7 CONTRACT LAW A.S Bhat* I
INTRODUCTION
THIS PART of the survey covers 56 cases, out of which 48 cases have been decided by various high courts and others by the Supreme Court. The courts have, by and large, followed the established principles relating to contract law. However, the Madras High Court in a remarkable decision in Oriental Insurance Co. Ltd. v. Karur Vysya Bank Ltd.l for the first time invoked the Indian Contract ( Amendment) Act, 1997 and made it clear that this amendment is prospective in nature. The law as it now stands after this amendment, makes it clear that not only curtailment of limitation period is impermissible, but also the extinction of right, if sought by the agreement under section 28 of the Contract Act. II
CONTRACT ACT, 1872
Scope of the Act
The Supreme Court in an epoch making judgment in Steel Authority of India Ltd. v. National Union Water Front Workers,2 which primarily related to contract labour jurisprudence, observed that in case of employer-employee relationship, contract laws are not inapplicable. The court emphasised that the law laid down by the apex court in Uptron India Ltd.3 cannot be read to exclude the applicability of contract law to the relation between labour and management.4 Acceptance of tender
In Oil and Natural Gas Commission v. Balaram Cements Ltd.,5 the Gujarat High Court reaffirmed that in the absence of any concluded contract, bank guarantee cannot be encashed. In the instant case the tenderer had offered revised rates before the acceptance of tender at old rates and no acceptance was communicated by the acceptors in terms of revised rates. Hence the court *
1 2 3 4 5
Dean Academic Affairs, University of Kashmir, Srinagar, Formerly, Head & Dean, Faculty of Law, University of Kashmir, Srinagar. The author wishes to thank Farooq Ahmad, Mohd Ayub and Fareed Ahmad, for their assistance in the writing of this survey. AIR 2001 Mad 489. AIR 2001 SC 3527. Uptron India Ltd. v. Shammi Bhan, AIR 1998 SC 1681. Supra note 2 at 3565. AIR 2001 Guj 287.
174
Annual Survey of Indian Law
[2001
concluded that no contract had come into existence between the parties. The court relied upon section 5 of the Act which clearly states: "An acceptance may be revoked at any time before the communication of the acceptance is complete against the acceptor, but not afterwards." Concluded contract
In Cotton Corpn. of India Ltd. v. M/s Alagappa Cotton Mills f which related to supply of imported goods, the Bombay High Court observed that where the acceptance had been communicated by telex message before the standard form was sent withdrawing the offer, the contract stands already concluded. The court emphasised that in the absence of valid revocation of offer no rescission of contract takes place and a valid contract exists between the parties for the purposes of claiming damages.7 In National Properties Ltd. v. Bata India Ltd.f the Calcutta High Court had to determine whether a contract becomes concluded aM hence specifically performable under the Specific Relief Act, 1963. A draft lease deed was to be sent, under the terms of the agreement, by the defendant for the approval of the plaintiff but the defendant did not send that. It was held by the court that the condition of sending draft lease for approval of plaintiff was a condition of bargain and not a commemoration of bargain, hence no concluded contract came into existence. The court made an in-depth survey and analysis of case law on the point and reiterated that in case of a specific condition of performance no concluded contract results unless that condition is fulfilled.9 The question for consideration in Shipping Corp. of India Ltd. v. C.L. Jain Woollen Mills10 arising in a batch of appeals before the Supreme Court, was whether the appellant, who under the terms of the contract between him and the owner of goods, having a lien over the goods, until the dues are paid, can be forced to release the goods, without charging any demurrage, merely because the customs authorities issued a detention order for a specified period. The court held that section 170 of the Act engrafts the principle of bailee's lien that if somebody has received the article r being delivered to him and is required to store the same until cleared for which he might have borne the expenses, he has a right to detain it until his dues are paid." In M/s Marthi Crystal Salt Co. Ltd. v. Oriental Insurance Co. Ltd.,12 the plaintiff company was approached by the development officer for insuring the salt stocks and salt works against damage from flood and inundation. The development officer had on his own, received the premium amount against a receipt, and requested the defendant insurance company to arrange for insurance. But before any action by the defendant company the loss to the salt occurred due 6 7 8 9 10 11 12
AIR 2001 B o m 429. Id. at 433. AIR 2001 Cal 177. Id. 186. AIR 2001 SC 1806. Id. at 1812. AIR 2001 M a d 288.
