Rapid Metro Gurgaon Dispute: Supreme Court Ruling on Concession Agreements and Debt Obligations

The case of Rapid MetroRail Gurgaon Limited & Others vs. Haryana Mass Rapid Transport Corporation Limited & Others revolved around the complex legal dispute regarding the termination of concession agreements, the debt obligations of public transport projects, and the role of financial institutions in ensuring the viability of infrastructure projects. The Supreme Court’s decision in this matter addressed critical issues of contract enforcement, financial obligations, and the sanctity of arbitration clauses in concession agreements.

Background of the Case

The dispute arose from concession agreements signed between the Haryana Shehri Vikas Pradhikaran (HSVP) and two entities, Rapid MetroRail Gurgaon Limited (RMGL) and Rapid MetroRail Gurgaon South Limited (RMGSL), both subsidiaries of the IL&FS group. The agreements were for developing and operating metro rail projects in Gurgaon.

RMGL and RMGSL entered into separate agreements for two metro projects: one linking Delhi Metro’s Sikanderpur Station to NH-8 and the other extending it to Sector 56, Gurugram. Under these agreements, the entities were granted exclusive rights to operate the metro services for 99 and 98 years, respectively.

Termination and Legal Disputes

In June 2019, RMGL and RMGSL issued termination notices to HSVP, citing material breaches by the latter. Subsequently, HSVP countered with termination notices of its own in August 2019, asserting that RMGL and RMGSL had failed to fulfill their obligations.

The Haryana Mass Rapid Transport Corporation (HMRTC), which took over metro projects in Haryana, sought to block the termination through a writ petition in the Punjab and Haryana High Court. The court, in an interim order, directed RMGL and RMGSL to continue operating the metro while an audit of the debt due under the agreements was conducted by the Comptroller and Auditor General of India (CAG).

Key Arguments of the Parties

Petitioner’s Arguments (RMGL and RMGSL):

The concession agreements required HSVP to pay 80% of the debt due in case of termination.
The High Court’s order to conduct an audit and deposit the debt due was based on mutual consent.
Delays in payment were unfair as the project had already been handed over to HMRTC.

The Supreme Court noted RMGL’s argument: “The obligation to deposit 80 per cent of the debt due as a consequence of the termination emanates from Article 24.4 of the Concession Agreement.”

Respondent’s Arguments (HMRTC and HSVP):

The IL&FS group was under financial distress, and RMGL and RMGSL were classified as “red entities.”
The project costs had been inflated, and forensic audits were ongoing.
The CAG report was inconclusive, and further audits were required before releasing funds.

Supreme Court’s Analysis

The Supreme Court emphasized that the dispute arose out of commercial contracts and must be resolved per the terms of the concession agreements. The court highlighted the importance of honoring financial obligations under public-private partnership agreements.

The court stated: “The issuance of a notice of termination, the consequences which would ensue, and the resolution of disputes is specifically provided in the arbitration agreement between the parties.”

The Supreme Court held that:

The High Court’s order directing a financial audit by CAG and requiring HSVP to deposit 80% of the debt due was valid.
RMGL and RMGSL had handed over metro operations, and delays in depositing funds violated contractual obligations.
Ongoing forensic investigations into IL&FS did not justify withholding the debt due, as the deposit was to be maintained in an escrow account.

Final Judgment

The Supreme Court issued the following directions:

HSVP must deposit 80% of the debt due into the escrow account within three months.
The deposited funds must remain in escrow and cannot be appropriated without permission.
Any disputes over the audit report must be resolved through arbitration.
RMGL and RMGSL must provide all necessary documents for the final transfer of assets.
The pending writ petitions in the High Court were disposed of.

The Supreme Court concluded: “There is a vital public interest element in ensuring that the monies which are liable to be deposited in the Escrow Account with a nationalized bank are duly deposited.”

The ruling reinforced the principle that contractual obligations in infrastructure projects must be upheld, ensuring financial institutions’ interests are protected while allowing for legal scrutiny of financial irregularities.

Petitioner Name: Rapid MetroRail Gurgaon Limited & Others.
Respondent Name: Haryana Mass Rapid Transport Corporation Limited & Others.
Judgment By: Justice Dhananjaya Y Chandrachud, Justice M R Shah, Justice Sanjiv Khanna.
Place Of Incident: Gurgaon.
Judgment Date: 26-03-2021.

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