Bombay High Court Upholds Termination of Central Railway Contract Over Forged Bank Guarantees, Reaffirms Principle That Fraud Vitiates All Transactions

Court’s Decision:

The Bombay High Court dismissed the writ petition filed under Article 226 of the Constitution challenging the termination of a contract and the alleged breach of natural justice. The Court upheld the termination, citing the petitioner’s submission of forged bank guarantees as a grave and irremediable breach of trust. It concluded that fraud vitiates all transactions and that the respondents’ actions were consistent with the terms of the contract and legal principles.

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Facts:

1. The petitioner, a joint venture company, was awarded a contract by the Central Railway for developing critical railway infrastructure.
2. As part of the contractual obligations, the petitioner submitted performance bank guarantees totaling ₹7.66 crores and additional guarantees for mobilization advances.
3. Upon re-verification by IDBI Bank and Yes Bank, the guarantees were found to be forged.
4. The respondents issued multiple show-cause notices to the petitioner, alleging fraud and seeking a response, which the petitioner failed to adequately provide.

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Issues:

1. Whether the termination of the contract based on forged bank guarantees was lawful.
2. Whether the respondents breached principles of natural justice in terminating the contract.

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Petitioner’s Arguments:

1. Claimed that the absence of its director delayed the verification process and sought extensions to reply to the show-cause notices.
2. Argued that the respondents failed to issue proper notice under Clause 62 of the General Conditions of Contract (GCC) before terminating the agreement.
3. Alleged double jeopardy in imposing penalties under Clause 17B while also terminating the contract.
4. Contended that the extension of the project timeline implied the contract remained valid despite the allegations.

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Respondent’s Arguments:

1. Emphasized that the forgery of bank guarantees was an irreparable breach that justified contract termination under Clause 62 of the GCC.
2. Argued that procedural safeguards, including multiple show-cause notices, were provided, ensuring compliance with principles of natural justice.
3. Stated that fraud undermined the sanctity of the contract and disqualified the petitioner from seeking relief under constitutional remedies.

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Analysis of the Law:

1. Clause 62 of GCC: The provision allows termination of contracts in cases of non-compliance or fraudulent acts such as submission of forged documents.
2. Fraud and Legal Precedents:
   • Fraud vitiates all solemn acts (S.P. Chengalvaraya Naidu vs. Jagannath, 1994).
   • Procedural safeguards are secondary when fraud is admitted and irremediable.
3. Natural Justice: The Court held that the issuance of four show-cause notices provided sufficient opportunity to the petitioner to address allegations.

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Precedent Analysis:

1. Sudhir Kumar Singh (2021): Established that procedural lapses do not invalidate decisions if the affected party admits the core allegations and no prejudice is caused.
2. Khushee Construction Case: Distinguished on the grounds that it involved an innocent third-party error, unlike the deliberate fraud in this case.

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Court’s Reasoning:

1. The petitioner admitted the forgery of bank guarantees, eliminating any scope for rectification under Clause 62.
2. Fraud is an irremediable breach that fundamentally disrupts the trust required for contractual relationships.
3. Procedural compliance by the respondents, including the issuance of multiple notices, negated claims of natural justice violations.
4. The extension of project timelines was procedural and did not nullify the termination based on fraud.

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Conclusion:

The Court found no merit in the petitioner’s claims and upheld the termination of the contract. It ruled that the admitted fraud disqualified the petitioner from seeking equitable relief under Article 226. The writ petition was dismissed, with the Court reiterating that fraud vitiates all transactions. No costs were imposed.

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