The State of Gujarat Through Chief Secretary and Another vs Amber Builders

Contracts Disputes Arbitration Tribunal Act, 1992 (hereinafter 2

referred to as ‘the Gujarat Act’) has jurisdiction to make interim

orders in terms of Section 17 of the Arbitration and Conciliation

Act, 1996 (hereinafter referred to as ‘the A&C Act’).

2. At the outset, it may be noted that the Gujarat Act was

enacted with a view to compulsorily refer all disputes arising out

of “works contract” entered into by the State Government or the

Public Sector Undertakings with any other person for those

works defined as “works contract” in terms of Section 2 (k) of the

Gujarat Act. As far as this case is concerned, it is not disputed

that the contract entered into between the appellant State and

the respondent­contractor was a “works contract”. The contract

order pertaining to the parties dated 31.07.2007 contained an

arbitration clause, relevant portion of which reads as follows:­

“Clause : 30(1) Disputes to be referred to Tribunal : The dispute relating to this contract, so far as they relate to of the following matters, whether such disputes arise during the progress of the work of or after the completin or abandoned thereof, shall be referred to the Arbitration Tribunal, Gujarat State…”

3. It is not disputed that the Gujarat Act is applicable in the

present cases. We are mainly concerned with Clause 43.A of the

contract entered into between the parties, which reads as

follows:­ 3

“43.A Any sum of money due and payable to the Contractor (including the security deposit returnable to the contractor) executing any Government work or work of any District Panchayat wholly financed as grant­in­aid under this contract shall be appropriate by any District Panchayat/Government and shall be set off against any claim of the Government/District Panchayat of Gujarat state by the District Panchayat of Gujarat State/Government for the payment of a sum of money arising out or under any other contract made by the contractor with the Government/District Panchayat of Gujarat State for the work wholly financed as grant­in­aid by Government of Gujarat State. When no such amount for purpose of the recovery from the contractor against any claim of the Government/District Panchayat of Gujarat state is available, such a recovery shall be made from the contractor as arrears of land revenue.”

4. In this judgment, we are only referring to the facts of Civil

Appeal No.8307 of 2019 @ SLP(C) No.36095 of 2016. The

respondent­contractor was awarded a contract for strengthening

a section of National Highway under work order dated

31.07.2007. According to the contractor, he completed the work

on 30.04.2008 and final bill was paid to the contractor. The road

was damaged and, according to the contractor, this had occurred

due to heavy rains. The State called upon the contractor to

repair the damaged portion and, according to the contractor, this

repair was completed after the rains stopped.

5. The case of the contractor is that in terms of the contract,

the contractor was only liable to remove defects for a period of 3

years which period ended on 30.04.2011. On 10.09.2012, the 4

contractor wrote a letter to the State to release the security

amount. This amount was accordingly released vide letter dated

10.09.2012. The State issued letter dated 11.11.2014 calling

upon the contractor to pay a sum of Rs.1,09,00,092/­. This

claim was based on the premise that the contractor had not

carried out the road repair work in accordance with the contract.

The appellant State threatened to withhold the payments from

the security deposits and bills of other pending works. This

notice was challenged by filing a writ petition in the High Court of

Gujarat on the ground that the State was not competent to

withhold the amount payable to the contractor under other

contracts or recover the amount from payments made under

other contracts until the liability of the contractor was

determined and quantified by a Court or forum of competent

jurisdiction. The stand of the State was that since the work of

the contractor was defective, the State had got the work done

from another person at the risk of the contractor. In case, the

contractor has any dispute, he can approach the Court and

reliance was placed on Clause 43.A of the agreement quoted

above.

5

6. The High Court relied upon the judgment of this Court in

State of Karnataka vs. Shree Rameshwara Rice Mills,

Thirthahalli1 and the consistent view of the Gujarat High Court

in various judgments referred to in the impugned judgment and

held that without quantification or crystallization of the amount

sought to be recovered, the employer or the contractor cannot

unilaterally recover the said amounts from the ongoing contract

work of the same contractor in connection with another contract.

