A Chinese high court has ruled in favor of two Nepali banks, following hearings on a case between a Chinese company contracted for the construction of the Melamchi Water Supply Project (MWSP) and the two Nepali banks.

The Chinese construction company China Railway 15 Bureau Group Corporation and China Machinery Industry Group Corporation Inc Joint Venture had won the construction contract for the MWSP. However, they left the work midway, stalling the project. Then the contract for the project with them was canceled.

The Chinese company had secured performance security and advance payment guarantee from China Construction Bank (CCB) while agreeing to the construction contract. Nepal’s Himalayan Bank and Bank of Kathmandu (BoK) were its counter guarantors. After the Chinese company left in the middle of the construction, their contract was canceled and USD 6.65 million as performance security and EUR 1.41 million as advance payment guarantee were confiscated from the two Nepali banks.

After the Melamchi Project received funds from the Nepali banks, a dispute arose because the Chinese bank did not reimburse the Nepali banks.

The dispute went to a district court of China and then to the high court. On Monday, the high court ruled in favor of the Nepali banks. After this decision, the Chinese bank has to pay about Rs 1.5 billion to the Nepali banks.

According to Senior Advocate Gandhi Pandit, who had fought the case on behalf of the Nepali banks, the Higher People's Court of China’s Henan Province on Monday decided that CCB should return about Rs 1.5 billion to the two Nepali banks.

After the cancellation of the contract, both banks of Nepal had paid about Rs 1.5 billion as performance security and advance payment guarantee to the MWSPon behalf of the CCB. However, CCB was hesitating to reimburse the Nepali banks.

Ashoke Rana, chief executive officer of Himalayan Bank, mentioned that the Chinese court had decided that the Nepali banks should receive reimbursement for the counter-guarantee. “We have received information that the Higher People's Court of Henan Province has decided in our favor,” he said on Tuesday. He added, “Even though it is later than expected, we are happy to have received justice from the Chinese court.” Chief Executive Officer Rana said that Himalayan Bank will now receive the amount it paid in advance. Likewise, the BoK will also be reimbursed.

After the contract was canceled and the project took funds from the Nepali banks, both the banks had initially requested for an inquiry from the CCB. However, the CCB filed a case at the Chinese district court before making payments to the two Nepali banks. Senior Advocate Pandit said that the district court had decided that the Chinese bank did not have to give money to both the banks of Nepal. Then the Nepali banks appealed to the Higher People's Court of Henan Province.

Advocate Pandit said that after winning the case, BoK will get back about Rs 900 million while Himalayan Bank will receive about Rs 700 million. An agreement was signed on February 19, 2009, between the Chinese company China Railway 15 and MWSP for the construction of the headworks and tunnel of the project.

According to the contract, the Chinese company had to complete the construction by September 2, 2013. This deadline was set as per the work plan and contract prepared by the construction company. However, since the Chinese company could not complete the work as stipulated in the contract, the MWSP broke the contract on 25 September 2012.

During this period, the Chinese company dug only 6,417 meters of the tunnel and took payment of Rs 510.69 million. With the cancellation of the contract, USD 6.65 million as performance security and EUR 1.41 million as advance payment guarantee were confiscated in accordance with the rules. With the cancellation of the contract with the first contractor, the Italian company CMC was selected for completing the project.