THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment Reserved on: May 25, 2011
Judgment Pronounced on: May 31, 2011
+ CS(OS) No. 1295/2011
HCL TECHNOLOGIES LIMITED .....Plaintiff
- versus -
UNIQUE IDENTIFICATION
AUTHORITY OF INDIA .....Defendant
Advocates who appeared in this case:
For the Plaintiff: Mr Neeraj Kishan Kaul, Sr. Adv with
Mr Kartik Yadav, Adv.
For the Defendant: Mr S.K. Dubey, Sr. Government
Counsel, Mr Neeraj Chaudhari, CGSC
and Mr Khalid Arshad and Mr Nitin
Sharma, Advs. for D-1&2, Mr Rajiv
Kapur, Adv. for D-3
CORAM:-
HON'BLE MR JUSTICE V.K. JAIN
1. Whether Reporters of local papers may
be allowed to see the judgment? Yes
2. To be referred to the Reporter or not? Yes
3. Whether the judgment should be reported Yes
in Digest?
V.K. JAIN, J
IA No. 8635/2011 (O. 39 R. 1&2 CPC)
1. This is a suit for grant of perpetual injunction. Defendant
No.2 - Unique Identification Authority of India (UIDAI) which is stated
to be an office attached to the Planning Commission, to issue, a unique
CS(OS)No.1295/2011 Page 1 of 28
identification number to all Indian residents invited „Expression of
Interest‟ for appointment of „Managed Service Provider‟ (MSP) for
Central ID Data Repository. Each participant in the tendering process
was required to submit an „Earnest Money Deposit‟ (EMD) of Rs.2 crores
in the form of bank guarantee in favour of defendant No.2. The EMD of
unsuccessful applicants was to be returned to them within one month of
issue of „Request For Proposal‟ (RFP) to the successful applicants. The
EMD furnished by the successful applicants was to remain in force till
RFP evaluation process was complete. The plaintiff, in compliance with
the terms and conditions of the aforesaid tender submitted a bank
guarantee of Rs.2 crores issued by defendant No.3 - State Bank of India.
The bank guarantee was extended from time to time and is valid upto
May 31, 2011. Vide letter dated May 9, 2011, the plaintiff withdrew
from the biding process, without submitting a bid. It is alleged that
defendant No.2, assuming the plaintiff to be a bidder, is seeking to encash
the aforesaid bank guarantee and has informed the plaintiff that its
request for returning the bank guarantee has not been accepted. It has
accordingly been prayed that defendant No.2 be restrained from forfeiting
the earnest money and be directed to return the earnest money amount of
Rs.2 crores deposited by the plaintiff, vide bank guarantee dated
23.08.2010.
2. This suit was listed for the first time on 23.05.2011 when an
CS(OS)No.1295/2011 Page 2 of 28
adjournment was taken by the plaintiff. When the matter was taken up on
24.05.2011, the plaintiff amended the plaint so as to implead Union of
India as defendant No. 1 and State Bank of India as defendant No.3. The
matter was adjourned to 25.05.2011 on the request of the plaintiff which
was required to serve advance copy of the plaint on the nominated
counsel for Union of India. The arguments on IA 8635/2011 filed by the
plaintiff seeking ad interim injunction against invocation of bank
guarantee and receipt of money from the bank were heard. The
defendants did not get enough time to file written statement and has
orally opposed the application.
3. A perusal of the tender document dated 18.06.2010 filed by
the plaintiff - Company would show that the tendering process was
divided into two sections. Defendant No.2 invited „Expression of
Interest‟ for selection of the „Managed Service Provider‟ making it clear
that the document was not to be construed as Tender/RFP. The second
stage of tendering process comprised inviting techno-commercial bids by
issuance of Request for Proposal to those EOI respondents, who were
short-listed on the basis of pre-qualification criteria mentioned in the
document.
4. Clause 1 of Annexure 6.4 which is proforma of EMD Form
reads as under:-
” THE CONDITIONS of this obligation are:
CS(OS)No.1295/2011 Page 3 of 28
1. If the Respondent, having been notified of the
acceptance of its EOI by the Client during the period
of validity of EOI
(a) Withdraws his participation from the
EOI during the period of validity of EOI
document; or
(b) Fails or refuses to participate in the
subsequent tender process after having been short
listed in accordance of the EOI Document.
We undertake to pay to the Client upto the above
amount upon receipt of its first written demand,
without the Client having to substantiate its demand,
provided that in its demand the Client will note that
the amount claimed by it is due to it owing to the
occurrence of one or both of the two conditions,
specifying the occurred condition or conditions.
