Contractor Cannot Deny Payments To ‘Sub-Contractor’ Merely On The Ground That It Has Not Received The Payments From The ‘Employer’: Delhi High Court

The bench of Justice Manoj Kumar Ohri held that ordinarily in back-to-back contracts, the payments due to a ‘Sub-contractor’ is subject to the payment by employer to the Contractor. However, this mechanism is to be followed only during the currency of the contract and once the parties are in a dispute, Contractor cannot defer payments in perpetuity on the ground of the pendency of payments, when it has not otherwise disputed the correctness of the bills.

The Court also held that since the Indian Evidence Act does not apply to arbitration proceedings, it can’t be insisted that the evidence produced by the parties during the arbitration proceedings must be tested on the rigorous rules of evidence laid down in the Indian Evidence Act. Further, it held that the arbitrator is the master of the quality and quantity of the evidence produced.

Facts

The Petitioner, a Contractor, was entrusted with the BTG Civil and Structural Work within a 1350 MW thermal power project at Sinner, Nasik, Maharashtra. This contract was awarded by M/s India Bulls Infrastructure Company Ltd. (Principal Employer) through a letter of award dated 05.05.2011. The total contract value amounted to Rs. 201.51 crores.

A portion of the contract, specifically involving steel fabrication and erection, was sub-contracted to the Respondent, a Sub-contractor, based on an MOU dated 02.07.2011. This MOU contained a provision that subjected the Sub-contractor to the terms and conditions of the contract between the Principal Employer and the Contractor, for the sub-contracted portion of the work.

Following the MOU, the Petitioner issued a letter of award dated 26.07.2011 to the Sub-contractor.

Further, a tripartite agreement dated 06.08.2011 was executed involving the Principal Employer, the Contractor, and the Sub-contractor. This agreement defined the scope of work, the roles of each party, and their respective relationships.

The Sub-contractor, as per Clause 13 of the MOU and Clause 1 of the tripartite agreement, provided an advance Bank Guarantee to the Principal Employer. This Bank Guarantee amounted to 5% of the contract value (Rs. 3,81,78,000/-) and was issued by the State Bank of India, New Delhi, in favor of the Principal Employer on behalf of the Contractor.

Commencing from August 2011 until November 2011, the Sub-contractor executed the structural steel fabrication and erection work for Mill & Bunker Bay at Unit 6-10, Phase-II, Sinner TPP, Nasik, in line with its obligations. However, at the Contractor's direction, the Sub-contractor ceased the work.

In a meeting on 17.11.2011, the Contractor officially informed the Sub-contractor about shifting the work from Phase II to Phase I, assigning the structural steel fabrication and erection for Mill & Bunker Bay at Unit 4-5, Phase I, Sinner TPP, Nasik. This transition incurred additional costs, agreed to be borne by the Principal Employer.

On 05.12.2011, the Contractor issued a new work order for Phase I, which commenced in December 2011 and continued until June 2012, when the Contractor directed the Sub-contractor to halt work once more.

The Sub-contractor claimed that, despite receiving payments from the Principal Employer for the work executed at both sites, its running bills remained unpaid by the Contractor.

The unresolved disputes led the Sub-contractor to invoke the Arbitration clause. Consequently, in ARB. P. 64/2019, the Court referred the matter to the Arbitral Tribunal (AT) with Justice Ajit Bharioke (Retd.) as the Sole Arbitrator, as per the order dated 27.03.2019.

After considering the parties' arguments, the AT issued the impugned Award on 23.12.2022. Subsequently, the Sub-contractor filed an application under Section 33 of the A&C Act seeking ecorrections, which the AT ultimately rejected on 15.02.2023. Aggrieved thereby, the petitioner challenged the award under Section 34 of the A&C Act.

Grounds of Challenge

The petitioner challenged the award on the following grounds:

• The claims of the respondent were time as the cause of for the same arose way back in the year 2011-12 and the arbitration was invoked belatedly after the expiry of the limitation period.
• The arbitrator erred in partly allowing the claims of the respondent as in terms of Clause 5 of the MoU and the tripartite agreement, the release of the payment was on back-to-back basis i.e., the respondent could have claimed payment only when the petitioner was paid the same by the principal employer.
• The arbitrator also erred in awarding the claims of the petitioner as the petitioner did not produce any evidence to substantiate its claims.
• The agreement between the parties did not have any provision for awarding of interest, therefore, the arbitrator could not have awarded interest thereupon.

Analysis by the Court

The Court observed that there was the petitioner has taken a self-contradictory stand on the issue of limitation. On one hand it denied its liability to pay the respondent on the ground that the claim was pre-mature as it had not received the payments from the principal employer (PE) and on the other hand raised the issue of limitation. Further, the Court observed that the petitioner had itself claimed from the PE, the amount qua the same issue, therefore, the tribunal rightly concluded that the claims were within the period of limitation.

The Court found the argument of the Petitioner regarding the lack of evidence in arbitral tribunal’s reasoning to be misplaced. The Court observed that the tribunal has specifically rejected those claims of the respondent for which it failed to produce any evidence.

The Court held that the arbitrator partly allowed the claim of the respondent by taking into account a quality certificate by FQA for payments issued in a joint inspection carried by representative of PE and Contractor, a forwarding letter of the same date written by the Contractor to the PE and a tax invoice also of the same date in relation to the RA Bill-05. The Court held that the arbitrator was correct as the contractor had itself claimed the same amount qua R.A. Bill No. 5 from PE.

The Court reiterated that the since the Indian Evidence Act does not apply to arbitration proceedings, it can’t be insisted that the evidence produced by the parties during the arbitration proceedings must be tested on the rigorous rules of evidence laid down in the Indian Evidence Act. Further, it held that the arbitrator is the master of the quality and quantity of the evidence produced.

Next, the Court decided whether the petitioner could withhold the awarded amount citing non-payment by the PE.

The Court held that a contractor cannot deny payments to the ‘Sub-contractor’ merely on the ground that the contract is on back-to-back basis and it has not received the payments from the main employer.

The Court that ordinarily in back-to-back contracts, the payments due to a ‘Sub-contractor’ is subject to the payment by employer to the Contractor. However, this mechanism is to be followed only during the currency of the contract and once the parties are in a dispute, Contractor cannot defer payments in perpetuity on the ground of the pendency of payments, when it has not otherwise disputed the correctness of the bills.

Accordingly, the Court dismissed the petition.

Case Title: Gannon Dunkerley and Co Ltd v. Zillion Infraprojects Pvt Ltd, OMP(COMM) 234 of 2023

Citation: 2023 LiveLaw (Del) 674

Counsel for the Petitioner: Mrs. Pooja M. Saigal, Mr. Simrat Singh Pasay and Mr. Nipun Gupta, Advocates.

Counsel for the Respondent: Nemo

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