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Rule 227 - Arbitration Awards | KartavyaDesk

GFR 2017

Original Rule Text

[Rule 227A Arbitration Awards (i) In cases where the Ministry/ Department has challenged an arbitral award and, as a result, the amount of the arbitral award has not been paid, 75% of the arbitral award (which may include interest up to date of the award) shall be paid by the Ministry/ Department to the contractor/ concessionaire against a Bank Guarantee (BG). The BG shall only be for the said 75% of the arbitral award as above and not for the interest which may become payable to the Ministry/ Department should the subsequent court order require refund of the said amount. (ii) The payment may be made into a designated Escrow Account with the stipulation that the proceeds will be used first, for payment of lenders' dues, second, for completion of the project and then for completion of other projects of the same Ministry/ Department as mutually agreed/ decided. Any balance remaining in the escrow account subsequent to settlement of lenders' dues and completion of projects of the Ministry/ Department may be allowed to be used by the contractor/ concessionaire with the prior approval of the lead banker and the Ministry/ Department. If otherwise eligible and subject to contractual provisions, retention money and other amounts withheld may also be released against BG.]53

What This Means

Rule 227 of the General Financial Rules (GFR), 2017, deals with payments when the government challenges an arbitration award. Imagine a situation where a contractor believes they are owed money by the government, and an arbitrator agrees with them. If the government decides to fight the arbitrator's decision in court, this rule comes into play. Instead of withholding the entire amount until the court case is resolved, the government can pay 75% of the award to the contractor, even while the legal challenge is ongoing. This payment is secured by a Bank Guarantee (BG) from the contractor.

This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.

Key Points

  • •Applies when the government challenges an arbitration award.
  • •Allows payment of 75% of the arbitral award to the contractor against a Bank Guarantee (BG).
  • •The BG covers the 75% award amount, excluding potential interest refunds.
  • •Payment can be made into an Escrow Account for specific purposes like paying lenders and completing projects.
  • •Retention money and other withheld amounts may be released against BG, subject to contractual provisions.

Practical Example

M/s. ABC Construction won an arbitration award of ₹10 crore (including interest) against the Ministry of Road Transport and Highways for a disputed road construction project. The Ministry challenges the award in court. As per Rule 227, the Ministry can pay ₹7.5 crore (75% of ₹10 crore) to ABC Construction against a Bank Guarantee of ₹7.5 crore. This payment is deposited into a designated Escrow Account. The agreement stipulates that the funds will first be used to settle ABC Construction's outstanding loans related to the project, then to complete the remaining road construction, and finally, for another highway project under the same Ministry. Any remaining funds after these uses, with approval from the lead banker and the Ministry, can be used by ABC Construction.

This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.

Frequently Asked Questions

What happens if the court eventually rules in favor of the government?▼
If the court rules in favor of the government, the contractor is obligated to refund the 75% amount paid, as per the terms of the Bank Guarantee.
Does the Bank Guarantee cover the interest that might accrue if the court orders a refund?▼
No, the Bank Guarantee only covers the principal amount of 75% of the arbitral award, not any interest that might be payable if a refund is required.
What is an Escrow Account and why is it used in this context?▼
An Escrow Account is a neutral third-party account used to hold funds until specific conditions are met. In this case, it ensures that the funds are used for the intended purposes, such as paying lenders and completing projects, before the contractor can access any remaining balance.
Can retention money be released under this rule?▼
Yes, if otherwise eligible and subject to contractual provisions, retention money and other amounts withheld may also be released against a Bank Guarantee.
What is the purpose of Rule 227?▼
Rule 227 aims to balance the government's right to challenge arbitration awards with the need to ensure contractors receive a portion of the awarded amount while the legal process is ongoing, thereby facilitating project completion and financial stability.

This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.

Test Your Knowledge

Question 1 of 3

According to Rule 227 of GFR 2017, when a Ministry/Department challenges an arbitral award, what percentage of the award amount (including interest up to the date of the award) shall be paid to the contractor/concessionaire against a Bank Guarantee (BG)?

Related Rules

Rule 271General Financial Rules 2017 (amended July 2024) - Rule 271 - Chapter 10Rule 109General Financial Rules 2017 (amended July 2024) - Rule 109Rule 146General Financial Rules 2017 (amended July 2024) - Rule 146 - Chapter 6Rule 169General Financial Rules 2017 (amended July 2024) - Rule 169 - Chapter 6Rule 215General Financial Rules 2017 (amended July 2024) - Rule 215 - Chapter 6

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