2337D
IN THE
LEARNED HIGH COURT OF KERALA
________________________________________________________________________________
IN THE MATTERS OF
CAPITAL SURE LTD...................................................................................PLAINTIFF
v.
STELLAR HOLDINGS.........................................................DEFENDANT
CIVIL SUIT NO. XXXX/2025
[Under order viii rule 1 of the code of civil procedure,1908]
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MEMORIAL ON BEHALF OF THE DEFENDANT
DRAWN AND FILED BY THE COUNSEL FOR THE DEFENDANT
INDEX OF AUTHORITIES
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STATEMENT OF FACTS
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NovaInfra Pvt. Ltd., a leading Indian infrastructure firm, partnered with MetroSmart Corp., a
multinational urban development company, to construct a high-speed rail corridor between Mumbai
and Pune. To ensure financial security, NovaInfra secured a performance bond from CapitalSure
Ltd., a global insurance provider, with Stellar Holdings, NovaInfra’s parent company, providing a
counter-indemnity to CapitalSure.
During negotiations, MetroSmart highlighted the project's inclusion in a government-backed Smart
Mobility Initiative, promising expedited approvals and financial incentives. However, it also
imposed strict deadlines and additional construction requirements, which NovaInfra reluctantly
accepted despite concerns about their feasibility.
Although NovaInfra completed the project on time and within budget, MetroSmart raised concerns
over minor deviations from agreed construction standards, alleging potential long-term
inefficiencies. It invoked the performance bond, leading CapitalSure to compensate MetroSmart as
per its contractual obligations. However, when CapitalSure sought reimbursement from Stellar
Holdings under the counter-indemnity agreement, Stellar Holdings refused, arguing that:
1. The invocation of the bond was unjustified, as the deviations were minor and did not
materially impact the project.
2. MetroSmart exerted undue pressure during negotiations, making the agreement unfair and
unenforceable under the doctrine of "special inequity."
3. CapitalSure failed to conduct proper due diligence before approving MetroSmart’s claim,
making its payout unreasonable.
Following this dispute, CapitalSure filed a suit in the Bombay High Court, seeking enforcement of
the counter-indemnity agreement and reimbursement from Stellar Holdings.
Hence, the present matter before this learned Court.
STATEMENT OF JURISDICTION
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The Counsel for the Defendant most humbly and respectfully submits that this Learned High Court
of Bombay has the requisite jurisdiction to hear and to adjudicate upon the present matters of Civil
Suit no. XXXX of 2025 filed under order VIII Rule (1) of the Civil Procedure Code, 1908.
The parties most humbly submit to the jurisdiction of this learned Court.
ISSUES FOR CONSIDERATION
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I. Whether MetroSmart’s invocation of the performance bond
was justified, considering the minor deviations from agreed
construction standards.
II. Whether CapitalSure acted in good faith by honouring
MetroSmart’s claim or should have conducted further verification
before making the payout.
III. Whether the counter-indemnity provided by Stellar Holdings
is enforceable given the alleged undue influence and "special
inequity" in contract negotiations.
SUMMARY OF ARGUMENTS
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ARGUMENTS ADVANCED
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I. METROSMART’S INVOCATION OF THE PERFORMANCE BOND WAS
UNJUSTIFIED
A. NovaInfra Fully Performed Its Obligations Under the Contract
1. Substantial performance permits a party to satisfy their contractual obligations even if every
detail isn’t perfectly met, provided that the essential purpose of the contract is achieved.
Under it, minor deviations from the contract that don’t impact the core objective of the
agreement may still satisfy contractual obligations, such as in construction or service-based
contracts. The they must be such that do not defeat the contract’s essential purpose so as to
maintain fairness for both parties while honouring the general intent of the agreement.
(citation).
2. The court in the case of Bolton v. Madden (1873-74) LR 9 QB 55). held that substantial
performance means fulfilling the main obligations of the contract, even if there are minor
defects. However, if the defects are significant enough to undermine the purpose of the
contract, the performance cannot be considered substantial like in this case there were some
defects in the heating system which were serious and prevented it from serving its primary
purpose. Therefore, the claimant was not entitled to recover any payment.
3. Similarly in the case of Jacob & Youngs, Inc. v. Kent,230 N.Y. 239 (1921) there were
some particular type of pipes that were to be used in the making of plaintiff’s house but the
defendant used some other type of pipes, the court held that substantial performance was
achieved despite minor deviations in the type of pipes used in construction. The deviations
were deemed insignificant and did not materially affect the overall performance of the
contract.
4. In the case of Hoenig v. Isaacs, [1952] 2 All ER 176 it was held that only breaches that ‘go
to the root of the contract’ entitles the employer to repudiate liability and refuse payment.
Here the working of the project was not affected and no loss was incurred by Metrosmart
and so they are not entitled to invoke the performance bond.
