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2016 Supreme(Del) 3184
IN THE HIGH COURT OF DELHI AT NEW DELHI
MANMOHAN SINGH, J.
RATTANINDIA POWER LTD - Appellant
Versus
BHARAT HEAVY ELECTRICALS LTD. - Respondent
Arb. A. (Comm.) No.24/2016 & I.A. No.9720/2016
Decided on : 29-08-2016
Advocate Appeared:
For the Petitioner: Mrs.Prathiba M. Singh, Sr.Adv. with Mr.Rajat Navet & Mr.Jevesh Nagrath, Advs.
For the Respondent: Mr.Ankit Parhar, Adv.
Bank guarantees are independent contracts and can be enforced separately from the underlying contract. The financial soundness of the parties and the termination of the underlying contract are relevant factors in deciding the release of bank guarantees.
Headnote:
Arbitration - Bank Guarantees - Arbitration and Conciliation Act, 1996 - Section 37(2)(b)
Fact of the Case:
The appellant engaged the respondent for setting up a Thermal Power Plant. Disputes arose regarding the quality and timing of supplies and services provided by the respondent. The respondent terminated the contracts and sought release of Bank Guarantees. The appellant contested the termination and sought refund of advances.
Finding of the Court:
The Arbitral Tribunal directed the release of Bank Guarantees, considering the financial soundness of the respondent and the termination of the contracts. The court modified the order to keep performance bank guarantees alive during arbitration.
Issues: Disputes over quality and timing of supplies, validity of termination, entitlement to refund, and release of Bank Guarantees.
Ratio Decidendi: The termination of the main contract does not affect the validity of bank guarantees. Bank guarantees are independent contracts and can be enforced separately. Financial soundness of the parties and the termination of the underlying contract are relevant factors in deciding the release of bank guarantees.
Final Decision: The appeal was disposed of, and the impugned order was modified to keep performance bank guarantees alive during arbitration.
MANMOHAN SINGH, J.
1. By way of this order, I propose to decide the abovementioned appeal filed by the appellant (who is the respondent in the arbitration proceedings) under Section 37(2)(b) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “Act”) against the interim order dated 4th August, 2016 passed by the Arbitral Tribunal under Section 17 of the Act. The respondent is the claimant in the arbitration proceedings. The appellant has also raised a counter-claim in the arbitration proceedings which is pending adjudication.
By the impugned order, the Arbitral Tribunal has directed the release of the Advance Bank Guarantee ('ABG') as well as the Performance Bank Guarantee ('PBG'), as the contract was terminated by the respondent.
2. The brief facts of the case as pleaded by the appellant are as under:-
(i) The appellant had engaged the services of the respondent for setting up of a Thermal Power Plant at Amravati, Maharashtra. The respondent was to make the supplies and was also to erect and commission the power plant. The power plant project was divided into two phases i.e. Phase-I which was for 1350 MW and Phase-II which was for 5X270 MW.
(ii) A Letter of Award (‘LOA’) was issued by the appellant in favour of the respondent on 11th October, 2010, as amended on 26th April, 2011, for Design, Engineering, Manufacturing, Shop Inspection and Testing, Supply, Transportation, Erection, Commissioning and demonstration of Performance Guarantees along with comprehensive Marine cum Erection insurance of 5X270 MW Thermal Power Plant Project at Amravati, Maharashtra (Phase-II).
In terms of Clause 4.1 of the LOA, 5% of the contract price had to be paid by the appellant to the respondent as advance against security of Advance Bank Guarantee of equal amount to be provided by the respondent to the appellant. The Advance Bank Guarantee was to remain valid till recovery of advance or successful completion of commissioning, whichever was earlier.
(iii) In addition to the Advance Bank Guarantee, the respondent was also to furnish a Contract Performance Guarantee for 10% of the contract price and which was to remain valid till the expiry of warranty period.
(iv) The works were divided under two contracts namely, supply contract and the services contract. In furtherance of the LOA, a supply contract was executed on 26th May, 2011 (as amended on 3rd August, 2011 and on 2nd May, 2012) (‘Supply Contract’) and the services contract was executed on 26th May, 2011 (as amended on 2nd May, 2012) between the appellant and the respondent.
(v) The total value of the Supply Contract was Rs.17,19,09,14,280/-; USD 52,056,000 and Euro 8,27,24,000.
(vi) In terms of Clauses 5.1, 6 and 8.1 of the Supply Contract, the appellant paid a sum of Rs.123.53 Crores to the respondent towards advance payment. The receipt of this payment is admitted and cannot be disputed by the respondent.
(vii) The appellant has also submitted that the appellant in addition to advance amount has further paid a sum of Rs.16.8 crores against supplies made by the respondent and the said amount is more than the actual sequential supplies, as required in the contract, made by the respondent.
(viii) The total value of the Services Contract was Rs.413 Crores. In terms of Clause 5 of the Services Contract, the appellant paid a sum of Rs.17.25 Crores to the respondent towards advance payment. The receipt of this payment is admitted and cannot be disputed by the respondent.
3. On receipt of the advance payment from the appellant and to secure the same in terms of the Supply Contract and Services Contract, the respondent furnished the following Bank Guarantees in favour of the appellant:
(a) Bank Guarantee bearing No.0999610BG0003078 dated 20th November, 2010 for Rs.123,53,30,086/- in favour of the appellant issued by SBI for securing the advance under the Supply Contract.
(b) Bank Guarantee bearing No.0999610BG0003075 dated 20th November, 2010 for Rs.17.25 Crores in favour of the
