No Basis To Retain Bank Guarantees After Arbitral Award Is Settled: Delhi High Court

The Delhi High Court has held that once an arbitral award resolving the main contractual dispute is settled between the parties and the settlement amount is paid, there is no basis for retaining or seeking to invoke performance bank guarantees, security deposits, or fixed deposit receipts (FDRs) furnished under the contract.

Justice Tushar Rao Gedela observed, “If that be so, then once the main claims in respect of the dispute arising out of the contract between the parties is adjudicated and subsequently the arbitral award is settled between parties, there is no reason as to why and on what basis the performance bank guarantees, security deposits, FDRs in respect thereto, can be retained or sought to be invoked by the petitioner.”

The court made the observation while dismissing two petitions filed by the Union of India under Section 34 of the Arbitration and Conciliation Act, 1996, challenging an April 5, 2019, arbitral award in favour of ANS Construction Ltd.

Section 34 permits a party to challenge an arbitral award before a court on specified grounds.

The dispute arose from construction work awarded to ANS Construction on September 7, 2010 for residential quarters and development works at Balrampur, Uttar Pradesh.

Under the September 28, 2010 agreement, the work was to begin on September 29, 2010 and be completed by December 28, 2011.

ANS Construction had furnished an FDR of ₹9.50 lakh towards earnest money, along with bank guarantees towards performance security, earnest money and security deposit.

The contractual disputes were initially referred to sole arbitrator V.K. Malik on May 2, 2014. The first arbitration involved 13 claims, followed by 12 additional claims in July 2015. ANS Construction later sought reference of six more claims on February 16, 2017. These included claims concerning release of the FDR and bank guarantees, as well as claims relating to the mobilisation-advance guarantee and repayment of compensation.

The Union objected to the jurisdiction of Malik over those six claims, and they were therefore not adjudicated in the first proceedings. Malik subsequently passed an award on July 26, 2017 granting ₹1.63 crore to ANS Construction after adjusting ₹69.50 lakh towards the Union's counterclaim for mobilisation advance.

The first award was later settled between the parties through a settlement agreement dated December 5, 2017. The Union acted upon the settlement and paid the sums agreed between the parties.

The six additional claims had separately been referred to sole arbitrator S.K. Verma on July 25, 2017. After ANS Construction failed to file its statement of claim despite several notices, those proceedings were terminated on February 15, 2018 under Section 25(a) of the Act.

ANS Construction then approached the Delhi High Court seeking protection against encashment of the guarantees. On September 4, 2018, with both sides agreeing to the arrangement, the court appointed former Delhi High Court judge Justice Pratibha Rani as arbitrator to adjudicate the six additional claims.

Interim protection was continued in respect of three specified bank guarantees.

The Union argued that the six claims could not have been referred again after the earlier proceedings had been terminated.

Justice Gedela rejected the objection. He noted that when the High Court appointed Justice Rani on September 4, 2018, the Union had not objected on the ground that the same six claims had already been terminated.

Instead, the order recorded that the Union's counsel had “categorically agreed” to the appointment of an arbitrator for those very claims.

“Having regard thereto, raising the said argument at this belated stage is not permissible,” the court observed.

Justice Rani subsequently passed the April 5, 2019 award.

It permanently restrained the Union from encashing specified bank guarantees and an FDR, directed their release, and awarded ₹7,08,375 to ANS Construction towards bank charges incurred in keeping the guarantees alive.

The Union challenged the award of these charges, arguing that the guarantees had been kept alive because of the High Court's September 4, 2018 order.

The court rejected this contention, noting that the same order expressly authorised the arbitrator to adjudicate a claim for interest or charges incurred in keeping the guarantees alive.

Finding no perversity or violation of the fundamental policy of India in the arbitrator's findings, the court dismissed both Section 34 petitions.

For Petitioner (Union of India): Central Government Standing Counsel Pratima N. Lakra, with Advocate Shailendra Kumar Mishra.

For Respondent (M/s ANS Construction Ltd.): Senior Advocate  Sandeep P. Agarwal, with Advocate Sushil Aggarwal