State vs J.C. Gammon Ltd. and Others

Vithayathil, J.—The first Defendant State is the Appellant. The suit was filed by the Plaintiff company under the following circumstances: The second Defendant was the Resident Engineer appointed by the State in respect of the Pallivassal Hydro-Electric Scheme. In December 1837, he invited tenders for the construction of a Movable Weir and Main Intake. Clause 1(a) of the tender notification provided that the under should be accompanied by an earnest money of Rs. 10,000/- in cash or Government of India Pronotes or other security approved by the Chief Engineer. It was also provided that in the case of a successful tenderer entering into an agreement with the Government this amount would be credited towards the security required to be deposited by him and that in the case of unsuccessful tenderers the money would be returned. On 19th January 193.9, the Plaintiff company sent a tender in1 due form to the second Defendant along with a draft for Rs. 10,000/-1 drawn in favour of the Diwan by the Bombay Branch of the Travancore National and Quilon Bank Ltd., on its Trivandrum Main Raod Branch. The tender and the draft were received by the second Defendant.

On 16th February 1938, the second Defendant called for certain details relating to the work and the Plaintiff supplied the same. As certain conditions of the contract and schedule of terms were subsequently altered the second Defendant wrote to the Plaintiff on 25th May 1938 that it was decided to call fresh tenders and that the earnest money which had been sent along with the previous tender would be accepted as earnest money for the fresh tender. The second Defendant did bring to the notice of the Government the fact that a draft had been sent by the Plaintiff company drawn in the name of the Diwan and consequently the draft was not cashed by the first Defendant.

The Travancore National and Quilon Bank v. Ltd., suspended business on the 20th June 1938. On 21st June 1933, the then Resident Engineer returned the draft to the Plaintiff asking the Plaintiff to make fresh earnest money deposit along with the fresh tender. The Plaintiff replied that the draft sent by them ought to have been cashed in time by the Government and returned the same to the Resident Engineer. In February 1939, the Resident Engineer again returned the draft to the Plaintiff and also informed them that the work had been otherwise arranged for. Therefore, the Plaintiff file this suit claiming the amount covered by the draft from the first Defendant and alternatively from the second Defendant. The Plaintiff also moved for the appointment of a receiver for collecting the dividend from the liquidation Court in respect'' of the amount covered by the draft.

The first Defendant contended that the earnest money deposit made by the Plaintiff in the form of a draft was not sanctioned by the terms of the tender notification, that the second Defendant had no authority to accept it as earnest money, that the first Defendant is not bound by the unauthorised act of the second Defendant in accepting the draft as earnest money, that the first Defendant has not accepted the draft and was, therefore, not bound to cash it and that the first Defendant was not liable to the Plaintiff for the amount covered by the draft. The second Defendant contended that although he received the tender and the draft sent by the Plaintiff the draft was not approved by the Chief Engineer as proper earnest money deposit, that the draft was returned when the tender was not accepted and that he is not liable for damages.

The Court below found that the draft was accepted by the second Defendant as proper earnest money deposit, that the second Defendant had authority to receive the draft as earnest money, that the first Defendant is bound by the act of the second Defendant that the first Defendant is liable to the Plaintiff for damages for not cashing the draft in time. The second Defendant was, however, not made liable for the plaint claim since the Plaintiff claimed relief primarily against the first Defendant. The Court below, therefore, gave the Plaintiff a decree against the first Defendant for the plaint amount and costs of the suit. The Court had appointed a receiver to collect the dividend in respect of the amount covered by the draft from the liquidation Court. It was directed that the amounts collected by the receiver should be credited towards the plaint claim.

The first Defendant has appealed from this decree. The Plaintiff has not appealed from that portion of the decree which made the second Defendant not liable for the plaint claim. We do not, therefore, think it necessary to decide in this appeal whether the second Defendant is liable to the Plaintiff for the plaint claim. The only question to be decided in this appeal is whether the first Defendant State is liable to the Plaintiff for the amount claimed in the plaint.

