IN THE HIGH COURT OF JUDICATURE AT PATNA CWJC No.12868 of 2006 HINDUSTAN STEELWORKS CONSTRUCTION Versus 1. State of Bihar through Secretary, Public Works Department, Government of Bihar, Patna. 2. Commissioner cum Secretary, Road Construction Department, Muzaffarpur Division No. 1, Government of Bihar, Patna. 3. The Executive Engineer, Road Construction Department, Division No. 1, Muzaffarpur. 4. State Bank of India, Industrial Finance Branch, Nageshwar Colony, Boring Road, Patna. 5. State Bank of India, 10 Middleton Row, Kolkata 700071 W I T H CWJC No.2688 of 2007 HINDUSTAN STEEL WORKS CONSTRUCTION Versus 1. The State of Bihar, through the Secretary and Commissioner, Department of Road Construction, Bihar, Patna. 2. The Engineer-in-chief-cum-Special Secretary, Department of Road Construction, Bihar, Patna. 3. The Chief Engineer, Road Construction Department, Communication North Bihar Construction Circle, Road Construction Department, Darbhanga. 4. The Superintending Engineer, Saran Road Circle, Hajipur. 5. The Executive Engineer, Road Construction Division, Vaishali at Hajipur. 6. Bihar State Bridge Construction Corporation, Patna through its Additional Commissioner cum Special Secretary, Patna. 7. State Bank of India, Middleton RW Branch, 10 Middleton Row, Kolkata 700071. --------------------- For the Petitioner : Mr.Ganesh Pd. Singh, Sr. Adv. Mr. Vikash Jain, Adv. Mr. Rajnish Kant, Adv. Mr. Manish Kumar, Adv. For the State : Mr. Shashi Bhushan Kumar, S.C. 16 For the Bihar State : Mr. Nadim Seraj, J.C. to AAG-2 Bridge Construction with Mr. Kumar Pankaj J.C. to S.C. 16 Corporation ------------------------ 10 30.09.2008 The petitioner in both these writ petitions are the same being Hindustan Steel Works Construction Limited, a government of India undertaking. It had undertaken two road widening-cum- strengthening projects of NABARD for being executed on behalf of the State of Bihar from respective area Executive Engineers. Two bank guarantees for each work were furnished by the petitioner from the Respondent-State Bank of India in favour of the State of Bihar and its 2 invocation and payment thereof by the State of Bihar and the Respondent-State Bank of India respectively is disputed. The legality and propriety of which is, in question, in the present writ petitions. No facts are in dispute and the plain and simple question is, whether State of Bihar at all legally invoked the bank guarantee and even if they invoked the guarantees, was State Bank of India legally competent and justified in permitting its encashment. The facts and issues being similar in both the writ petitions, with consent of parties the writ petitions were taken up for hearing at the stage of admission itself for its disposal. The petitioner Hindustan Steel Works Construction Limited is a Government of India undertaking having its registered Office at Kolkata. Facts of “CWJC No. 12868 of 2006” Pursuant to notice inviting tender by the Road Construction Department, Road Division No. 1, Muzaffarpur for widening and strengthening Muzaffarpur-Pusa road measuring about 30.08 Kms. and construction of RCC culverts under NABARD scheme, petitioners tendered. The tender was awarded to the petitioner for the said work. Before agreement was executed petitioner company was required to furnish two bank guarantees. It accordingly requested its banker State Bank of India to issue requisite bank guarantee in favour of the Executive Engineer, Road Construction Department, Road Division No. 1, Muzaffarpur. First was BG No. 0654005 BG 0000174 dated 19.12.2005 (Annexure-3) was issued by the Respondent-State Bank of 3 India in favour of the Respondent-Executive Engineer for Rs. 55,00,000/- and was valid up to 18.06.2006. It is not in dispute that on 15.06.2006 it was revalidated and renewed up to 18.12.2007. The second was BG No. 39/03 dated 05.05.2006 for Rs. 55,61,884/- and was valid up to 04.05.2008 in favour of Respondent-Executive Engineer. The bank guarantees having thus been obtained, on 06.05.2006 agreement being Agreement No. 1F2 of 2006-07 dated 06.05.2006 was executed between the petitioner and the Respondent-Executive Engineer for widening and strengthening work of Muzaffarpur-Pusa road measuring 30.08 Kms. and culvert (Annexure-1). These bank guarantees were invoked by letters dated 19.09.2006 (Annexures 5 and 6 respectively for the two bank guarantees). Facts of “CWJC No. 2688 of 2007” Pursuant to notice inviting tender issued by the Executive Engineer, Road Construction Department, Vaishali Road Division, Hajipur for strengthening and widening Hajipur-Bhairopur- Mahanar road measuring about 30.50 Kms. under NABARD scheme, petitioner-company tendered and was selected. Two bank guarantees were furnished being BG No. 0654005 BG 0000151 dated 19.12.2005 for Rs. 48,56,400/- valid up to 18.06.2006. It