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Gammon India Ltd. v. M.S Reddy & Co. And Another
Factual and Procedural Background
The appellants, main contractors for the construction of the Adavinainar Koil Masonry Dam in Tamil Nadu, sub-contracted a portion of the project to the first respondent. Under the sub-contract, the first respondent furnished a bid guarantee of Rs 50 lakhs to secure: (a) non-withdrawal of its bid during validity, (b) execution of the agreement upon acceptance, and (c) provision of a performance guarantee (then fixed at 3% of the contract value, i.e., Rs 75 lakhs).
After the respondent’s bid was accepted and a work order issued, the respondent failed to furnish the performance guarantee despite extensions. Consequently, the appellants invoked the bid guarantee. The respondent filed a suit and obtained an ad-interim injunction, but the trial court dismissed the interim application on 31-01-2001.
The respondent appealed to the Karnataka High Court. No interim restraint on payment was obtained; therefore, the second respondent bank honoured the guarantee and paid Rs 50 lakhs to the appellants. The respondent then sought directions for refund of that amount. By order dated 16-10-2001, the High Court allowed the appeal, set aside the trial court’s order, criticised the appellants for receiving payment during pendency of the appeal, and suggested recourse under Section 144 CPC.
The present Supreme Court appeal challenges the High Court’s order and observations.
Legal Issues Presented
- Whether the High Court erred in treating the existing bid guarantee as a performance guarantee and, on that basis, in holding that the guarantee could not be invoked by the appellants.
- Whether the High Court’s reliance on Section 144 of the Code of Civil Procedure to justify refund of the guarantee amount, and its critical observations against the appellants and the bank, were legally sustainable.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The Supreme Court held that even if the parties contemplated converting the bid guarantee into a performance guarantee, a fresh instrument with different terms and duration would have been necessary. The existing bid guarantee, by its own terms, expressly permitted invocation upon the subcontractor’s failure to furnish a separate performance guarantee of Rs 75 lakhs, a condition that was undeniably breached.
The Court rejected the High Court’s conclusion that the guarantee could not be invoked, pointing out that the letter relied on by the High Court (dated 15-11-1999) actually showed the appellants requesting an additional guarantee of Rs 25 lakhs, underscoring that conversion never occurred.
Regarding Section 144 CPC, the Court clarified that the provision applies only where an act is carried out pursuant to a court order or decree. In the absence of any injunction or stay against payment, the bank was contractually bound to honour the on-demand guarantee; thus Section 144 had no application.
The Supreme Court further found the High Court’s adverse comments on the appellants’ conduct “entirely uncalled for” and directed that those remarks be deleted and disregarded in all pending proceedings.
All observations within the Supreme Court order were stated to be prima facie and not binding at the final hearing of the suit.
Holding and Implications
APPEAL ALLOWED; High Court order dated 16-10-2001 set aside.
Consequences: (1) The invocation and encashment of the bid guarantee remain valid; no refund is directed. (2) The High Court’s critical remarks are expunged and cannot be relied upon in any forum. (3) No costs are awarded. The decision resolves the dispute between the parties but sets no new precedent beyond clarifying the inapplicability of Section 144 CPC where payment under an on-demand guarantee occurs without a court order.
Order
1. Leave granted.
2. This appeal is against the order dated 16-10-2001.
3. Briefly stated, the facts are as follows:
The appellants were awarded a contract for the construction of the Adavinainar Koil Masonry Dam in the State of Tamil Nadu by the Public Works Department, Government of Tamil Nadu. The appellants sub-contracted a part of the work to the 1st respondent. One of the conditions of the sub-contract was that a bid guarantee, in a sum of Rs 50 lakhs be given. Such a bid guarantee was furnished. The bid guarantee was taken to ensure that the 1st respondent would not: (a) withdraw his bid during the validity period; (b) that on acceptance of his bid the 1st respondent would not fail or refuse to execute his agreement; and (c) to ensure that the 1st respondent furnished a performance guarantee as per the terms of the contract. At the time the bid guarantee was given the performance guarantee was to be for 3% of the contracted sum i.e a sum of Rs 75 lakhs.
4. The 1st respondent's bid was accepted. A work order was issued to the 1st respondent. The 1st respondent, however, failed to furnish the performance guarantee even though time to furnish so was extended. Ultimately, the appellants invoked the bid guarantee on the ground that the performance guarantee was not furnished. As the appellants invoked the bid guarantee, the 1st respondent filed a suit. Initially an ad interim injunction was granted. However, ultimately the IA filed by the 1st respondent was dismissed by the trial court on 31-1-2001.
