Case Note & Summary
The petitioner, PG Setty Construction Technology Pvt. Ltd., a construction company, filed a writ petition under Articles 226 and 227 of the Constitution of India seeking to quash the demand letters dated 16.12.2022 and 30.12.2022 issued by the second respondent (Executive Engineer, Contracts, Karnataka State Police Housing and Infrastructure Development Corporation) for encashment of a bank guarantee of Rs. 1,15,13,500/-. The petitioner also sought a direction to restrain the respondents from encashing the bank guarantee. The dispute arose out of a tender process for construction projects in Chamraj Nagar and Mandya. The petitioner had submitted a bid and was issued a letter of acceptance, but no work order was issued. The Corporation invoked the bank guarantee alleging breach of contract. The petitioner contended that there was no concluded contract as no work order was issued, and the invocation was arbitrary and malafide. The respondents argued that the letter of acceptance constituted a concluded contract and the petitioner had failed to commence work. The court analyzed the tender conditions and found that a work order was essential for a concluded contract. Since no work order was issued, there was no concluded contract. The court held that the invocation of the bank guarantee without a concluded contract and without any breach was arbitrary and liable to be quashed. The court allowed the petition, quashed the demand letters, and directed the respondents not to encash the bank guarantee.
Headnote
A) Contract Law - Bank Guarantee - Invocation - Restraint on Encashment - The court examined whether a bank guarantee can be restrained from encashment when there is no concluded contract and no breach by the contractor - Held that invocation of bank guarantee without a concluded contract and without any breach is arbitrary and liable to be quashed (Paras 10-20). B) Contract Law - Formation of Contract - Work Order - Essential for Concluded Contract - The court held that a work order is essential for a concluded contract; mere issuance of letter of acceptance does not create a contract if work order is not issued - Held that without a work order, there is no concluded contract and invocation of bank guarantee is premature (Paras 15-18). C) Contract Law - Bank Guarantee - Invocation - Fraud or Irretrievable Injustice - The court reiterated that for restraining encashment of bank guarantee, there must be fraud or irretrievable injustice - Held that in the absence of fraud, the court can still intervene if invocation is without any breach and contrary to contract terms (Paras 12-14).
Issue of Consideration
Whether the invocation of the bank guarantee by the Corporation is arbitrary and without any breach of contract, and whether the petitioner is entitled to an injunction against encashment.
Final Decision
The court allowed the writ petition, quashed Annexure-C and Annexure-F demand letters, and directed the respondents not to encash the bank guarantee.
Law Points
- Bank guarantee invocation must be in terms of the contract
- fraud or irretrievable injustice required to restrain encashment
- no concluded contract if work order not issued
- invocation without breach is arbitrary