5. Same was re-affirmed in the case of Dakin v. Lee (1916) I KB 566. In this case the
plaintiffs had substantially completed the contract work but there were certain defects and
omissions, but it did not mean the whole contract or work was invalidated, the plaintiff was
held entitled to recover the sum for his work. Krishna Menon vs Cochin Devaswom,
Board And Anr. AIR1963KER181. It was stated that, in order to decide the question
whether the contract was substantially performed a decision as to the materiality of the term
in the contract not complied with is important.
6. NovaInfra completed the construction work within the decided time and budget even after
there were strict deadlines and restrictions imposed by Metrosmart, the above cases show
that the substantial performance was completed by NovaInfra and so Metrosmart is not
entitled to invoke the performance bond as the major portion or the substantial part of the
contract was completed justly.
B. There Was No Actual Loss Which Could Justify Invocation Of The
Performance Bond
7. Section 73 of the Indian Contract Act, 1872 (Compensation for
Loss or Damage) states that compensation can only be claimed for
actual losses suffered due to a breach of contract. In the present case
there are two things to be dealt with, firstly that the deviations and
discrepancies that MetroSmart is talking about are minor in nature and
thus do not impact the overall working of the project and secondly the
concerns shown by MetroSmart are ‘alleged’ and are mere ‘possibilities’
and not the proved deviations for which they can demand compensation.
8. In the case of Union of India v. Raman Iron Foundry,(1974) 2 SCC 231 the Supreme
Court observed:
"A claim for unliquidated damages does not give rise to a debt until the liability is
adjudicated upon and damages assessed by an adjudicatory authority."
This means that until a breach is legally determined and the corresponding damages are
quantified, there is no 'debt' that can be claimed. Consequently, invoking a performance
guarantee based on unverified or speculative claims is unjustified.
9. The Court further stated:
"When there is a breach of contract, the party who commits the breach does not
instantly incur any pecuniary obligation nor does the party complaining of the breach
become entitled to a debt due from the other party."
This underscores that an immediate financial liability does not arise upon an alleged breach.
Therefore, in line with this judgment, performance guarantees should
only be enforced when there is a clear, adjudicated failure in contract
execution, not for technical or speculative concerns.
10. Similarly in the case of Hindustan Construction Co. Ltd. v. State of Bihar,1999 (8)
SCC 436
11. the Supreme Court observed:
"The invocation will have to be in accordance with the terms of the Bank Guarantee;
or else, the invocation itself would be bad."
This basically means that that first there has to be an actual loss along with adhering to
the terms on which it is supposed to be invoked or it’s invocation would be invalid.
12. Similar observation was held in the case of Indian Oil Corporation vs Lloyds Steel
Industries Ltd,AIR 2008 (NOC) 866 (DEL.) the petitioner did not suffer any loss on
account of delay in execution of contract and so was not given any compensation,
even though there was a provision in the contract which talked about compensation on
loss to the petitioner, but since there was no loss, there was no compensation.
Standard Chartered Bank v. Heavy Engineering Corporation Ltd,(2019) 14 scc
570, State Bank of India and Another v. Mula Sahakari Sakhar Karkhana Ltd
AIR 2007 SUPREME COURT 2361 are some other authorities where same principle
was upheld.
13. This is also what Stellar Holdings said. They promised to indemnify CapitalSure
any losses arising from the bond’s invocation, but since the bond’s
invocation itself is unjustified as there was no loss to be
compensated for, they are not liable to pay any amount to
CapitalSure.
C. Invocation of the Bond Without Material Defects Constitutes
Unjust Enrichment
14. Section 70 of the Indian Contract Act, 1872 (Obligation of
person enjoying benefit of non-gratuitous act)
‘Where a person lawfully does anything for another person, or
delivers anything to him, not intending to do so gratuitously, and
such other person enjoys the benefit thereof, the latter is bound to
make compensation to the former in respect of, or to restore, the
thing so done or delivered.’ Applying this in the present case it can
be seen that since MetroSmart gained a fully functional high-speed
rail corridor but was still claiming compensation, it clearly amounts
to an abuse of contractual provisions for financial advantage.
15. This has been so held by the Supreme Court in State of W.B. v. B.K. Mondal &
Sons, 1962 AIR 779 where the plaintiff on request of a government
officer constructed certain structures for Civil Supplies Department of the
Government but the state tried to escape the liability but under section
70 they were held liable. It was held that the state had the right to reject
the structures but it accepted and enjoyed the benefit which established
that if a party voluntarily accepts and enjoys the benefit of work done by another, it cannot
later refuse to compensate the performing party, even if there were technical lapses in the
contract formation.
16. In the present case also MetroSmart accepted and fully utilized the high-speed rail corridor
constructed by NovaInfra even after alleging minor deviations from agreed
construction standards and the possibility of long-term inefficiencies. It
never rejected the work nor demanded corrections before invoking the performance bond.
