Project

ON

Guarantee

Sub: Legal & Tax aspects of Business

Submitted To:
Prof. I.R.panjwan

Submitted by:

Jagdip Kaur Sandhu

MMS-1 Div-c

Roll no: 2011130

 CONTENTS

CHAPTER PARTICULARS PAGE

NUMBER NUMBER
1 Introduction 3
2 Types of Guarantee 5
3 Statutory analysis 6
4 Judiciary analysis 7-18
Case law:
Ansal Engineering Projects Ltd. vs. Tehri Hydro
Development
Hcl Technologies Limited vs Unique Identification
Authority
5 Conclusion 19
6 Bibliography 19
Contract of Guarantee

1. Introduction:

A contract of guarantee is a contract to perform the promise, or discharge the liability of a third
person in case of his default

The person who gives the guarantee is called the ‘surety’ the person in respect of whose
default the guarantee is given is called the ‘principal debtor’ and the person to whom the
guarantee is given is called the ‘creditor’. A guarantee may be either oral or written (Sec 126). It
may be express or implied. To invoke contract of guarantee, default must be committed by the
third person on whose behalf a person stands surety. The contract of guarantee is also known as
the contract of ‘suretyship’.

Business owners know it is very difficult to borrow money for the business from a creditor
without a personal guarantee even if the creditor has security against all of the business. If you
sign the typical standard guarantee form used by creditors, you may be giving up rights designed
to level the field. Some terms of the creditor guarantee are not in your best interest. .

But what is a guarantee, what defences do you as a guarantor have and what are your rights? If
you must pay under the guarantee, can you recover the money and how? Before you sign a
guarantee, whether to support your business, or to help a relative or friend, you should know the
answers to these questions. You should also consult a qualified lawyer to make sure the
guarantee is not any broader than absolutely necessary.

A guarantee is a contract between the guarantor (the person that gives the guarantee) and the
creditor (typically the creditor that makes the loan). As a contract, it must meet the essential
conditions required to form a valid and enforceable contract. There must be certainty of the
terms of the guarantee: what is the extent of the guarantee, when can the creditor call for
performance under the guarantee, and how can it be revoked.

There must be some consideration for the guarantee as with all contracts. Usually this is the loan
made to the business. It could also be an agreement to hold off taking some action that the
creditor is otherwise entitled to take, or allowing more time for the business to meet its
obligations to the creditor under the existing arrangements. The amount or nature of the
consideration does not matter as long as there is some consideration.

The guarantee is normally in written and signed by the guarantor. But a guarantee can be
enforceable even if it is not in writing; the guarantee could be implied from the conduct of the
parties such as a partial payment after a promise relied upon by the creditor to provide credit to
the debtor.
By giving the guarantee, the guarantor promises to carry out the obligations of the third party
(the debtor) if the debtor fails to do so. If you guarantee a loan made to the black sheep of the
family, then you agree that when the loan is not paid by the black sheep, you will make payment.
The guarantee is usually of a loan. But, you can guarantee any type of obligation.

In practice the creditor wants a "standard form" of guarantee where the guarantor waives various
rights or defences available at common law. For example, at common law the creditor would
normally be required to protect the security of the debtor; not allow the security to be lost or sold
for less than fair value; not change or alter the terms of the loan with the debtor; not do anything

that would materially alter the risk assumed by the guarantor; and not give up claims of the
creditor against the debtor. If the creditor allows any this to happen, then the guarantor could be
released from the guarantee. Most guarantees require the creditor to give up these defences or
rights. With proper legal advice and some negotiation, you can retain many of these rights or at
the very least limit the circumstances under which you give up your rights.

Even if you have signed a standard form guarantee, certain defences may still be available to
you. Do not assume that if you signed a guarantee no defences available against claims of the
creditor. An essential requirement for a valid guarantee is mutual consent: both the creditor and
the guarantor intended there be a guarantee. That is, when you signed the document, it must be
clear you intended to give a guarantee. Sometimes you sign a document without realising that it
contains a guarantee. Be forewarned however your signature will raise a presumption you
intended to enter into the very same contract or agreement as set out in the document you signed.

At times a person may feel there is no choice but to provide the guarantee; it is to help a family
member with a new business, or your company needs the loan to continue an expansion
programme. However, if you provide the guarantee because of what the law considers to be
duress or undue influence, then the guarantee will not stand up in court. The creditor cannot
always act only in its own best interest. Depending on the circumstances, the creditor may owe a
fiduciary duty to the person asked to provide the guarantee. If this duty exists, and the creditor
acts in breach of the duty, then the creditor cannot rely upon the guarantee.

