Pending CBI Probe Not Adjudication: Bombay High Court Upholds Arbitral Award Against Central Railway

The Bombay High Court on Wednesday held that Central Railway cannot withhold undisputed payments to a contractor merely because a criminal case is pending in relation to another supply. The Court said a CBI investigation does not amount to adjudication under a contract and cannot, by itself, justify retaining money that is otherwise payable.

A single bench of Justice Gauri Godse held that the Railways were required to first raise a recovery claim and subject it to adjudication before exercising any lien under the contract.

“Pendency of the criminal prosecution initiated by CBI cannot be termed as adjudication for recovery of the amount alleged to have been recovered fraudulently by the respondent,” the court observed.

The dispute concerned two purchase orders issued by Central Railway to Bridge Track and Tower Pvt. Ltd. under the same contract. The first order was for railway switches, which were admittedly supplied. The second was for elastic rail clips.

Railways alleged that payments under the second order were released without actual supply and claimed that a fraud had been committed, leading to a CBI investigation and criminal prosecution.

Citing the pending probe, the Railways withheld Rs 31.32 lakh that was due for the supplies made under the first purchase order. An arbitral tribunal later directed the release of the amount, holding that the Railways had not followed the contractual requirements for withholding payment.

The Railways challenged the award before the High Court under Section 34 of the Arbitration and Conciliation Act.

Before the Court, the Railways argued that under the Indian Railways Standard Conditions of Contract, they were entitled to retain amounts payable under one purchase order while a criminal prosecution relating to alleged fraudulent payments under another purchase order was pending.

The contractor countered that criminal proceedings do not decide civil liability and that no recovery claim had ever been raised or put to adjudication as required under the contract.

Agreeing with the contractor, the court said the contract made it clear that a lien could be exercised only when a claim for recovery was raised and subjected to adjudication.

“Under the terms and conditions of the contract in this case, filing a claim for adjudication is necessary to maintain a lien on the security deposit or the sum payable,” the court said.

The court went on to make a detailed clarification on the limits of relying on criminal proceedings.

It held, “Findings recorded in criminal proceedings would not bind the civil proceedings, if any, initiated by the petitioner to recover the amount alleged to have been fraudulently recovered by the respondent. Hence, the petitioner is not entitled to charge a lien on the amounts due and payable for the goods admittedly supplied under the first purchase order by relying upon its right to keep a lien on the ground that a criminal proceeding is pending regarding the amounts recovered by the respondent under the second purchase order.”

The court noted that the Railways had never invoked arbitration or any other adjudicatory process to recover the amount allegedly released under the second purchase order. In the absence of such a claim, it held, the Railways had no contractual or legal basis to freeze payments for goods that were admittedly supplied.

Finding that the arbitral tribunal had adopted a judicious approach and correctly interpreted the contract, the court refused to interfere with the award and dismissed the Railways' petition.

For Petitioner: Advocate Chetan C. Agrawal

For Respondent: Advocate Aseem Naphade