Two Nepali banks have won the legal battle in China for the recovery of frozen bank guarantee amounts, paving the way for them to get back an amount equivalent to Rs1.78 billion.

Overturning its own 2015 decision, a Chinese court on Friday ruled that the Melamchi Drinking Water Project had been fair in its termination of the contract it had awarded to China Railway 15 Bureau Group for non-performance.

“The Chinese bank ruled in our favour,” Ashoke Rana, the CEO of Himalayan Bank, told the Post.

Himalayan Bank and Bank of Kathmandu had gone to a higher court after Zhengzhou Intermediate People’s Court had ruled that China Construction Bank did not need to release the counter guarantee to the Nepali banks since the termination of the contract in 2012 had been illegal.

Five years after the ruling, the same court in China reversed its earlier decision after a higher court—Henan High People’s Court—saw defects in its earlier ruling and ordered the lower court to review its decision after examining additional evidence presented by the Nepali banks, Gandhi Pandit, a senior advocate who assisted the Chinese lawyers on the behalf of the Nepali banks, said.

In July 2020, Henan High People’s Court had referred the case to the Zhengzhou Intermediate People’s Court.

“We have submitted our claims to the China Construction Bank to release the amount as per the court ruling on Friday,” said Rana.

In 2012, Melamchi Drinking Water Project had terminated the contract to China Railway 15 Bureau Group and asked the two Nepali banks to give the Project the performance guarantee amount. The Nepali banks then asked China Construction Bank, the Chinese bank where the Chinese company had deposited the counter guarantee, to release the amount but after China Railway 15 Bureau Group went to court claiming that its contract had been terminated unfairly and the Chinese court gave a stay order following which the Nepali banks could not recover the amount from the Chinese bank.

Nepali banks had then reached Patan Appellate Court which initially issued a stay order against payment to Melamchi, but later discontinued the stay order forcing the Nepali banks to pay the bank guarantee amount to the Melamchi.

Following the Patan Appellate Court verdict and giving the guarantee amount to Melamchi Drinking Water Project Himalayan Bank and Bank of Kathmandu had filed an appeal at Henan High People’s Court.

During the appeal hearing, lawyers of the two banks presented two new pieces of evidence—a document signed between the Chinese contractor, Melamchi Board and Asian Development Bank, the lender for the project, in which the Chinese contractor had admitted its failure to deliver the work in time, and another document stating that the bank that gives counter guarantee can't stop advance payment guarantee amount as per general international practice, according to Gandhi Pandit.

The Manila-based Asian Development Bank is the lending agency for the long-delayed Melamchi Drinking Water Project that will bring water to Kathmandu Valley from the snow-fed Melamchi river northeast of the capital.

“Based on these evidence, the Henan appeal court referred the case to the same lower court asking it to decide by considering the additional facts that we had presented,” said Pandit. “Finally, the lower court ruled in favour of the Nepali banks on Friday morning.”

In January 2015, the same court had ruled that Melamchi Drinking Water Project cannot get bank guarantee and advance payment guarantee amounts from the relevant banks concerned, terming the project’s claim “fraud”.

In its ruling, the court had stated that the banks giving guarantee and counter guarantee shall not make payment to Melamchi, arguing that making such a payment would damage the rights of the Chinese contractor.

Shovan Dev Pant, chief executive officer of Bank of Kathmandu, said his bank on Friday sent claims to the Chinese bank to release the amount.

Even though the Nepali banks are asking the China Construction Bank to release the amount immediately, it is not sure whether the Chinese bank will release the amount immediately as the China Railway 15 Bureau Group still has 15 days to appeal.

“We are confident that the bank guarantee amount will be received sooner or later,” said Pant. “Once the bank guarantee amount is released from China, the entire amount will be our profit,”

These banks were forced to make provisioning (setting aside equivalent amounts separately) of the unpaid bank guarantee amount affecting the profitability of these banks.

This is the second case where the Nepali banks have won the counter guarantee related case. Earlier in June this year, Nepal Investment Bank Limited had won a legal battle against Cooperativa Muratori e Cementisti di Ravenna (CMC), an Italian contractor hired by the Tanahu Hydropower Company, allowing the bank to recover nearly Rs2 billion from the company.

The Italian company had filed a case in March last year at a court in Bologna, asking for an injunction against the release of the bank guarantee. The court had issued an order in favour of CMC, which it upheld in its second order.

Nepal Investment Bank had then appealed the ruling at a higher court in November last year. The higher court in June decided in favour of the Nepal Investment Bank.

“We have already recovered the amount from the Italian counter guarantee,” Jyoti Pandey, the CEO of Nepal Investment Bank, said.

Himalayan Bank and Nepal Investment Bank, which will also gain from devaluation of Nepali rupees against the US dollar, are now preparing a case demanding compensation for the loss in interest amount.

“We have also asked our lawyers in China to file another case demanding compensation for our cost in interest of the bank guarantee amount and legal challenge,” said Rana.