Delhi High Court
Saurabh Metals Pvt. Ltd. vs Union Of India & Ors. on 18 July, 2023
$~42
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of Decision: 18th July, 2023
+ LPA 557/2023 & CM APPLs. 36106/2023, 36107/2023
SAURABH METALS PVT. LTD. ..... Appellant
Through: Ms. Purti Gupta and Ms. Henna
George, Advocates.
versus
UNION OF INDIA & ORS. ..... Respondents
Through: Mr. Vineet Dhanda, CGSC with Mr.
Vinay Yadav, Mr. Archit Agarwal
and Ms. Durga Dass Vashist,
Advocates for R-1/ UOI.
Mr. Santosh Kumar Rout and Mr.
Abhishek Chakraborty, Advocates for
R-4/ PNB.
CORAM:
HON'BLE THE CHIEF JUSTICE
HON'BLE MR. JUSTICE SANJEEV NARULA
JUDGMENT
SANJEEV NARULA, J. (Oral):
1. M/s Saurabh Metals Pvt. Ltd, a Micro Small and Medium Enterprise
["MSME"] unit, has filed the present appeal against judgment dated 12th
July, 2023, whereby learned Single Judge has dismissed their writ petition
and upheld the decision/ action of Ministry of Railways, Union of India
[Respondent No. 1] to forfeit the Performance Bank Guarantee ["PBG"] of
Rs. 25.20 lakhs. This PBG was furnished by the Appellant on 30th
November, 2021, as a part of their contractual obligations under a tender
floated by Respondent No.1 [hereinafter, "impugned judgement"].
Signature Not Verified
By:SAPNA SETHI
Signing Date:25.07.2023
14:27:56
2. As the impugned judgement extensively narrates the facts of the case,
we will recount only the essential facts which are necessary for
contextualizing our decision:
2.1. Appellant-Company, a MSME unit engaged in the business of
engineering goods, participated in Tender No. 2021/RS(WTA)-
149/Tender/516 floated by Respondent No. 1 for supply of BOX N/ BG
Axle (22.9 Tonne Axle Load). The acceptance of their bid was
communicated through letter dated 17th November, 2021, which inter alia
required the Appellant to furnish a PBG for 03% of the value of the contract
i.e., Rs. 25.20 lakhs.
2.2. The above condition was fulfilled on 30th November, 2021 and
consequently, Respondent No. 1 placed a Developmental Order on 29th
December, 2021 on the Appellant. With the approval of Appellant's Quality
Assurance Plan under the Developmental Order, the contract stood
concluded.
2.3. However, owing to lack of necessary capital to fulfil their obligations,
the Appellant wrote to Respondent No. 1, requesting them to issue a
cancellation advice for the aforesaid Developmental Order with no financial
repercussions, in terms of the 'Vivad se Vishwas- 1' scheme issued by the
Ministry of Finance, Government of India on 06th February, 2023 and
revised on 11th April, 2023 [hereinafter, "the Scheme"]. In response, on 08th
June, 2023, Respondents declined to give the benefit of the Scheme and
cancelled the Developmental Order, thus forfeiting and invoking the PBG,
as per clause 0504 of the Indian Railway Standard Conditions.
2.4. The Appellant challenged the aforesaid communication in W.P.(C)
8456/2023, wherein on 13th June, 2023, the Court granted an interim order
Signature Not Verified
By:SAPNA SETHI
Signing Date:25.07.2023
14:27:56
restraining invocation of the PBG. Later, the writ petition was dismissed
through the impugned judgment, holding as under:
"10. As far as performance security is concerned, paragraph 2(iv) of the
Scheme requires the original delivery period/completion period to be between
19.02.2020 and 31.03.2022. Admittedly, the present case does not fall within these
parameters. I am therefore of the view that the contention of the Government of
India in its communication dated 22.05.2023 to this effect cannot be faulted.
11. I am also of the prima facie view that Ms. Gupta's reliance upon
paragraph 2(v) of the scheme is misplaced. The aforesaid clause applies to cases of
forfeiture of bid security [earnest money deposited or action for debarment of
tender]. In the present case, the bank guarantee in question was submitted under
Clause 13 of the "Instructions to Tenderers", and was to secure performance of
the contract. Clause 11 of the Instructions to Tenderers specifically provides that
earnest money deposit was not required. The case therefore falls within paragraph
2(iv), which covers "performance security", rather than paragraph 2(v) of the
Scheme.
