However, to clear the ground, it is necessary to postulate that recourse to the jurisdiction under Article 226 of the Constitution is not excluded altogether in a contractual matter. A public law remedy is available for enforcing legal rights subject to well-settled parameters.

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A two judge Bench of this Court in ABL International Ltd. v. Export Credit Guarantee Corporation of India [ ABL International ] analyzed a long line of precedent of this Court to conclude that writs under Article 226 are maintainable for asserting contractual rights against the state, or its instrumentalities, as defined under Article 12 of the Indian Constitution. Speaking through Justice N Santosh Hegde, the Court held:

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“27. …the following legal principles emerge as to the maintainability of a writ petition:

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(a) In an appropriate case, a writ petition as against a State or an instrumentality of a State arising out of a contractual obligation is maintainable.

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(b) Merely because some disputed questions of fact arise for consideration, same cannot be a ground to refuse to entertain a writ petition in all cases as a matter of rule.

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This exposition has been followed by this Court, and has been adopted by three-judge Bench decisions of this Court in State of UP v. Sudhir Kumar and Popatrao Vynkatrao Patil v. State of Maharashtra . The decision in ABL International , cautions that the plenary power under Article 226 must be used with circumspection when other remedies have been provided by the contract. But as a statement of principle, the jurisdiction under Article 226 is not excluded in contractual matters. Article 23.1 of the Development Agreement in the present case mandates the parties to resolve their disputes through an arbitration. However, the presence of an arbitration clause within a contract between a state instrumentality and a private party has not acted as an absolute bar to availing remedies under Article 226. If the state instrumentality violates its constitutional mandate under Article 14 to act fairly and reasonably, relief under the plenary powers of the Article 226 of the Constitution would lie. This principle was recognized in ABL International :

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“28. However, while entertaining an objection as to the maintainability of a writ petition under Article 226 of the Constitution of India, the court should bear in mind the fact that the power to issue prerogative writs under Article 226 of the Constitution is plenary in nature and is not limited by any other provisions of the Constitution. The High Court having regard to the facts of the case, has a

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discretion to entertain or not to entertain a writ petition. The Court has imposed upon itself certain restrictions in the exercise of this power. (See Whirlpool Corpn. v. Registrar of Trade Marks [(1998) 8 SCC 1].) And this plenary right of the High Court to issue a prerogative writ will not normally be exercised by the Court to the exclusion of other available remedies unless such action of the State or its instrumentality is arbitrary and unreasonable so as to violate the constitutional mandate of Article 14 or for other valid and legitimate reasons, for which the Court thinks it necessary to exercise the said jurisdiction .”

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( emphasis supplied )

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Therefore, while exercising its jurisdiction under Article 226, the Court is entitled to enquire into whether the action of the State or its instrumentalities is arbitrary or unfair and in consequence, in violation of Article 14. The jurisdiction under Article 226 is a valuable constitutional safeguard against an arbitrary exercise of state power or a misuse of authority. In determining as to whether the jurisdiction should be exercised in a contractual dispute, the Court must, undoubtedly eschew, disputed questions of fact which would depend upon an evidentiary determination requiring a trial. But equally, it is wellsettled that the jurisdiction under Article 226 cannot be ousted only on the basis that the dispute pertains to the contractual arena. This is for the simple reason that the State and its instrumentalities are not exempt from the duty to act fairly merely because in their business dealings they have entered into the realm of contract. Similarly, the presence of an arbitration

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clause does oust the jurisdiction under Article 226 in all cases though, it still needs to be decided from case to case as to whether recourse to a public law remedy can justifiably be invoked. The jurisdiction under Article 226 was rightly invoked by the Single Judge and the Division Bench of the Andhra Pradesh in this case, when the foundational representation of the contract has failed. TSIIC, a state instrumentality, has not just reneged on its contractual obligation, but hoarded the refund of the principal and interest on the consideration that was paid by Unitech over a decade ago. It does not dispute the entitlement of Unitech to the refund of its principal."