is not disputed that this bank guarantee was revalidated and renewed up to 18.12.2007. The said bank guarantee was issued by the petitioner‟s banker State Bank of India. The second bank guarantee was BG No. 39/04 dated 05.05.2006 for Rs. 52,30,542/- and was valid up to 04.05.2008, both were in favour of the Respondent-Executive Engineer. Thereafter, Agreement No. 3 F2 4 of 2006-07 dated 31.08.2006 was executed between the parties for the said work. The two bank guarantees have been invoked by letters dated 15.02.2007 and 13.02.2007 respectively and have been encashed. Mr. Vikash Jain, learned counsel for the petitioner in the first case has raised a short and simple issue for consideration. He submits on behalf of the petitioner that a reference to the bank guarantees would show that they were not unconditional bank guarantees. The invocation of bank guarantee was subject to fulfillment of conditions mentioned therein and undisputedly in the facts of the present case those conditions did not at all arise and/or were not fulfilled. Thus, the invocation was on misrepresentation amounting fraud and its encashment is impermissible in law. On the facts obtaining, this submission was adopted and reiterated by Mr. Ganesh Prasad Singh, learned senior counsel appearing for the petitioner in the second case. He has further made prayer that substantial amount of pending bills for work already done have not been settled. This may be directed to be settled. The Bank Guarantees In order to appreciate the contentions it is first necessary to notice the provisions of the bank guarantee. It is not disputed that except for the change of guarantee no., date, amount and beneficiary the essential terms of all the four bank guarantees are identical and same. The relevant and essential part of the bank guarantees are quoted hereunder :- “…….THE CONDITIONS of this 5 obligation are: (1) If after Bid opening the Bidder withdraws his bid during the period of Bid validity specified in the Form of Bid; or (2) If the Bidder having been notified of the acceptance of his bid by the Employer during the period of Bid validity: (a) Fails or refuses to execute of the Form of Agreement in accordance with the Instructions to Bidders, if required; or (b) Fails or refuses to furnish the Performance Security and Initial Security Deposit of the contract price. We undertake to pay to the Employer up to the above amount upon receipt of his first written demand, without the Employer having to substantiate 6 his demand, provided that in his demand the Employer will note that the amount claimed by him is due to him owing to the occurrence of one or any of the two conditions, specifying the occurred condition or conditions. This Guarantee will remain in force up to and including the date 18.06.2006 after the deadline for submission of Bids as such deadline is stated in the Instructions to Bidders or as it may be extended by the Employer, notice of which extension(s) to the Bank being hereby waived. Any demand in respect of this guarantee should reach the Bank not later than the above date. Notwithstanding anything herein contained, our liability under this guarantee is limited to Rs. 55,00,000/- (Rupees Fifty five lakhs only) and will 7 remain in force upto dated 18.06.2006 including the date of expiry of the period of the tender validity and any demand in respect thereof must reach the Bank not later than the date of expiry of this guarantee i.e. on or before 18.06.2006 failing which all the right of the employer under the guarantee shall be forfeited and the Bank shall be deemed to be relieved or discharged from all liabilities hereunder. Notwithstanding anything contained hereinbefore: (a) Our liability under this Bank guarantee shall not exceed Rs. 55,00,000/- (Rupees Fifty five lakhs only). (b) This Bank Guarantee shall be valid up to 18.06.2006 And (c) We are liable to pay the guaranteed amount or any part 8 thereof under this Bank Guarantee only and only if you serve upon us a written claim or demand on or before 18.06.2006. (Emphasis supplied by me) Issues and considerations The short point that arises from the aforesaid condition is that the bank guarantee could only be invoked under the three conditions specified therein, which is made clear in the bank guarantee itself wherein, it is clearly stated that when the demand is made the employer (beneficiary) will note that the amount claimed by him is due to him, owing to the occurrence of one or any of the two conditions specifying the occurred condition or conditions. A reference to the conditions would clearly show that all the three contingencies are occurrable during the period prior to agreement. This is apparent, if we take each condition separately. The first condition talks about withdrawing the bid after bid opening during the period of bid validity. The second condition is in two parts. It is again operative during period of bid validity. After notifying the acceptance of the bid if agreement is not executed and lastly fails or refuses to furnish performance security and initial security deposit of the contract price. Thus, seen it is not dependent on the performance of the agreement or deficiency in performance thereof. It is only on occurrence of the two conditions which have to be noted and disclosed that letter of guarantee could be invoked and enforced and not otherwise. 