This guarantee will remain in force upto and
including 60 days after the period of EOI Response
validity, and any demand in respect thereof should
reach the Bank not later than the above date.”
5. Clause 6.1.6 of Annexure 6.3 reads as under:-
“6.1.6 We understand that the bid security furnished by us may
be forfeited:
(a) If we withdraw our participation from
the EOI during the period of validity of EOI
document; or
(b) In the case we do not participate in the
subsequent Tender process after having been
short listed”
6. Clause 7 & 8 of Invitation to Bid read as under:-
“7. The Bidder is required to pay
Rs.50,00,00,000/- (INR Fifty Crore Only) towards
Bid Security in the form of a Bank GuaranteeCS(OS)No.1295/2011 Page 4 of 28
failing which the bid submitted by the bidder shall
be rejected. The Bank Guarantee should be drawn
in favour of “PAO, UIDAI” and payable at New
Delhi.
8. The bidders, in line with clause 3.2 of
relevant expression of interest (EoI) for “Managed
Services Provider(MSP) for CIDR dated 18th June,
2010 shall extend the validity of the EMD of
Rs.2,00,00,000 (INR Two Crores only), submitted
as part of EoI Response, so that the same is valid
for 45 days beyond the validity of this RFP Bid as
per Clause 5(f) above. This extension of EMD
submitted at the time of EoI stage shall be
submitted along with bid security of
Rs.50,00,00,000/- (INR Fifty Crore Only).”
7. Clause 12.7 of the Invitation to Bid reads as under:-
"12.7 The bid security may be forfeited:
a) If a Bidder withdraws its bid during the
period of bid validity specified by the Bidder in the
Bid; or
b) In the case of a successful Bidder, if the Bidder
fails;
i. to sign the Contract in accordance with Clause 31;
or
ii. to furnish performance security in accordance with
Clause 32.”
8. Clause 21.1 of the Invitation to Bid reads as under:-
“21.1. The Bidder may modify or withdraw its
bids after the bids’ submission, provided that
written notice of the modification or withdrawal is
received by the Purchaser prior to the last date
prescribed for receipt of bids.”
9. Clause 32.1 of the tender document reads as under:-
CS(OS)No.1295/2011 Page 5 of 28
“32.1. Within 15 days of the receipt of
notification of award from the Purchaser, the
successful Bidder shall furnish the performance
security in accordance with the Conditions of
Contract, in the form of a Contract Performance
Bank Guarantee as per the format prescribed at
Attachment 1 of Section III.”
10. Clause 32.2 of the tender document reads as under:-
“32.2 Failure of the successful Bidder to
comply with the requirement of Clause 31 or
Clause 32.1 shall constitute sufficient grounds for
the annulment of the award and forfeiture of the
bid security, in which event the Purchaser may
award the Contract to the next best evaluated
Bidder or call for new bids.”
11. Clauses 1 and 2 of Annexure-I; bid security form reads as
under:-
“THE CONDITIONS of this obligation are:
1. If the bidder, withdraws its Bid during the period
of bid validity specified by the bidder on the Bid
Form; or
2. If the bidder, having been notified of the
acceptance of its bid by the Purchaser during the
period of bid validity,
(a) Fails or refuses to execute the Contract, if
required; or
(b) Fails or refuses to furnish the Performance
Security, in accordance with the instructions
to bidders”
12. A perusal of the bank guarantee executed by defendant No.3
– State Bank of India, would show that it is in terms of the format
CS(OS)No.1295/2011 Page 6 of 28
provided in the tender document in this regard. To the extent it is
relevant the bank guarantee reads as under:-
THE CONDITIONS of this obligation are:
1. If the Respondent, having been notified of the acceptance of its
EOI by the Client during the period of validity of EOI
(a) withdraws his participation from the EOI during the
period of EOI document; or
(b) fails or refuses to participate in the subsequent tender
process after having been short listed in accordance of the
EOI Document.”
13. It is an admitted position that on scrutiny of the „Expression of
Interest‟ submitted by the plaintiff Company, it was short-listed for
inviting techno-commercial bids by issuance of RFP. It is also an
admitted case that no techno-commercial bid was actually submitted by
the plaintiff – Company and it sought refund of the bank guarantee.
