Bombay High Court Orders Afcons to Maintain Bank Guarantees Pending Final Section 34 Adjudication

The High Court of Judicature at Bombay , presided over by Justice Amit Borkar, has issued a significant directive ensuring the continuity of financial security in a long-standing commercial dispute. The Court ordered the Afcons Gunanusa Joint Venture to keep existing bank guarantees alive until the final adjudication of the petition filed by the Oil and Natural Gas Corporation Limited (ONGC) under Section 34 of the Arbitration and Conciliation Act, 1996 .

The Genesis of a Complex Dispute

The conflict arises from a contract executed in 2008 for the design, engineering, and installation of the ICP-R process platform, a critical infrastructure project aimed at boosting national crude oil and natural gas production. Following project delays exceeding 220 days, disputes emerged regarding the attribution of responsibility and ONGC’s subsequent claim for liquidated damages . During the ensuing arbitral proceedings , the parties opted to substitute the immediate deduction of damages with unconditional and irrevocable bank guarantees, a mechanism designed to allow the project to continue while reserving legal rights.

Conflicting Legal Interpretations

Before the Arbitral Tribunal , ONGC argued that as a public utility project, time was of the essence and that liquidated damages served as a genuine pre-estimate of loss. While the Tribunal acknowledged that the delay was attributable to the respondent, it ultimately dismissed ONGC's counterclaim , citing the lack of proof of actual loss—a decision heavily influenced by the Supreme Court ’s interpretation of Section 74 of the Indian Contract Act, 1872 . ONGC challenged this, asserting that in projects of national importance, the burden of proving that no loss occurred should shift to the party causing the delay.

The Court’s Reasoning

In its evaluation of whether post-award interim protection was warranted, the High Court emphasized that it was not revisiting the merits of the award. Instead, it focused on whether " rare and compelling circumstances " mandated the preservation of the status quo .

Justice Borkar noted the following:

"The Bank Guarantees constitute the only security available for securing the petitioner's liquidated damages claim; if the Bank Guarantees are permitted to lapse and the petitioner succeeds in the proceedings under Section 34, such success would become meaningless because there would be no security left to satisfy its claim."

The Court further observed that the petitioner was not seeking a new security but rather the preservation of an arrangement that had persisted for nearly fifteen years.

Implications for Arbitration in India

The ruling highlights the judiciary’s role in ensuring that arbitration remains a viable alternative to litigation, particularly where the " loser pays " principle and cost efficiency are concerned. As noted in broader legal discourse, the adjudication of arbitral costs and security must be a meticulous process, as the success of arbitration depends on its ability to deliver timely, cost-effective, and equitable results. By protecting the subject matter of the dispute through the extension of the bank guarantees, the Court has ensured that any future legal victory for ONGC remains executable, thereby reinforcing the importance of contractual security in large-scale public interest projects.

The High Court clarified that this decision is strictly an interim measure and should not influence the final outcome of the pending Section 34 petition , leaving all rights and contentions open for full, independent adjudication.