9 The petitioner‟s further case is that a reference to the invocation letter would show that the invocation was not for any conditions, as specified in bank guarantee, but for the sole reason that having entered into the agreement, the petitioner was unable to expeditiously execute the work, thus, the ground for invocation is failure to perform the agreement/contract. Undisputedly, this is not one of the contingencies under which guarantee could be invoked. The invocation was on misrepresentation amounting to fraud and the conditions not being satisfied much less mentioned even in the letter of invocation, the State Bank of India acted contrary to the terms of conditions of guarantee and de hors the same, which was mala fide in law. The State Bank of India could not and ought not to have permitted encashment of bank guarantee, as it had a responsibility towards the petitioner in that regard commensurate to the obligation towards the beneficiary under the guarantee. The State of Bihar in its counter affidavit has first questioned the maintainability of the writ petitions. They submit that the dispute essentially arises out of a contract and as such the only remedy to the petitioner was through the process of Civil Court and the writ petitions are not maintainable. As to the issues raised on behalf of the petitioners they have not even attempted to justify invocation of bank guarantee with reference to any of the conditions specified in the bank guarantee but maintain that as the petitioner failed to perform the agreement in the manner prescribed, to the satisfaction of the Respondent-State, under the 10 agreement they had a right to rescind the agreement and forfeit security and thus they had a right to invoke the four bank guarantees irrespective of the conditions therein being satisfied or not. On behalf of State Bank of India, though, initially a feeble attempt was made to urge that the bank guarantees were unconditional for which reference was made to the use of expression “notwithstanding anything herein contain/contained hereinbefore”, in the last two paragraphs of the bank guarantee, as referred to above. But, when confronted with the substantive part of the condition of obligation under the bank guarantee which specifically provided for declaration of the conditions having occurred, all that was said was that the bank acted bona fide in pursuance to the bank guarantee given, „duly‟ honored its obligation. Though, in the counter affidavit it clearly recognized that the bank guarantee could be invoked only on the conditions being specified, it even did not attempt to justify that any of the conditions was even referred to in the letter of invocation much less satisfied. Yet, they found themselves bound to honor the guarantee and thus made the entire payment secured by the guarantee to the State of Bihar and debited the same to the account of the petitioner. The issue thus is, firstly, whether the bank guarantee was unconditional or not? Secondly, whether it was necessary for the State of Bihar to note and specify that any of the conditions was satisfied for invocation of the bank guarantee before invoking the same and lastly in absence of any such mention, more particularly, in view of a totally different contingencies being mentioned was the Respondent- 11 State Bank of India obliged in fact and in law to honor its commitment under the bank guarantee, consequently, whether the petitioner is entitled to any relief in these proceedings. First, I would like to deal with the question of maintainability of the writ petitions, as raised by the respondents. In nut shell, their submission is that we (respondents) may have committed a wrong but the said wrong can only be remedied by petitioner by resorting to civil suit and not by preferring writ petition under Article 226 of the Constitution. In my view, the proposition is too general and too wide to be accepted. In my view, it is not mere breach of contract in private law domain simpliciter but a highly and grossly arbitrary action in wrongly and virtually verging on fraud committed by State in public law domain in invoking guarantee and in the State Bank of India honoring such invocation. The contract between State and petitioner and the bank guarantee