Delhi High Court rules employer cannot retain performance bank guarantee after acknowledgment

Delhi High Court rules employer cannot retain performance bank guarantee after acknowledgment

The bench observed that the appellant had earlier issued the certificate of completion of the contract

The Delhi High Court has held that the employer cannot withhold the performance bank guarantee after the contractor's acknowledgment of the due performance of the contract.

The bench of Justice V Kameshwar Rao stated that the employer is not allowed to do so merely for securing the amount of its counter-claims.

In 2014, the parties entered into an agreement. However, there was a delay in the execution of the project work, which led to the retention of performance bank guarantees by the appellant. Thus, the respondent invoked the arbitration clause and the parties were referred to arbitration.

The respondent appealed before the arbitral tribunal under the Arbitration and Conciliation (A&C) Act, 1996 for the release of performance bank guarantees withheld by the appellant.

Vide its February 2022 order, the tribunal directed the appellant to release the bank guarantees of Rs.10,00,00,000 and refund approximately Rs.30 lakh. It said the total worth of its counter-claim under the final bill was around Rs.6 crore, whereas in the Schedule of Credit, the appellant entered an amount of Rs.29.3 crore against the respondent as against the original amount of Rs.23 crore. The difference of Rs.6.3 crore was attributable to the erstwhile contractor.

Aggrieved by the order, the appellant challenged the order on the grounds:

1. In the impugned order, the arbitrator rendered a finding, which is on the merit of the dispute. Thus, pre-judging the entire issue, it has gone beyond the scope of the A&C Act.

2. The respondent has admitted to severe financial distress due to the Covid-19 pandemic. Therefore, if the amount of the counter-claim is not secured by bank guarantees, the possible award in its favor would be rendered infructuous.

3. The arbitrator has wrongly applied the principles of Order XXXVIII Rule 5 of CPC in directing the release of a bank guarantee of Rs.10,00,00,000, as it is not a case where the appellant has sought the intervention of the court or the arbitrator to secure the claims.

4. 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 bill, thus, the demand for the release of a bank guarantee was premature.

5. As per Clause 19.4, the appellant could retain the bank guarantees to make good the loss suffered by it during the execution of the project. Therefore, the arbitrator disregarded the contractual provisions while rendering the impugned order.

On the other hand, the respondent raised the objections:

1. The scope of appeal under the A&C Act is narrower than a regular appeal. The court would not interfere with the finding of the tribunal unless it was perverse or contrary to the law. The order cannot be examined in minute detail and the court cannot impose its views on the tribunal.

2. The appellant still has a valid bank guarantee of Rs.4,05,56,000.

3. The appellant has already encashed a bank guarantee of Rs.3 crore and the amount of Rs.6,29,60,450.50 that it claimed from the respondent was to be paid by the erstwhile contractor. So, it cannot be imposed with that liability. By adjusting the two amounts, the remaining amount claimed by the appellant comes down to Rs.4.8 crore. For that, it already has a bank guarantee of over Rs.4 crore.

4. The order of the tribunal has judicially balanced the equities, as the appellant has already secured Rs.7.05 crore out of its counter-claim for Rs.15 crore which involves a claim of interest of over Rs.7 crore.

5. The appellant has acknowledged the due performance by issuing the completion certificate and the performance bank guarantee cannot be retained after acknowledgment of performance. It cannot be withheld to secure counter-claims.

The court observed that against a counter-claim of Rs.14 crore, which included the claim of interest worth over Rs.7 crore, the appellant had already secured more than that amount. Since the counter-claims of the appellant were yet to be decided by the arbitrator, the due amount could not be called a determinable debt. Thus, the employer could not withhold the performance bank guarantee merely for securing the amount of its counter-claims.

The bench held that the appellant issued the certificate of completion, thereby, acknowledging the due performance of the contract. Therefore, the employer was not in a position to withhold it.

Rejecting the argument that in terms of the General Conditions of Contract, the bank guarantee could only be returned after the payment of the final bill, the court held that on the one hand, the appellant admitted that no amount was due under the final bill, yet it said the claim was premature as the bill was not settled.

Dismissing the appeal as bereft of merit, the court ruled that the appellant could not blow hot and cold at the same time.