Vol. XXXVII]
Contract Law
175
to heavy rainfall and gale winds that took place for four days immediately after the receipt of premium on 5.5.1990. This material circumstance was also not reported to the insurance company. The insurance company pleaded that acceptance of an offer for insurance could be made only by the regional officer of the company and that the development officer could not enter into any contract of insurance with the plaintiff. Relying on a Bombay High Court judgment in Oriental Fire And General Insurance Co. Ltd. v. Panvel Industrial Cooperative Estates Ltd.,13 the Madras High Court dismissed the suit holding that mere payment of premium amount after its ascertainment or keeping the cheque for long time would not amount to implied acceptance by conduct or a concluded contract. The court further held that there was a lack of bona fides on the part of the plaintiff because he had suppressed the material facts by not disclosing alteration in the risk despite its full-fledged knowledge before the conclusion of the contract.14 The principle of uberrima fides, according to the court, casts a duty upon the assured to disclose any material alteration in the risk which comes to his knowledge upto the conclusion of the contract.15 Capacity to contract
The apex court in Punjab University v. V.N. Tripathi^ held that an action by a person who is not competent to contract but ratified by a person having competence, shall not be treated as illegal. In the instant case the registrar filed an appeal against the order of trial court which action was not within his competence. However, this action of the registrar was ratified by senate, the authority competent to do so under the Punjab University Act. The court held that such an action of the registrar cannot be deemed improper on the ground that registrar had no power to file an appeal.17 Free consent
The Delhi High Court in Kishan Lai Kalra v. N.D.M.Cn held that dispossession from the premises on the threat of arrest under MISA amounts to coercion and hence section 15 of the Act is applicable. In Dalbir Singh v. Dalbir Singh™ an arhtiya had taken undue advantage of a farmer who used to bring his agricultural produce for sale to him. The farmer was always in the grip of arhtiya. He was constantly in need of money without which he could not meet his domestic and agricultural expenses. An agreement for sale of entire landholding of the farmer was obtained by the arhtiya thus leaving his family to starvation. The courts below did take into account whether the agreement was the result of free will and volition and whether there was any undue influence on the farmer in the execution of the agreement. The Punjab and Haryana High Court dismissed 13 14 15 16 17 18 19
AIR 1992 Bom 107. Supra note 12 at 304. Ibid. AIR 2001 SC 3672. Id. at 3674. AIR 2001 Del 402. AIR 2001 P & H 216.
176
Annual Survey of Indian Law
[2001
the suit for specific performance of the agreement and held that the courts below had misread the evidence in respect of the agreement which was not genuine under section 16 of the Contract Act.20 In Ratan Pal Singh v. Kunwar Pal Singh,2] the contention of the appellant was that the agreement to sell was obtained by fraud under the pretext that he was executing a surety bond. The courts below had disbelieved him on a meticulous scrutiny of evidence and the circumstance of the case and found that the seller executed the deed with knowledge and for consideration. It was held by the Allahabad High Court that the concurrent findings of fact of the courts below did not suffer from perversity and, therefore, could not be interfered with.22 In Hakim Singh v. Ram Sanehi23 the appellant vendor alleged that the sale deed 'was got executed by means of fraud by the purchaser. The son of the vendor was an attesting witness of the deed whose name though included in the list of witnesses was not produced nor was any explanation given in this behalf. There was also evidence that at the time of the execution son of the vendor and also one of his well wishers were present. Besides, the purchaser was not carrying on any money lending business, and the vendor could riot therefore have approached him for taking loan as alleged by him. The court on these facts held that the deed was not executed by practising fraud.24 The Kerala High Court in N.Narayani Ammal v. PSanjeev25 held that the documents executed under fraud are viodable and not void. The court reiterated the legal position that when consent to an agreement is obtained by coercion, fraud or misrepresentation, the contract is voidable at the option of the party whose consent was so obtained.26 The Gujarat High Court in G. S.R..C. Ahmedabad v. B. Arunchandra & Co27 held that where the payment of earnest money was a condition precedent for discharge of contract and the same remained unsatisfied it did not give rise to a concluded contract. Hence claim for damages was not maintainable against the contractor for breach of contract.28 The Bombay High Court in R. Kumar & Co. v. Chemicals Unlimited29 reiterated an established position that an unconditional acknowledgement to pay tantamounts to promise to pay. If nothing is said to the contrary after making an acknowledgement to pay then the natural inference which an honest man will draw is that there is an implied promise on the part of the person making such acknowledgement.30
20 21 22 23 24 25 26 27 28 29 30
Id. at 227, para 24. AIR 2001 All 224. Id. at 225-26. AIR 2001 All 231. Id at 234. AIR 2001 Ker 305. Id at 307. AIR 2001 Guj 343. Id. at 352. AIR 2001 Bom 116. Ibid.