given by the State bank of India to the State of Bihar on behalf of the petitioner was consequence to the public functions of the State and thus within public law domain. If what was submitted by respondents is to be accepted then no writ petition could be filed under Article 226 in the High Courts in matters arising out of contract. But, regrettably, such is not the case, for, there is enormous number of cases both of High Courts and the Apex Court, where in contractual matters interference has been there in the writ jurisdiction. It is by now well established that where the actions of the State or its instrumentality, being State within the meaning of Article 12 of the Constitution either 12 act de hors the contract or in contravention to the contract, the actions are per se arbitrary or in violation of statutory provisions writ petitions have been held to be maintainable, the actions being violative of Article 14 of the Constitution. Without being exhaustive in this matter I would first refer to a Division Bench judgment of the Delhi High Court in the case of M/s Bottle Glass Private Limited, New Delhi vs. Union of India and others since reported in AIR 1985 Delhi 400. In that case a bank guarantee which had been sought for by the government was being sought to be invoked and a writ petition was filed. The question arose whether such an action could be brought in a writ proceeding. It was answered thus :- “……..When the Government obtains a bank guarantee when it is entering into commercial transaction with another party, then the Court would be hesitant in staying the operation of the bank guarantee. In the case like the present, however, the bank guarantee was demanded by the respondents not as a part of a commercial transaction but in exercise of its statutory or executive power as a Government. 13 If bank guarantee has been furnished by a party on its being required to do so by the Government, by exercising its statutory or executive power, then the Courts can examine the action of the Government when it seeks to invoke the bank guarantee. A Government is required to act fairly and judiciously. Any action of the Government which is regarded as arbitrary is per se violative of Article of Article 14 of the Constitution. If it can be shown, therefore, that the decision of the Government to invoke the bank guarantee is arbitrary or mala fide then that decision can be challenged…….” Next, I may refer to the judgment of the Apex Court in the case of M/s Hyderabad Commercials vs. Indian Bank and others since reported in AIR 1991 Supreme Court 247. In that case the appellant had deposited certain money in their account but the Bank having credited the same to the appellant‟s account, later transferred it to another person‟s account. The appellant protested, the Bank accepted 14 its mistake and intimated that it would be recredited to their account but they failed to do so. The appellant filed a writ petition, where Bank took a plea that it was transferred from the appellant‟s account to the other person‟s account on oral instructions of the appellant. The writ petition was dismissed on the ground that the case involved disputed questions of fact. The appellant moved the Apex Court. The Apex Court noted that on such admission as made by the Bank, which is an instrumentality of the State it was under a legal obligation to pay back the disputed amount to the appellant. While, setting aside the order of the High Court dismissing the writ petition, the appeal was allowed with directions to the Respondent-Bank to recredit the amount to the appellant‟s account along with interest. While doing so, their Lordships observed thus in paragraph 5, thereof:- Paragraph 5: “Since the basic facts regarding the unauthorized transfer of the disputed amount from the appellant’s account as well as the Bank’s liability was admitted, there was no justification for the High Court to direct the appellant to file suit on ground of disputed questions of fact. The respondent bank is an instrumentality of the State and it must function 15 honestly to serve its customers”. It would be seen from this case that it was pure and simple contractual matter but as the actions of the Bank, which was State instrumentality, was violative of Article 14 of the Constitution, the writ petition was held to be maintainable, especially, as there were no disputed questions of facts. We then come to the case of Hindustan Petroleum Corporation Limited and another vs. Dolly Das since reported in (1999) 4 Supreme Court Cases 450, wherein in paragraph 9 their Lordships held thus:- Paragraph 9: “We may now advert to the contention that the writ remedy is not appropriate in this case. Where interpretation of a contract arises in relation to immovable property and in working such a contract or relief thereof