Delhi High Court
Bharat Sanchar Nigam Ltd. vs Haryana Telecom Ltd. on 28 February, 2012
Author: Pradeep Nandrajog
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* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of Decision : February 28, 2012
+ FAO(OS) 596/2006
BHARAT SANCHAR NIGAM LTD. ..... Appellant
Represented by: Mr.Chandan Kumar, Advocate.
versus
HARYANA TELECOM LTD. ....Respondent
Represented by: Mr.Narender M.Sharma, Advocate
and Mr.Abhishek Sharma, Advocate
CORAM:
HON'BLE MR. JUSTICE PRADEEP NANDRAJOG
HON'BLE MS. JUSTICE PRATIBHA RANI
PRADEEP NANDRAJOG, J. (Oral)
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1. Pertaining to supply of cables the respondent was
bound by the General Conditions of Contract and vide condition
No.4, under the caption 'Performance Security', was obliged
to furnish 'The Performance Security Bond' in the form of a
bank guarantee issued by a Scheduled Bank as per proforma
provided in Section IX of the bid documents.
2. The proforma of the Security Bond, relevant part,
reads as under:
'In consideration of the President of India (hereinafter called
the Government) having agreed to exempt ____
(hereinafter called the contractor) from the demand under
the terms and conditions of an agreement/(Purchase
Order) No._______________ dated _______ made between
______ and _________ for _________ for the supply of ______
(hereinafter called the said agreement) of security deposit
for the due fulfillment by the said contractor of the terms
and conditions contained in the said agreement on
production of a bank guarantee for ___ we, (name of the
Bank)______ (hereinafter referred to as the Bank) at the
request of ______ (contractor), do hereby undertake to pay
to the Government an amount not exceeding ______ against
any loss or damage caused to or suffered or would be
caused to be suffered by the Government by reason of any
breach by the said contractor of any of the terms or
conditions contained in the said agreement.
We (name of the Bank) ______ do hereby undertake
to pay amounts due and payable under this guarantee
without any demur, merely on a demand from the
Government stating that the amount claimed is due by way
of loss or damage caused to or would be caused to or
suffered by the Government by reason of breach by the
said contractor of any of the terms and conditions
contained in the said agreement or by reason of the
contractors failure to perform the said agreement'
3. A guarantee bond executed by a nationalized Bank
was submitted by the respondent when the work was awarded.
After supplying certain length, out of the contracted quantity of
cables, the respondent breached the agreement and the
appellant invoked the bank guarantee. Attempt by the
respondent to obtain an injunction resulted in an order being
passed that pending adjudication of the dispute by an
Arbitrator, the respondent would keep alive the bank guarantee
and its encashment would be dependent upon the decision of
the Arbitrator.
4. Alleging breaches committed by the appellant and
stating that the prices of the cables had fallen when the work
was re-tendered and that the appellant awarded the balance
work at a price short by 30% of the contract stipulated price,
the respondent claimed, amongst others, that the bank
guarantee, which was to secure the loss to the appellant, could
not be encashed because there was no loss.
5. The learned Arbitrator held that the Performance
Bank Guarantee in sum of `68,31,107/- was rightly invoked due
to non-performance of the contract and specifically held that
he was not going into the issue of losses or damages. Thus the
bank guarantee became liable to be encashed.
6. Challenge to the award has succeeded before the
learned Single Judge who has held that unless loss caused was
proved by the appellant due to the breach of the contract, the
same could not be recovered by way of damages, and for
which view the learned Single Judge has noted various
judgments pertaining to Section 73 and 74 of the Contract Act.
7. Learned counsel for the appellant urges that the
bank guarantee was a performance guarantee and thus
without proving any loss caused due to breach of contract, the
appellant was entitled to recover the sum guaranteed. Learned
counsel for the appellant concedes that no loss was caused to
the appellant, and in fact, due to breach of the contract, the
appellant got a benefit inasmuch as the appellant was able to
procure cables at a cheaper price because prices had fallen.
8. Now, a performance guarantee is one where the
surety becomes liable to the beneficiary, claiming under the
guarantee, upon proof of breach of terms of the underlying
contract or on proof of both breach as well as the loss occurring
from the breach. Thus, it all depends upon the language of the
guarantee. Where the surety is liable only upon proof of breach
of the underlying contract, the guarantee would be a first
demand or on demand guarantee and is like a credit note or a
promissory note payable on demand. Such a guarantee is akin,
upon default of the underlying contract, to a security deposit
under the contract i.e. being liable to be forfeited. But, where
the liability under the guarantee is not only upon proof of
breach of terms of the underlying contract but also on the loss
occurring from the breach, the guarantee has to be honoured
by the surety upon proof of both.
9. The language of the guarantee in question is to pay
the beneficiary the damages occasioned i.e. the loss caused.
10. Let us not confuse the law pertaining to the
invocation of a bank guarantee with respect to the liability of
the bank to honour the same even if the beneficiary wrongly
claims that a loss was caused. A bank guarantee payable on
demand and without demur, pertaining to a loss caused to the
beneficiary, would have to be honoured if while invoking the
bank guarantee the beneficiary claims that a loss was caused
to the beneficiary. Being payable on demand, the bank cannot
ask for proof of the loss caused. But, even when this were to
happen, if at a for a, the party at whose instance the bank
guarantee was furnished is able to establish that no loss was
occasioned to the beneficiary due to breach of contract, the
said party would be entitled to recover the amount
appropriated by the beneficiary.
11. In the instant case, the bank guarantee was kept
alive pending adjudication of dispute before the Arbitrator and
unfortunately, the Arbitrator has, without understanding the
aforesaid legal position i.e. by ignoring the fundamental law of
the land on the subject, held that the appellant would be
entitled to receive the amount under the bank guarantee in
spite of no loss being occasioned. The learned Arbitrator erred
in holding that it was not his concern whether any loss was
occasioned.
12. The appeal is accordingly dismissed.
13. No costs.
(PRADEEP NANDRAJOG)
JUDGE
(PRATIBHA RANI)
JUDGE
FEBRUARY 28, 2012
'dc'
