Employer Cannot Retain Performance Bank Guarantee After Acknowledging Of Due Performance: Delhi High Court

The bench of Justice V. Kameshwar Rao held that the employer cannot also withhold the performance bank guarantee merely for securing the amount of its counter-claims.

Facts

The parties entered into an agreement dated 05.11.2014. There was some delay in the execution of the project work which led to the retention of performance bank guarantees by the appellant. Accordingly, the respondent invoked the arbitration clause and the parties were referred to arbitration.

The respondent moved an application under Section 17 of the A&C Act before the arbitral tribunal for the release of performance bank guarantees withheld by appellants. The tribunal vide its order dated 10.02.2022 directed the appellant to release the bank guarantees to the tune of Rs. 10,00,00,000/-.

The tribunal further directed the refund of amount of Rs. 30 Lakhs approximately on the ground that the total worth of its counter-claim under the final bill was around 6 Crores whereas in the Schedule of Credit the appellant entered an amount of Rs. 29.3 Crores against the respondent as against the original amount of Rs. 23 Crores and the difference of Rs. 6.3 Crores was attributable to the erstwhile contractor.

Aggrieved thereby, the appellant filed an appeal under Section 37 of the A&C Act.

Grounds of Appeal

The appellant challenged the order of the tribunal on the following grounds:

• The arbitrator, in the impugned order, has rendered a finding which is on the merit of the dispute, thus, pre-judging the entire issue, it has gone beyond the scope of Section 17 of the A&C Act.
• The respondent has admitted to severe financial distress due to covid-19, therefore, if the amount of the counter-claim is not secured by bank guarantees, the possible award in its favour would be rendered infructuous.
• Moreover, the arbitrator has wrongly applied the principles of Order XXXVIII Rule 5 of CPC in directing the release of Bank Guarantee of Rs. 10,00,00,000/- as it is not a case where the appellant has sought intervention of the Court or the Arbitrator regarding furnishing Bank Guarantee to secure the claims preferred by the appellant.
• As per Clause 58, the performance bank guarantees could be returned only after the final bill was settled, however, the parties have not settled the final bill, therefore, the demand for release of bank guarantee was premature.
• As per Clause 19.4, the appellant could retain the bank guarantees to make good of the loss suffered by it during the execution of the project work, therefore, the arbitrator has disregarded the contractual provisions while rendering the impugned order.

The respondent raised the following objections:

• The scope of appeal under Section 37 of the A&C Act is narrower from a regular appeal, as the Court would not interfere with the finding of the tribunal unless the same is perverse or contrary to law and the order of the tribunal cannot be examined in minute details and the court cannot impose its view over that of the tribunal.
• The appellant still has a valid bank guarantee to the tune of Rs. 4,05,56,000/-
• The appellant has already enchased a bank guarantee of Rs. 3 Crores and the amount of Rs. 6,29,60,450.50/- that it has claimed from the respondent was to be paid by the erstwhile contractor, consequently, it cannot be imposed with that liability. Therefore, adjusting the two amounts, the remaining amount claimed by the appellant comes down to Rs. 4.8 Crores for that it already has a bank guarantee of more than Rs. 4 crores.
• The order of the tribunal has judicially balanced the equities as the appellant is already secured to the tune of Rs. 7.05 Crores out of its counter-claim for Rs. 15 Crores that involves claim of interest of more than 7 crores.
• The appellant has acknowledged the due performance by issuing the completion certificate and performance bank guarantee cannot be retained after acknowledgement of performance.
• Performance bank guarantee cannot be withheld to secure counter-claims.

Analysis by the Court

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

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 the securing the amount of its counter-claims.

The Court observed that the appellant had issued the certificate of completion, thereby, acknowledging the due performance of the contract. The Court held that the employer cannot withhold the performance bank guarantee after acknowledgement of due performance of the contract.

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 final bill. The Court held that on one had 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 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.

Case Title: Union of India v. RCCIVL-LITL (JV)

Citation: 2022 LiveLaw (Del) 1170

Counsel for the Appellant: Mr. Jaswinder Singh, Adv.

Counsel for the Respondent: Ms. Amrita Panda, Adv.

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