The High Court of Delhi, in a pivotal decision on December 12, 2022, addressed the contentious issue of whether employers can retain performance bank guarantees after the acknowledged completion of contractual obligations. This ruling came in the case of Union of India vs. RCCIVL-LITL (JV), where the court, presided over by Hon’ble Mr. Justice V. Kameswar Rao, delivered a detailed judgement that not only clarified the legal standing on the release of bank guarantees but also highlighted the principles governing interim relief under the Arbitration and Conciliation Act, 1996.

Facts of the Case

The Union of India, through the Director General, Married Accommodation Project, Integrated HQ of Ministry of Defence (Army), entered into a contract with the respondent RCCIVL-LITL (JV) on November 5, 2014, for a project valued at INR 281.11 crore. The scheduled dates for commencement and completion were January 1, 2015, and January 31, 2017, respectively. However, the project was completed on June 30, 2018, with the defect liability period expiring on June 30, 2020.

Upon securing the contract, the respondent deposited performance bank guarantees amounting to INR 14,05,56,000/-. An additional INR 3,00,00,000/- was retained against retention money after the work’s completion. Despite the completion, issues arose when the final bill submitted by the respondent was disputed and subsequently prepared by the appellant’s consultant, leading to arbitration.

Grounds for Appeal

The Union of India appealed under Section 37(2)(b) of the Arbitration and Conciliation Act, 1996, to set aside the orders dated January 12, 2022, and February 19, 2022, passed by the learned arbitrator. The arbitrator had directed the appellant to release the bank guarantee amounting to INR 10,00,00,000/- while retaining INR 4,05,56,000/-.

The appellant contended that the arbitrator misconstrued the contractual provisions and made premature observations on the merits of the controversy. They argued that the principles for granting interim relief under Section 17 of the Act were not correctly applied. The appellant’s counsel, Mr. Jaswinder Singh, emphasized that the arbitrator had pre-judged the issue, considering the pending counter-claim of approximately INR 14 crore and the financial distress admitted by the respondent.

The appellant, Union of India, contested the tribunal’s orders on several grounds

  • The arbitrator rendered a finding on the merits of the dispute, thus pre-judging the entire issue and exceeding the scope of Section 17 of the Arbitration and Conciliation Act, 1996.
  • The respondent admitted severe financial distress due to COVID-19, thus raising concerns that an unsecured counter-claim award would be rendered ineffective.
  • The arbitrator misapplied the principles of Order XXXVIII Rule 5 of the Civil Procedure Code by directing the release of ₹10,00,00,000/- in bank guarantees without any intervention from the court to secure the appellant’s claims.
  • Clause 58 of the contract stipulates that performance bank guarantees can be returned only after the final bill is settled. Since the final bill was not settled, the demand for release was premature.
  • Clause 19.4 of the contract allows the appellant to retain bank guarantees to cover any losses incurred during project execution. The arbitrator disregarded these contractual provisions.

Respondent’s Objections

  • The scope of appeal under Section 37 of the Arbitration and Conciliation Act is narrower than that of a regular appeal, and the court should not interfere unless the tribunal’s finding is perverse or contrary to law.
  • The appellant still holds a valid bank guarantee of ₹4,05,56,000/-.
  • The appellant has already encashed a ₹3,00,00,000/- bank guarantee. The amount of ₹6,29,60,450.50/- claimed by the appellant should be borne by the erstwhile contractor, reducing the appellant’s claim to ₹4.8 crore, for which it already holds a guarantee of more than ₹4 crore.
  • The tribunal’s order balanced the equities by securing the appellant’s interests to the tune of ₹7.05 crore against a counter-claim of ₹15 crore, which includes over ₹7 crore in interest.
  • The appellant acknowledged due performance by issuing a completion certificate, and performance bank guarantees cannot be retained post-acknowledgement.
  • Performance bank guarantees cannot be withheld to secure counter-claims.

Court’s Analysis

Justice V. Kameswar Rao highlighted key aspects in his judgement, stating, “the release of the performance bank guarantee should only have been granted as part of the final award in the event the appellant was unsuccessful in the arbitration proceedings.” He noted that the arbitrator rightly balanced equities by retaining a bank guarantee of INR 4,05,56,000/- to secure the appellant’s interests pending final adjudication of counter-claims.

The Court observed that as against a counter-claim of INR 14 crore that includes a claim of interest worth more than INR 7 crore, the appellant is already secured with an amount of more than INR 7 crore.

The Court held that the counter-claims of the appellant are yet to be decided by the arbitrator, therefore, the amount allegedly due cannot be called a determinable debt. The Court held that the employer cannot also withhold the performance bank guarantee merely for securing the amount of its counter-claims.

The judge referenced the case of Bharat Sanchar Nigam Ltd. v. Teracom Ltd., noting, “performance security cannot be retained after acknowledgment of due performance of the contract.” He pointed out that in the present case, the appellant had issued a completion certificate in July 2018, thereby acknowledging due performance and nullifying their right to retain the performance bank guarantees beyond that point.

The Court further rejected the argument that in terms of Clause 58 of GCC, the bank guarantee could only be returned after the payment of the final bill. The Court held that on one hand the appellant says that there is no amount due under the final bill and on the other hand it says that the claim is premature as the final bill is not settled. The Court held that it cannot blow hot and cold at the same time.

Accordingly, the Court dismissed the appeal as bereft of merit.

Conclusion

The judgement concludes that the Delhi High Court found no merit in the appeal and dismissed it, stating that the arbitrator had judiciously balanced the interests of both parties. The appellant’s application I.A. 4725/2022 was declared infructuous and dismissed accordingly.

This ruling reiterates that employers cannot unjustly retain performance bank guarantees after confirming that the contractual obligations have been duly performed, ensuring fair practice in contractual and arbitration proceedings.

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