Mere Extension Of Bank Guarantee Does Not By Itself Extend Claim Period : Delhi High Court

The Delhi High Court has held that the invocation of a bank guarantee has to be done in accordance with the terms of the bank guarantee, or else, the invocation itself would be bad.

A single judge bench of Justice V. Kameswar Rao further observed that where the terms of bank guarantee provide a period 90 days from the date of expiry of the defect liability period as provided in the contract, invocation of bank guarantee after expiry of such period is not permissible, merely on account of extension of bank guarantee.

"It is one thing to say that the contract is terminated and other thing to say that the validity of the BGs has been extended. The intent of the terms of the BGs is that it needs to be invoked within 90 days of the cancellation of the contract which admittedly has not been done."

Briefly, the facts of the case are that the Respondent, Hindustan Steelworks Construction Limited (HSCL) got into a series of contracts with the appellant/plaintiff on back to back basis for help and collaboration in order to enable HSCL to successfully bid for a tender floated by National Thermal Power Corporation Ltd. (NTPC) for civil and structural works in Bihar. HSCL was awarded a tender for civil and structural works. On request of HSCL, the appellant/plaintiff approached its bank i.e., the Punjab & Sind Bank which issued two Bank Guarantees (BG) for ₹58 lakhs and ₹47 lakhs respectively, in favour of HSCL. Subsequently, the tender was withdrawn from HSCL by the NTPC.

The case of the appellant/plaintiff before the Trial Court was that the work of the appellant/plaintiff depended upon the completion of civil works by the  HSCL and therefore the appellant/plaintiff could not execute its work detailed in the sub-contracts. However, despite this, HSCL sent a letter to the Punjab & Sind Bank seeking the invocation of the two BGs.

The same was challenged by the plaintiff in the Trial Court which rejected the suit filed and upheld the invocation of the BGs by HSCL on the grounds that as per the terms of the BGs, various rights were given to HSCL to cancel/revoke/extent or invoke the BGs and the same was to remain in force till all the dues of the owner were paid or satisfied and till the owner certified that the terms and conditions of the contract had been fully carried out by the appellant/plaintiff.

The appellants submitted that the invocation of the BGs was not in terms of the BGs itself. Further, the contract between the appellant and HSCL was back-to-back to the contract between HSCL and the NTPC with identical contractual terms and conditions as applicable to both the parties. Since the contract between HSCL and NTPC was terminated by NTPC, resultantly, the present contracts between HSCL and the appellant were also terminated by HSCL.

It was also submitted that the terms of the BGs included that the owner shall have no claim after 90 days from the date of expiry of the defect liability period as provided in the contract or no claim after 90 days from the date of the cancellation of the said contract, as the case may be. However, the invocation of the BGs in the present case was done much after the period of 90 days expiry period. Per contra, HSCL contended that the appellant had extended the validity of the BGs from time to time and thus, the HSCL was justified is invoking the BGs.

The court noted that the intent of the terms of the BGs was that it needed to be invoked within 90 days of the cancellation of the contract which wasn't done in the present case. It was further noted that the parties to the dispute had nothing to do either with the completion of work or with the completion of the defect liability period. They were not involved in completion of the work as the contract was terminated. The court stated that it was a settled proposition of law that the invocation of the BG will have to be in accordance with the terms of the BG, or else, the invocation itself would be bad.

As per the findings of the Trial Court in the impugned Judgment, the court noted, the extension of the BGs time to time by the appellant proved novation of the existing contract. This finding of the Trial Court was in the context that the validity period of BGs having been extended, despite the contract being terminated hence, the contract of BGs would stand novated. Here, the court noted that–

"It means, the terms of the BGs that the invocation of the BGs shall be within 90 days from the date of expiry of the defect liability period or from the date of cancellation of the contract remained as it is...Though the validity of the BGs was extended, still the demand / claim / invocation of BGs had to be made on or before the expiry of 90 days period from the date of cancellation of the contract, or from the date of expiry of the defect liability period."

This demonstrated that the invocation of the BGs was contrary to the Clauses of the BGs. The judgment in the case of National Highways Authority of India vs. Bridge & Roof Co. Ltd which stated that in a construction contract, the defect liability period by its very nature begins after the work is completed was also cited. The court, while noting the aforesaid judgement also stated that, in the present case, the work having been terminated, there was no question of the expiry of the defect liability period for invocation of the BGs.

The court noted that the HSCL had placed reliance on the judgment of Standard Chartered Bank vs. Heavy Engineering Corporation Ltd. & Anr. to contend that the Court ordinarily should not interfere with the invocation or encashment of the BGs so long as the invocation is in terms of the BGs.

Here, the court opined that the Trial Court had failed to see the facts in the present case in proper perspective. As per the provisions of the BGs, it could only be invoked within or before 90 days from the date of expiry of defect liability period and the defect liability period would arise only after the completion of work by the appellant. However, in the instant case, the work had not been performed by the appellant.

Thus, the present appeal was allowed and the impugned Judgment of the Trial Court was set aside. 

CASE TITLE: HARJI ENGINEERING WORKS PRIVATE LIMITED v. PUNJAB AND SIND BANK & ANR

Citation: 2022 LiveLaw (Del) 687

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