5. The 1st respondent then filed an appeal in the Karnataka High Court. No injunction order restraining the 2nd respondent Bank from making payment to the appellants appears to have been obtained pending the appeal. The Bank was thus bound to and made payment under the guarantee. The 1st respondent then filed an IA for directions against the appellants to refund the amount of Rs 50 lakhs paid to it by the 2nd respondent Bank.
6. The appeal has been allowed by the impugned judgment. The order dated 31-1-2001 has been set aside. However, the interim application filed by the 1st respondent has been dismissed. The High Court has whilst disposing of the appeal observed as follows:
“32. It is also pertinent to note regarding the conduct of Defendant 1. The appellant filed the appeal on 13-2-2001 and when the matter was posted for admission and consideration of the interim prayer, Defendant 1 took time for two weeks to file objections and in the meantime, collected the amount of Rs 50 lakhs covered by the guarantee, from the respondent Bank. As such, Defendant 1 has shown true colours. All these discussions pointedly show that irretrievable injustice has been caused to the appellant. As such, the impugned order is liable to be set aside.
33. The appellant has maintained an application for a direction to Respondent 1 to return the amount withdrawn.
34. It is submitted by the learned counsel for the appellant that any payment made by the second respondent is subject to result of this appeal and if this appeal is allowed and if an order of the court below is set aside, necessary consequences shall follow as he would be put in the same position as he was and further submitted that he can take recourse under Section 144 CPC. This submission appears to be plausible. If the appellant thinks that he has got any remedy under Section 144 CPC, very well he can proceed for redressal. It is also further brought to my attention that not only in case of decree but also in the cases of reversal of any orders in any appeal any such order as sought for, can be passed. There is no dispute regarding the said proposition of law. But this has to be done by the court at the first instance. There is also no dispute regarding the said proposition of law that the act of the court shall prejudice no man. It is pertinent to note that such orders can only be passed by the court of first instance and not by the appellate court. Considering the facts of this case, passing of such an order in this case is not necessary as the second respondent knowing fully well the pendency of this appeal before this Court, had ventured to make payment to the first respondent even though the second respondent itself had written a letter to the first respondent to treat the bid guarantee as the performance guarantee. The second respondent ought to have waited at least till the passing of the interim order. Therefore, any act done by the second respondent is subject to result of this appeal. However, it will be open to the second respondent to recover the said amount from the first respondent Gammon India Ltd. as the same was paid subject to the result of this appeal. It is also open to the appellant to file necessary applications before the trial court to seek necessary orders against the respondents if the position of the appellant has been altered by virtue of the order being set aside in this appeal.”
7. It must be mentioned that the High Court has also held, on the basis of a letter dated 15-5-1999 by which the 2nd respondent Bank had informed the appellants that the bid guarantee could be treated as a performance guarantee and the appellants' letter dated 15-11-1999, that the appellants had agreed to the bid guarantee being treated as a performance guarantee. The High Court was of the view that there was no ground on which the performance guarantee could be invoked. The High Court was of the view that pending the appeal, the appellants should not have received the money and that the 2nd respondent Bank should not have paid the same.
8. We are unable to sustain the findings of the High Court. Even presuming that there was an offer that the bid guarantee be treated as a performance guarantee a new guarantee document would still have to be issued. The terms and period of a bid guarantee would necessarily be completely different from that of a performance guarantee. Therefore, the bid guarantee which had been given could, as it stood, never be treated as a performance guarantee. If, as held by the High Court, the bid guarantee was to be treated as a performance guarantee, the terms of this guarantee provided that it could be enforced on non-furnishing of a performance guarantee as required under the contract. It could not be denied that under the contract the performance guarantee was to be for Rs 75 lakhs. This has never been furnished. Thus, the High Court was wrong in concluding that the guarantee could not be invoked. The High Court appears to have overlooked the fact that the letter dated 15-11-1999, on the basis of which the High Court concludes that the bid guarantee was converted into a performance guarantee, shows that the appellants had asked for the guarantee of Rs 25 lakhs.
9. We also find that the observations made by the High Court suggest that a case is made out under Section 144 of the Code of Civil Procedure. Section 144 of the Code of Civil Procedure would only apply if by virtue of an order or a decree of the court something was done. In this case, there was no order of the Court to make payment. As there was no injunction or stay against making payment the 2nd respondent Bank was bound to make payment as per the terms of the on-demand guarantee and as per the settled law.
10. In this view of the matter, we are of the view that the comments made by the learned Judge are entirely uncalled for. The same will stand deleted and not be taken into consideration by any court or tribunal in any pending proceedings.
11. We also clarify that all observations made by us in this order are prima facie observations which also shall not be binding at the time of the final hearing of the suit.
12. In this view of the matter, the appeal is allowed. There shall be no order as to costs.
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