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Once the State and its intrumentalities enter into the realm of contract, they are not exempt from the duty to act fairly in their business dealings. Here, the petitioner alleges that the first respondent is acting unfairly and unreasonably by refusing to release the performance security even after expiry of the DLP. In Kenny Manuel (supra), the contention that the court should not interfere with the invocation of Bank Guarantee was repelled. This Court categorically held that in cases where invocation of Bank Guarantee is with respect to a fictitious liability, that will necessarily result in irretrievable injury to the contractor and in such circumstances, there can be interference. Similar view was expressed by the Apex Court in Millenium Delhi Broadcast LLP (supra), while

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refusing to interfere with the decision of the Telecom Regulatory Authority, setting aside the invocation of Bank Guarantee for alleged violation of contract condition. In the light of the above precedents, the challenge against maintainability is rejected.

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In order to resolve the issues raised in this writ petition, it is necessary to carefully scrutinize the relevant clauses of the General Conditions of Contract extracted below;

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“ 4.2.3 The whole of the Performance Security amount shall be liable to be forfeited by the Employer at the discretion of the Employer, in the event of any breach of contract on the part of the Contractor.

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i. On completion of the entire work, one half of the Performance Security shall be refunded to the Contractor, on issue of Taking over Certificate by the Engineer, in accordance with Sub-Clause 9.1 and 9.2 of these conditions. This shall not relieve the Contractor from his obligations and liabilities, to make good that may be detected during the Defects Liability Period.

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ii. The balance amount shall become due and shall be paid to the on Contractor on signing of the Performance Certificate after the expiry of the final Defects Liability Period as per Clause 10.9 of these, conditions.

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9.1 The Works shall be taken over by the Employer when they have been completed in accordance with the Contract, have passed the Tests on Completion, including Integrated Testing and Commissioning where ever applicable as per the contract, and a

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Taking Over Certificate for the Works shall be issued. If the Works are divided into Sections, the Contractor shall be entitled to apply for a Taking Over Certificate for each Section. The Contractor may apply by notice to the Engineer for a TakingOver-Certificate not earlier than 14 days before the works or section (as the case may be) will in the Contractor's opinion, be complete and ready for taking over. The Engineer shal, within 28 days after the receipt of the Contractor's application shall conduct a complete joint survey of the works including carrying out any tests prescribed in the contract and prepare a list of defects and outstanding works and:

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(a) issue the Taking Over Certificate to the Contractor, stating the date on which the Works or Section were completed, including the Tests on Completion and Integrated Testing and Commissioning where ever applicable as per the contract in accordance with the Contract & defects and/or outstanding works are minor that does not affect the use and safety of the Works or Section for their intended purposes. The list of such works alongwith the target date of completion for each work shall be enclosed with the taking over certificate and completion of all these works rectification of defects within the sipulated Sme shall be the responsibility of the contractor and any failure in t may be considered a reason by the Engineer to cancel the taking over certificate issued earlier, or

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(b) reject the application, giving his reasons and specifying the work required to be done by the Contractor to enable the Taking Over Certificate to be Issued. The Contractor shall then complete such work before issuing a further notice under this Sub-Clause.

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10.1 "Defects Liability Period" shall mean the defects liability period stated in Special Conditions of Contract calculated from

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the date of taking over of Works. Provided that, if any part of the Works or sub-systems or componer that part has been replaced, renewed or repaired except minor repair, "Defects Liability Period" in respect of that part or sub-system or component of that part shall start from the date such replacement, renewal or repair has b completed to the satisfaction of the Engineer. The order that the Construction and/or Manufacture Documents and the W all be in the condition required by the Contract (fair wear and tear excepted as soon as practicable after the expiry of the Contract Period, the Contractor shall execute all such work of amendment, reconstruction, and remedying defects or damage, as may be instructed in writing by the Employer or the Engineer during the Defect Liability Period.

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10.9 The Contract shall not be considered to be completed until the Performance Certificate has been signed by the Engineer and delivered to the Contractor at the end of 'Defect Liability Period, stating the date on which 'the Contractor completed his obligations related to completion of works and rectification of defects during Defect Liability Period to the Engineer's satisfaction. Only the Performance Certificate shall be deemed to constitute approval of the Works.”