Another defence is "non est factum". Here the guarantor is really saying that the guarantee
alleged is so fundamentally different from the agreement he thought he was making that he could
not have intended to make the guarantee. But again if the document signed by you contains the
guarantee; it will be difficult to raise such a defence. The appropriate facts to support such a
defence might be found if the guarantor cannot for some reason read or understand the language.
It may also be found if in signing a new or replacement guarantee the terms of the guarantee are
changed without the knowledge of the guarantor.

If the creditor made any commitments to you about the guarantee, it is important that those
commitments be in the guarantee. Many individuals have tried to argue that the creditor
promised not to use the guarantee; or that the guarantee would only be used if some other person
did not pay. Such commitments are not binding on the creditor unless they are in writing and,
normally, contained in the guarantee document.

If you pay the creditor, you have the right to recover that money from the debtor. You are also
entitled to take an assignment of the creditor's rights against the principal debtor. Of course these
rights have value only if the debtor has the means to pay you.

Most creditors insist that the guarantor get independent legal advice from a solicitor before the
guarantee is signed. This is to ensure that the creditor can enforce the guarantee if necessary.

You should insist on getting independent legal advice from a solicitor qualified in business law
to protect your rights.

Illustrations

A lends money to B and C promises A that in case B fails to pay money he will pay the money.

Every contract of guarantee has three parties (1) principal debtor i.e. B (2) creditor i.e. A (3)
surety i.e. C

2. Types of guarantee:
Continuing guarantee: A guarantee which extends to a series of transaction is called
“Continuing Guarantee”.

Illustration: A, in consideration that B will employ C in collecting the rents of B’s Zamindari,
promises B to be responsible to the amount of Rs.5000, for the due collection and payment by C
of those rents. This is a Continuing Guarantee.

 Revocation of continuing guarantee:

1. By notice: (Sec.131) A continuing guarantee may at any time be revoked by the surety, as to
future transactions, by notice to creditor

2. By death of surety: (Sec.131) In the absence of any contract to the contrary, death of surety
operates as revocation of continuing guarantee, so as far as regards future transactions.

3. By discharge of surety: Continuing guarantee is also revoked when the surety is discharged in
any of the following ways:

 By variance in the terms of contract: (Sec 133) Any variance, made without the surety’s
consent in the terms of the contract between the principal debtor and the creditor,
discharges the surety as to transactions subsequent to the variance.
 By release or discharge of principal debtor: (Sec 134) The surety is discharged by any
contract between the creditor and the principal debtor, by which the principal debtor is
 released or by any act or omission of the creditor, the legal consequence of which is the
discharge of the principal debtor.
 By creditor compounding with the principal debtor: A contract between the creditor s and
the principal debtor, by which the creditor makes a composition with, or promises to give
time to, or not to sue the principal debtor discharge the surety unless the surety assents to
such contract.
 By creditor’s act or omission impairing surety’s eventual remedy: (Sec 139) If the
creditor does any act which is inconsistent with the rights of the surety, or omits to do any
act which his duty to the surety requires him to do, and the eventual remedy of the surety
himself against the principal debtor is thereby impaired, the surety is discharged.
 By creditor losing security against the principal debtor: (Sec 141) If the creditor loses
or,without the consent of the surety, parts with the security he has against the principal
debtor at the time when the contract of suretyship is entered into, the surety is discharged
to the extent of the value of the security.
 By misrepresentation: (Sec 142) When a creditor misrepresents to the surety regarding
the material facts, the guarantee is invalid and therefore the surety is discharged.
 By concealment: (Sec 143) When a creditor obtains a guarantee by concealing or keeping
silent over the material facts, the surety is discharged as the guarantee is invalid.
 Failure of co-surety to join: (Sec 144) Failure on the part of some person to join the
surety who gave the guarantee on the express understanding that the creditor shall not act
upon it until such another person has joined in it as co-surety, invalidates the guarantee
and therefore discharges the surety.