It was further directed that the State could not recover the

amounts sought to be recovered from the payments due and

payable to the contractor in other contracts. Liberty was,

however, given to the State to seek recovery through other means

as may be permissible under law. Accordingly vide judgment

dated 18.02.2016 the petition was allowed and the

communication dated 11.11.2014 was set aside.

7. This judgment has been challenged before us. Shri

Preetesh Kapoor, learned senior counsel appearing for the State

of Gujarat contends that the High Court has no jurisdiction to

pass such an order. He submits that, in fact, the remedy, if any,

of the respondent contractor was to approach the State Tribunal 1 (1987) 2 SCC 160 6

as constituted under the Gujarat Act and the writ court could not

have granted such relief. On the other hand, Shri. K. G.

Sukhwani, learned counsel appearing for the respondent submits

that the Tribunal constituted under the Gujarat Act has no

jurisdiction to grant such relief and he has placed reliance on an

order of the State Tribunal dated 24.11.2005 wherein the

Tribunal held that it can only exercise jurisdiction, powers and

authority conferred on it by or under the Gujarat Act of which it

is a creation. It was further held that if the Gujarat Act does not

empower the Tribunal to grant injunction, and it cannot take

recourse to the Code of Civil Procedure, 1908 for grant of interim

relief. It also held that an order of interim injunction, as prayed

for like in the present case, does not fall within the ambit of

‘interim award’. The Tribunal held that there is no power to

grant such injunction.

8. It appears to us that since then, in Gujarat, challenges to all

communications/orders, whereby the State taking recourse to

the provision of the contract akin to Clause 43.A seeks to recover

amounts by setting it off against the claims of contractor in other

contracts, are dealt with by the High Court. 7

9. We have extracted the main issue in the opening portion of

the Judgment. Section 2(a) of the Gujarat Act defines an

‘Arbitration Act’ to mean Arbitration Act, 1940. It is not disputed

by the parties that this will now read to mean the A&C Act.

10. We may also refer to certain provisions of the A&C Act.

Section 2(e)(i) of the A&C Act defines ‘Court’ in the context of

disputes other than the international commercial arbitration as

follows:­

“(i) in the case of an arbitration other than international commercial arbitration, the principal Civil Court of original jurisdiction in a district, and includes the High Court in exercise of its ordinary original civil jurisdiction, having jurisdiction to decide the questions forming the subject­matter of the arbitration if the same had been the subject­ matter of a suit, but does not include any Civil Court of a grade inferior to such principal Civil Court, or any Court of Small Causes;”

11. We may also refer to Section 2(2) & 2(4) of the A&C Act

which read as follows:­

“(2) This Part shall apply where the place of arbitration is in India:

Provided that subject to an agreement to the contrary, the provisions of sections 9, 27 and clause

(a) of sub­section (1) and sub­section (3) of section 37 shall also apply to international commercial arbitration, even if the place of arbitration is outside India, and an arbitral award made or to be made in 8

such place is enforceable and recognised under the provisions of Part II of this Act.”

xxx xxx xxx

“(4) This Part except sub­section (1) of section 40, sections 41 and 43 shall apply to every arbitration under any other enactment for the time being in force, as if the arbitration were pursuant to an arbitration agreement and as if that other enactment were an arbitration agreement, except in so far as the provisions of this Part are inconsistent with that other enactment or with any rules made thereunder.”

12. Section 9 of the A&C Act empowers the Court to grant

interim measures. However, Section 9(3) clearly provides that

once an arbitral tribunal is constituted, the Court shall not

entertain an application under Section 9(1) unless the Court

comes to the conclusion that such circumstances exist which

would make the remedy under Section 17 not efficacious.