Relying upon clause 6.1.6 of Annexure-6.3, it was contended by the
learned counsel for the plaintiff that there is no provision in the tender
document for forfeiting the amount of EMD in case the short-listed
respondent withdraws from the tendering process before submitting the
techno-commercial bid. It was also contended by him, that this is also a
case of special equity in favour of the plaintiff – Company since no loss
has been caused to the defendants on account of withdrawal of the
plaintiff from the tendering process without submitting the techno-
commercial bid whereas irretrievable loss will be caused to the plaintiff,
CS(OS)No.1295/2011 Page 7 of 28
if the bank guarantee is allowed to be encashed. It was also submitted
that being State, the defendant is expected to act fairly and reasonably in
all its dealings including the commercial contracts. This is also his
contention, that since the bank guarantee furnished by the plaintiff –
Company expressly referred to the terms of the tender document, those
terms have necessarily be read while interpreting the bank guarantee and
the bank guarantee cannot be invoked unless the terms and conditions of
the tender document provide for the forfeiture of the EMD. In support of
his contention, the learned counsel for the plaintiff has relied upon
Hindustan Construction Co. Ltd. and Anr. Vs. Satluj Jal Vidyut Nigam
Ltd., AIR 2006 Delhi 169, Pioneer Publicity Corporation vs. Delhi
Transport Corporation and Anr. (2003) II AD Delhi 469.
The learned counsel for the defendant, on the other hand, has
contended that the bank guarantee furnished by the plaintiff Company has
become invocable as the plaintiff Company has withdrawn from the
tendering process and has failed or refused to participate in the
subsequent tendering process, after having been short-listed in
accordance with the EOI document. He has also contended that no fraud
has been pleaded by the plaintiff and there are no special equities in
favour of the plaintiff – Company. This is also his contention that the
alleged unjust enrichment of the defendants cannot be a ground for not
invoking the bank guarantee. In support of his contention, he has relied
CS(OS)No.1295/2011 Page 8 of 28
upon the decision of the Supreme Court in Dwarikesh Sugar Industries
Ltd. vs. Prem Heavy Engineering Works(P) Ltd., and Another, 1997(6)
SCC 450.
14. In Hindustan Construction Co. Ltd. (supra), the applicants
furnished guarantees which were to be returned to it on 7 th July, 2003 i.e.
after one year of the maintenance periods. The respondent, however,
sought to invoke the bank guarantee on 7th July, 2003. On account of the
threats and duress alleged to have been applied by the respondent by
invoking the bank guarantees, the applicant, submitted an undertaking
that the performance was not to be considered complete till such time
advance ad hoc payments remained unadjusted and that the bank
guarantee would be kept in force and could be invoked by the respondent
without need to prove or show grounds for invocation. In view of this
undertaking, encashment of the bank guarantee was put on hold by the
respondent. This was also the case of the applicant that before the
original time for completion of contract was to expire on 23 rd April, 1998,
the respondent appointed a Consultant to examine the issue of extension
of time, since the respondent had conveyed its difficulty in settling the
claims by the applicant on the ground that their officers were not having
the requisite experience and skill. On the recommendations of the
Consultant, the petitioner was granted an interim extension of 25 months
i.e. upto 30th June, 1997 and thereafter, an interim payment of Rs. 35.98
CS(OS)No.1295/2011 Page 9 of 28
crores was also released to it by the respondent as partial compensation of
additional cost arising from the prolongation of the work. Subsequently,
the respondent unilaterally set up an Internal Claims Review Committee
and sought to review the additional time and additional compensation
awarded to the petitioner. This was alleged to be a mala fide act on the
part of the respondent. The petitioner protested against it and sought
reference of the dispute to Dispute Review Board (DRB) which was
constituted in terms of the contract. The Board granted certain extensions
and related cost compensation to the applicants on cost of various items.
It was also held that the applicants were entitled to Rs. 41 crores over and
above the amount already paid and they were not liable for any liquidated
damages. However, a part of the findings recorded by the Board was not
accepted by the respondent who intended to invoke the arbitration clause.
The applicants wrote to respondent requesting that no step should be
taken for encashment of the bank guarantee until the points/issues were
finally decided by the arbitral forum. The respondent intended to claim
liquidated damages of Rs. 73.44 crores in addition to claim of Rs. 35.98
crores which it had already paid to the applicant as ad hoc payments. The
respondent threatened to invoke the bank guarantees amounting to Rs.