12. In the absence of the benefit of the Scheme being available to the
petitioner, I do not find any ground of fraud or special equities to justify an
injunction against the invocation of the bank guarantee. The petitioner's own case
is that it was unaware of the infrastructure required for compliance of its
contractual obligations. It is stated in the writ petition that the petitioner submitted
a tender for supply of 1000 axles only on account of the fact that a quotation for
less than 50% of the tendered quantity was deemed to be unresponsive. I am
unable to accept, at least at this stage, that a contracting party, even if it is an
MSME, can be absolved of its contractual obligations on such a ground. It is for a
party to satisfy itself that it is capable of executing a contract before participating
in a tender. In fact, Mr. Dhanda has drawn my attention to a communication dated
03.07.2021 signed by the petitioner, in which the petitioner has stated that it has
examined the relevant specifications and is aware of the nature of the stores
required, and that it undertakes to supply the stores in accordance with the
requirements.
13. Having regard to the aforesaid position, I do not find any ground to
injunct the encashment of the subject bank guarantee in the present proceedings
under Article 226 of the Constitution.
14. The petition is, therefore, dismissed and the interim order dated
13.06.2023 is vacated. All pending applications are disposed of.
15. The parties are free to avail of all contractual remedies in respect of
their respective claims and counter claims, if any."
3. Ms. Purti Gupta, counsel for Appellant, assails the impugned
judgment contending as follows:
3.1. Since the tender in question was categorized as a 'development
tender' under the 'Make in India' scheme, no financial loss or prejudice
Signature Not Verified
By:SAPNA SETHI
Signing Date:25.07.2023
14:27:56
would be caused to Respondent No. 1 on account of its cancellation. No
operational cost has been incurred as the quantity of axles to be supplied
under the tender (2000 units) is insignificant in comparison to the annual
purchase quantity (about 2,00,000 units).
3.2. The minimum requirements for setting up the necessary plant and
machinery and other technical parameters were not mentioned in the tender
documents. Despite genuine efforts and substantial investments to develop
the axles, unfortunately, Appellant could not meet the target. Therefore,
Appellant must not be made to bear the consequences of Respondent No. 1's
failure to make proper disclosure in the tender documents.
3.3. Appellant is a 'small' enterprise and could not arrange Rs. 200 crores
required for setting up the plant and machinery required for production of
the wheel axles. Had they been aware of the voluminous expenditure
required to fulfil the tender, they would have not applied for the same.
Respondent No. 1 has perpetrated fraud upon Appellant by not revealing the
scale and equipment required for manufacturing of the axles. The tender
documents also do not specify as to which MSMEs would be unfit to
participate in the tender.
3.4. Reliance is placed upon judgements in Himadri Chemical Industries
Ltd. v. Coal Tar Refining Company 1 and Standard Chartered Bank v.
Heavy Engineering Corporation Ltd.,2 wherein criteria for irretrievable
justice or special equities pertaining to cases of bank guarantees was laid
down.
2007 8 SCC 110.
2019 SCC Online SC 1638.
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By:SAPNA SETHI
Signing Date:25.07.2023
14:27:56
3.5. Appellant is entitled to refund of 95% of the performance security as
provided under the Scheme, which is intended to aid MSMEs in case of
defaults in deliveries under the contract.
4. Heard the counsel and considered the afore-noted contentions.
Despite Ms. Gupta's passionate presentation of the Appellant's case, we
remain unconvinced by the arguments put forth by her, for reasons discussed
hereinafter.
5. First and foremost, it must be highlighted that the PBG presented by
the Appellant is unconditional. Appellant's banker has firmly pledged to
expeditiously settle the claimed amount, upon Respondents' demand. This
commitment stands independent of any disputes raised by the Appellant
relating to the Respondent No.1's liability. Thus, Appellant's banker is
legally bound to release the necessary payments to Respondents, regardless
of any dispute or contention put forward by the Appellant.
6. Ms. Gupta strongly relies on clause 2(iv) and (v) of the Scheme dated
11th April, 2023, to urge that Respondents cannot forfeit the entire PBG
amount. However, in our opinion, her contention is misplaced. Clause 2(iv)
explicitly affords protection to MSMEs against forfeiture of performance
security if the delivery period under the contract was between 19th February,
2020 and 31st March, 2022. In the given case, it is undisputed that the
expected delivery date under the Developmental Order was 26th July, 2022.