or any other fallout thereto may have the effect of giving rise to an action in tort or for damages, the appropriate remedy would be a civil suit. But if the facts pleaded before the Court are of such a nature which do not involve any complicated questions of fact 16 needing elaborate investigation of the same, the High Court could also exercise writ jurisdiction under Article 226 of the Constitution in such matters. There can be no hard and fast rule in such matters. When the High Court has chosen to exercise its powers under Article 226 of the Constitution we cannot say that the discretion exercised in entertaining the petition is wrong”. Then, again I may refer to the well known judgment of the Apex Court in the case of Chairman, Railway Board and others vs. Mrs. Chandrima Das and others since reported in AIR 2000 Supreme Court 988, wherein, in paragraph 9 their Lordships held thus:- Paragraph 9: “…….It was found that though initially a petition under Article 226 of the Constitution relating to contractual matters was held not to lie, the law underwent a change by subsequent decisions and it was noticed that even though the 17 petition may relate essentially to a contractual matter, it would still be amenable to the writ jurisdiction of the High Court under Article 226. The Public Law remedies have also been extended to the realm of tort……” Now, we come to a very recent decision of the Apex Court in the case of ABL International Limited and another vs. Export Credit Guarantee Corporation of India Limited and others since reported in (2004) 3 Supreme Court Cases 553. In that case the question of maintainability of writ petition including monetary claims was considered in detail. In the said judgment the Apex court examined its judgment in the case of State of Bihar vs. Jain Plastic and Chemicals Limited since reported in (2002) 1 Supreme Court Cases 216. This later case is often relied on by respondents to question the maintainability of writ petition for alleged breach of contract. In fairness to the learned State counsel in the present case he has sought to rely on the case of Jain Plastic (supra). In this case {ABL International Limited (supra)} the judgment of Jain Plastic has been considered in paragraphs 15 and 16 of the reports. Their Lordships have held thus in paragraph 16:- Paragraph 16: “A perusal of this judgment though shows that a writ petition involving serious 18 disputed questions of facts which requires consideration of evidence which is not on record, will not normally be entertained by a court in the exercise of its jurisdiction under Article 226 of the Constitution of India. This decision again, in our opinion, does not lay down an absolute rule that in all cases involving disputed questions of fact the parties should be relegated to a civil suit……….” Further, their Lordships have explained the law in paragraph 19 of ABL International Limited (supra), which is quoted hereunder:- Paragraph 19: “Therefore, it is clear from the above enunciation of law that merely because one of the parties to the litigation raises a dispute in regard to the facts of the case, the court entertaining such petition under Article 226 of the Constitution is not always bound to relegate the 19 parties to a suit. In the above case of Gunwant Kaur this Court even went to the extent of holding that in a writ petition, if the facts require, even oral evidence can be taken. This clearly shows that in an appropriate case, the writ court has the jurisdiction to entertain a writ petition involving disputed questions of fact and there is no absolute bar for entertaining a writ petition even if the same arises out of a contractual obligation and/or involves some disputed questions of fact”. I may also usefully refer to what has been noted by the Apex Court in paragraph 23 of the said reports, which is quoted hereunder:- Paragraph 23: “It is clear from the above observations of this Court, once the State or an instrumentality of the State is a party of the contract, it has an obligation in law to act fairly, 20 justly and reasonably which is the requirement of Article 14 of the Constitution of India………..” In the end their Lordships have summarized the legal principles in paragraph 27 of the reports, which is quoted hereunder as follows:- Paragraph 27: “From the above discussion of ours, the following legal principles emerge as to the maintainability of a writ petition: (a) In an appropriate case, a writ petition as against a State or an instrumentality of a State arising out of a contractual obligation is maintainable. (b) Merely because some disputed questions of fact arise for consideration, same cannot be a ground to refuse to entertain a writ petition in all cases as a matter of rule. (c) A writ petition involving a consequential relief of monetary claim is also