123.97 crores. The case of the applicant was that the respondent could
not be permitted to invoke the bank guarantee in an arbitrary method
which was opposed to the specific terms of the contract as it would cause
CS(OS)No.1295/2011 Page 10 of 28
serious prejudice to its interest. It was also pointed out that the
respondent itself had accepted the decision of the Board in regard to part
of the extended period while the other part was being questioned by it
without any basis and justification. In a petition filed by the applicant
under Section 9 of the Arbitration and Conciliation Act, the following
four grounds were mainly taken:-
(a) The invocation of bank guarantees by the respondents is
intended to overreach the adjudicative process, provided under the
terms of the agreement. This is a fraudulent attempt on the part of
the respondent;
(b) The invocation of bank guarantees is contrary to the terms of
the bank guarantee;
(c) The facts and circumstances of the case clearly demonstrate
special equities in favor of the petitioners so as to justify grant of
an injunction order; and
(d) The petitioners shall suffer irretrievable injustice and injury in
the event the bank guarantees are permitted to be encashed.
15. After considering various decisions on this subject, this Court
inter alia observed as under:-
“12. …..Originally, the only exception carved
out to encashment of bank guarantee
unconditionally was, fraud. However,
subsequent judicial pronouncements have
extended this scope by adding other class of
cases which would fall in this exception – Cases
of irretrievable injury, fraud, extraordinary
special equities and invocation of bank
guarantee being not in terms of the bankCS(OS)No.1295/2011 Page 11 of 28
guarantee itself. It is very difficult to draw any
straitjacket formula which would universally
apply to all the cases. The Court would have to
examine each case in order to find out whether
the case falls in any or more of the afore-stated
classes.”
16. The legal propositions were formulated by the Court as
under:
On the analysis of the above law laid down by the
Supreme Court in its different judgments, it is clear that
injunction against encashment of bank guarantee is an
exception and not the rule. Cases of such exceptions would
have to be evidenced by documents and pleadings on
record and compulsorily should fall within any of the
following limited categories:-
i) If there is a fraud in connection with the bank
guarantee which would vitiate the very foundation of
such guarantee and the beneficiary seeks to take
advantage of such fraud.
ii) The applicant, in the facts and circumstance of the
case, clearly establishes a case of irretrievable
injustice or irreparable damage.
iii) The applicant is able to establish exceptional or
special equities of the kind which would prick the
judicial conscience of the court.
iv) When the bank guarantee is not invoked strictly in its
terms and by the person empowered to invoke under
the terms of the guarantee. In other words, the letter
of invocation is in apparent violation to the specific
terms of the bank guarantee.
CS(OS)No.1295/2011 Page 12 of 28
x x x. The concept of irretrievable injustice,
or damages, or special equities would come into play
where the parties to a contract having been provided with
internal adjudicative mechanism, attempts to frustrate
results of such an internal adjudication by recourse to
encashment of bank guarantee, particularly when under the
terms and conditions of the contract, including the terms of
the guarantee, such determination is ‘final’, of course
subject to the limitations spelled out in such contracts. An
attempt to over-reach the process of adjudication with
intent to cause irreparable prejudice to the other side
would be a circumstance which would influence the
decision or tilt the special equities in favor of the applicant
before the Court.
17. In Hindustan Steelworks Construction Ltd. vs. Tarapore
and Co. (1996) 5 SCC 34, Supreme Court held that in case of an
unconditional bank guarantee, the nature of obligation of the bank is
absolute and not dependent upon any dispute or proceeding between
the party at whose instance the bank guarantee is given and the
beneficiary, there being only two exceptions – fraud and special
equities. In that case Special equities were claimed on the basis as to
who had committed breach of the contract. Determination of
disputes was held not to be a factor, which would be sufficient to
make the case as exceptional case justifying interference by the court
restraining invocation of the bank guarantee.
CS(OS)No.1295/2011 Page 13 of 28
18. In Ansal Engineering Project Ltd. vs. Tehri Hydro
Development Corporation Ltd. and Anr. (1996) 5 SCC 450,
Supreme Court inter alia held as under:-
“4. It is settled law that bank guarantee is an
independent and distinct contract between the bank
and the beneficiary and is not qualified by the
underlying transaction and the validity of the primary
contract between the person at whose instance the
bank guarantee was given and the beneficiary. Unless
fraud or special equity exists, is pleaded and prima
facie established by strong evidence as a triable issue,
the beneficiary cannot be restrained from encashing
the bank guarantee even if dispute between the
beneficiary and the person at whose instance the bank
guarantee was given by the Bank, had arisen in
performance of the contract or execution of the works
undertaken in furtherance thereof. x x
x
5. …….The court exercising its power cannot
interfere with enforcement of bank guarantee/letters of
credit except only in cases where fraud or special
equity is prima facie made out in the case as triable
issue by strong evidence so as to prevent irretrievable
injustice to the parties. The trading operation would
not be jettisoned and faith of the people in the efficacy
of banking transactions would not be eroded or
brought to disbelief.”
