Arbitral Tribunal Cannot Permit PBG Appropriation Contrary To Contractual Terms: Delhi High Court

The Delhi High Court on 31 August held that an arbitral tribunal cannot permit appropriation of Performance Bank Guarantee (PBG) proceeds contrary to the contractual terms governing the parties.

Justice Avneesh Jhingan was hearing a petition under Section 34 of the Arbitration and Conciliation Act, 1996 filed by ISGEC Heavy Engineering Limited challenging an arbitral award arising from its dispute with Prakash Industries Limited. The Bench observed:

“The tribunal permitting appropriation of the PBG proceeds towards the unproved losses and damages is without any basis and is consequently perverse. To that extent the award suffers from patent illegality.”

The dispute arose from an agreement/Purchase Order (PO) for the supply, supervision of erection and commissioning of Waste Heat Recovery Boilers (WHRBs), under which ISGEC furnished a PBG of Rs. 1.47 crore.

Issues subsequently arose over the performance of the equipment. The ID fans supplied by ISGEC stopped functioning, resulting in the shutdown of Kiln No. 6. Prakash Industries purchased replacement ID fans at a cost of Rs. 65.92 lakh and invoked the PBG.

The Arbitral Tribunal allowed Prakash Industries' claim of Rs. 65.92 lakh towards replacement of the ID fans but rejected its remaining claims. It nevertheless rejected ISGEC's counter-claim seeking refund of the PBG amount and awarded Prakash Industries Rs. 20 lakh towards costs.

Before the High Court, ISGEC challenged the rejection of its counter-claim concerning the PBG and the award of costs.

The Bench distinguished between invocation of a PBG and appropriation of its proceeds. It held that while invocation may be based on non-fulfilment of contractual obligations, retention and appropriation of the proceeds requires the beneficiary to establish and quantify the loss or damage for which the amount is sought to be retained.

It noted that Prakash Industries had to establish the loss or damage for which it sought to retain the PBG proceeds. Finding that this requirement had not been met, it held that the Tribunal erred in rejecting ISGEC's first counter-claim. It added:

“Clause 17 of the amended PO starts with a non-obstante clause and the parties agreed that neither party would be liable to the other for loss of production, loss of profit, loss of use or any other indirect or consequential damage. The interplay between the PBG and clause 17 was not considered by the tribunal and the relevant clause was ignored. It is trite law that the tribunal cannot travel beyond the terms and conditions agreed between the parties and in doing so committed a jurisdictional error.”

Further, the Court relied on the Supreme Court's decisions in Ssangyong Engineering and Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131; PSA SICAL Terminals (P) Ltd. v. Board of Trustees of V.O. Chidambaranar Port Trust, Tuticorin, 2021 SCC OnLine SC 508; and Indian Oil Corporation Ltd. v. Shree Ganesh Petroleum Rajgurunagar, (2022) 4 SCC 463, for the principle that an arbitral tribunal cannot travel beyond the terms and conditions agreed between the parties.

It rejected ISGEC's challenge to the award of costs. It noted that Section 31A(3) of the Arbitration Act confers discretion on the arbitral tribunal to award costs after considering the circumstances of the case.

Relying on the Supreme Court's decision in Gayatri Balasamy v. ISG Novasoft Technologies Ltd., (2025) 7 SCC 1, the Bench held that although a court cannot modify an arbitral award, a severable part of the award may be set aside.

Accordingly, the High Court set aside the rejection of ISGEC's first counter-claim, holding that the portion of the award concerning the counter-claim was severable.

For Petitioner: Advocates Shambhu Sharan and Kashish Bansal

For Respondent: Senior Advocate Manish Vashisht with Advocates Alok Singh, Kishore Bhandari and Jai Brata Singh,