Evidently, benefit of this clause cannot accrue to Appellant as the delivery
date surpasses the cut-off period. Apropos clause 2(v), it must be noted that
the same does not apply to the Appellant as the stipulation provided therein
pertains to forfeiture of bid security or debarment action, which is not the
situation here. Clause 11 of the Instructions to Tenderers waives the
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By:SAPNA SETHI
Signing Date:25.07.2023
14:27:56
requirement of making an earnest money deposit and the only precondition
was of furnishing a security deposit under clause 13. Thus, the learned
Single Judge's holding on the issue of non-applicability of the Scheme to
Appellant is correct.
7. The law on imposition of a stay on the invocation of PBG, as laid
down by the Supreme Court on various occasions, needs no reiteration. In
general, courts exercise caution and are hesitant to intervene in such cases.
Our approach has consistently been conservative, and injunctions are seldom
granted, unless in exceptional circumstances depicting clear and compelling
evidence of fraud that fundamentally affects the underlying transaction.
Therefore, the Appellant bears the burden of proving fraud voiding the
underlying transaction.
8. The other exception to the general rule of non-intervention by the
court, is the ground of "special equities". This exception may apply if there
is a risk of irretrievable injury or irretrievable injustice if an injunction is not
granted. However, here again, it is for the Appellant to establish a
compelling case, with clear and convincing evidence.
9. Ms. Gupta's arguments fail to align with the exceptions mentioned
hereinabove. Moreover, in the pleadings, Appellant admits to their inability
to meet the tender requirements. Although Ms. Gupta asserts that Appellant
became aware of the contractual requirements only during their
representatives' visit to the Wheel Axle Plant in Bangalore on 29th June,
2022, but such delayed awareness does not serve as a valid excuse to avoid
the contract. This assertion in fact, raises doubts on Appellant's willingness
to fulfil the contractual commitments, and indicates that they are deliberately
evading the contract. It is implausible that Appellant was unaware of the
Signature Not Verified
By:SAPNA SETHI
Signing Date:25.07.2023
14:27:56
substantial investment needed for production of wheel axles. They willingly
participated in the tender, which demonstrates awareness of requirements
and their obligations under the contract. Nonetheless, it was their
responsibility to conduct due diligence and to ensure that they possess
capabilities to execute the contract, before participating in the tender
process. In this case, Appellant's failure to fulfil their obligations cannot be
overlooked on account of alleged ignorance of capital investment. For the
above reasons, we are of the opinion that the Appellant-Company cannot be
allowed to evade its contractual responsibilities by preventing Respondent
No.1 from encashing the PBG.
10. The Appellant has also alleged that Respondent No. 1 perpetrated
fraud by not disclosing the scale of investment and equipment required by
the tenderer. They claim that Respondent No. 1 ought to have specified that
MSMEs were unfit to participate due to huge investment requirements of
about Rs. 200 crores. We do not agree. The allegation is entirely
unsubstantiated and appears to have been levelled only in an attempt to
bring the case within the exceptional ground of 'fraud' for seeking stay on
invocation of PBG.
11. Ms. Gupta's attempt to seek equitable relief by emphasizing the
Appellant's status as a MSME, fails to sway the Court. While MSME status
may be a relevant factor to consider, but that does not in itself demonstrate a
case of irretrievable injustice or special equities. The size or scale of the
Appellant's operations alone does not establish a compelling case for grant
of exceptional and discretionary relief of injunction. Appellant has failed to
prove that enforcement of PBG would result in severe and irreparable harm
that cannot be adequately compensated through monetary damages.
Signature Not Verified
By:SAPNA SETHI
Signing Date:25.07.2023
14:27:56
12. We would like to clarify that at this juncture, we cannot conclusively
ascertain whether Respondent No. 1 has directly incurred financial losses or
significant operational costs due to cancellation of the Developmental Order.
Our current examination is focused on evaluating the contractual obligations
of the involved parties, rather than assessing the financial gains or losses
experienced by Respondent No. 1.
13. Thus, due to lack of compelling evidence, specificity in the plea, and
absence of special equities, the Court finds no grounds to stay the invocation
of the PBG in this matter. We do not find any infirmity in the view taken by
the learned Single Judge.
14. Dismissed, along with other pending applications.
SANJEEV NARULA, J
SATISH CHANDRA SHARMA, CJ
JULY 18, 2023/d.negi
(Corrected and released on 25th July, 2023)
Signature Not Verified
By:SAPNA SETHI
Signing Date:25.07.2023
14:27:56
