J&K And Ladakh HC Holds Past Arbitration No Bar In Refund Claim, Directs SKUAST-J To Release Deposit

On 3 August, the Jammu & Kashmir and Ladakh High Court held that a contractor's claim for refund of earnest money and performance security cannot be rejected merely because it was not raised in earlier arbitration proceedings over delayed payments.

A Bench of Justice Sanjay Parihar directed Sher-e-Kashmir University of Agricultural Sciences and Technology, Jammu to refund Rs. 29 lakh deposited by Construction Engineer for a boys' hostel project and held that the refund claim was not barred merely because it was not raised in earlier arbitration proceedings. He observed:

“Once the contract had been fully performed and the respondents had accepted the completion of the work without alleging any breach or deficiency, the petitioner's reference to arbitration was confined solely to his claim for interest on delayed payment of the admitted contractual dues. The petitioner had no occasion to seek refund of the earnest money and performance security before the Arbitrator, particularly when the respondents themselves had consistently maintained that no dispute existed which was capable of being referred to arbitration. Having adopted such a stand, the respondents cannot now be permitted to contend that the petitioner ought to have included the relief of refund of the security deposits in the arbitral proceedings.”

The dispute arose from a contract awarded to Construction Engineer for construction of a G+1 boys' hostel building, along with sanitary and internal electrification works, at the Faculty of Agriculture main campus of the University in Jammu.

After completion of the work, payments were delayed amid allegations that the then Vice-Chancellor had created liabilities of Rs. 28.44 crore and executed works without obtaining the required technical sanction. The Government subsequently constituted a committee to examine the liabilities.

The contractor approached the High Court under Section 11(6) of the Jammu and Kashmir Arbitration and Conciliation Act, 1997, which provides for appointment of an arbitrator when parties fail to agree on one.

The application was allowed on 20 December 2013 and the arbitrator, by an award dated 31 October 2016, granted price escalation and interest on delayed payments. SKUAST-J's challenge to the award before the Principal District Judge, Jammu was dismissed, while further proceedings remained pending before the High Court.

Construction Engineer issued a legal notice on 1 September 2020 seeking release of the earnest money, performance security and bill deposit. After pursuing the University from 2021, the contractor filed the present writ petition seeking refund.

The contractor argued that the arbitration proceedings were limited to its claim for interest on delayed payment of admitted contractual dues and did not cover the refund of earnest money or performance security.

SKUAST-J argued that all contractual claims should have been raised before the arbitrator and that the writ petition was barred by res judicata (the rule against re-litigating an issue already decided) and Order II Rule II of the Code of Civil Procedure (which bars claims arising from the same cause of action if omitted earlier).

The University also claimed a lien over the deposits to secure any possible liability arising from the pending challenge proceedings.

Rejecting the objections, the Court noted that SKUAST-J had admitted that it never disputed the satisfactory execution of the contract and had earlier maintained that no arbitrable dispute existed between the parties. It held:

“A party which admits due performance of the contract and raises no claim for breach cannot assert any lien over the contractor's security deposit merely on the speculative ground that some liability may arise in future.”

Further, the Bench held that procedural objections could not be used to avoid an admitted contractual obligation, particularly when there was no forfeiture order based on breach or proof of loss.

Accordingly, the High Court issued a writ of mandamus directing SKUAST-J to release Rs. 11 lakh in earnest money and Rs. 18 lakh in performance security, while declining the claim for further interest.

Appearances for petitioner (M/S Construction Engineer): Senior Advocate D.C. Raina, with Advocates Anuj Dewan Raina and Mohd Junid.

Appearances for respondents (SKUAST-J and its officials): Advocate Anil Khajuria.