Back
High Court Of Delhi
SAHIBABAD STILS PRIVATE LIMITED - Appellant
Versus
ENGINEERING PROJECTS (INDIA) LIMITED - Respondent
First Appeal (OS) 64 of 1986
Decided On : 09/16/1987
CONTRACT - GUARANTEE - ENFORCEABILITY - CONSIDERATION - APPROVAL OF CONTRACT BY THIRD PARTY - EFFECT ON GUARANTEE - WAIVER OF TERM REGARDING APPROVAL - TEMPORARY INJUNCTION.
Fact of the Case:
EPI awarded a contract to SSL for civil works, structural fabrication, and erection work subject to NTPC's approval. NTPC partially approved the association of SSL for supplying labor and tools. SSL continued work despite the lack of full approval. EPI demanded payment under the performance guarantee executed by Indian Overseas Bank. SSL filed a suit for a declaration that there was no contract between SSL and EPI and for an injunction restraining EPI from encashing the guarantee.
Finding of the Court:
The court held that the contract between EPI and SSL was not a concluded contract as it was subject to NTPC's approval, which was not granted. The performance guarantee was unenforceable as it lacked consideration due to the invalidity of the primary contract. EPI's conduct in requesting SSL to expedite the work after NTPC's partial approval did not amount to a waiver of the approval term.
Issues: 1. Whether the contract between EPI and SSL was a concluded contract. 2. Whether the performance guarantee was enforceable in the absence of a valid primary contract. 3. Whether EPI's conduct amounted to a waiver of the approval term.
Ratio Decidendi: 1. A contract is formed when one party accepts an offer made by the other. An acceptance must be absolute and unqualified to convert a proposal into a promise. 2. A guarantee is a contract to perform the promise or discharge the liability of a third person in case of default. It is an autonomous and independent contract but is based on the primary contract between the principal debtor and the creditor. 3. Consideration is a necessary element of a binding contract. A guarantee must be supported by valuable consideration. 4. Waiver requires a clear and unequivocal promise, representation, or assurance that a party will not insist on a particular term. Implied waiver must be based on conduct that is inconsistent with the insistence on the term.
Final Decision: The court allowed the appeal, set aside the lower court's order, and granted a temporary injunction restraining EPI from encashing the bank guarantee until the disposal of the suit. The appellant was required to keep the bank guarantee alive during the operation of the temporary injunction.
( 1 ) THIS appeal is directed against the judgment of a learned single Judge of this Court dated February 6, 1986 dismissing plaintiff/ appellant s application for grant of temporary injunction.
( 2 ) NATIONAL Thermal Power Corporation (for short NTPC) had entrusted to Engineering Projects (India) Limited (for short EPI) the turnkey project for setting up of a Coal Handling Plant for Badarpur Thermal Power Station On January 11, 1984 EPI issued a Letter of Indent to have pretender tie up with M/s. Sahibabad Steels Pvt. Ltd. (for short SSL), the plaintiff, for civil works, structural fabrication and erection work at a lump sum cost of Rs. 3. 70 crores. The terms and conditions for this work was to be on back- to-back basis, as agreed between EPI and NTPC. After some negotiations and correspondence SSL submitted its offer vide its letter dated August 6,1984. It agreed to execute the said work on a lump sum cost of Rs. 3. 89 crores. Its offer was accepted by EPI by its letter dated August 27, 1984. This acceptance was, however, subject to the approval of NTPC. In case the approval was not received, any expenditure incurred by SSL in the preparatory work was to be on its own account and EPI was to be indemnified against any claim whatsoever. A formal agreement was executed on December 7, 1984. It was made effective from August 27, 1984. Clause 5. 0 of this agreement provides :-
"this Sub-contract is subject to the approval of NTPC for SSL s association with EPI for this project. In such an eventuality of not being approved by NTPC this agreement shall cease to have effect whatsoever and the amounts/moneys drawn by SSL on account of advance and/or otherwise shall be paid back/refunded to EPI,"
( 3 ) FOR the due performance of the agreement the plaintiff was required to furnish a bank guarantee in the sum of Rs. 38,90,000. 00. The performance bank guarantee for the said amount was executed by Indian Overseas Bank In favour of EPI on September 18, 1984.
( 4 ) EPI started executing the work under the contract apparently in the hope that EPI would obtain the requisite approval from NTPC. EPI did make efforts to obtain the approval in term. of clause 5. 0 of the agreement. NTPC, ultimately, by its letter dated February 5, 1985 informed EPI as under :- "we wish to inform you that we have no objection to your employing M/s. S. S. L. for the purpose of supply of labour and general tools and tackles provided they fulfil all necessary statutory Labour Act requirements. "
( 5 ) IT is clear from this letter that NTPC did not accord approval for the entire civil, engineering and structural works required for the Coal Handling Plant, as was envisaged in the agreement between EPI and SSL. EPI sent a copy of this letter to SSL on March 13/15, 1985.
( 6 ) INSPITE of this information SSL continued executing some work under the contract. EPI, however, complained that the SSL was neglecting to excute the work. Ultimately alleging that SSL had defaulted, breached the terms of the contract and had failed to perform its obligations under the contract, it called upon the Indian Overseas Bank to pay Rs. 38,90,000. 00 , the guarantee amount.
( 7 ) FEELING aggrieved SSL, on September 16, 1985, brought a suit seeking a decree for declaration that there was no contract or agreement between SSL and EPI and for permanent injunction restraining EPI from encashing the bank guarantee in question and restraining Indian Overseas Bank from paying to EPI the amount of the said guarantee. It was pleaded that the contract with EPI was not a concluded contract. It was subject to approval by NTPC. NTPC did not accord approval and therefore the contract ceased to have any effect. The contract between SSL and EPI being invalid the bank guarantee was absolutely without consideration and unenforceable.
( 8 ) IN those proceedings SSL brought an application under Order 39 Rule I of the Code of Civil Procedure seeking temporary injunction in terms of the permanent inj
AI
An indispensable Tool for Legal Professionals, Endorsed by Various High Court and Judicial Officers
Please visit our Training & Support
Center or Contact Us for assistance
Scan Me!
India’s Legal research and Law Firm App, Download now!
For Daily Legal Updates, Join us on :
Back to top
