Banks to appeal against order to pay counter guarantee

  • melamchi counter guarantee row
- POST REPORT, Kathmandu
Banks to appeal against order to pay counter guarantee

Apr 20, 2015-

Nepali banks that issued a counter guarantee in the Melamchi Drinking Water Project contract have planned to appeal to the Supreme Court after the Patan Appellate Court ordered them to pay the counter guarantee amount.

The Appellate Court on Sunday scrapped the case filed by Himalayan Bank Limited (HBL) and the Bank of Kathmandu (BoK) demanding an injunction of payment to Melamchi and ordered them to make payment to the project.

Before they went to court, Nepal Rastra Bank had tried to debit an amount equivalent to the counter guarantee from their accounts at the central bank and credit it to Melamchi.

After the local banks failed to receive the guarantee amount from China Construction Bank that had issued the contractor guarantee, HBL and BoK have been refusing to release the amount to the project.

The two banks had provided a counter guarantee to China Construction Bank in the form of a performance security of $6.62 million and guarantee for advance payment of $6.62 million and 1.4 million euros.

“We will definitely go to the Supreme Court after the full verdict of the Appellate Court is received,” said Ashoke Rana, chief executive officer of HBL.

A source handling the case said that there had been discussions to file a separate fraud case against Melamchi as the payment of the guarantee amount can be prevented only when fraud on the part of the project is established.  

According to the source, as Chinese court has confirmed that since Melamchi committed fraud in dealing with the Chinese Contractor, China Railway 15 Bureau Group, there is a room for a reversal of the Appellate Court’s verdict from the Supreme Court.

Stating that Melamchi’s non-performance forced the contractor to terminate the contract, the Chinese court, Zhengzhou Intermediate People’s Court, said that the contractor had first sent the contract termination letter which meant the contract would be terminated within a certain deadline, but the project cancelled the contract before the deadline expired.

The court termed Melamchi’s act “perversion” to the termination right of China Railway 15 Bureau Group, and said it was an “abuse action of Melamchi’s contractual termination rights”. “So, the Court confirmed the statement in the Performance Bank Guarantee claim letter (by Melamchi) false.” The Chinese court ordered the bank not to pay the amount to Melamchi. However, Melamchi didn’t fight a legal battle in China stating that the case did not fall under the jurisdiction of a Chinese court. The poor performing contractor and Melamchi had terminated the contract for digging a tunnel at the Melamchi project in September 2012.

BoK CEO Ajaya Shrestha said that they could appeal to the Supreme Court if there was room for correction in the Appellate Court’s verdict. “After the full verdict is received, we will discuss how to move ahead,” he added.  

Melamchi’s lawyers said on Sunday that as per the Uniform Rules for Demand Guarantee, the Nepali banks should have released the amount to the project immediately after the contract with the Chinese bank was terminated. “Had this verdict gone against Melamchi, many construction projects in Nepal would suffer badly as giving demand guarantee means being ready to pay whenever demand is made,” said Shikhar Pandit, a lawyer defending Melamchi.

These two banks have already provisioned half of the amount they have been told to pay as possible risk in the fiscal year 2013-14. They were supposed to make full provisioning in the current fiscal year as per the central bank’s directive.

Published: 21-04-2015 10:14

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