Vol. XXXVII] Legality of object
Contract Law
177
In Universal Petrochemicals Ltd. v. R.S.E.B.3] the Calcutta High Court reiterated the principle laid down in section 23 of the Contract Act that there can be no contract which could defeat the provisions of any law.32 The court reversed the single bench judgment of the same high court delivered in 1984 in the case of Ganpatri Agarwal v. The Fertilizer Corporation of India,33 wherein it was held that sub-section (4) of section 31 of the Arbitration Act, 1940 could not override a contract between the parties. The court held that a statutory provision is the sovereign will of the legislature and the same binds every one and certainly the parties who are coming under it unless the provision is made subject to contract or the law is repealed or declared unconstitutional by a competent court. The court emphasized that if the proposition of law laid down in the Ganpatri is followed the same will lead to disastrous consequences as any two individuals would be allowed to contract out of a statutory liability.34 In Board of Education of S.T.B. Churches, Nellore v. State of A.P,35 the Andhra Pradesh High Court held that a provision of law which is contrary to the public policy as contemplated under section 23 of the Indian Contract Act cannot be sustained. A consent order of a court can also be questioned on the grounds on which an agreement can be questioned. If a consent order or a decree passed is contrary to the public policy or contrary to any constitutional provisions and, if as a result whereof, valuable rights of the parties are taken away, the same cannot be sustained and such consent orders are a nullity with no force of law.36 In Mohanlal Dungarmal Futnani v. Vishanji Dungarmal Futnani31 the Calcutta High Court held that an agreement to refer disputes with regard to construction of will is not contrary to the provisions of the Indian Sucession Act, 1925 and is not, therefore, an illegal agreement under section 23 of the Contract Act. In T.H.R. Pvt. Ltd., Ernakulam v. Greater Cochin Development Authority,3* the tender conditions stipulated that successful tenderer would be obliged to start construction work immediately after the tender was accepted. However, a stay order was in operation on the day of contract which prohibited construction. The petitioner after getting the possession of land was not able to carry out the construction nor did he pay the balance amount. It was alleged by him that it was illogical to direct him to pay penal interest. It is because of the statutory stay that he could not effect construction The petitioner, therefore, contended that the agreement was contrary to law since at the time of notification of the tender, there was a stay and construction within 500 meters of land towards the side from the coast was prohibited. The court held that the agreement with an unlawful 31 32 33 34 35 36 37 38
AIR 2001 Cal 102. Id. at 108. AIR 1984 Cal 35. Supra note 31 at 108, para 50. AIR 2001 AP319. Id. at 326. AIR 2001 Cal 122. AIR 2001 Ker 279.