 Invalid guarantees:
Under the following circumstances, the contract of guarantee shall be invalid:

 By misrepresentation: (Sec 142) when a creditor misrepresents to the surety regarding the
material facts, the guarantee is invalid and therefore the surety is discharged.
 By concealment: (Sec 143) When a creditor obtains a guarantee by concealing or keeping
silent over the material facts, the surety is discharged as the guarantee is invalid.
 Failure of co-surety to join: (Sec 144) Failure on the part of some person to join the
surety who gave the guarantee on the express understanding that the creditor shall not act
upon it until such another person has joined in it as co-surety, invalidates the guarantee
and therefore discharges the surety.
 Essential elements absent: If the guarantee lacks one or more of the essential elements of
an ordinary contract, the guarantee will be invalid.
3. Statutory analysis of Guarantee:
1. There must be debt existing which should be recoverable.

2. Three parties are involved:

 Principal Debtor, Creditor & Surety.

3. Three contracts take place

 Between principal debtor & creditor

 Between creditor & surety.
 Between surety & principal debtor.

4. There must be distinct promise, oral or written, by surety to pay debt in case of default
committed by principal debtor.

5. There must be some consideration

6. The liability must be legally enforceable

7. The contract of guarantee must have all the essentials of contract

8. Liability of Surety is Contingent.

9. In every Guarantee there is an implied indemnity given by principal debtor to surety.

10. Guarantee will be all parties.

11. Guarantee is to be stamped. (Maximum stamp duty Rs.10 lakhs)

12. Guarantee is in possession of creditor.

4. Judiciary analysis
Case law:
Ansal Engineering Projects Ltd. vs. Tehri Hydro Development ... on 31 July, 1996

Equivalent citations: 1996 VIAD SC 290, 1997 88 CompCas 149 SC

Bench: K Ramaswamy, S Ahmed, G Pattanaik
ORDER:
1. This Special Leave Petition arises from the order of the learned Single Judge of the Delhi High
Court dated January 17, 1996 made in Suit No. 990/95. The petitioner had sought for injunction
under Section 41 read with Schedule II of the Arbitration Act, 1940 [for short, the 'Act'] to
restrain the respondent from invoking the bank guarantee No. 33/1991 dated February 13, 1991
to encash Rs. 57,9701- pursuant to the letter of invocation dated April 5, 1995. The facts
mentioned therein are that petitioner had entered into contract on March 30, 1991 pursuant to a
tender submitted by him to construct 108 residential quarters at Katharia, Bhagirath Puram,
Tehri. The construction was to be completed within stipulated period but was not completed. In
terms of the contract, the first respondent had terminated it. The petitioner availed of the remedy
under Section 20 of the Act for appointment of an arbitrator for reference of the dispute in terms
of the contract. Pending consideration thereof, he filed an application to restrain the respondent
to encash the bank guarantee. The respondent after termination of the contract had issued a letter
of invocation dated April 5, 1995 calling upon the UCO Bank to pay the aforesaid amount in
terms of the bank guarantee. It was contended in the High Court that the amount due and payable
by the petitioner should be determined in the suit. The bank guarantee could not be invoked till
then and the payment thereof could not be made. The respondent had played fraud on the
petitioner in entering into the contract and seeking extension of the time. There are exceptional
circumstances which necessitated the petitioner to seek relief of injunction pending
determination of the amount due and payable by the petitioner. The High Court rejected the
contentions and dismissed the petition. Thus, this special leave petition.

2. Admittedly, the bank guarantee given by the UCO Bank on behalf of the petitioner reads as
under:

On production of a Bank Guarantee for the above principal amount and interest due thereon, we,
UCO Bank, 5, Parliament Street, New Delhi (hereinafter referred to as "the Bank") at the request
of Ansal Engineering Projects Limited Contractor (s) do hereby undertake to pay to the
Corporation an amount not exceeding Rs. 57,57,970/- plus interest as aforesaid against any loss
or damage caused to suffered or would be caused to or suffered by the Corporation by reason of
any breach by the said Contractor (s) of any of the terms or conditions contained in the said
Agreement.

We, UCO Bank, 5, Parliament Street, New Delhi do hereby undertake to pay the amount due and
payable under this guarantee without any demur, merely on a demand from the Corporation
stating that the amount claimed is due by way of loss or damage caused to or would be caused to
or suffered by the Corporation by reason of breach by the said contractor (s) of any of the terms
or conditions contained in the said Agreement or by reason of the Contractor (s) failure to
perform the said Agreement. Any such demand made on the bank shall be conclusive as regards
the amount due and payable by the bank under this guarantee. However, out liability under this
guarantee shall be restricted to an amount not exceeding Rs. 57,57,9707/- plus interest due on the
outstanding balance of mobilisation advance @ 18% p.a.

