Zhengzhou Intermediate People’s Court, where Melamchi’s previous contractor China Railway 15 Bureau Group had filed a case against the project, issued the verdict.

Terminating the contract with China Railway in September 2012, the project had sought payment of a bank guarantee of $ 6.65 million from Himalayan Bank Limited (HBL) and guarantees for advance payment of $6.62 million and €1.4 million from Bank of Kathmandu (BoK). The Nepali banks had given counter guarantee to China Construction Bank, which had offered guarantee to China Railway.

The Chinese court ruled that the banks giving guarantee and counter guarantee shall not make payment to Melamchi, arguing making such a payment would damage the rights of the Chinese contractor.

The verdict comes as a respite for the two Nepali banks which fought a legal battle in China, but they said they would appeal to a higher court in China seeking an order to release the money to Melamchi.

The project refused to go for a legal fight in China, claiming the case does not fall under the jurisdiction of the Chinese court as per the contract. However, Zhengzhou Intermediate People’s Court claimed the case falls under its own jurisdiction “based on the place for infringing consequences occurred”.

The court termed Melamchi’s absence in the court sessions as the project “giving up the right to reply and cross-examination”. “Melamchi shall borne the disadvantage result,” reads the verdict.

While Melamchi has said it terminated the contract, the verdict states the Chinese contractor, in fact, terminated the contract after Melamchi failed to fulfill its obligations to the contractor as per the contract.

Stating Melamchi’s non-performance forced the contractor to terminate contract, the court said the contractor first sent the contract termination letter, which meant the contract would be terminated in a certain deadline, but the project cancelled the contract before the deadline expiry. 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 court has mentioned Melamchi’s failure to provide the contractor with sufficient dates of sub surface and hydrological condition and project without condition of commencement.

The verdict reads Melamchi didn’t accept the contractor’s optimisation plan to speed up construction, and said the contractor had every right to terminate the contract based on the contract paper.

On advance payment bank guarantee claims by the project from BoK, the court said Melamchi did not make advance payment to the contractor adequately which it should have done although the contractor invested enough manpower and equipment. The advance payment made by Melamchi to the contractor was deductable from the advance payment guarantee.

The court states when the contract is terminated for any reasons, and if the advance payment still has balance, such a balance shall be payment to the contractor till the final settlement according to the contract.

The court has told the defendants they could appeal to Henan High People’s Court within 15 days after this verdict is received. But Ghanashyam Bhattarai, executive director of Melamchi Water Supply Development Board, said they have not yet received the verdict and they would discuss the matter.

“We didn’t involve in the legal fight in China as the contract letter clearly states Nepal is the place where the case should have been filed,” he said. “Although we didn’t fight, we provided necessary evidences to the Chinese court.”

He said there was no ground for the contractor to terminate the contract, and the project had directed the contractor to correct its work in a 52-point directive three months prior to the contract termination.