Performance Security Cannot Be Retained After Acknowledgement Of Due Performance : Delhi High Court

The Single Bench of Justice Vibhu Bakhru upheld the award of an Arbitral Tribunal directing BSNL to refund the amount recovered by it from invocation of Performance Bank Guarantee, since no claim regarding failure to perform obligations under the Contract was made by it.

The Petitioner BSNL had issued a notice inviting tenders for purchase of Integrated Fixed Wireless Terminal Devices. The Respondent Teracom Ltd participated in the said tender and was declared as the successful bidder. Thereafter, BSNL requested Teracom to extend the Performance Bank Guarantee furnished by it, which was resisted by Teracom. BSNL, thereafter, invoked the Performance Bank Guarantee against Teracom. Teracom issued a notice to BSNL invoking the Arbitration Agreement, seeking reference of the dispute to arbitration. The Arbitral Tribunal awarded an amount of over two crore rupees in favour of Teracom, being the amount recovered by BSNL through encashing the Performance Bank Guarantee. BSNL filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996 before the Delhi High Court challenging the Arbitral Award.

The Counsel for BSNL submitted before the High Court that the Arbitral Tribunal had erred in directing refund of the amount recovered by BSNL through encashment of Performance Bank Guarantee. The Counsel averred that under the contract, BSNL was entitled to forfeit the Performance Bank Guarantee and since Teracom had not extended the Performance Bank Guarantee, BSNL had encashed the same. The Counsel contended that once the Performance Bank Guarantee was encashed, there was no obligation on the part of BSNL to refund it and the same stood forfeited. The Counsel added that the Arbitral Tribunal had erred in rejecting BSNL's claim for a set off.

The Court observed that the Performance Bank Guarantee was extended eight times by Teracom. However, since the Performance Bank Guarantee was not extended thereafter, BSNL had invoked the same.

The Court ruled that BSNL could not forfeit the amount recovered against the Performance Bank Guarantee, since it had not made any claim regarding failure on the part of Teracom to perform its obligations under the Contract. The Court added that BSNL could not be permitted to retain Performance Security after it had acknowledged due performance of the Contract by Teracom.

"In view of the above, the Arbitral Tribunal had rightly directed refund of the amount recovered by BSNL from invocation of the Performance Bank Guarantee in question. There is no principle in law whereby BSNL could be permitted to retain the Performance Security after it had acknowledged due performance ofthe Contract."

The Court noted that in terms of the Contract entered into between BSNL and Teracom, BSNL was entitled to claim a set off of any amount due to it against any amount payable to Teracom. However, the Court added that in order to claim a set off, it was necessary for BSNL to establish that an ascertained sum of money was payable to it. Since no such defence was raised by BSNL in its Statement of Defence before the Arbitral Tribunal, the Court ruled that the decision of the Arbitral Tribunal rejecting the claim of BSNL could not be faulted.

The Court ruled that even if the claim for set off was crystalised after filing the Statement of Defence before the Arbitral Tribunal, BSNL could have sought an amendment to its Statement of Defence, which was not sought by it.

The Court therefore upheld the Arbitral Award and dismissed the petition of BSNL.

Case Title: Bharat Sanchar Nigam Limited versus Teracom Limited

Citation: 2022 LiveLaw (Del) 271

Dated: 28.03.2022 (Delhi High Court)

Counsel for the Petitioner: Ms Ruchi Gour Narula

Counsel for the Respondent: Ms Iram Majid

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