We undertake to pay to the Corporation money so demanded notwithstanding any dispute or

disputes raised by the Contractor (s)/Supplier (s) in any suit or proceeding pending before any
Court or Tribunal relating thereto. Our Liability under this present being absolute and
unequivocal.

3. The letter of invocation of the respondent is thus:

We hereby invoke subject Bank Guarantee and demand the amount detailed herein after as the
amount claimed is due by way of loss and damage caused to or would be caused to or suffered
by THDC/ourselves by reason of breach by Your customer of the terms and conditions contained
in the said agreement and also by reason of your Customer's failure to perform the said
agreement.

THDC/We are limiting our claim against you to the extent of the principal amount of
mobilization advance lying outstanding against your customer plus interest due on the
outstanding balance of mobilization advance @ 18% per annum. You are as such, requested to
pay the following amounts:

(a) Outstanding amount of mobilization advance due and payable by M/s. Ansal Engineering
Project Limited, in terms of the Bank Guarantee in question. Rs. 51,02,6587

(b) Balance interest @ 18% per annum calculated on the outstanding mobilization advance upto
30th October, 1994, Rs. 13,89,6257-.

(c) Interest @ 18% per annum on the outstanding mobilization advance of Rs. 51,026587- w.e.f.
31.10.1994 till the date of payment by you.

This notice of demand may be treated , as a fresh demand to pay the above noted amounts in
terms of order dated 1.9.1994 passed by the Hon. High Court of Delhi at New Delhi in O.M.P.
No. 39/1994 titled as M/s Ansal Engineering Projects . Ltd. versus Tehri Hydro Development
Corporation Ltd. & Yourself. Photo copy of the said order is enclosed herewith for ready
reference.
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 (sic) pleaded and prima facie established by
strong evidence as a triable issue, the beneficiary cannot be restrained from encasing 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 The Bank unconditionally and irrevocably promised to
pay, on demand, the amount of liability undertaken in the guarantee without any demur or
dispute in terms of the bank guarantee. The object behind is to inculcate respect for free flow of
commence and trade and faith in the commercial banking transactions unhedged by pending
disputes between the beneficiary and the contractor.