178
Annual Survey of Indian Law
[2001
object or consideration is no doubt void under section 23 but this provision applies only in cases where the consideration or object is void ab initio which was not the case of the petitioner and such a plea could not be invoked by contractor (petitioner) for denying payment of land cost on the ground that performance of contract had become impossible.39 The Delhi High Court in Bank of Rajasthan Ltd. v. Sh. Pala Ram Gupta40 reiterated an established position that an agreement against any statute is not enforceable and is void for being against public policy. In this case the defendant had taken a loan from the plaintiff bank for construction of a building, a part of which was to be leased to the bank after the construction was complete. However , it was later on discovered that the said building could not be used for commercial purpose under the Delhi Development Act. The court declared the agreement void under section 23 of the Contract Act. The Karnataka High Court in Munesh v. Anasumyamma41 restated the statutory position that an agreement with an unlawful object is not enforceable. Furthermore, it was laid down that an unlawful agreement or compromise cannot be recorded in terms of order 23 rule 3 of CPC and no decree for divorce can be granted on the basis of such unlawful agreement. In Dhurandhar Prasad Singh v. Jai Prakash University42 the apex court drew the difference between the expressions void and voidable. The court observed that the expression void has several facets. One type of void acts, transactions, decrees are those which are wholly without jurisdiction, void ab initio and for avoiding the same no declaration is necessary. Law does not take any notice of the same and it can be disregarded in collateral proceedings or otherwise. Voidable act is that which is a good act unless avoided, e.g., if a suit is filed for declaration that a document is fraudulent and/or forged and fabricated, it is voidable as apparent state of affairs is real state of affairs and a party who alleges otherwise is obliged to prove it. In cases, where legal effect of a document cannot be taken away without setting aside the same, it cannot be treated to be void but would be obviously voidable.43 In C. J. International Hotels Ltd. v. N.D.M.C.,44 land was allotted in auction on licence basis for construction of hotel. Subsequently, a representation was made by hotelier to reduce licence fee because he was unable to run the hotel. The Delhi High Court found no reason to invalidate the agreement on the ground that it violated public interest. The court emphasised that once the agreement has been entered into with open eyes, temporary injunction cannot be granted on the ground that the licensee finds the trading transaction unprofitable.45 InH.HM. Shantidevi P. Gaikwad v. SavjibhaiHaribhalPatel46 the Supreme 39 40 41 42 43 44 45 46
Id. at 281. AIR 2001 Del 58. AIR 2001 Kant 355. AIR 2001 SC 2552. Id. at 2560, per B.N. Agarwal, J. AIR 2001 Del 435. Id. at 446. AIR 2001 SC 1462.
Vol. XXXVII]
Contract Law
179
Court reiterated the settled law that a contract giving absolute power to the parties to terminate agreement does not amount to interfering with the integrity of the contract. The court emphasised that invalidating a contract on the ground that it gives absolute power to the parties to terminate the agreement, would itself interfere with the rights of the parties to freely enter into the contracts.47 The court observed:48 We do not think that it can be said that if a party has a right to terminate a contract at will the imposition by him of a condition, however hard, on failure to fulfil which the termination was to take effect, would make the termination illegal, for the party affected was not entitled even to the benefit of a difficult condition. Damages
In R.LPinto v. FF Menzes49 the Karnataka High Court held that where there is a complete contract of sale, the purchaser is entitled to cancel the contract and seek the refund of purchase money. But where a contract is at an executory stage, it would not be proper in law to force the purchaser to purchase the property on the ground that he was aware of the defective or imperfect title at the time of agreement of sale. It does not prevent the purchaser to change his opinion before the contract is concluded. However, this rule is subject to one condition that the purchaser has to compensate any loss or damage which the vendor has sustained in the course of such transaction for which the purchaser has equally contributed by his folly.50 The Madras High Court in Gratex Machinery Co v. Mahindra & Mahindra Ltd.,51 maintained that the contractor is entitled to 15 per cent increase as escalation charges in terms of price on completion of work. The court pointed out that where time is an essence of the contract, which has not been adhered to by either of the two contracting parties, the snag of time limitation gets lifted and contract becomes automatically enforceable in terms of escalation clause in the agreement.52 In O.N.G.C v. Assoc, of Natural Gas Consuming Industries.53 the apex court reiterated the law that principle of deemed renewal of contract and restitution apply where the escalation of prices by seller were found justified and valid by the courts. It was laid down that, where seller is restrained by the court to charge escalated prices and directed to continue supply on original prices, he is entitled to recover the difference in price as well as interest for delayed payment. The court after perusing the case law on the point quoted with approval the observation made in an earlier case,54 wherein it was held by the apex court that in view of the 47 48 49 50 51 52 53 54
Id. at 1479. Id. at 1479 per Y.K. Sabharwal, J. AIR 2001 Kant 141. Id at 142. AIR 2001 Mad 473. Id. at 480. AIR 2001 SC 2796. Gurcharan Singh v. NDMC, 1996 AIR SC 749.
