Facts of the Case

The petitioner, M/s. Sri Siva Sai Enterprises, a partnership firm, had executed a works contract with the Food Corporation of India (FCI) for handling and transport of food grains at FSD, Peddapally, and had furnished two bank guarantees totalling Rs. 80,80,000/- (dated 14.08.2020) as performance security. FCI issued a letter dated 29.09.2022 to Canara Bank seeking to encash these guarantees — but to recover losses attributed not to the petitioner's own contract, but to an alleged breach by a different contracting party (Respondent No. 4, M/s. Sri Siva Sai Agencies) under an entirely separate contract dated 22.08.2005. The petitioner challenged this encashment as illegal, arguing it had completed its own work satisfactorily and had no connection to the other contractor's alleged default.

Issues Involved

  1. Whether FCI could encash the petitioner's performance bank guarantees, furnished for one contract, to recover a disputed and unadjudicated claim of loss arising from a different contract executed by a different contractor.

Petitioner's Arguments

  • The bank guarantees were furnished specifically in relation to the petitioner's own, successfully completed contract for handling and transport at Peddapally, and could not be invoked for losses caused by a different contractor under a wholly separate contract.
  • Encashing these guarantees for another party's alleged breach would cause irretrievable loss to the petitioner, who had no connection to that other contract or its disputed claim.

Respondent's Arguments

FCI relied on precedents such as Gangotri Enterprises and, on appeal, H.M. Kamaluddin Ansari & Co. v. Union of India, contending that standard government contract clauses confer ample power on the purchaser/government to withhold amounts or encash guarantees in respect of pending claims arising under other contracts with the same or related contracting parties.

Court Order / Findings

  • The Court reviewed the Supreme Court's evolving jurisprudence — Raman Iron Foundry, later overruled on the point by the Full Bench in H.M. Kamaluddin Ansari, and the subsequent decision in State of Gujarat v. Amber Builders declaring Gangotri Enterprises per incuriam — and held that Kamaluddin Ansari does allow withholding of amounts due under one contract for claims under another, but only where the relevant contract clause and the same contracting relationship permit this.
  • Distinguishing the facts, the Court found that the bank guarantees here were furnished by the petitioner for its own separate contract with FCI (Respondent No. 1), while the claimed losses arose from an entirely different contract between Respondent No. 4 (a different contractor) and Respondent No. 1 — meaning the guarantees could not be invoked to cover a stranger's alleged breach.
  • The Court held that doing so would cause irretrievable loss to the petitioner, who had successfully completed its own work.
  • The writ petition was allowed: the impugned letter dated 29.09.2022 was set aside, and FCI was restrained from encashing the bank guarantees for losses caused by Respondent No. 4 under the separate contract, without costs.

Important Clarification

This is a contract-law and bank-guarantee ruling with no GST content — the amounts and guarantees discussed relate purely to a food-grain handling and transport contract dispute. It is included here for completeness and correction only, and offers no guidance on any GST question.

Sections Involved

  • Section 41(b), Arbitration and Conciliation Act, 1996 (as discussed through case law on interim relief)
  • Article 226, Constitution of India, 1950

Decision – In Favour of

Decided in favour of the petitioner; FCI was restrained from encashing the bank guarantees, and the impugned encashment letter was set aside. No GST issue was involved or decided.

Case Details

  • Court: High Court for the State of Telangana at Hyderabad
  • Case No.: Writ Petition No. 37926 of 2022 (with connected IA Nos. 1 and 2 of 2022)
  • Coram: Hon'ble Sri Justice K. Lakshman
  • Date of Order: 30 January 2023

Link to Download the Order

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