5. It is equally settled law that in terms of the bank guarantee the beneficiary is entitled to invoke
the bank guarantee and seek encashment of the amount specified in the bank guarantee. It does
not depend upon the result of the decision in the dispute between the parties, in case of the
breach. The underlying object is that an irrevocable commitment either in the form of bank
guarantee or letters of credit solemnly given by the bank must be honoured. 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 issued 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. The question, therefore, is: whether the petitioner had made out any case of
irreparable injury by proof of special equity or fraud so as to invoke the jurisdiction of the Court
by way of injunction to restrain the first respondent from encashing the bank guarantee. The
High Court held that the petitioner has not made out either. We have carefully scanned the
reasons given by the High Court as well as the contentions raised by the parties. On the facts, we
do not find that any case of fraud has been made out. The contention is that after promise to
extend time for constructing the buildings and allotment of extra house and the term of bank
guarantees was extended, the contract was terminated. It is not a case of fraud but one of acting
in terms of contract. It is next contended by Shri G. Nageshwara Rao, learned counsel for the
petitioner that unless the amount due and payable is determined by a competent court or tribunal
by mere invocation of bank guarantee or letter of credit pleading that the amount is due and
payable by the petitioner, which was disputed, cannot be held to be due and payable in a case.
The Court has yet to go into the question and until a finding after trial, a decision is given by a
court or tribunal that amount is due and payable by the petitioner, it cannot be held to be due and
payable. Therefore, the High Court committed manifest error of law in refusing to grant
injunction as the petitioner has made out a prima facie strong case. We find no force in the
contention. All the clauses of, the contract of the bank guarantee are to be read together. Bank
guarantee/letters of credit is an independent contract between the bank and the beneficiary. It
does not depend on the result of the dispute between the persons on whose behalf the bank
guarantee was given by the bank and the beneficiary. Though the question was not elaborately
discussed, it was in sum answered by this Court in Hindustan Steel Workers Construction Ltd. v.
G.S. Atwal & Co. (Engineers) Pvt. Ltd.. This Court had held in Para 6 that the entire dispute was
pending before the arbitrator. Whether, and if so, what is the amount due to the appellant was to
be adjudicated in the arbitration proceedings. The order of the learned Single Judge proceeds on
the basis that the amounts claimed were not and cannot be said to be due and the bank has
violated the understanding between the respondent and the Bank in giving unconditional
guarantee to the appellant. The learned Judge held that the bank had issued a guarantee in a
standard form, covering a wider spectrum than agreed to between the respondent and the bank
and it cannot be a reason to hold that the appellant is in any way fettered in invoking the
unconditional bank guarantee. Similarly, the reasoning of the learned Single Judge that before
invoking the performance guarantee the appellant should assess the quantum of loss and
damages and mention the ascertained figure, cannot be put forward to restrain the appellant from
invoking the unconditional guarantee. This reasoning would clearly indicate that the final
adjudication is not a pre-condition to invoke the bank guarantee and that is not a ground to issue
injunction restraining the beneficiary to enforce the bank guarantee. In Hindustan Steel Works
Construction Ltd. v. Tarapore & Co. & Anr. , it was Contended that a contractor had a
counterclaim against the appellant; that disputes had been referred to the arbitrator and no
amount was said to be due and payable by the contractor to the appellant till the arbitrator
declared the award. It was contended therein that those were exceptional circumstances
justifying interference by restraining the appellant from enforcing the bank guarantee. The High
Court had issued interim injunction from enforcing the bank guarantee. Interfering with and
reversing the order of the High Court, this Court has held in para 23 that a bank must honour its
commitment free from interference by the courts. The special circumstances or special equity
pleaded in the case that there was a serious dispute on the question as to who has committed the
breach of the contract and that whether the amount is due and payable by the contractor to the
appellant till the arbitrator declares the award, was not sufficient to make the case an exceptional
one justifying interference by restraining the appellant from enforcing the bank guarantee. The
order of injunction, therefore, was reserved with certain directions with which we are not
concerned in this case.
6. A conjoint reading of the bank guarantee and the letter of invocation demanding payment of
amount due and payable by the petitioner would show that the first respondent had specified and
quantified in terms of the bank guarantee a total sum with interest due thereon in a sum of Rs.
57,57,970/- as on April 5, 1995. A demand in terms of clause (i) of the bank guarantee was
made. The bank had irrevocably promised and undertaken to pay to the Corporation without any
demur or damage an amount not exceeding Rs. 57,57,970/- plus interest's per terms and
conditions contained in the bank guarantee untrammelled by the bi-lateral agreement between the
petitioner and the first respondent-Corporation stating the amount claimed was due and payable
on account of loss or damage caused to or likely to be caused to or by the Corporation by reason
of any breach by the said contract or any of the terms and conditions contained in the said
agreement notwithstanding any dispute or disputes raised under the contract in any suit or
proceedings pending before any court or tribunal relating thereto. The liability of, the bank is
absolute and unequivocal; it would thereby be clear that the bank is not concerned with the
ultimate decision of a court and a tribunal in its finding after adjudication as to the amount due
and payable by the petitioner to the first respondent. What would be material is the quantification
of the liability in the letter of revocation. The bank should verify whether the amount claimed is
within the terms of the bank guarantee or letter of credit. It is axiomatic that any payment by the
bank, obviously be subject to the final decision of the court or the tribunal. At the stage of
invocation of bank guarantee, the need for final adjudication and decision on the amount due and
payable by the petitioner, would run contrary to the terms of the special contract in which the
bank had undertaken to pay the amount due and payable by the contractor. Thus we hold that
there is no question of making out any prima facie case much less strong evidence or special
equity or exceptional circumstances for interference by way of injunction.

7. The special leave petition is accordingly dismissed.

Case law

Hcl Technologies Limited vs Unique Identification Authority ... on 31 May, 2011

THE HIGH COURT OF DELHI AT NEW DELHI

Judgment Reserved on: May 25, 2011 Judgment Pronounced on: May 31, 2011

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?

2. To be referred to the Reporter or not?

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 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 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 EMD Form 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 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 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 Guarantee 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:-

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 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 , 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, 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.
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 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 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 bank
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. 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.

5. Conclusion:

"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 friable 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....."

6. Bibliography:

Mulla: Indian Contract Act (volume 2)

Business law for management: K.R.BULCHANDANI

Indiankanoon.org

http://www.e-law.bc.ca