180
Annual Survey of Indian Law
[2001
legal maxim actus curiae neminem gravabit which means that an act of court shall prejudice no man, the defendant is justified in making a claim for interest over the arrears which have remained unpaid for more than 12 years because of the interim orders passed by this court.55 In Baldev Steal Ltd. v. Empire Dyeing & Mfg. Co Ltd.,56 the Delhi. High Court reaffirmed the settled principle of law by stating that the plaintiff, who is in default and not willing to perform the contract, cannot ask for specific performance of contract. The court noted that plaintiff had committed breach of contract by not purchasing the goods as ordered and which had been made ready by the defendant. In view of this, the plaintiff can neither be entitled to damages nor for specific performance of contract. The court, nevertheless, held the plaintiff entitled to receive the advance amount paid to the defendant, as there existed no forfeiture clause between the parties.57 The Gujarat High Court in Gujarat Housing Board v. Harilal Jethalal,58 had to consider the claim of the contractor for compensation in view of escalation of prices based on quantum meruit. The contract in this case was in writing and specific and delay in completion of work was proved to be due to contractor's fault. It was found that the defendant had mala fide intention to claim escalation in prices whereas in fact full payment was made to him as per the agreed rates. The court held that the claim is not maintainable on the ground of quantum meruit.59 The apex court in State Bank of Saurashtra v. PNB.,60 reiterated the law that where parties can be adequately compensated by the award of reasonable damages, specific performance of contract may not be appropriate in case it leads to unconscionable result. The court had to determine the case under Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 where the bank, having agreed to purchase and deliver certain units to purchaser, failed to do so despite the payment made by the purchaser. Thus, mere delivery of units without compensating the loss caused by delay was not reasonable.61 In Kishan Lai Kalra v. ND.M.C,62 the Delhi High Court observed that in a suit for damages the quantum of damages may not be determined as a claim on account of payment of retrenchment compensation and payment of gratuity to its workmen on account of premature termination and dispossession of plaintiff before the expiry of term of licence, because of the fact that this amount was otherwise also payable on dispensing with the services of the workmen. The court emphasized that such payment cannot be attributed to the illegal dispossession of the plaintiff from the suit property. However, the court allowed the plaintiff to recover damages on account of actual loss of profit for running 55 56 57 58 59 60 61 62
Id at 754. AIR 2001 Del 391. Id. at 400. AIR 2001 Guj 259. Id. at 272. AIR 2001 SC 2412. Id. at 2413. AIR 2001 Del 403.
Vol. XXXVII]
Contract Law
181
a business caused by the illegal dispossession of the plaintiff.63 In Usha Beltran Ltd. v. Nand Kishore Parasramakaf4 the Calcutta High Court reiterated the settled law by observing that the defendant, is not guilty of breach of contract, so he cannot be asked to pay damages for his failure to deliver ordered material. The court emphasised that damages can be quantified only by way of compensation for loss suffered and not by way of punishment. In the instant case the plaintiff had refused to accept goods at the enhanced prices offered by the defedant. The court ruled that in view of the fact that the agreement had come to a naught, the transactions had come to a standstill between the parties due to absence of mutuality of consensus. It did not, therefore, entitle the plaintiff to claim damages.65 In FACT Engineering Works v. Kerala Industries66 the Kerala High Court reaffirmed the law that before maintaining a claim for damages, it is essential for the court to determine the fault of the plaintiff or defendant to justify any claim for damages. In the instant case the court had passed the decree for recovery of a certain amount without going into the question whether delay in completion of work entitled the parties to invoke liquidated damages. The court held that the decree is liable to be set aside and claim for damages not tenable.67 In G.S.R.T.C Ahmedabad v. B Trunchandra & Co.,68 the Gujarat High Court observed that where a contract is yet to be concluded, a claim for damages is not maintainable for breach of contract. In M/s Somaiya Organics (India) Ltd. v. State of Uttar Pradesh,69 the question which arose as a sequel to a judgment of the Supreme Court in Synthetics and Chemicals Ltd. v. State of UP10 was whether the land fee, which had been levied by the appropriate state enactment but not collected by reason of the orders of the court or otherwise, could be collected after the said provisions were held under the judgment as prospectively invalid. It was observed that in Mafatlals case71 the principle of unjust enrichment was invoked as the refund was claimed even though the amount of excise duty paid had already been recovered.72 The principle of unjust enrichment, however, did not apply to the case in view of the direction given in the second Synthetics case73 that no refund be given. That the principle of unjust enrichment could not be extended to give a right to the state to recover or realise fee after the statute has been struck down.74 In M/s Deokar Exports Pvt Ltd. v. New India Assurance Co. Ltd.,15 the 63 64 65 66 67 68 69 70 71 72 73 74 75
Id. at 409 The court analysed a catena of cases on the subject. AIR 2001 Cal 137. Id. at 145. AIR 2001 Ker 326. Id. at 326. AIR 2001 Guj 343 at 352. AIR 2001 SC 1723. AIR 1990 SC 1927. Mafatlal Industries Ltd. v. Union of India, (1977) 5 SCC 536. Supra note 69 at 1735. Supra note 70. Supra note 69 at 1735. AIR 2001 Bom 327.