It is seen from the tender notification, Ex. VIII, that a draft was not one of the approved forms of earnest money deposit. Only cash deposits or Government of India Pronotes or other security approved by the Chief Engineer were recognised as valid earnest money deposits. The Plaintiff has no ease that a draft was approved by the Chief Engineer as a proper form of earnest money deposit. It is, therefore, clear that the second Defendant had no authority to accept the draft as earnest money. There is nothing to ''show that this unauthorised act of the second Defendant was subsequently ratified by the first Defendant or that the first, Defendant at any time accepted the draft. We have given our reasons in the judgment in A.S. No. 598 of 1122 in which the Plaintiff and the first Defendant are parties for holding that the acceptance of the draft by the second Defendant would not bind the first Defendant State. We do not think it necessary to discuss the question again in this case. A copy of the judgment in A.S. No. 593/22 will be appended to this judgment.

For the reasons given by us in that judgment we hold that the acceptance of the draft by the second Defendant does not amount to an acceptance by the first Defendant. The Chief Engineer was informed of the fact that the second Defendant had accepted the draft as earnest money only when the then Resident Engineer wrote to the Chief Engineer the letter, Ex. IV, on 7-7-1938 and it was only when the Chief Engineer sent the letter, Ex. E to the Financial Secretary to the Government on 7-7- 1938 that Government knew about the matter. It will thus be seen that there was no occasion for the Diwan to accept the draft. So long as the Diwan had not accepted the draft lucre was no obligation on his part to cash it. Therefore, Section 74, Negotiable Instruments Act, will not apply to this case. According to the terms of the tender notification the Plaintiff was entitled to get back the earnest money if the tender was not accepted. The draft was returned to the Plaintiff when his tender was not accepted by the Government. In the circumstances we do not think that the first Defendant can be made liable to the Plaintiff for failure to cash the draft as soon as it was received by the second Defendant. We have held in A.S. No. 598 of 1122 that the State cannot be made liable for damages on account of an unauthorised act on the part of a public servant. In this case also the Plaintiff could have claimed the whole amount covered by the draft from the liquidation Court. The first Defendant cannot be made liable to the Plaintiff for any loss caused by the Plaintiff''s failure to make such a claim. We therefore hold that the first Defendant State is not liable for the plaint claim.

As for costs, we think it proper that in the circumstances of this case both parties should be directed to bear their costs.

We, therefore, set aside the judgment and decree of the Court below and dismiss the suit in so far as it relates to the claim against the Defendants for the plaint amount. The receiver appointed by the Court will, however, continue and the amounts collected by him from the liquidation Court in respect of the claim under the draft will be deposited in Court for payment to the Plaintiff. Both parties will suffer their costs throughout. The appeal is allowed in the manner stated above.

(The judgment in A.S. No. 598 of 1122 referred to in para 6 above is given below)

JUDGMENT: The Defendant State is the Appellant. The suit is for return of earnest money deposited by the Plaintiff along with a tender given by the Plaintiff for the construction of the Kozhencheri Bridge. The Plaintiff is a construction company in Bombay. The Chief Engineer of the erstwhile Travancore State published a notification in November 1937 inviting tenders for the construction of the Kozhencheri bridge. The relevant terms of the notification were that the tender should reach his office not later than 3 P.m. on 17-1-1938 and that the tender should be accompanied by an earnest money deposit certificate of Rs. 3000 in the form of interest-bearing Travancore Government Securities or Travancore Saving Bank Deposits. The Plaintiff company sent a tender from Bombay on 15-1-1938 enclosing therewith a draft from the Bombay branch of the Travancore National and Quilon Bank Ltd., for Rs. 3000 drawn on its Trivandrum Main Road branch in favour of the Diwan of Travancore. The Plaintiff also sent an express telegram to the Chief Engineer on 15-1- 1938 itself informing the latter that a tender has been posted by the Plaintiff. It is seen that this tender was received in the Chief Engineer''s office on 20-1-1938, but it happened to be misplaced and was not brought to the notice of the Chief Engineer. There was only one tender received within the due date and that was of Messrs. Dharm Singh Dutta, Burma.

In the meanwhile, there was a new proposal to construct the bridge with treated timber and Government ordered on 8-1-1938 that the sale of tender forms might be stopped. But at the same time they directed that .the tender notification need not be cancelled. On 2-2-1938 Government directed the Chief Engineer to inform the tenderers that they would be given the option of either allowing the earnest money to remain with Government as earnest money deposit or to withdraw it for being deposited when fresh tenders would be called for or an extension of time would be granted. It is seen that Messrs. Dharm Singh Dutta alone were informed of this order of Government. Their earnest money was returned to them as requested by them.

