The Karnataka High Court has stepped in to protect a Bengaluru-based infrastructure company from being penalised for a fraud it did not commit. In a detailed order, the court ruled that while Indian Railways was justified in cancelling the tender, it could not impose liquidated damages or debar the company from future tenders merely because a forged bank guarantee had surfaced during the bidding process.
Background of the Case
The petitions were filed by M/s DRN Infrastructure Pvt. Ltd., which had participated in railway tenders floated by South Western Railway. After the bids were submitted, the Railways discovered that the bank guarantees furnished by the company were fake.
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Based on this discovery, the Railways terminated the tender process, encashed the bid security, and indicated that further action could follow under tender clauses that allow blacklisting and recovery of damages in cases involving fraud.
The company moved the High Court, challenging not the termination itself, but the threatened levy of liquidated damages and the possibility of being barred from future railway tenders.
What the Company Told the Court
Senior counsel appearing for DRN Infrastructure argued that the company was itself a victim of fraud. According to the submissions, the firm had relied on third-party agents to arrange bank guarantees. It was only after the Railways raised doubts that the company realised the guarantees were forged.
“The petitioner was shocked to learn that the guarantees were fabricated,” the counsel submitted, pointing out that the company had already lodged a criminal complaint in Mumbai against the alleged fraudsters.
The investigation, the court was told, revealed a larger scam. Nearly a dozen companies had allegedly been cheated using similar forged guarantees, with the charge sheet naming other individuals as the masterminds. Importantly, neither the company nor its officials were listed as accused.
Railways’ Stand
Opposing the plea, the Railways argued that the tender conditions were clear. Once a fake bank guarantee was submitted, the authorities were entitled to invoke clauses allowing forfeiture, damages, and even debarment, regardless of whether the bidder was personally involved in the fraud.
The Railways maintained that allowing bidders to escape consequences would weaken the integrity of the tendering process.
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Court’s Observations
After hearing both sides, the bench of Justice Suraj Govindaraj framed a narrow but crucial question: whether the contractor could be said, even on the face of it, to be involved in the fabrication of the bank guarantees.
The court noted that the criminal case had been initiated by the company itself and that the charge sheet did not allege any role played by the petitioner in creating or procuring forged documents.
“There is no particular allegation against the petitioner having indulged in such activities,” the court observed, adding that the fraud appeared to have been carried out by third parties.
The judge also took note of the fact that the company had already lost its bid security and had given up the tender without protest, which, in the court’s view, demonstrated its bona fides.
Wider Concern Flagged
During the hearing, the Additional Solicitor General drew attention to a broader issue the growing number of cases involving fake bank guarantees in public procurement.
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The court acknowledged this concern, observing that such frauds pose a serious risk to public funds and institutional trust. While refraining from issuing binding directions, the judge suggested that authorities examine technological solutions such as digital verification systems and secure authentication mechanisms to prevent recurrence.
Decision
Allowing the writ petitions, the High Court quashed the Railway notices only to the extent they sought to levy liquidated damages or debar the company from future tenders.
At the same time, the court made it clear that the termination of the tender would continue to stand and that the forfeiture of the bid security would not be reversed.
With these directions, the petitions were disposed of, marking a clear line between cancelling a tainted bid and punishing a bidder who was found to be an unwitting victim of fraud.
Case Title:- M/s DRN Infrastructure Pvt. Ltd. vs Union of India & Others