13. Section 17 of the A&C Act provides for interim measures to

be granted by the arbitral tribunal. It reads as follows:­

“17. Interim measures ordered by arbitral tribunal.—(1) A party may, during the arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with section 36, apply to the arbitral tribunal—

(i) for the appointment of a guardian for a minor or person of unsound mind for the purposes of arbitral proceedings; or 9

(ii) for an interim measure of protection in respect of any of the following matters, namely:—

(a) the preservation, interim custody or sale of any goods which are the subject­matter of the arbitration agreement;

(b) securing the amount in dispute in the arbitration;

(c) the detention, preservation or inspection of any property or thing which is the subject­matter of the dispute in arbitration, or as to which any question may arise therein and authorising for any of the aforesaid purposes any person to enter upon any land or building in the possession of any party, or authorising any samples to be taken, or any observation to be made, or experiment to be tried, which may be necessary or expedient for the purpose of obtaining full information or evidence;

(d) interim injunction or the appointment of a receiver;

(e) such other interim measure of protection as may appear to the arbitral tribunal to be just and convenient, and the arbitral tribunal shall have the same power for making orders, as the court has for the purpose of, and in relation to, any proceedings before it.

(2) Subject to any orders passed in an appeal under section 37, any order issued by the arbitral tribunal under this section shall be deemed to be an order of the Court for all purposes and shall be enforceable under the Code of Civil Procedure, 1908 (5 of 1908), in the same manner as if it were an order of the Court.”

14. We may also refer to Section 31(6) of the A&C Act which

reads as follows:­ 10

“31. Form and contents of arbitral award.­

xxx xxx xxx

(6) The arbitral tribunal may, at any time during the arbitral proceedings, make an interim arbitral award on any matter with respect to which it may make a final arbitral award.”

15. Part I of the A&C Act i.e. from Section 2 to Section 43 deals

with Arbitration and Section 2(2) clearly states that the said Part

would apply to all Arbitrations which take place in India. Section

2(4) makes it absolutely clear that other than Section 40(1), 41

and 43, Part I of the A&C Act shall apply to all arbitrations even

if they are carried out under any other enactment as if the

arbitrations were pursuant to an arbitration agreement except

insofar as the provisions of Part I are inconsistent with the other

enactment or any rules made thereunder. A plain reading would

show that the provisions of Part I of the A&C Act would apply to

all arbitrations where the place of arbitration is within India.

Even statutory arbitrations under other Acts would be governed

by Part I. The only exception is that if there is any departure

from Part I in the special enactment then the special enactment

will prevail and the A&C Act will give way to the special

enactment.

11

16. It is in this context that we have to examine the Gujarat Act.

We have already referred to certain provision of the Gujarat Act.

Reference and procedure of the Tribunal is governed by Chapter

3 of the Gujarat Act. Section 8 provides that where any dispute

within the meaning of the said Act, arises between the parties,

the said dispute shall be referred to arbitration under the said

Act whether the agreement in question contained an arbitration

clause or not. Basically, the intention of the Stage Legislature

was that all disputes relating to works contract between the State

Government and the persons executing the works defined as

works contract would be compulsorily referred to the Arbitral

Tribunal constituted under Section 3 of the Gujarat Act. Section

8(3) clearly provides that where the Tribunal admits a reference

under sub­section (2) it will make an award or an interim award

giving its reasons thereof. This Section recognizes the power of

the Tribunal to make interim awards. However, as pointed

above, the Tribunal took a view that an interim award could not

be in the nature of an injunction.

17. The practice and procedure of the Tribunal is governed by

Section 9 of the Act. Section 12 of the Act vests revisional powers 12

in the High Court of Gujarat where an award or any interim

award can be challenged on the grounds set out therein. The

High Court also has suo motu powers in this regard. Section 13

which is relevant for our purpose reads as follows:­

“13. Bar of jurisdiction of Courts.­ (1) Save as otherwise provided by section 12, no Civil Court shall have jurisdiction to deal with or decide any question which the Tribunal is empowered to deal with and decide by or under this Act and no injunction shall be granted by any Civil Court in respect of any action taken or to be taken in pursuance of any power by or under this Act.

(2) No award or interim award or order made or proceedings taken under this Act by the Tribunal shall be called in question in any Civil Court.”

