Himalayan Bank, BoK seek MWSDB's support in fighting Chinese case

Himalayan Bank and Bank of Kathmandu (BoK) have formally requested Melamchi Water Supply Development Board (MWSDB) to join hands in fighting a legal battle against China Railway 15 Bureau Group Corporation -- the ousted contractor of Melamchi Water Supply Diversion Project -- which moved the Chinese court and obtained an order that halted payment of over Rs 1 billion to two Nepali banks. The move comes seven months after a Chinese court ordered China Construction Bank to withhold payment against bank guarantees issued in favor of MWSDB, leaving two domestic banks working on behalf of China´s second largest bank high and dry. “We are seeking the support of Melamchi Water Supply Development Board in fighting the legal battle, as the (ousted) Chinese contractor has filed a court case citing MWSDB is demanding payment in a fraudulent manner,” a high-ranking official of one of the banks told Republica on condition of anonymity. “Since the plaintiff has identified MWSDB as the one that conducted the offence, we believe MWSDB´s participation would expedite the process of solving the case.” Although MWSDB has not formally responded to the request, it has hinted that it is not interested in taking the offer put forth by Himalayan Bank and Bank of Kathmandu. “We had sought counter guarantee from banks based in Nepal to avoid these kinds of hassles. And we have paid the two banks around Rs 70 million in commissions for the job,” MWSDB Executive Director Krishna Prasad Acharya told Republica. “Besides, the court case is going on in China, and not Nepal. So it does not fall in our jurisdiction.” However, high-ranking officials of the two banks said now is not the time to hurl blames at each other. “We will be able to discourage such practices in the coming days only if we treat this case as a national issue. We can only be strong if we stick together,” the official said. The experience of Himalayan Bank and Bank of Kathmandu in terms of bagging international bank guarantee payment turned sour after MWSDB terminated its agreement with China Railway 15 Bureau Group Corporation to dig a crucial 26.3-km tunnel for the Melamchi Water Supply project. The agreement was cancelled after the Chinese contractor demanded more funds than mentioned in the bid document to complete the work. Following this, the Chinese contractor filed a case at a court in China and obtained an injunction that barred China Construction Bank from making bank guarantee payment to MWSDB. Based on the ruling, the Chinese bank then denied releasing US$6.62 million and 1.4 million euros to Bank of Kathmandu, which had issued advance payment guarantee on behalf of the Chinese bank. Concurrently, the Chinese bank also refused to release $6.2 million to Himalayan Bank for guarantee provided against performance bond issued by the Melamchi project contractor. The performance bond is usually issued by contractors in construction projects as a security against job completion, and it guarantees full payment to contract provider in case the contractor fails to complete the project. This is the same with advance payment guarantee provided by Bank of Kathmandu. As per the International Chamber of Commerce Uniform Rules for Demand Guarantee, bank guarantees are independent, meaning contractors cannot prevent a bank from making payment against such guarantees. However, the contractor can protect itself if it is able to show to the court that the payment against guarantee is being demanded in a fraudulent manner. And such evidence allows contractors to file lawsuit against contract providers and banks and halt payment process. In case of China, courts see authenticity of documents submitted by the contract providers, whether the underlying contract is against public orders, or involvement of fraudulent acts prior to supporting contractors´ claim for suspension of payment, a paper written by Samuel RQ Jiang states. They also see whether underlying obligation has been fulfilled by the Chinese contractor or it failed to execute its duties because of willful misconduct of the contract provider, the paper further says. “Chinese court´s acceptance of the case filed by China Railway 15 Bureau Group Corporation shows that there is some substance in arguments made by the Chinese contractor. This means MWSDB´s participation is even more necessary for us,” the bank official said.