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2016 Supreme(Del) 3183
IN THE HIGH COURT OF DELHI AT NEW DELHI
MANMOHAN SINGH, J.
RATTANINDIA NASIK POWER LTD - Petitioner
Versus
BHARAT HEAVY ELECTRICALS LTD - Respondent
Arb. A. (Comm.) No.23/2016 & I.A. No.9551/2016
Decided on : 29-08-2016
Advocate Appeared:
For the Petitioner: Mr.Parag P. Tripathi & Mr.Rajiv Nayar, Sr.Advs. with Mr.Rajat Navet, Mr.Jeevesh Nagrath, Mr.Saurabh Seth & Mr.Dalveer Thakran, Advs.
For the Respondent: Mr.P.V.Kapur, Sr.Adv. with Mr.Punit Tyagi, Mr.Ankit Parhar, Mr.Abhilash Chaudhary & Mr.Ambarish Pandey, Advs.
The unconditional nature of Bank Guarantees as independent contracts, separate from the underlying contract, and the principle that termination of the main contract does not affect the validity and enforceability of the 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 supplies and services provided by the respondent, leading to termination of the contracts. The appellant sought refund of advances made and contested the respondent's claims. The Arbitral Tribunal directed release of the Bank Guarantees, prompting the appeal.
Finding of the Court:
The court found that the disputes regarding advance adjustment, contract termination, and entitlement to performance of contract were yet to be adjudicated by the Arbitral Tribunal. It noted the financial status of the respondent and the unconditional nature of the Bank Guarantees.
Issues: The issues included the validity of termination, adjustment of advances, and entitlement to performance of the terminated contract. The court also considered the unconditional nature of the Bank Guarantees and the financial status of the respondent.
Ratio Decidendi: The court held that the termination of the main contract and disputes related to termination did not affect the validity and enforceability of the Bank Guarantees. It emphasized the unconditional nature of the Bank Guarantees as independent contracts, separate from the underlying contract.
Final Decision: The court modified the impugned order, directing the performance bank guarantees to be kept alive during the arbitration proceedings, while allowing the release of the remaining bank guarantees upon filing of an affidavit of undertaking by the respondent. The appeal was disposed of with no costs.
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 herein 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 Nasik, 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 8th 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 Nasik, 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.17,12,09,14,280/-; USD 52,056,000 and Euro 8,27,24,000.
(vi) In terms of Clause 5.1, 6 and 8.1 of the Supply Contract, the appellant paid a sum of Rs.123 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.29.22 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 Clauses 5.1, 6 and 8.1 of the Services Contract, the appellant paid a sum of Rs.17 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.IBG23533 dated 8th November, 2010 for Rs.123,02,94,778/- in favour of the appellant issued by Federal Bank Ltd. for securing the advance under the Supply Contract.
(b) Bank Guarantee bearing No.IBG25702 dated 28th February, 2011 for Rs. 17 Crores in favour of