182
Annual Survey of Indian Law
[2001
appellant had proceeded before the National Consumer Disputes Redressal Commission to recover an insurance claim. The claim was, however, rejected by the commission on the ground of absence of jurisdiction. The claimant had been given liberty by the commission to pursue any other available remedy. It was held that liability of the insurance company under the policy of insurance having not been decided, a subsequent suit for damages was not barred, nor did the principle of res judicata in the given circumstances apply.76 In A. Murali & Co. v. State Trading Corp. of India Ltd.,11 the Madras High Court held that a party to a contract taking security deposit from the other party to ensure due performance of the contract, is not entitled to forfeit the deposit on the ground of default when no loss is caused to him in consequence of such default. It was held by the court that section 74 undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract whether the actual damage or loss is proved to have been caused. It merely dispenses with proof of actual loss or damage, it does not, however, necessarily lead to the award of compensation. Liability of surety
In Uttar Pradesh Financial Corpn v. M/s Garlon Polyfeb Industries,™ the Allahabad High Court reiterated the principle that the liability of surety is coextensive with that of the principal debtor. The court observed that in view of the fact that terms of guarantee stipulated liability of guarantors on demand and in the absence of any condition contrary to it in the contract of guarantee, the state financial corporation was justified in proceeding against the guarantors before proceeding against the company.79 In Smt Florence Mabel R.J. v. State of Kerala^ the appellant had undertaken to pay in instalments the loan advanced to the principal debtor in case of latter's default. The principal debtor had taken loan for running a bee farm but did not repay and surety was asked to pay the amount as promised. The surety contended that the object for which loan was taken did not materialize due to the death of bees because of viral infection and the frustration of main object absolved him from any legal responsibility which he had undertaken in the capacity of surety. The court held that this contention of surety was not tenable because he (surety) had specifically agreed that in case of failure on the part of the principal debtor to pay off the installment, he would be liable jointly and severally. The frustration of the main object for which loan was taken does not mitigate the liability of surety.*1 In Punjab National Bank v. Lakshmi I& T Company Pvt. Ltd.*2 it was laid down that the change in the management of the company does not ipso facto 76 77 78 79 80 81 82
Id. at 329-30. AIR 2001 Mad 271. AIR 2001 All 286. Id. at 288. AIR 2001 Ker 19. Id. at 20 (Emphasis added). AIR 2001 All 31.
Vol. XXXVII]
Contract Law
183
absolve surety from the responsibility undertaken by him. The change of members of board of directors or appointment of another person as managing director does not cancel or change terms of contract entered into by a person for company or on behalf of the company. The Kerala High Court in E.P. George v. Bank of India*3 held that the liability of a guarantor exists only in the event of the default by the principal debtor as it is an obligation created by the document for the guarantor. It is a debt arising in future. It may not be a debt in presenti. The definition of guarantee provided under section 126 encompasses both the debt in presenti and the debt in future.84 Discharge of surety
In Bimal Singh Duggal v. Central Bank of India*5 money was lent by a bank for the purchase of trucks. The bank allowed the purchaser to sell the same but without informing the surety. The court held that the liability of surety does not get impaired as the delay in sale of truck would have increased the liability instead of lessening it. The court maintained that commercial prudence on the part of debtors as well as bank, to sell the truck in time saved money from being wasted.86 Thus, surety couldn't claim discharge from liability under the given circumstances. Bank guarantee
In M/s National Telecom of India Ltd. v. Union of India,87 it was laid down that where the beneficiary is made the sole judge as to the question whether or not there has been a breach of the underlying contract by the party, on whose behalf the bank guarantee was furnished, or whether or not the amount under the bank guarantee is due to the beneficiary, the bank is under an obligation to pay the amount covered under the bank guarantee on demand by the beneficiary without raising any objection. It is only in the event of fraud or irretrievable injustice or in a case of special equity or where the invocation of the bank guarantee has not been made in terms of the bank guarantee itself, that the court will interfere with the invocation of a bank guarantee. It was ruled in Modi Korea Telecommunication Ltd. v. Indus Ind. Bank Ltd.8* that where a suit for invocation of a bank guarantee has been dismissed, the plaintiff cannot request the bank to remit the amount mentioned therein. If the bank turns down his request that will not give a fresh cause of action to the plaintiff. The Gujarat High Court in Intercontinental (India) v. Indian S & G.I.E.I. Corpn., New Delhi*9 emphasized the fact that injunction against invocation of 83 84 85 86 87 88 89
AIR 2001 Ker 107. Id. at 109. AIR 2001 Guj 340. Id. at 342. AIR 2001 Del 236. AIR 2001 Del 254. AIR 2001 Guj 227.