Subsequently, the representative of the Plaintiff company made enquiries relating to their tender, and as a result of the search made in the Chief Engineer''s Office the cover containing the tender and the draft was recovered from the table of the Head Draftsman on 14-3-1938, and they were kept in the office. As the question of the construction of the bridge was not finally decided no further action was taken in the matter by the Chief Engineer. The Travancore National and Quilon Bank Ltd. suspended payment on 20-6-1938 and was subsequently ordered to be wound up. After that the Plaintiff company called for a certificate from the Chief Engineer for the earnest money sent by them in the form of the draft. Such a certificate was sent by the Chief Engineer on 30-8-1938. Ex. E is that certificate. It was to the following effect:

This is to confirm that tender deposit of Rs. 3000 in respect of the proposed R. O. C. bridge across the Pumba River at Kozhencheri is held by me on account of Messrs. J. C. Gammon Ltd., Bombay, as at 30th April, 1938.

On 23-11-1939 the Plaintiff sent a letter to the Diwan requesting the return of the earnest money The Chief Secretary to Government forwarded the letter to the Chief Engineer. The Plaintiff sent a further letter to the Diwan on 21-12-39 reiterating their demand. That also was forwarded by the Chief Secretary to the Chief Engineer. The Chief Engineer wrote to the Plaintiff on 23-12-1939 returning the draft. But the Plaintiff''s solicitors sent it back to the Chief Engineer on 5-1-1940 claiming the amount covered by the draft. A similar letter was sent by them to the Chief Secretary also. At the request of the Plaintiff the Chief Engineer sent Anr. certificate on 9-1-1940 to the following effect:

This is to certify that the tender deposit of Rs. 3000 (three thousand) in respect of: R.C.C. bridge across the Pumba river at Kozhencheri was held by me on account; of Messrs. J.C. Gammon Ltd., Bombay, on 29-4-39. This has since been returned to the from on 29-12-1939.

On 9-1-1940 itself the Plaintiff''s solicitors wrote Anr. letter to the Chief Secretary to Government demanding payment of the amount and intimating ''that the draft was being held at the disposal of Government for the purpose of making a claim in the Liquidation Court. Government refused to make a claim in the Liquidation Court and returned the draft to the Plaintiff on 29-1-1940. Plaintiff thereupon filed this suit for the return of Rs. 3000 with interest. The Plaintiff also moved for the appointment of a receiver for the purpose of making a claim .in the Liquidation Court in respect of the amount covered by the draft. A receiver was accordingly appointed by the Court and he preferred a claim for the amount covered by the draft. It is reported that the creditors of the Bank have realised till now about 14 annas in the rupee and that it is expected that they will be able to get some more dividend.

The Defendant contended that the tender made by the Plaintiff was not valid as it was not received in the Chief Engineer''s Office within the prescribed time and as earnest money was not sent in the manner prescribed in the tender notification. According to the notification only interest-bearing Travancore Government Securities or Travancore Savings Bank Deposits- could be sent as earnest money deposit. The Chief Engineer had no authority to accept a draft as earnest money deposit. Government was not bound to accept the draft as earnest money, and the Diwan has not accepted it, and therefore there was no obligation on the part of the Diwan to cash the draft. It was also contended that the Government was not responsible for any wrongful act of negligence on the part of the Chief Engineer. Government, therefore disclaimed liability for the plaint claim.

The Court below found that although the Plaintiff''s tender was not in accordance with the terms of the tender notification, the Chief Engineer accepted it as valid and that the State is estopped from contending that the tender was not valid. It was also held that the Chief Engineer accepted the draft as proper earnest money deposit, that the Government is estopped from extending that the Chief Engineer had no authority to accept the draft, that the Chief Engineer was acting as the authorised agent of the Defendant and that the Defendant is, therefore, liable to make good the damage suffered by the Plaintiff on account of the negligence of the Chief Engineer. The Defendant was accordingly held liable for the amount claimed by the Plaintiff and the suit was decreed with costs.