19. In U.P. State Sugar Corporation Vs. Sumac International
Ltd. (1997) 1 SCC 568, the Supreme Court held as under:-
“The law relating to invocation of such bank
guarantees is by now well settled. When in the
course of commercial dealings an unconditional
bank guarantee is given or accepted, the
beneficiary is entitled to realize such a bank
guarantee in terms thereof irrespective of anyCS(OS)No.1295/2011 Page 14 of 28
pending disputes. The bank giving such a
guarantee is bound to honour it as per its terms
irrespective of any dispute raised by its customer.
The very purpose of giving such a bank guarantee
would otherwise be defeated. The courts should,
therefore, be slow in granting an injunction to
restrain the realization of such a bank guarantee.
The courts have carved out only two exceptions. A
fraud in connection with such a bank guarantee
would vitiate the very foundation of such a bank
guarantee. Hence if there is such a fraud of which
the beneficiary seeks to take the advantage, he can
be restrained from doing so. The second exception
relates to cases where allowing the encashment of
an unconditional bank guarantee would result in
irretrievable harm or injustice to one of the parties
concerned. Since in most cases payment of money
under such a bank guarantee would adversely
affect the bank and its customer at whose instance
the guarantee is given, the harm or injustice
contemplated under this head must be such an
exceptional and irretrievable nature as would
override the terms of the guarantee and the adverse
effect of such an injunction on commercial
dealings in the country.”
20. The legal proposition with respect to irretrievable injury was
summarized by this Court in the case of Dwarikesh Sugar Industries Ltd.
vs. Prem Heavy Engineering Works (P) Ltd. and Anr., (1997) 6 SCC
450, as under:-
“The second exception to the rule of granting
injunction, i.e., the resulting of irretrievable injury,
has to be such a circumstance which would make it
impossible for the guarantor to reimburse himself,
if he ultimately succeeds. This will have to be
decisively established and it must be proved to the
satisfaction of the court that there would be noCS(OS)No.1295/2011 Page 15 of 28
possibility whatsoever of the recovery of the
amount from the beneficiary, by way of
restitution.”
21. In the case of Pioneer (supra), there was a contract between
the parties in respect of „back panel right side space and inside space
above window panel’ of buses. A clause in the agreement stipulated that
any decrease or increase in the number of buses will not alter the monthly
rental fee. Clause 9 (C) provided that the parties were competent to
terminate the contract without assigning any reasons, but giving three
months notice in writing. Invoking the aforesaid clause, DTC sought to
terminate the contract w.e.f 02.02.2003 vide its letter dated 02.11.2002.
This Court was of the view that DTC had not been able to adequately
justify its action for terminating the Contract before it was otherwise
determinable and its actions were whimsical and devoid of any reason.
During the course of judgment, this Court, inter alia, observed as under:-
“The freedom which exists under the realm of
private contract in respect of the performance of
contractual obligation does not apply in the same
measure where the Government is a party. Every
action of the Government has to pass the rigorous
inquisition of fair play, lack of arbitrariness, and its
being founded on good and sound reasons.
Government’s freedom to contract as well as
freedom to break free from the obligations of a
contract is now rightly restricted in diverse
manners. While the Government may enjoy the
role of distribution of largesse, it may also suffer
from the vulnerability of committing errors orCS(OS)No.1295/2011 Page 16 of 28
perpetrating an inequitable or unjust
implementation of its policies through its faceless
and unidentifiable officers and agents. It, therefore,
behoves the Court to treat Government contracts in
a manner altogether different to that of the
compact between private parties.
XXXX…..XXXX. The Hon’ble Supreme Court
has opined that even where the State is empowered
by a particular clause in a contract to terminate it
by a notice simplicitor, the only possible
construction that can be given to such a clause is
that the reasons which prevailed upon it for
justifying the termination need not be conveyed to
the adversary. The Apex Court has clarified that
such a clause does not permit the taking of
arbitrary, biased, unreasonable or an ill-informed
decisions.”
22. In National Highways Authority of India vs. Ganga
Enterprises and Another (2003) 7 SCC 410, the appellant issued a
tender notice calling for tenders for collection of toll on a portion of the
highway running through Rajasthan. Two types of securities were to be
furnished by the tenderer, one being a bid security and the other was a
performance security. The tender document, inter alia, provided as under:
“7.3 The Bid Security of unsuccessful bidders will
be returned by National Highways Authority of
India as promptly as possible, but not later than 30
days after the expiration of the period of bid
validity.
