M/S. Sri Siva Sai Enterprises vs. The Food Corporation Of INDIA

Facts

M/s. Sri Siva Sai Enterprises (Petitioner), a partnership firm, entered into a Handling and Transportation agreement with the Food Corporation of India (FCI) for work at FSD, Peddapally, from June 16, 2020, to June 15, 2022. As security, the Petitioner submitted two bank guarantees totaling Rs. 8,80,000/- dated August 14, 2020. The Petitioner claims to have successfully completed the work. Subsequently, FCI (Respondent No. 2) sought to encash these bank guarantees on September 29, 2022, to recover alleged losses from another contract awarded to M/s. Sri Siva Sai Agencies (Respondent No. 4), a proprietorship firm run by Respondent No. 5, who is also a partner in the Petitioner firm. The Petitioner contends that Respondent No. 4's contract at PWS, Nagunoor, was terminated due to non-submission of security deposit, and FCI seeks to recover these losses from the Petitioner's bank guarantees.

Held

The Court allowed the writ petition, setting aside the impugned letter dated September 29, 2022, issued by Respondent No. 2 to Respondent No. 3. The Court held that the Petitioner, M/s. Sri Siva Sai Enterprises, is a distinct legal entity and cannot be held liable for the alleged breaches of Respondent No. 4 in relation to a separate contract. The Court reasoned that the bank guarantees submitted by the Petitioner were for the work performed by it under its own contract with FCI and could not be invoked for breaches committed by another contractor. The Court emphasized the principle of separate legal entity and the doctrine of privity of contract, citing precedents like Indowind Energy Ltd. v. Wescare (I) Ltd. and M.C. Chacko v. State Bank of Travancoree. The Court found that encashing the Petitioner's bank guarantees for losses in another contract would result in irretrievable loss to the Petitioner, which had successfully completed its own contractual obligations. FCI was restrained from encashing the said bank guarantees.

Key Issues

1. Whether the Petitioner, M/s. Sri Siva Sai Enterprises, a separate partnership firm, can be held liable for alleged losses incurred by M/s. Sri Siva Sai Agencies (a proprietorship firm) in a separate contract, merely because Respondent No. 5 is a partner in both entities, thereby justifying the encashment of bank guarantees submitted by the Petitioner for its own contract? (Question of law and fact, turning on principles of separate legal entity, vicarious liability, and contractual privity). Contentions: Petitioner: Argued that it is a distinct legal entity from Respondent No. 4 and cannot be held liable for the latter's contractual breaches. Relied on the principle that common partners do not make entities liable for each other's acts and cited Gangotri Enterprises Ltd. v. Union of India and Indowind Energy Ltd. v. Wescare (I) Ltd. Further argued that the doctrine of privity of contract applies, as the Petitioner was not a party to the contract between Respondent No. 4 and FCI, and thus cannot be liable for its non-performance. Cited M.C. Chacko v. State Bank of Travancoree. Revenue/State (FCI): Contended that it is entitled to encash bank guarantees submitted for one contract to recover losses from another contract, citing clauses in the agreement and relying on the relationship between the Petitioner and Respondent No. 4 through Respondent No. 5.