The main arguments advanced on behalf of the Defendant in this appeal were that the tender made by the Plaintiff was not valid since it did not comply with the terms of the tender notification and that in any case the State is not liable to the Plaintiff for a misfeasance or nonfeasance on the part of the Chief Engineer. It was argued that the Chief Engineer had no authority to accept a tender which was received after the due date and which was not accompanied by an earnest money deposit in the form prescribed in the tender notification. It was also contended that the Chief Engineer had no authority to accept a draft as proper earnest money deposit. We do not think that; it is necessary to decide in this case whether the Plaintiff had made a valid tender. Admittedly the Plaintiff''s tender was not accepted either by the Chief Engineer or by the Government. The suit is only for return of the earnest money. Whether the tender was valid or not the Plaintiff is entitled to get back the earnest money. The only question for consideration is whether the Plaintiff is entitled to get the money covered by the draft or only to get back the draft. It is admitted that the draft was returned to the Plaintiff. The damage incurred by the Plaintiff was due to the failure to cash the draft within a reasonable time. The real question, therefore, for consideration is whether the State is liable to the Plaintiff for the failure to cash the draft within a reasonable time after it was sent by the Plaintiff to the Chief Engineer.

Section 74 of the Negotiable Instruments Act provides that a negotiable instrument payable on demand must be presented for payment within a reasonable time after it is received by the holder. If, therefore, owing to the failure of the holder of a draft to cash it within a reasonable time after its acceptance, the amount covered by the draft cannot be realised, the holder will be responsible for the loss caused by such failure. The person in whose favour the draft was drawn in the present case was the Diwan. But he had not however, accepted it. There is nothing to show that the Diwan knew about this draft before the Plaintiff wrote to him on 23-11-1939. The letter sent by the Chief Secretary to the Chief Engineer, Ex. VII, dated 30-11-1939 shows that the Government knew about the draft only after the Plaintiff''s letter dated 23-11-1939 was received by the Diwan. The Bank had stopped payment, as stated above, on 20-6-1938.

In the letter, Ex. N, sent by the Chief Secretary to Government to the Plaintiff''s solicitors on 6-3-1940 this is what is stated:

The draft has not been accepted by the Diwan at any time, and it is, therefore not considered proper for him to endorse the draft to your clients. Such endorsement can be made only by one who at the time of endorsement is the owner of the draft. Your clients may themselves therefore, without prejudice to their contentions, prefer their claim as on a draft returned to them without acceptance.

So long as there is nothing to show that the Diwan accepted the draft it cannot be said that he was under an obligation to cash it. We do not, therefore, think that Section 74, Negotiable Instruments Act, applies to this case so far as the State is concerned.

The further question for consideration is whether the Defendant State is bound by the acceptance of the draft by the Chief Engineer, as earnest money deposit. It cannot be seriously contended that the Chief Engineer did not accept the draft as earnest money deposit. The certificate, Ext. E, issued by the Chief Engineer clearly shows that the draft was accepted by him as earnest money deposit. Will this acceptance by the Chief Engineer amount to an acceptance by the Diwan? The terms of the tender notification clearly show that the Chief Engineer had no authority to accept a draft as earnest money deposit. It was therefore an unauthorised act on the part of the Chief Engineer to have accepted the draft as earnest money deposit. We do not think that the State is bound by this unauthorised act on the part of its officer. The position of a public servant is different from that of an ordinary agent.

The question is dealt with by Story in his Commentaries on the Law of Agency. The learned author says thus at page 374 (9th Edition):

In respect to the acts and declarations and representations of public agents, it would seem that the same rule does not prevail which ordinarily governs in relation to mere private agents. As to the latter (as we have seen) the principals are in many cases bound, where they have not authorised the declarations and representations to be made. But in cases of public agents the Government or other public authority is not bound, unless it manifestly appears that the agent is acting within the scope of his authority or is held out as having authority to do the act or is employed in his capacity as a public agent to make the declaration or representation for the Government. Indeed, this rule seems indispensable in order to guard the public against losses and injuries arising from the fraud or mistake or rashness or indiscretion of their agents and there is no hardship in requiring from private persons dealing with public officers the duty of inquiring as to their real or apparent power and authority to bind the Government.