Section 13 specifically bars the jurisdiction of the Civil Courts.

This clearly means that powers vested in a Civil Court under the

A&C Act, such as the powers to grant interim relief in terms of

Section 9 of the A&C Act and the powers for setting aside an

award under Section 34 of the Act cannot be exercised by Civil

Courts insofar as the awards made under the Gujarat Act are

concerned. As far as Gujarat Act is concerned, the power to set

aside/modify an award is vested in the High Court under Section

12. Section 21 of the Gujarat Act reads as follows:­

“21. Arbitration Act to cease to apply.­ The provisions of the Arbitration Act, shall in so far as 13

they are inconsistent with the provisions of this Act, cease to apply to any dispute arising from a works contract and all arbitration proceedings in relation to such dispute before an arbitrator, umpire, court or authority shall stand transferred to the Tribunal.”

18. We are clearly of the view that the appropriate remedy for

the contractor was to approach the arbitral tribunal constituted

under the Gujarat Act since that would have jurisdiction to

decide whether the notice issued by the Government was a legal

notice and whether the Government was, in fact, entitled to

recover any amount from the contractor. It would also be within

the jurisdiction of the Tribunal to decide whether the contractor

has made out a prima facie case for grant of interim relief. We

are purposely not going into the merits of the case because once

we hold that the Tribunal has the jurisdiction to entertain and

adjudicate upon the dispute it would not be proper for us to

make any comments on the merits.

19. Shri Sukhwani, learned counsel appearing for the

respondents has placed reliance on a judgment of this Court in

Gangotri Enterprises Limited vs. Union of India and

Others2 to submit that till the demand of the Government is

crystallised or adjudicated upon, the Government cannot

2 (2016) 11 SCC 720 14

withhold the money of the contractor. Since this case been

specifically relied upon we are duty bound to go in the

correctness of the view laid down in Gangotri Enterprises

(supra). The judgment in Gangotri Enterprises (supra) is

primarily based on the judgment of a two Judges’ Bench of this

Court in Union of India vs. Raman Iron Foundry3 In this

case, this Court held that the Government had no right to

appropriate the amount claimed without getting it first

adjudicated. The relevant portion of the judgment reads as

follows:

“6… But here the order of interim injunction made by the learned Judge does not, expressly or by necessary implication, carry any direction to the appellant to pay the amounts due to the respondent under other contracts. It is not only in form but also in substance a negative injunction. It has no positive content. What it does is merely to injunct the appellant from recovering, suo moto, the damages claimed by it from out of other amounts due to the respondent. It does not direct that the appellant shall pay such amounts to the respondent. The appellant can still refuse to pay such amounts if it thinks it has a valid defence and if the appellant does so, the only remedy open to the respondent would be to take measures in an appropriate forum for recovery of such amounts where it would be decided whether the appellant is liable to pay such amounts to the respondent or not. No breach of the order of interim injunction as such would be involved in non­payment of such amounts by the appellant to the respondent. The only thing which the appellant is interdicted from doing is to make recovery of its claim for damages by appropriating such amounts in satisfaction of the claim. That is clearly

3 (1974) 2 SCC 231 15

within the power of the Court under Section 41 (b) because the claim for damages forms the subject matter of the arbitration proceedings and the Court can always say that until such claim is adjudicated upon, the appellant shall be restrained from recovering it by appropriating other amounts due to the respondent. The order of interim injunction made by the learned Judge cannot, therefore, be said to be outside the scope of his power under Section 41 (b) read with the Second Schedule.

xxx xxx xxx “11…We must, therefore, hold that the appellant had no right or authority under Clause 18 to appropriate the amounts of other pending bills of the respondent in or towards satisfaction of its claim for damages against the respondent and the learned Judge was justified in issuing an interim injunction restraining the appellant from doing so.”