7.4 The Bid Security of the successful bidders will
be returned by National Highways Authority of
India soon after the bidder has furnished the
required Performance Security.
CS(OS)No.1295/2011 Page 17 of 28
7.5 The Bid Security may be forfeited:
(a) if the bidder withdraws his bid during the
period of bid validity; or
(b) in case this successful bidder fails within the
specified period to
(i) furnish the required Performance
Security; and
(ii) sign the Agreement.”
It was noticed by Supreme Court that the bid security was not
for performance of the contract, but was in essence an earnest to be given
to ensure that the bidder did not withdraw his bid during the period of bid
validity and/or that after acceptance, the performance security was
furnished and the agreement signed. The respondent withdrew his bid
before expiry of the period during which it was to remain valid. On the
next day, the appellants accepted the offer of the respondent. However, as
the respondent had withdrawn his bid, the performance guarantee was not
furnished and no agreement was entered into. The appellant encashed the
bank guarantee for Rs 50 lakhs. The respondent filed a writ petition in the
High Court for refund of the aforesaid amount. The writ petition was
allowed by the High Court holding that the offer had been withdrawn
before it was accepted and no completed contract had come into
existence. The High Court also noted that in law it was always open to
the parties to withdraw its offer before its acceptance. Setting aside the
CS(OS)No.1295/2011 Page 18 of 28
decision of the High Court, Supreme Court, inter alia, held as under:-
“In our view, the High Court fell in error in so
holding. By invoking the bank guarantee and/or
enforcing the bid security, there is no statutory
right, exercise of which was being fettered. There
is no term in the contract which is contrary to the
provisions of the Indian Contract Act. The Indian
Contract Act merely provides that a person can
withdraw his offer before its acceptance. But
withdrawal of an offer, before it is accepted, is a
completely different aspect from forfeiture of
earnest/security money which has been given for a
particular purpose. A person may have a right to
withdraw his offer but if he has made his offer on a
condition that some earnest money will be
forfeited for not entering into contract or if some
act is not performed, then even though he may
have a right to withdraw his offer, he has no right
to claim that the earnest/security be returned to
him. Forfeiture of such earnest/security, in no way,
affects any statutory right under the Indian
Contract Act. Such earnest/security is given and
taken to ensure that a contract comes into
existence. It would be an anomalous situation that
a person who, by his own conduct, precludes, the
coming into existence of the contract is then given
advantage or benefit of his own wrong by not
allowing forfeiture.
It must be remembered that, particularly in
government contracts, such a term is always
included in order to ensure that only a genuine
party makes a bid. If such a term was not there
even a person who does not have the capacity or a
person who has no intention of entering into the
contract will make a bid. The whole purpose of
such a clause i.e. to see that only genuine bids areCS(OS)No.1295/2011 Page 19 of 28
received would be lost if forfeiture was not
permitted.”
In para 3 of the judgment, Supreme Court, inter alia, noted as
under:
“As earnest/security for performance (of the first
part of the offer) the Respondent along with his bid
furnished a bank guarantee in a sum of Rs. 50
lakhs as bid security. The bank guarantee furnished
was a “on demand guarantee” which specifically
provided that the bank guarantee could be enforced
“on demand” if the bidder withdraws his bid
during the period of bid validity or if the bidden
having been notified of the acceptance of his bids,
fails to furnish the performance security or fails to
sign the Agreement. The amount of the bank
guarantee was to be paid by the bank without
demur on a written demand merely stating that one
of these conditions had been fulfilled. The moment
the bank guarantee was given and accepted by the
appellants the first portion of the offer, regarding
bid security, stood accepted. Of course, this did not
mean that a completed contract in respect of the
work of toll collection had come into existence.”
23. A careful examination of the terms of the bank guarantee
furnished by the plaintiff-company to the defendant-UIDAI would show
that in the event of the plaintiff-company, having been informed of
acceptance of EOI, by the UIDAI, during the period of its validity, failing
or refusing to participate in the subsequent tender process after having
been shortlisted, the bank is required to pay to UIDAI the amount of Rs 2
crores on the very first written demand and without asking UIDAI to
substantiate its demand. During the course of arguments, the learned
CS(OS)No.1295/2011 Page 20 of 28
counsel for UIDAI, placed on record a copy of the letter dated 29 th May,
2011, written by it to defendant No.3-State Bank of India, invoking the
bank guarantee furnished by the plaintiff-company and asking the bank to
pay a sum of Rs 2 crore to it, latest by 25th May, 2011. It has been clearly
stated in para 2 of this letter that by not submitting the bid after having
been listed at the EOI stage, the plaintiff had failed or refused to
participate in the tender process in terms of clause 1(b) of the bank
guarantee, which also amounts to violation of the conditions of the EOI.
