The Bombay High Court has clarified that under the terms of the contract, specifically Clause 2401 of the Indian Railways Standard Conditions of Contract (IRS Conditions), the right of a purchaser to withhold payment and exercise a lien on sums due to a contractor is contingent upon the purchaser having an active claim for a sum of money that is pending finalisation or adjudication through a formal process like arbitration or a court proceeding.
The Court held that mere pendency of a criminal investigation or prosecution, such as a CBI enquiry, regarding alleged fraud does not constitute an ‘adjudication of a claim’, as stipulated by the contract. Therefore, a lien cannot be validly maintained solely on the basis of a criminal proceeding without the purchaser first initiating a formal claim for recovery of the disputed amount.
Accordingly, while holding that the arbitral tribunal had correctly interpreted Clause 2401 of the IRS terms and conditions, the Court held that the Central Railway through its Principal Chief Engineer (petitioner) was not entitled to withhold the amount payable for goods admittedly supplied under the first purchase order by raising a lien based on the pending criminal proceedings related to the second purchase order, as no formal claim for recovery had been initiated. The Court thus, upheld the arbitral award.
A Single Judge Bench of Justice Gauri Godse observed that the central issue was whether the petitioner was entitled to withhold payment due under the first purchase order by placing a lien on it, solely based on the pending CBI criminal prosecution concerning the second purchase order. The Bench analysed Clause 2401 of the IRS terms, which allows the purchaser to withhold and have a lien on any sum payable to the contractor whenever a ‘claim or claims for payment of a sum of money arises out of or under the contract against the Contractor’, pending the ‘finalisation or adjudication of any such claim’.
The Bench noted that to exercise this right of lien, the petitioner must first raise a claim for the recovery of the money allegedly lost, which it had admittedly not done by invoking arbitration. The Bench also observed that findings in a criminal proceeding are not binding on a civil proceeding and that a criminal court’s decision is not binding on a civil court. Therefore, the pendency of the CBI prosecution cannot be considered an ‘adjudication’ for the recovery of the amount as required by Clause 2401.
The Bench also referred to the definition of ‘lien’ from Black’s Law Dictionary as a ‘charge or security’ on a property, not a right to the thing itself, reinforcing that a lien secures a claim, which must first be formally raised. Accordingly, the Bench cautioned that a contractual clause for withholding payment applies only where a claim is admitted or substantiated through a judicial process, which had not occurred here.
Briefly, the dispute arose from two purchase orders placed by the petitioner with Bridge Track and Tower Pvt Ltd. (respondent). The first, dated February 9, 2012, was for the supply of 344 fan-shaped switches, and the second, dated July 17, 2012, was for Elastic Rail Clips (ERC). The petitioner alleged that the respondent, in collusion with railway staff, fraudulently received payment for the second purchase order without actually supplying the goods, which led to the initiation of criminal proceedings and a CBI investigation.
Citing Clause 2401 of the Indian Railways Standard (IRS) Conditions of Contract, the petitioner withheld payments amounting to Rs. 31.32 Lakh due to the respondent under the first purchase order, pending the outcome of the CBI enquiry.
When the matter reached the Arbitral Tribunal, it ruled in favour of the respondent, directing the release of the withheld amount, stating the petitioner had not provided the required notice for withholding the payment and could not do so merely on the grounds of a pending criminal case. The petitioner challenged this award, arguing it had the right to a lien on the amount payable under the first contract until the CBI enquiry regarding the second contract was concluded.
Appearances:
Advocates Chetan C. Agrawal and Saurabh Gori, for the Petitioner/Applicant
Advocates Aseem Naphade, Deepanjali Mishra, and A. P. Singh, for the Respondent
