Karnataka High Court Upholds State Corporation's Decision To Encash Bank Guarantee Furnished By Private Contractor Over "Shoddy Construction"

The Karnataka High Court has dismissed the petition filed by a private contractor seeking refund of bank guarantee encashed by the Karnataka State Police Housing and Infrastructure Development Corporation for carrying out "shoddy construction" of police quarters.

A single judge bench of Justice M Nagaprasanna remarked,

“The construction if it is of such poor quality, it is high time that such contractor should be penalised; penalised I mean, in a manner known to law, in terms of the contract. That is what was exactly done by the Corporation. The act of penalising the petitioner for such shoddy construction is done by encashing the Bank guarantee. No fault can be found with the act of the Corporation in encashing the Bank guarantee.”

The company was awarded the contract by the Board for constructing 144 Police Quarters in Mandya and Chamarajnagar Districts under a particular scheme – Police Gruha 2020 Scheme. The kind of construction was also indicated in such entrustment. For the construction of the project, the petitioner and the Corporation entered into a contract and the contract contained certain conditions – one such condition was a defect liability period.

It was argued that the construction is over, bills are completely paid and the quality of construction was checked before payment of bills and the contract between the parties stood concluded. Petitioner further averred that the defect liability period that the contract recognized was with regard to infrastructure facilities only and the reason for encashing the Bank guarantee now by the Corporation is for petty mistakes or general problems in the construction which do not relate to infrastructure facilities.

The Corporation contended that the construction was of such poor quality that the building began to develop cracks the moment construction was completed, water is seeping in large quantities when it rains.

The bench noted that as per the contract, the defect liability period would commence from the date of completion of the project as certified by the Engineer-incharge and shall operate for a period of 24 months. The defect liability period mandates that in the event of any structural defects found in the work executed, the petitioner is solely responsible for repairing or replacing the required part of the work and the petitioner should attend to any defect immediately.

Noting that even after several communications sent to the company the defects were not rectified, the bench said “There are various defects communicated in the communication. It is also indicative of the fact that repeated calls made to the petitioner by the Corporation have all been deliberately ignored and therefore, left with no choice they have encashed the Bank Guarantee.”

It added “It is not that the petitioner was taken by surprise of the encashment of Bank Guarantee coming as a bolt from the blue to the petitioner.”

Pursuing the photographs of the sub-standard construction the bench said “A perusal of the photographs would clearly indicate the kind of construction that the petitioner has undertaken of the project. They are on the face of it shoddy. Dampness in the entire quarters, water logging, cracks in the walls, cracks in the terrace, leakages from all quarters in the solar panels; door frames that are used were so poor quality that they are already eaten by termites etc. Though this Court would not assess the quality by looking at pictures, but it is always “a picture is worth a thousand words”, not in all cases but in cases of this kind. The photos produced speak for themselves.”

Rejecting the argument of the petitioners that those defects would not come within the defect liability period as they are all petty problems which the Corporation has to get solved by skilled labourers, the bench held “There is no fraud played in the case at hand by the Corporation in encashing the Bank Guarantee. It is encashed purely in terms of conditions of contract.”

It added “The Bank Guarantee is not furnished for it to be photo-framed and hung on the wall, it has a purpose. The purpose is redeemed by the Corporation and cannot be found fault with.”

Expressing concern over how the Engineers of the Corporation have cleared the bills without inspecting the construction and the quality of construction, the bench observed “The Police Gruha 2020 scheme is not a private project or private scheme. It is a scheme funded by the Government. If it is a scheme funded by the Government, it is public money. Therefore, contractors undertaking construction utilising public money cannot be seen to make constructions that are very poor and the life of such inhabitants there becoming unlivable, as this Court, has in plethora of cases come across, contractors undertaking shoddy constructions particularly of low income group (LIG) and mid income group (MIG) houses, in certain cases, even in high income group (HIG) houses.”

It opined “It is for the respondent/State to take care that proper constructions are made under any scheme which involves public money, so that public money is not misused by such contractors who undertake such constructions and bring those Engineers to books who would approve such shoddy constructions, as and when it is found.”

Accordingly it dismissed the petition.

Case Title: PG Setty Construction Technology Pvt Ltd And The Managing Director, Karnataka State Police Housing And Infrastructure Development Corporation & Others

Case No: WRIT PETITION No. 753 OF 2023

Citation: 2023 LiveLaw (Kar) 213

Date of Order: 02-06-2023

Appearance: Senior Advocate Jayakuamar S Patil a/w Advocate V V Gunjal for petitioner.

Senior Advocate G Papi Reddy a/w Advocate Prakash G Pawar for R1, R2.

Click Here To Read/Download Order