In - ''Lee v. Munroe'' 7 Cranch 366 referred to by the learned author a Statute limiting the amount of an expenditure was held to be notice in law and in fact to the contractor that the officers of the Government cannot exceed the prescribed bounds and it was held that if those bounds are exceeded the claimant must be deemed to have gone beyond the fixed limit at his own risk. In - ''Lyon v. Adamson'', Anr. decision referred to by the learned author, (7 Clarke 10 W A 509 (sic)) the law was laid down thus:

By the law of agency at the common law there is this difference between the individuals and the Government; the former are liable to the extent of the power they have apparently given to their agents, while the Government are liable only to the extent of the power it has actually given to its officers.

In - ''Collector of Masulipatam v. Cavaly Venkata Narainapah'' 8 Moo Ind App 529 (PC) it was observed by their Lordships of the Privy Council that 1953 ''the acts of a Government officer bind the Government only when he is acting in the discharge of a certain duty within the limits of his authority, or, if he exceed that authority, when the Government in fact, or in law, directly or by implication, ratifies the excess.

This principle was affirmed by Bhashyam Ay- yangar J. in-''Secy. of State v. Kasturi Reddy'' 26 Mad 268 . In - AIR 1943 18 (Federal Court) Varadarachariar J. observed thus:

It has always been recognised that even in determining questions involving the relationship of a public servant to the Crown and the liability of the State for acts of public officers the principles of the ordinary law of agency cannot be applied except with considerable qualifications.

In - ''Gurucharan Kaur v. Province of Madras'' 1944 FLJ 115 the same learned Judge held that the State cannot be held liable for the wrongful acts of public servants unless these acts had been done under the orders of the Government or had been subsequently adopted and ratified by it. Applying this principles, we hold that the acceptance of the draft by the Chief Engineer, which he was not authorised to do under the terms of the tender notification, cannot bind the State.

The Court below had relied on Ext. XIX, a letter sent by the Chief Secretary to Government to the Chief Engineer on 25-1-1940 for holding that the Defendant has admitted that a draft could be accepted as earnest money deposit and that the Defendant is estopped from contending otherwise. The relevant portions of that letter may be extracted:

There is no liability that can attach to Government either in respect of the draft received in flagrant defiance of the tender notification or by reason of a certificate ''ex post facto''... In this connection Government observes that this is Anr. instance of inexcusable negligence on the part of the P. W. D. in accepting a cheque in lieu of cash when it is elementary law that a cheque is not a proper tender. Further any officer who accepts a cheque does so on his own risk. There may be cases in which a cheque may be accepted but this is certainly in cases where the solvency of the constituents are beyond question. Even in such cases a cheque may be temporarily accepted but it should be cashed within three days. It is not clear why these elementary precautions of insisting on cash or Government security were ignored in this case.

We do not think that this letter in any way amounts to an admission by the Defendant that the Chief Engineer had authority to accept the draft in question as earnest money deposit or that the Defendant is estopped from contending that the Chief Engineer had no such authority. It is expressly stated that an officer who accepts a cheque in lieu of cash does so on his own responsibility. The question whether the Chief Engineer had authority to accept the draft will have to be decided on the basis of the terms of the tender notification. Those terms made it clear that he had no such authority. There is nothing to show that Government ratified his unauthorised act.

On the other hand, as soon as Government came to know that the Chief Engineer had accepted the draft, Government made it clear that they would not be bound by the unauthorised act of the Chief Engineer and that they would not accept the draft. We are, therefore, of opinion that Government cannot be made liable to the Plaintiff for the unauthorised act of the Chief Engineer. The Chief Engineer was not made a party to the suit and no relief was claimed against him in the suit although in a similar suit instituted by the Plaintiff against the State, namely, O.S. No. 42 of 1115, of the Trivandrum District Court, the Resident Engineer who accepted a draft sent by the Plaintiff as earnest money deposit was made a Defendant and relief was claimed against him.

Another aspect of the case which was not considered by the Court below is that the Plaintiff would not have been put to any loss by reason of the failure on the part of the Defendant to cash the draft in time if a claim was made in the liquidation Court for the whole amount, since the Plaintiff would be entitled to priority for the amount covered by the draft over the other creditors of the Bank. When a person deposits a sum of money in one branch of a Bank for payment through Anr. e branch and gets a, draft drawn on the latter branch his position in relation to the bank is not that of an ordinary creditor. The bank will be only an agent for transferring the money and consequently will be in the position of a trustee. Reference may be made in this connection to Ghosh on Indian Company Law (1951 Edn.), pp. 659 and 660.