It would be pertinent to note that there is absolutely no reference to the
bid security in the bank guarantee and the obligation of the bank, to pay
the amount of the bank guarantee to UIDAI, arises the moment, it
receives a demand from it on the ground that, the plaintiff had either
withdrawn participation from the EOI or had failed or refused to
participate in the subsequent tender process after having been shortlisted.
Reading the bank guarantee without any aid of the tender document
clearly entitles the defendant UIDAI to invoke the bank guarantee in the
event of failure or refusal of the plaintiff-company to participate in the
tendering process by declining to submit the bid or otherwise
withdrawing from the subsequent tendering process.
24. The learned counsel for the plaintiff relying upon the decision
of Supreme Court in Daewoo Motors India Ltd. Vs. Union of India
(UOI) and Ors. (2003) 4 SCC 690, as stated below:
CS(OS)No.1295/2011 Page 21 of 28
x x x it is true that the bank guarantees
has to be read in conjunction with the terms of the contract
but when the bank guarantee itself is in absolute terms, the
agreement between the company and the first respondent
would be of no avail to the bank.
and reiterated by this Court in Hindustan Construction (supra) case that
the terms and conditions of the tender document have necessarily to be
read in the bank guarantee. The bank guarantee provided for payment of
Rs 4 crore 80 lakhs to President of India by way of loss or damage caused
or suffered by reason of non-fulfilment of export obligations under a
notification or by reason of any breach of any of the terms and conditions
of the bond submitted by Daewoo Motors India Limited. Emphasizing on
the words “by reason of the non-fulfilment of the export obligations
under the above-said Notification”, it was contended on behalf of the
petitioner that since there was no default or non-fulfilment of the export
obligation, the respondent was not entitled to invoke the bank guarantee.
The contention was, however, rejected by Supreme Court. Holding that
the above-referred words could not be read in isolation by disassociating
them from the context in which they had been used, it was held that the
words “by reason of the non-fulfilment of the export obligations under
the above-said notification” do not constitute a condition precedent to
invoke the bank guarantee much less they give any cause of action to the
bank to contest the encashment of the bank guarantee on the ground of
CS(OS)No.1295/2011 Page 22 of 28
there being non-fulfilment of the export obligation. This judgment,
therefore, does not help the plaintiff.
25. Assuming that the terms and conditions of the tender
document have to be read in order to decide whether the bank guarantee
could be invoked by UIDAI or not, I find that the terms and conditions of
the tender document clearly stipulated forfeiture of the EMD in the event
of the respondent, who has been successful on evaluation of the EOI
refusing to participate in the tendering process by declining to submit the
bid or in some other manner.
26. As noted earlier, annexure 6.4 which is the proforma of EMD
form and which has been used in the bank guarantee furnished by the
plaintiff-company expressly provided for payment of the amount of EMD
(Rs 2 crore) to UIDAI in the event of the short-listed respondent failing
or refusing to participate in the subsequent tender process and it is not in
dispute that the plaintiff-company was short-listed and it has declined to
participate in the subsequent process by not submitting the bid. The
expression “bid security” used in clause 6.1.6 of annexure 6.3, to my
mind, is a mistake since it is clause 12.7 of Invitation to bid which
provides for forfeiture of the bid security in the event the bidder
withdrawing the bid during its validity or failing to sign the contract or
furnishing the performance security. It would be pertinent to note here
that the amount of bid security fixed in the tender document was Rs 50
CS(OS)No.1295/2011 Page 23 of 28
crores, whereas the amount of EMD was only Rs 2 crore.