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A conjoint reading of the above Clauses would show that one half of the performance security should be refunded to the contractor on issue of Taking Over Certificate by the Engineer. As per Clause 4.2.3 (i), refund of one half of the performance security does not relieve the contractor from his obligation and liability to make good the defects detected during the DLP. In

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the case at hand, the DLP was up to 10.09.2021 and Ext. R1(a) communication pointing out defects was issued on 08.11.2021, based on the joint inspection conducted on 20.11.2021. Therefore, obviously the defects were pointed out after expiry of DLP.

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Even accepting that the petitioner is liable to cure the defects pointed out Ext. R1(a), Ext. P10 report of joint inspection conducted on 20.11 .2021 shows that, out of the six six defects pointed out in R1(a), defects Nos. 1 to 3 were attended, defect Nos. 5 and 6 were beyond the scope of inspection and defect. No. 4 was decided to be discussed as the fixation was found to be in accordance with the drawing issued. In such circumstances, the first respondent cannot project the petitioner's failure to cure the defects as the reason for not releasing the performance security amount. Likewise, reliance cannot be placed on Clause 10.9 also since the Engineer is bound to sign the Performance Certificate and the Certificate should be delivered to the contractor at the end of the DLP.

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The pendency of arbitration proceedings at the

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instance of the petitioner cannot also be projected as a reason, since the arbitration is with respect to the petitioner's claim for release of amounts due towards the works executed. Moreover, the first respondent has not even raised a counter claim against the petitioner in the arbitration proceedings.

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For the aforementioned reasons, the writ petition is allowed. The respondents are directed to release the Bank Guarantee of Rs.50,00,375/-, furnished by the petitioner as performance guarantee, within ten days of receipt of a copy of this judgment.

Sd/-

V.G.ARUN

JUDGE

W.P.(C). 8629/2022

APPENDIX OF WP(C) 8629/2022

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PETITIONER EXHIBITS

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Exhibit P1	A TRUE COPY OF THE LETTER OF ACCEPTANCE NO. DMRC/KOCHI/12/999 DATED 29.05.2019.
Exhibit P2	A TRUE COPY OF THE PERFORMANCE GUARANTEE NO. 8519IPEBG190002 DATED 25.06.2019 ISSUED BY THE 2ND RESPONDENT.
Exhibit P3	A TRUE COPY OF THE EXTENSION OF BANK GUARANTEE NO. EDPY/2020-21/BG/04 DATED 18.11.2020.
Exhibit P4	A TRUE COPY OF THE CONTRACT AGREEMENT DATED 19.08.2019 BETWEEN THE PETITIONER AND THE 1ST RESPONDENT.
Exhibit P5	THE TRUE COPIES OF THE RELEVANT PAGES OF THE TENDER DOCUMENTS OF CONTRACT KC 31, CONSTRUCTION OF COMBINED ASS/TSS BUILDING AT MUTTOM DEPOT INCLUDING ARCHITECTURAL FINISHING WORKS OF KOCHI METRO RAIL PROJECT.
Exhibit P6	A TRUE COPY OF LETTER NO. DMRC/KOCHI/12/KC 31 DATED 24.10.2020 SENT BY THE 1ST RESPONDENT.
Exhibit P7	A TRUE COPY OF LETTER NO. VP/DMRC/ASS/TSS 404 DATED 06.10.2021 SENT BY THE PETITIONER TO THE 1ST RESPONDENT.
Exhibit P8	A TRUE COPY OF E-MAIL NO. DMRC/ED- CIVIL -P1/FINANCE/BG- KOCHI/EXT. NOTICE /2022/03 DATED 07.03.2022 SENT BY THE 1ST RESPONDENT TO THE 2ND RESPONDENT.
Exhibit P9	A TRUE COPY OF THE LETTER NO. DMRC/EDCP1/KOCHI/KC- 31/VISKONS/2022 DATED 08.03.2022 SENT BY THE 1ST RESPONDENT TO THE PETITIONER.
RESPONDENT EXHIBITS
Exhibit R1A	TRUE COPY OF LETTER NO KMRL/PRJ/DMRC5/2013/1529 DATED 8.11.2021

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Exhibit R1B TRUE COPY OF EXTENSION OF BANK GUARANTEE DATED 25.3.2022

Viskons Projects, v. Delhi Metro Rail Corporation

Case brief

What is this about?

What did the court decide?

Viskons Projects, v. Delhi Metro Rail Corporation

Case brief

What is this about?

What did the court decide?

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