The learned author says:

When a bank collects a cheque, bill or any other document, it may do so as a holder for value or a mere agent of the holder for the purpose of collection. In the latter case the proceeds of the cheque are held by the Bank as trustee for the holder of the cheque. When the holder of the cheque or claimant has no account with the bank the latter is only an agent for collection. The Bank does not cease to be a trustee in respect of the money realised by sending a draft in payment thereof, and the party by accepting the draft as a conditional payment does not consent to accept the Bank as his creditor. Where the Bank has suspended payment before the receipt by it of the amount of such cheques etc., the bank holds the money as a trustee for the customer irrespective altogether of the consideration whether or not the latter had an account with the bank on the date of the receipt of the money and whether or not the money has been credited to the account. Unless and until the proceeds of such cheques etc.; have actually been certified to the customer''s account under the latter''s express or implied authority, the relationship of debtor and creditor does not come into existence and the bank holds as trustee, as the customer''s agent. The mere circumstance that the customer was, the bank''s constituent at the relevant time and had an account with him to which the proceeds could properly have been credited is not enough to create a relationship of debtor and creditor. In such a case, the money was trust money and therefore could not form part of general assets of the Bank and was payable to priority to the general body of creditors.

Reference may also be made to Bhasyyam and Adiga''s Negotiable Instruments Act, 1950 Edn, page 188 where the learned authors observe thus:

Where a certain sum was handed to a bank for remitting it by telegraphic transfer to Anr. place but the money was not transferred or credited in the cui*rent account but on that very day the bank suspended payment the money must be deemed to be the j property of the person depositing it who would be entitled to preferential payment.

At page 413 it is stated thus:

If the sole object of obtaining the draft by paying money into the bank and the express, purpose is utilizing the bank as a machine for transmitting money and for payment at the other end to the payer himself or to a nominee of the payer, the bank stands in the relationship of an agent of the payer and hence acts in a fiduciary capacity. Consequently if the Bank fails, the payer will be entitled to preferential payment.

It is, therefore, clear that the Plaintiff would have been entitled to get the whole amount covered by the draft if a claim was preferred for that purpose in the liquidation Court. The Defendant cannot be held responsible for the failure on the part of the Plaintiff to make such, a claim. In this view of the case also the Defendant cannot be held liable to the Plaintiff for any damages.

The decree of the Court, below malting the Defendant liable to the Plaintiff for the plaint claim has, therefore, to be set aside. As. it is necessary that the receiver appointed in the case should be allowed to collect the dividend due to the Plaintiff from the liquidation Court the suit cannot be dismissed in its entirety. The receiver will realise the dividend due to the Plaintiff and the amount so realised will be deposited in Court for payment to the Plaintiff.

As for costs, we think that in the circumstances of this case both parties should be directed to suffer their costs both here and in the Court below. It is evident that although the Plaintiff was not justified in sending a draft to the Chief Engineer, as earnest money deposit the suit was necessitated by the negligence on the part of the officers of the State. The tender and the draft were misplaced in the office of the Chief Engineer and when they were subsequently discovered the Chief Engineer accepted the draft as a valid earnest money deposit and informed the Plaintiff that the money was kept by him as earnest money to the credit of the Plaintiff. The Plaintiff had no reason to suspect that the draft was not cashed. The draft was kept in the office of the Chief Engineer for about two years. Subsequently when the Plaintiff requested the Defendant to prefer a claim in the liquidation Court as the draft had been drawn in the name of the Diwan, the Defendant refused to comply with this request. When the Plaintiff suggested that the draft might be endorsed in favour of the Plaintiff by the Defendant ''without recourse so that the Plaintiff might prefer a claim in the Liquidation Court that request also was not acceded to. In the circumstances, we think that it is only proper that the Defendant State should be directed to suffer its costs.

We, therefore, set aside the decree of the Court below and dismiss the suit so far as the relief against the Defendant is concerned. The Receiver appointed in the case will, however, continue and realise the dividend due to the Plaintiff in respect of the amount covered by the draft and deposit the same in Court for payment to the Plaintiff. Both parties will suffer their costs throughout. The appeal is allowed in the manner stated above.