184
Annual Survey of Indian Law
[2001
bank guarantee cannot be ordered on the ground that there was no concluded contract. The court pointed out that where there is initially no consensus between parties regarding certain terms and conditions of agreement but later on parties come round and agreed on certain specific terms and conditions, it amounts to a concluded contract. The court observed: "Even if some changes were made as alleged, it would not affect the bank guarantee once parties arrived at consensus ad idem and acted upon it."90 In Amrok Logistics Trading Pvt. Ltd. v. Digvijay Cement Co. Ltd.9] the Gujarat High Court reaffirmed the settled law that bank guarantee is enforceable, notwithstanding the fact that the parties have suffered loss due to non performance of any obligation arising out of the underlying agreement. This preposition becomes all the more important for the fact that no case of fraud or misrepresentation has been agitated. The court emphasized that dispute of accounts by itself will not provide a ground for grant of stay against encashment of bank guarantee. The court remarked:92 If this is permitted to be done the purpose behind resting the transaction on the basis of bank guarantee will be marred which would ultimately affect trade and commerce and economic development. Rights of pawnee
In KM. Hidayathulle v. Bank of India93 the Madras High Court held that where a pawner commits default in the payment of debt within the stipulated time in respect of which goods were pledged, the pawnee has two options available. He can either file suit against the pawner and retain the goods as collateral security or resort to the sale of the pledged goods by giving reasonable notice to the pawner. These two remedies provided to the pawnee are disjunctive in nature. There is absolutely no scope for holding that where the pawnee resorts to the alternative course of sale, the limitation period for filing a suit should be extended. Agency
Powers of agent In R.L. Pinto v. F.F. Menzes94 the power of attorney in the light of section 188 of the Contract Act was debated. It was held that the general power of attorney relating to movable or immovable properties creates the necessary legal power to represent the principal and negotiate with regard to the properties of the principal which existed and belonged to the principal on the date of the power of attorney and any property acquired by the principal subsequent thereto,
90 91 92 93 94
Id. at 233, per A.L. Dave, J. AIR 2001 Guj 299. Id. at 303, per A.L. Dave, J. AIR 2001 Mad 251. Supra note 49.
Vol. XXXVII]
Contract Law
185
until the power of attorney ceases or is revoked. However, in case of special power of attorney, the authority to represent and sue on behalf of the principal is limited to the extent mentioned in the terms of the deed whereas in general power of attorney no such limitations can be read into the document.95 Liability of agent In Board of Trustees of the Port of Madras v. S. S. Corpn. Pvt. Ltd.96 the Madras High Court reiterated the settled principle of law that in case of principal being disclosed and ascertained, the agent cannot be held liable, except in case of a contract to the contrary. In the instant case the consignee (as bailer and owner of the goods) failed to take delivery of goods from the ship. He was, therefore, held liable to make good the loss resulting to the port trust (the bailee). The court held the port trust entitled to recover charges under the Major Port Trusts Act, 1963 in respect of the goods from the owner, viz, the consignee, and not the shipping agent.97 In Jay tee Export v. Natvar Parekh Industries Ltd.9* the Calcutta High Court had to determine liability of agent in case of known and disclosed principal and also where agency coupled with no interest of the agent. The court reiterated the law that attachment of bank account of agent cannot be countenanced under law.99 Miscellaneous
The J&K High Court in M/s Riaz Construction Co. v. Union of India, 10° followed the ratio of the Supreme Court ruling in Raunaq International Ltd. v. I.V.R. Construction Ltd.,m wherein it was laid down that unless the court is satisfied that there is a substantial amount of public interest, or the transaction is entered with mala fide intention the court should not intervene under article 226 of the Constitution in disputes between two rival tenderers. In the same vein court held that it cannot substitute its opinion against the expert opinion, unless mala fides is established from the record. The conditions like technical capability and financial capacity laid down by the authorities as pre-requisite for submitting tender cannot be said to be arbitrary or unfair. Furthermore, the court held that the petitioner cannot approbate and reprobate that his tender be considered and the conditions laid therein be struck down.102 In Golam Mohammad v. Supdt, N.R.S. Medical College and Hospital,™3 the Calcutta High Court laid down broad parameters which the state must adopt while accepting/rejecting a tender. The high court invoked the ruling of the 95 96 97 98 99 100 101 102 103
Id. at 144. AIR 2001 Mad 413. Id. at 417. AIR 2001 Cal 150. Id at 154. AIR 2001 J&K 7. AIR 1999 SC 393. Supra note 100 at 10. AIR 2001 Cal 5.