The judgment in Raman Iron Foundry (supra), was specifically

overruled on the issue in hand by a three Judge Bench of this

Court in the case of H.M. Kamaluddin Ansari & Co. vs. Union

of India4. In this case there was a general condition which

entitled the Government to recover the damages claimed by

appropriating any sum which may become due to the contractor

under other pending bills. In this case, this Court disagreed with

the findings in the Raman Iron Foundry (supra) and held as

follows:

“21…With profound respect we find that the aforesaid observation is incongruous with the proposition of law laid down by this Court just

4 (1983) 4 SCC 417 16

before this observation. We find it difficult to agree with the observation of the Court that the impugned order in form and substance being the negative the respondent could refuse to pay such amounts if it thinks it has a valid defence, and if it chooses to do so there would be no breach of the injunction order.

22. It is true that the order of injunction in that case was in negative form. But if an order injuncted a party from withholding the amount due to the other side under pending bills in other contracts, the order necessarily means that the amount must be paid. If the amount is withheld there will be a defiance of the injunction order and that party could be hauled up for infringing the injunction order. It will be a contradiction in terms to say that a party is injuncted from withholding the amount and yet it can withhold the amount as of right. In any case if the injunction order is one which a party was not bound to comply with, the court would be loath and reluctant to pass such an ineffective injunction order. The court never passes an order for the fun of passing it. It is passed only for the purpose of being carried out. Once this Court came to the conclusion that the court has power under Section 41 (b) read with Second Schedule to issue interim injunction but such interim injunction can only be for the purpose of and in relation to arbitration proceedings and further that the question whether any amounts were payable by the appellant to the respondent under other contracts, was not the subject matter of the arbitration proceedings and, therefore, the court obviously could not make any interim order which, though ostensibly in form an order of interim injunction, in substance amount to a direction to the appellant to pay the amounts due to the respondent under other contracts, and such an order would clearly be not for the purpose of and in relation to the arbitration proceedings; the subsequent observation of the Court that the order of injunction being negative in form and substance, there was no direction to the respondent to pay the amount due to the appellant under pending bills of other contracts, is manifestly inconsistent with the proposition of law laid down by this Court in the same case.

xxx xxx xxx 17

31. We are clearly of the view that an injunction order restraining the respondents from withholding the amount due under other pending bills to the contractor virtually amounts to a direction to pay the amount to the contractor­appellant. Such an order was clearly beyond the purview of clause (b) of Section 41 of the Arbitration Act. The Union of India has no objection to the grant of an injunction restraining it from recovering or appropriating the amount lying with it in respect of other claims of the contractor towards its claim for damages. But certainly Clause 18 of the standard contract confers ample power upon the Union of India to withhold the amount and no injunction order could be passed restraining the Union of India from withholding the amount.”

20. In our opinion, the judgment rendered in Gangotri

Enterprises Limited (supra) is per incuriam because it relies

upon Raman Iron Foundry (supra) which has been specifically

overruled by three Judge Bench in the case of H.M. Kamaluddin

Ansari (supra).

21. On a conjoint reading and a careful analysis of the Acts

together, we are of the view that insofar as the powers vested in

the Arbitral Tribunal in terms of the Section 17 of the A&C Act

are concerned, such powers can be exercised by the Tribunal

constituted under the Gujarat Act because there is no

inconsistency in these two Acts as far as the grant of interim

relief is concerned. This power is already vested in the tribunal 18

under the Gujarat Act and Section 17 of the A&C Act

compliments these powers and therefore it cannot be said that

the provisions of Section 17 of the A&C Act are inconsistent with

the Gujarat Act.

22. In view of the above discussion, both the appeals filed by

the State of Gujarat are allowed, and the judgments of the High

Court of Gujarat are set aside. However, liberty is given to the

contractor(s) to approach the Gujarat Public Works Contract

Disputes Arbitration Tribunal and if the Tribunal is approached

within 2 months from today, the tribunal shall not dismiss the

claim on the issue of limitation. It shall decide the same on

merits. Pending application(s), if any, shall stand(s) disposed of.

…………………………….J. (Deepak Gupta)

……………………………..J. (Aniruddha Bose)

New Delhi January 8, 2020