The Bombay High Court has clarified that a public entity cannot unilaterally withhold payments due under one contract based solely on allegations of fraud in another, absent a formal claim initiated through arbitration. This ruling reinforces the principle that contractual rights to retain funds are contingent on procedural compliance, not speculative criminal allegations.
Background & Facts
The Dispute
The dispute arose from two separate purchase orders issued by the Union of India (Petitioner) to M/s. Bridge Track And Tower Pvt. Ltd. (Respondent) for supply of railway components. The first purchase order, dated 9 February 2012, involved 344 sets of 60 kg fan-shaped switches. The second, dated 17 July 2012, covered 1,014,117 elastic rail clips. The Respondent raised three invoices totaling Rs. 31,32,396 for goods supplied under the first purchase order, which remained unpaid. The Petitioner withheld payment, alleging that the Respondent had fraudulently obtained payment under the second purchase order without supplying goods, triggering a CBI investigation and charge sheet for forgery and cheating.
Procedural History
- 2011-2012: Tender issued and purchase orders executed under Indian Railways Standard Conditions of Contract (IRS terms)
- 2013: Respondent raised invoices for goods delivered under first purchase order
- 2019: Petitioner issued a lien notice on amounts due under first purchase order, citing pending CBI proceedings
- 2023: Respondent initiated arbitration seeking payment for unpaid invoices
- 2025: Sole arbitrator awarded Rs. 24,93,462 for unpaid goods and Rs. 6,38,932 for PVC amount, rejecting lien defense
- 2026: Petitioner filed Section 34 petition to set aside award
Relief Sought
The Petitioner sought to set aside the arbitral award on grounds that it violated Clause 2401 of the IRS terms by failing to recognize its right to retain payment pending adjudication of criminal proceedings. The Respondent sought enforcement of the award and dismissal of the petition.
The Legal Issue
The central question was whether a party can invoke a contractual lien under Clause 2401 of the IRS terms to withhold payments due under one contract based solely on the pendency of criminal proceedings related to a separate transaction, without first filing a formal claim for recovery through arbitration.
Arguments Presented
For the Petitioner
The Petitioner relied on Clause 2401 of the IRS terms, arguing that it had the right to retain amounts payable under the first purchase order due to the CBI’s pending prosecution for fraud under the second. It cited M/s. H.M. Kamaluddin Ansari & Co. v. Union of India to assert that contractual lien rights are broad and not contingent on initiating arbitration. It further contended that the arbitral tribunal erred by ignoring the lien notice dated 6 August 2019 and the existence of a charge sheet.
For the Respondent
The Respondent countered that Clause 2401 requires a formal claim to be raised and adjudicated before a lien can be enforced. It relied on Vishnu Dutt Sharma v. Daya Sapra and Shanti Kumar Panda v. Shakuntala Devi to argue that criminal proceedings do not constitute civil adjudication. It also cited Board of Trustees of the Port of Bombay v. Sriyanesh Knitters and Black’s Law Dictionary to establish that a lien is a security interest, not a self-executing right, and cannot be asserted without a substantiated claim.
The Court's Analysis
The Court undertook a meticulous interpretation of Clause 2401 of the IRS terms, emphasizing that the right to withhold is not automatic but conditional. The clause permits withholding only "whenever any claim or claims for payment of a sum of money arises out of or under the contract against the Contractor." The Court held that the mere existence of a criminal investigation does not equate to a "claim" under the contract.
"The pendency of the criminal prosecution initiated by CBI cannot be termed as adjudication for recovery of the amount alleged to have been released fraudulently by the respondent."
The Court distinguished M/s. H.M. Kamaluddin Ansari & Co., noting that while the Apex Court recognized broad lien rights, it also held that such rights apply only when a claim is either admitted or substantiated through judicial or arbitral process. Here, the Petitioner had not filed any claim under the arbitration clause to recover the alleged fraudulent payments under the second purchase order. The Court further held that findings in criminal proceedings are not binding in civil matters, as established in Vishnu Dutt Sharma and Shanti Kumar Panda. The lien, as defined in Black’s Law Dictionary, is a charge for security, not a right to appropriate funds without recourse. The Court concluded that the arbitral tribunal correctly held that the Petitioner failed to discharge its burden of proving compliance with Clause 2401, particularly the requirement to notify the Respondent and initiate a claim.
The Verdict
The Petitioner’s application under Section 34 was dismissed. The Court upheld the arbitral award, holding that a contractual lien under Clause 2401 cannot be invoked without a formal claim filed through arbitration, and that pending criminal proceedings alone do not justify withholding payments for undisputed deliveries.
What This Means For Similar Cases
Formal Claim Is Prerequisite to Lien
- Practitioners must initiate arbitration or litigation to substantiate a claim before asserting a contractual lien under IRS or similar terms
- Merely issuing a notice of lien without a pending claim is procedurally invalid and will not survive judicial scrutiny
- Public sector entities must document and formally pursue recovery claims, not rely on criminal investigations as proxies
Criminal Proceedings Do Not Substitute Civil Adjudication
- Allegations of fraud in one contract cannot be used to justify withholding payments under another without a civil claim
- Arbitrators and courts will not treat CBI charge sheets or investigations as equivalent to adjudicated claims
- Parties must separate criminal allegations from contractual obligations in arbitration proceedings
Notice Alone Is Insufficient
- Clause 2401 requires both notification and a substantiated claim; notice without claim is meaningless
- Evidence of notice (e.g., registered post, acknowledgment) must be accompanied by proof of claim initiation
- Failure to file a claim renders any lien notice legally ineffective, regardless of its formality or timing