186
Annual Survey of Indian Law
[2001
Supreme Court expressed in Radha Krishna Agarwal v. State of Bihar104 wherein it was laid down that at the stage of entering into contractual relationship with citizens, namely, at the stage of considering various tenders submitted by various parties, the state must adopt an attitude of nondiscrimination and fairness. Elaborating this principle further, the Calcutta High Court laid down that at the stage of tenders, the state cannot afford to act on the basis of some undisclosed criteria or eligibility conditions that are not mentioned in the tender notice. However, the court did admit that in some cases and especially cases involving complicated commercial transactions or transaction involving very high level technical matters calling for special know how, the state may negotiate with the tenderer after the tender has been opened in the presence of other tenderers. But at no stage the state can rely on an undisclosed condition of eligibility for rejecting a batch of tenders. Such an action being unholy, unreasonable and unfair is opposed to the basic tenets of article 14 of the Constitution.105 The court made it clear in unequivocal terms that in case of floating public tender the state has to act keeping in view its obligation under part III of the Constitution. It is well settled that when the state floats a tender inviting the citizens or corporations or organizations to participate in it, the provisions of article 14 of the Constitution cast an unwritten obligation on the state to act in a manner which is consistent with the concept of a welfare state which is governed by rule of law. In such a situation the state must scrupulously observe fairness at all stages especially at the threshold stage.106 In Punjab National Bank v. Lakshmi I &T Company Pvt. Ltd.,™1 the Allahabad High Court was called upon to resolve multiple questions: (1) Who has to bear the loss which is caused due to the negligence of the receiver? (2) What is the liability of the bank to which goods have been pledged by the principal debtor? (3) What is the extent of the amount which is to be adjusted in respect of the goods pledged with the bank by the principal debtor?108 While answering to the first question, the court held that if a receiver is appointed at the instance of the applicant and it is found that the receiver is mismanaging the property or is guilty of any misappropriation, it is the duty of the applicant, who got him appointed to file an application before the court to take action against him (receiver), failing which he has to bear the loss caused due to the negligence of the receiver. In answer to the second question, the court made it clear that the bank acts as a bailee of the goods pledged by the principal debtor in lieu of the loan. The mere fact that the goods were stolen or were damaged due to natural decay will not absolve the liability of the bank as a bailee, unless it is shown by it, that it has taken all possible care as a prudent owner could have taken.
104 AIR 1977 SC 1496. 105 Id. at 1496. 106 Supra note 103. 107 Supra note 82. 108 Id. at 32.
Vol. XXXVII]
Contract Law
187
The court resolved the third issue by holding that the bank is entitled to recover the amount of loan from the defendant but after adjusting the amount of goods which were pledged with it. In P. Duraipandi v. Ramanathapuram Muncipal Corporation,109 it was laid down that a non statutory contract cannot be enforced by invoking article 226 of the Constitution. In this case municipality council had awarded a contract to the 2nd respondent which was challenged by the petitioner through article 226. The court held that it goes without saying that this is a non statutory contract and, therefore, no challenge could be entertained to the same under that article. The Madras High Court in D. Pandi v. Dhanalakshmi Bank Ltd.,no tried to solve some practical difficulties of the bank officials by holding that evidence of bank manager, who claims that the defendant guarantor was present, at the time of sanctioning of loan can be relied upon.
109 AIR 2001 Mad 70. 110 AIR 2001 Mad 243.
