2018 (4) TMI 2019 - HC - Companies Law

Principal contractor must pay sub-contractor regardless of client payment; withholding profits violates public policy under Arbitration Act Sections 34 & 37

The HC held that the principal contractor's liability to pay the sub-contractor is not contingent on receipt of payment from the client, as there was no ... Liability of principal contractor to pay sub-contractor - liability of principal contractor is contingent and conditional upon receipt of payment from the client or not - privity of contract - termination of the contract - HELD THAT:- There was no privity of contract between the respondent and CONCOR. The various clauses, on which reliance placed, merely stipulate that, out of the payment received by the appellant from CONCOR, the appellant was entitled to deduct its profit and commission, before making payment to the respondent. These clauses cannot be interpreted in such a way, as to disentitle the respondent to payment for work rendered by it, as instructed of the appellant and in accordance with the agreement between the appellant and the respondent, merely because the appellant did not receive payment from CONCOR. Any such interpretation would be grossly unjust, inequitable and against public policy, as it would amount to holding that the services rendered, and work done, by the respondent for the appellant, in terms of a bilateral contract duly drawn up between them, would have to be treated as rendered gratis, without any payment therefor. Such an interpretation, needless to say, cannot be adopted or accepted, by any court of law. The appellant may conceivably have its rights against CONCOR, which it would have to prosecute separately; the grievances of the appellant against CONCOR cannot, however, be allowed to spill over and engulf the respondent, leaving the respondent effectively in the lurch. The scope of interference, with arbitral awards, by this court, under Section 34 of the Arbitration and Conciliation Act, 1996 is circumscribed, and the scope of further interference, under Section 37 of the Act, is even more limited. There are no error in the impugned judgment of the learned Single Judge, in its decision not to interfere with the Award, dated 10th November, 2008, of the learned Sole Arbitrator. Even less is there any reason for us to interfere in the matter, in exercise of our jurisdiction under Section 37 of the Act. Appeal dismissed. ISSUES: Whether the liability of the principal contractor to pay the subcontractor is contingent upon receipt of payment from the client under a back-to-back contract arrangement.Whether termination of the contract between the principal contractor and the client extinguishes the principal contractor's liability towards the subcontractor.Whether the subcontractor is entitled to payment for work executed and refund of security deposit despite non-payment by the client to the principal contractor.The scope and extent of judicial interference with arbitral awards under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996. RULINGS / HOLDINGS: The court held that there was 'no privity of contract between the respondent and CONCOR' and that the liability to pay the subcontractor was that of the principal contractor, not contingent on payment from the client. The clauses stipulating payment on a back-to-back basis 'cannot be interpreted in such a way as to disentitle the respondent to payment' for work done.The termination of the contract between the principal contractor and the client does not extinguish the principal contractor's liability to the subcontractor; 'any such interpretation would be grossly unjust, inequitable and against public policy.'The subcontractor was entitled to payment of outstanding dues and refund of security deposit as per the arbitral award, which was upheld by the court. The award for Rs. 16,08,789/- and refund of Rs. 5,60,000/- was confirmed.The court reaffirmed that interference with arbitral awards under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996, is limited and circumscribed, and that an award would only be set aside if it is 'patently illegal,' 'perverse,' or 'contrary to the fundamental policy of Indian law.' The interpretation of contract terms by the arbitrator is entitled to deference and will not be substituted by the court unless palpably erroneous. RATIONALE: The court applied the principle that 'work duly done, as per contract, is required to be recompensed,' emphasizing that the subcontractor had a direct contractual relationship only with the principal contractor, not with the client.The contractual clauses providing for payment on a back-to-back basis were interpreted reasonably and holistically, rejecting the contention that non-payment by the client absolved the principal contractor of its payment obligations to the subcontractor.The court relied on established precedent and statutory framework under the Arbitration and Conciliation Act, 1996, particularly the limited grounds for setting aside arbitral awards under Section 34 and the restricted scope of appeals under Section 37, as summarized from authoritative Supreme Court decisions and prior judgments of the court itself.The court underscored that the arbitrator's findings, supported by evidence and reasonable interpretation of contract terms, are final on facts and law unless shown to be manifestly perverse or illegal, thereby upholding the principle of minimal judicial interference in arbitral awards.