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Delhi high court sets aside rejection of counter-claim on performance bank guarantee, holds proceeds cannot be retained without proving loss
Case Title: Isgec Heavy Engineering Ltd. v. Prakash Industries Ltd.
Case No.: O.M.P. (COMM) 503/2023
Coram: Justice Avneesh Jhingan
Citation: (2026) ibclaw.in 5219 HC
Date of Decision: 08 September 2026
The Delhi High Court has set aside the part of an arbitral award that allowed a purchaser to retain the proceeds of an encashed Performance Bank Guarantee (PBG) without establishing the loss for which it was retained. The Court, however, upheld the award of Rs. 20,00,000 as costs.
Justice Avneesh Jhingan was hearing a petition under Section 34 of the Arbitration and Conciliation Act, 1996 filed by Isgec Heavy Engineering Ltd. against an arbitral award dated 17.08.2023.
Background
On 18.11.2017, Prakash Industries Ltd. (PIL) placed a Purchase Order on Isgec for the supply, supervision of erection and commissioning of two Waste Heat Recovery Boilers along with Induced Draft (ID) fans. The order was amended on three occasions. Isgec furnished a PBG dated 24.04.2019 for Rs. 1,47,10,000, equivalent to 10% of the basic order value.
Disputes arose over delay and the performance of the equipment. The two ID fans stopped functioning in September 2019 and kiln no. 6 remained shut from 22.09.2019 to 16.11.2019. PIL purchased replacement fans at an additional cost of Rs. 65.92 lakhs, invoked the PBG on 18.11.2019 and invoked arbitration on 06.12.2019.
PIL raised five claims aggregating to Rs. 12,34,40,887 and Isgec raised five counter-claims. The tribunal allowed only the claim of Rs. 65,92,000 for replacement of the ID fans, with interest, and awarded Rs. 20,00,000 as costs. All counter-claims of Isgec were rejected, including counter-claim no. 1 seeking refund of the PBG amount with interest. The challenge before the High Court was confined to the rejection of counter-claim no. 1 and the award of costs.
Contentions
Isgec submitted that clause 17 of the amended Purchase Order excluded liability for loss of production, loss of profit, loss of use and any other indirect or consequential damage. Having rejected PIL's claims on that basis, the tribunal could not permit PIL to retain the PBG proceeds when no loss corresponding to that amount was proved. Isgec also contended that costs of Rs. 20,00,000 were excessive when compared with the amount awarded to PIL.
PIL submitted that the scope of Section 34 is limited and that clause 17 did not exclude direct loss caused by defective equipment. It relied on admissions in minutes of meetings that the hub design of the fans was defective. On costs, it submitted that the amount was within the tribunal's discretion, as PIL had claimed Rs. 3,29,43,584.
Court's Observations
The Court noted that the PBG was an undertaking by the bank to indemnify PIL for damage or loss suffered on account of non-fulfilment of the terms of the order relating to guaranteed performance and defect liability. It observed that invocation of a PBG is one aspect, while appropriation of the proceeds depends on the loss being established and quantified.
The Court recorded that the tribunal had awarded only the replacement cost of the ID fans and had accepted no other loss or damage. It also noted that clause 13(f), which provided for liquidated damages, was not invoked by PIL. The Court held that PIL was required to establish the loss for which the proceeds were sought to be retained, and that this limb was missing.
The Court further noted that clause 17 opens with a non-obstante expression and that the tribunal had not considered its interplay with the PBG. Referring to Ssangyong Engineering and Construction Co. Ltd. v. NHAI, PSA SICAL Terminals (P) Ltd. v. Board of Trustees of V.O. Chidambaranar Port Trust and Indian Oil Corporation Ltd. v. Shree Ganesh Petroleum, it reiterated that a tribunal cannot travel beyond the terms agreed between the parties. Permitting appropriation of the PBG proceeds towards unproved losses was held to be without basis and perverse, and the award was held to suffer from patent illegality to that extent.
On Costs
The Court found the challenge to costs unsustainable. It noted that Section 31A(3) of the Act gives the arbitrator discretion to award costs. It held that costs do not depend solely on the percentage of success and that the conduct of the parties, partial success, frivolous counter-claims causing delay and refusal of a reasonable offer to settle are relevant. The award of costs was upheld.
Severability
Relying on Gayatri Balasamy v. ISG Novasoft Technologies Ltd., (2025) 7 SCC 1, the Court observed that a severable part of an award may be set aside under Section 34. It held that the rejection of counter-claim no. 1 was severable and not intricately interconnected with the other claims.
Decision
The award, to the extent of rejecting counter-claim no. 1, was set aside. The petition was allowed to that extent.
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