27. Coming to the question as to whether the act of the defendant-
UIDAI in invoking the bank guarantee furnished by way of EMD is
unfair or unreasonable, it would only be appropriate to note that deposit
of earnest money and its forfeiture in the event specified in the tender
document is not unknown to the Government tenders and in fact is more
or less a standard condition in all the tenders invited by the Government
and its agencies. The purpose of stipulating forfeiture of the EMD in the
event of the tenderer backing out of his contractual obligation to
participate in the whole of the tendering process is to ensure that it is only
serious and financially sound tenderers who participate in the tendering
process and the fly by not operators, or those who are not serious about
participating in the tendering process do not frustrate the whole process
of tendering by withdrawing at the initial or an intermediate stage. If the
tenderers know that the EMD furnished by them cannot be forfeited, in
the event of there being a price/cost escalation, they may get to withdraw
from it at a subsequent stage and in a given case, if the number of
tenderers withdrawing from the tendering process happens to be
substantial, the remaining tenderers left in the fray for submitting the
bids may not be sufficient in number and consequently the Government
may not get a competitive rate for the product it seeks to purchase or the
service it seeks to avail. If the Government, on account of the number of
CS(OS)No.1295/2011 Page 24 of 28
tenderers left in the fray being inadequate has to cancel the tendering
process and issue fresh tenders that may, besides causing financial loss to
the Government, may also delay the important and time bound projects of
the Government. It is, therefore, necessary that the parties to the
tendering process strictly abide by the terms of the tender and this can be
ensured only by enforcing the provision made in the tender document for
forfeiture of EMD/bid security/performance security, as the case may be.
In a situation of this nature, the tenderer, who participates in the tendering
process, having read, understood and accepted all its terms and conditions
cannot be allowed to say that the State is unfair in enforcing its
contractual right under the tender document. The present case, in my
view, is squarely covered by the decision of the Supreme Court in the
case of National Highways Authority of India (supra), where similar
invocation of bank guarantee was upheld by the Court.
28. In my view, the facts and circumstances of the case do not
make out a case of special equities in favour of the plaintiff or of an
irreparable injury to it in the event of the bank guarantee being encashed.
Since there is breach of the terms of the tender on the part of the plaintiff
and not on the part of the defendant- UIDAI, it is difficult to say that
there is any special equity in favour of the plaintiff-company. In the case
before this Court, since the defendant- UIDAI is none other than the
Union of India, it cannot be said that in the event of bank guarantee being
CS(OS)No.1295/2011 Page 25 of 28
allowed to be encashed, it would be impossible or even difficult for the
guarantor (the plaintiff-company) to reimburse itself in case it sues the
defendant for recovery of the amount of bank guarantee. Also, prima
facie, the defendant- UIDAI appears to be entitled to receive the amount
of bank guarantee from defendant No. 3-Bank. Hence, there are no
exceptional circumstances warranting intervention of the Court against
encashment of the bank guarantee. As held by Supreme Court in the case
of Dwarikesh Sugar Industries Ltd. (supra), the resulting of
irretrievable injury has to be such a circumstance which would make it
impossible for the guarantor to reimburse himself if he ultimately
succeeds and it must be proved to the satisfaction of the Court that there
would be no possibility whatsoever of the recovery of the amount from
the beneficiary by way of restitution. No such circumstance exists in this
case since the defendant happens to be Government of India. In
Dwarikesh Sugar Industries Ltd. (supra), Supreme Court held that
unjust enrichment is not a valid ground to grant injunction against
encashment of bank guarantee. The Court inter alia observed as under:
“We also do not find any justification for the High Court
in invoking the alleged principle of unjust enrichment to
the facts of the present case and then deny the appellant
the right to encash the bank guarantee. If the High Court
had taken the trouble to see the law on the point it would
have been clear that in encashment of bank guarantee the
applicability of the principle of undue enrichment has no
application.”
CS(OS)No.1295/2011 Page 26 of 28
In my view, the plaintiff-company has failed to establish even prima facie
any harm or injustice of such an exceptional or irretrievable nature as
would override the terms of the guarantee and the adverse effect of an
injunction by the Court against invocation of the bank guarantee would
have on the commercial dealings in our country. The facts of this case
are altogether different from the facts of Hindustan Construction
(supra) and the case does not fall under any of the categories stipulated
therein as exception against encashment of bank guarantee as a rule. This
is not the case of one of the parties to the contract trying to frustrate the
internal adjudicating mechanism or an internal adjudication nor is there
any attempt to overreach the process of any pending adjudication.
For the reasons given in the preceding paragraphs, I find no
prima facie case for grant of injunction against encashment of the bank
guarantee.
The application is, therefore, dismissed. The interim order
passed by this Court on 25th May, 2011 directing the bank not to remit the
amount of bank guarantee till further orders, is hereby vacated.
CS(OS) No 1295/2011
Written statement be filed within the prescribed period.
Replication be filed within four weeks thereafter.
CS(OS)No.1295/2011 Page 27 of 28
The parties to appear before the Joint Registrar for
admission/denial of documents on 11th August, 2011.
The matter be listed before the Court for framing of issues on 05th
December, 2011.
(V.K. JAIN)
JUDGE
MAY 31, 2011
‘sn’/sd/bg
CS(OS)No.1295/2011 Page 28 of 28