The Calcutta High Court has held that a bank guarantee issued as performance security cannot be invoked by the beneficiary after the defects liability period has expired, absent any demonstrable breach or evidence of defective work. This ruling reinforces the principle that such guarantees are not instruments for recovering alleged overpayments or unproven claims, but are strictly tied to the performance obligations under the contract.
Background & Facts
The Dispute
The petitioners, M/s. Nirman Constructions & Anr., were awarded a contract by the Union of India (Respondent No. 2) for the modification and rebuilding of houses in DSP Township, including plastering, painting, and tiling works in Category-3 and above houses. The contract was formalized through a Letter of Acceptance dated 07.12.2022 and a Work Order dated 15.12.2022. As per the tender conditions, the petitioners were required to furnish a Performance Security Deposit equivalent to 3% of the total contract value.
Key Facts
- Total contract value (excluding GST): Rs. 2,02,35,722.45
- Performance Bank Guarantee submitted: Rs. 7,16,346/- (3% of contract value), issued by Punjab National Bank, CBB Durgapur Branch, dated 02.02.2023 (No. 03041LG000723)
- Work completed on: 31.12.2023
- Completion Certificate issued by General Manager (Projects), SAIL/DSP: 02.05.2024, stating work was completed as per contract terms
- Final bill raised by petitioners: 04.01.2024
- Final payment released by respondents: 20.01.2024 (amount: Rs. 2,02,29,511.94 excluding GST)
- Retention money (10% of bill amount): Rs. 20,22,950/- withheld by respondents
- Email dated 15.05.2024: Respondents withdrew the Completion Certificate without stating reasons
- Email dated 29.09.2025: Respondents sent a measurement sheet to petitioners requesting comments, but did not allege defects or non-compliance
- No communication received by petitioners regarding any defects in work between 31.12.2023 and 23.03.2026
- Defects Liability Period: One year from date of handover (i.e., expired on 31.12.2024)
- Letter dated 23.03.2026: Respondents instructed Punjab National Bank to encash the Bank Guarantee of Rs. 7,16,346/-
- Petitioners’ official email: dgp_sbnirman@rediffmail.com; respondents’ communication sent to dgp_sbnirman@nirmanconstruction.in (allegedly incorrect)
Procedural History
- 07.12.2022: Letter of Acceptance issued
- 15.12.2022: Work Order issued
- 02.02.2023: Performance Bank Guarantee submitted
- 31.12.2023: Work completed
- 02.05.2024: Completion Certificate issued
- 15.05.2024: Completion Certificate withdrawn via email (no reasons given)
- 20.01.2024: Final payment released
- 29.09.2025: Measurement sheet sent to petitioners (no defect allegations)
- 23.03.2026: Respondents instructed bank to encash Bank Guarantee
- 02.04.2026: Judgment delivered by Calcutta High Court
The Parties' Positions
For the Petitioners: The work was completed on 31.12.2023, accepted by the respondents, and the defects liability period expired on 31.12.2024. No defects were reported during this period. The respondents’ invocation of the bank guarantee after over two years is unjustified, arbitrary, and in bad faith. The withdrawal of the completion certificate was without notice or justification. The measurement sheet sent in 2025 was sent to an incorrect email address and did not constitute a formal notice of overpayment or defect.
For the Respondents: The petitioners were overpaid by Rs. 30,43,383.94 (excluding GST) and Rs. 5,47,809/- (GST), totaling Rs. 35,91,192.94. The retention money (Rs. 20,22,950/-) and bank guarantee (Rs. 7,16,346/-) are being invoked to recover the excess payment. The completion certificate was withdrawn due to discrepancies in measurement. Reliance was placed on Ansal Engineering Projects Limited v. Tehri Hydro Development Corporation and Standard Chartered Bank v. Heavy Engineering Corporation to assert the independence of the bank guarantee.
Relief Sought
The petitioners sought a direction to restrain the respondents from encashing the Bank Guarantee dated 02.02.2023 for Rs. 7,16,346/-, and to direct the release of the retention money of Rs. 20,22,950/-.
