SEPCO Electric Power Construction Corporation Vs. Power Mech Projects Ltd. [August2021]

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INTRODUCTION

This case concerns a dispute between SEPCO Electric Power Construction Corporation (the Appellant), a Chinese company, and Power Mech Projects Ltd. (the Respondent), an Indian company. The dispute revolves around the enforcement of SEPCO’s bank guarantee to secure an arbitral award in favour of Power Mech Projects Ltd. The main legal argument is whether the High Court was proper in requiring a bank guarantee from a “Scheduled Indian Bank” rather than a “Scheduled Bank” situated in India.

FACTS OF CASE

1. The Appellant is a Chinese company that was awarded contracts for coal-based power projects in India. 
2. The Respondent is a company established in India that works as the Appellant’s subcontractor. 
3.  The parties’ disputes were resolved through arbitration, with the Respondent receiving an award of about Rs. 142 crores on October 17, 2017. 
4. On February 12, 2019, a Single Bench of the Commercial Court of the High Court ordered the Appellant to provide a bank guarantee for Rs. 30 crores from a Scheduled Bank in India. 
5.  On March 22, 2019, the Appellant received an unconditional, irrevocable bank guarantee for Rs. 30 crores from ICBC (Industrial and Commercial Bank of China Limited), payable to the Registrar General of the Delhi High Court. 
6. The Appellant submitted an electronic copy of this Bank Guarantee with the Registry on March 26, 2019. 
7. The Appellant claims to have spent roughly Rs. 30 lakhs on furnishing the Bank Guarantee, and Rs. 36.40 crores were frozen in their ICBC account in China. 
8. On 09.04.2019, the Single Bench ordered the Appellant to replace the ICBC Bank Guarantee with one from a Scheduled Indian Bank for an equal sum. 
9. The court stressed that the initial decision required the Bank Guarantee to be from a Scheduled Indian Bank, not any scheduled bank in India.
10.  The Appellant originally complied with the direction by providing a Bank Guarantee from the Mumbai Branch of ICBC, which the court ruled insufficient. `1

ISSUES RAISED

1. Whether the High Court was correct in refusing to accept a bank guarantee from ICBC, a Scheduled Bank located in India, and instead insisting on a guarantee from a “Scheduled Indian Bank.”
2. Whether SEPCO should replace the bank guarantee issued by ICBC with one from a Scheduled Indian Bank​

CONTENTIONS OF APPELLANT

1. The Appellant contends that, while the order dated 12.02.2019 recorded an oral offer to provide a bank guarantee from a Scheduled Indian Bank, the operative portion of the decision simply required a guarantee from a Scheduled Bank located in India, which they fulfilled. 
2. They argue that the court’s decision to secure the Arbitral Award with a Bank Guarantee was influenced by the Appellant’s offer, although the precise requirement for an Indian bank was not explicitly indicated in the operative part of the order. 
3. The Appellant points out that ICBC’s Mumbai branch has established a $200 million US Dollar fund for investment in Indian Micro, Small, and Medium Enterprises (MSMEs), proving ICBC’s reliability in the Indian Commercial Market. 
4. They state that they followed the court’s direction by filing an affidavit within the two-week timeframe and providing a copy to the decree holder’s attorney. 
5. Mr. K.V. Vishwanathan, senior counsel for the Appellant, claims that getting the bank guarantee from ICBC resulted in a non-refundable charge of Rs. 30 lakh. 
6. The Appellant claims that even if there was an error in the court’s original order, it should not be amended in a way that results in financial loss to the Appellant, considering the costs already paid in getting the ICBC guarantee. 
7. They argue that the ICBC guarantee should be recognized since it fits the literal conditions of the original judgment (a Scheduled Bank located in India), and that modifying this criterion now would be unfair and costly to the Appellant. 
8. The Appellant asks that the court examine the substantial compliance they have previously made, including the financial commitment to get the ICBC guarantee, rather than requiring a new guarantee from an Indian bank.

CONTENTIONS OF RESPONDENT

1. The Respondent filed an application (OMP (I) (COMM) No. 523/2017) in the Commercial Division of the High Court under Section 9 of the Arbitration and Conciliation Act, requesting that the Appellant obtain the amount of the Arbitral Award. 
2. The Respondent contended that the Appellant had initially volunteered to provide a bank guarantee from a Scheduled Indian Bank, not simply any scheduled bank in India. 
3.  They claimed that the Bank Guarantee issued by ICBC (Industrial and Commercial Bank of China Limited) was conditional and voiced concern that it might not serve its intended purpose. 
4. The Respondent highlighted that the court’s original purpose, as indicated on April 9, 2019, was for the Bank Guarantee to be from a Scheduled Indian Bank. 
5. They noted that the Appellant proceeded to comply with the ICBC promise roughly four weeks after the clarification was given, indicating a delay in proper compliance.
6. The Respondent did not contest ICBC’s qualifications, but argued that the court’s order should be obeyed based on the Appellant’s own initial offer and the court’s explanation. 
7. They contended that because the initial decision was predicated on the Appellant’s counsel’s offer to furnish a guarantee from a Scheduled Indian Bank, there was no compelling reason to recall or modify that direction. 
8. The Respondent contended that the Appellant’s uncertainty, if any, about the type of bank required for the guarantee was clarified by the court’s clarification on April 9, 2019. 
9. They agreed with the court’s judgment to force the Appellant to replace the ICBC Bank Guarantee with one from a Scheduled Indian Bank of equal value.

JUDGEMENT

The Supreme Court, after hearing both parties, ruled:

• The High Court erred in requiring a bank guarantee from a Scheduled Indian Bank because SEPCO had previously satisfied with the initial ruling by obtaining a guarantee from a Scheduled Indian Bank (ICBC).
• The court stated that the ICBC was a respectable financial organization, and there was no evidence that it would fail to honour the promise.
• The SEPCO appeal was approved, and the High Court’s directions to replace the bank guarantee with one from a Scheduled Indian Bank were set aside.

ANALYSIS

The Court evaluated the Uniform Rules for Demand Guarantees (URDG) 758, a voluntary instrument published by the International Chamber of Commerce (ICC) to govern international banking activities. The Court noted that ICBC, a Chinese state-owned international banking institution, was categorized as a Scheduled Foreign Bank rather than a Scheduled Indian Bank. The Court also addressed the financial credibility issues created by ICBC’s past. The Court determined that the special leave applications did not raise any important legal issues that required intervention under Article 136 of the Constitution. The Special Leave Petitions were dismissed because they raised no substantive legal issues. The Court ruled that the directive to substitute the Bank Guarantee with a Scheduled Indian Bank’s guarantee was legitimate.

CONCLUSION

The verdict in SEPCO Electric Power Construction Corporation vs. Power Mech Projects Ltd. explains the rules for complying with court orders requiring financial assurances. It establishes that a Scheduled Bank located in India, such as ICBC, meets the standards outlined unless clearly refuted by a written order. This decision protects entities from arbitrary reinterpretations of court orders and promotes due process and open communication in judicial procedures.

REFERENCE 

1. https://indiankanoon.org/doc/14265981/
2. https://updates.manupatra.com/roundup/contentsummary.aspx?iid=34126

BY: Chukki Anagha C an Intern Under Legal Vihdiya

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