The Legal Issue
Can a beneficiary invoke a performance bank guarantee after the expiry of the defects liability period, without alleging or proving any defect in the work, solely on the ground of alleged overpayment based on a disputed measurement?
Arguments Presented
For the Petitioner
The petitioners argued that the bank guarantee was strictly tied to the performance obligations under the contract and the defects liability period. The guarantee was not a general security for all possible financial disputes. The completion certificate, even if later withdrawn, was issued after full execution of work. No notice of defect or overpayment was issued during the one-year liability period. The email dated 29.09.2025 was sent to an incorrect email address and did not constitute valid communication. The respondents had already accepted the work by releasing the final payment and taking possession. Invoking the guarantee after 27 months, with no prior notice or claim, was arbitrary and violative of natural justice.
For the Respondent
The respondents contended that the bank guarantee is an independent contract, not subject to the underlying transaction, as per Ansal Engineering and Standard Chartered Bank. They asserted that the petitioners were overpaid due to erroneous measurement, and the guarantee could be invoked to recover the excess amount. The withdrawal of the completion certificate was justified due to discrepancies, and the petitioners’ failure to respond to the measurement sheet constituted tacit acceptance of the overpayment claim. The blacklisting of the petitioners in unrelated matters was cited to establish a pattern of default.
The Court's Analysis
The Court examined the terms of the tender document, particularly Clause 9, which required the Performance Security Deposit to remain valid until the end of the defects liability period, and Clause 5, which permitted forfeiture only on breach of contract terms. The Court noted that the completion certificate issued on 02.05.2024 explicitly stated that the work was completed in accordance with the contract, and the employer had taken over the facilities. Although the certificate was later withdrawn via email on 15.05.2024, no reasons were provided, and no formal notice of defect or breach was issued thereafter.
"The respondents have not alleged any defect in the work executed by the petitioners during the one-year defects liability period, nor have they issued any notice demanding rectification or claiming damages."
The Court emphasized that the invocation of a bank guarantee is not a mechanism for settling disputed accounts or recovering alleged overpayments without due process. The respondents’ reliance on Ansal Engineering and Standard Chartered Bank was found misplaced, as those cases involved clear breaches or fraud, not post-expiry attempts to recover disputed amounts without notice.
The Court further held that the email dated 29.09.2025, sent to an email address not used by the petitioners, could not constitute valid communication. The respondents’ claim of overpayment was unsupported by any audit report, reconciliation statement, or formal demand notice. The fact that the respondents had already released the final payment and taken possession of the work indicated acceptance of the work’s completion.
The Court rejected the argument that blacklisting in unrelated matters justified invocation, noting that such conduct had no nexus with the present contract. The invocation after 27 months, with no communication during the entire defects liability period, was held to be arbitrary, mala fide, and violative of the principle of good faith.
The Verdict
The petition succeeded. The Court set aside and quashed the letter dated 23.03.2026 issued by the respondents to Punjab National Bank directing encashment of the Bank Guarantee of Rs. 7,16,346/-. The respondents were directed to release the retention money of Rs. 20,22,950/- within four weeks from the date of judgment. The Court further directed that the Bank Guarantee shall be returned to the petitioners upon surrender of the original document by the bank. No costs were awarded.
What This Means For Similar Cases
Invocation of Bank Guarantees Requires Timely and Valid Notice
- Practitioners must ensure that any invocation of a bank guarantee is preceded by a clear, documented notice of breach or defect within the stipulated liability period
- Post-expiry invocation based on disputed measurements or unverified claims will be struck down as arbitrary
Completion Certificate Withdrawal Must Be Justified
- Withdrawal of a completion certificate without reasons or follow-up communication does not revive contractual obligations or justify guarantee invocation
- The burden lies on the beneficiary to prove breach, not on the contractor to disprove uncommunicated allegations
Email Communication Must Be to Verified Addresses
- Service of notices or claims via unverified or incorrect email addresses does not constitute valid communication under contract law
- Parties must maintain and use official, contractually recognized communication channels