17. Just like the State in B.K. Mondal & Sons could have rejected the storage sheds but instead
chose to use them, MetroSmart had the opportunity to reject or demand rectifications before
project completion but failed to do so and so it has received and benefitted from NovaInfra’s
work, invoking the performance bond now amounts to unjust enrichment, which Section 70
of the Indian Contract Act, 1872 prohibits.
18. Thus, MetroSmart cannot escape liability under the pretence of minor deviations, just as the
State in B.K. Mondal & Sons could not avoid payment despite procedural issues in contract
formation. Also substantiating the fact that the invocation of the bond was unjustified.
II. CAPITALSURE DID NOT ACT IN GOOD FAITH BY HONOURING
METROSMART’S CLAIM AND SHOULD HAVE CONDUCTED FURTHER
VERIFICATION BEFORE MAKING THE PAYOUT.
A. Performance Bonds Should Not Be Paid Without Proper Scrutiny
19. CapitalSure had a duty to verify the legitimacy of MetroSmart’s claim before making the
payout. Performance bonds are not meant to be invoked mechanically; they require a
legitimate basis for enforcement. In Reliance Salt Ltd. v. Cosmos Enterprises (2007) 6
SCC 230, the Supreme Court held that performance bonds cannot be enforced arbitrarily
and must be backed by actual proof of contractual breach.
20. Similarly, in Hindustan Construction Co. Ltd. v. State of Bihar (1999) 8 SCC 436, the
Court ruled that a surety is not automatically liable unless there is clear evidence of default
by the primary obligor, which was not proved in the current case.
21. Before releasing funds, CapitalSure had the obligation to demand proof to verify whether
NovaInfra’s deviations materially impacted the project’s quality and purpose. As per Bharat
Heavy Electricals Ltd. vs. Indian Overseas Bank & Anr.,2000IAD(DELHI)897 a
performance bond or bank guarantee can only be invoked in strict accordance with its terms.
Any invocation unrelated to the defined contractual obligations is fraudulent or unjust.
22. Pinj Sons (P) Ltd. vs. Hong Kong & Shanghai Banking 1991(1)ARBLR157(DELHI)
further establishes that performance bonds cannot be arbitrarily enforced, they must adhere
to the specific conditions outlined in the contract. CapitalSure’s payout, without proper
scrutiny, violated these principles.
23. MetroSmart’s claim was based on minor deviations that did not amount to a material breach.
If CapitalSure paid without proper verification, it acted negligently. Courts have consistently
held that performance bonds operate under strict conditions, and enforcement must be based
on contractual terms and actual breach and since there was no actual loss, these principles
clearly show it was CapitalSure’s negligence and it is not entitled to any comepensation.
B. Failure to Investigate the Validity of MetroSmart’s Invocation Shows Bad Faith
24. Section 52 of the Indian Penal Code, 1860 states that an act is not done in good faith if
performed without due care and attention. Negligence negates good faith. In Kailas Sizing
Works v. Municipality of Bhivandi and Nizampur, AIR1969BOM127 the Court held that
acting in good faith requires honesty, fairness, and diligence, without wilful negligence or
consciousness of causing harm. CapitalSure’s failure to investigate MetroSmart’s claim
before making the payout constitutes a lack of due care, thus negating good faith.
25. The Supreme Court in Union of India v. D.N. Revri & Co. 1976 AIR 2257 emphasized that
commercial contracts should not be interpreted narrowly or pedantically. The intention of
the parties, which is crucial in determining the scope of good faith in contracts, can be
ascertained from the contract’s express words, the nature of the subject matter, and
surrounding circumstances, held in Swarnam Ramachandran v. Aravacode Chakungal
Jayapalan AIRONLINE 2004 SC 907.
26. An important observation was made in the case of Association of Unified Telecom Service
v. Union of India and Ors. AIRONLINE 2019 SC 1309 by the Delhi High Court that
good faith is an essential element of all contracts and requires that parties act honestly,
fairly, and in accordance with the reasonable expectations of the other party.
27. MetroSmart’s invocation of the performance bond was beyond the contractual scope, and
CapitalSure’s failure to challenge it demonstrates bad faith. By failing to challenge the
claim, CapitalSure violated its duty of fair dealing, making its decision to pay wrongful and
negligent.
III. THE COUNTER-INDEMNITY PROVIDED BY STELLAR HOLDINGS IS
UNENFORCEABLE GIVEN THE ALLEGED UNDUE INFLUENCE AND "SPECIAL
INEQUITY" IN CONTRACT NEGOTIATIONS.
PRAYER FOR RELIEF
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Wherefore, in light of facts stated, issues raised, authorities cited and arguments advanced, the
counsel on behalf of the defendant most humbly and respectfully requests this Learned High Court
of Bombay to declare and adjudge that:
1. The performance bond invoked by MetroSmart is unjustified.
2. CapitalSure was negligent in releasing the funds without verifying MetroSmart’s claims.
3. There was use of undue influence and special inequity in contract negotiations.
And further pass any order in favour of the plaintiff, which the Learned Court may so deem fit in
the end of justice, equity and good conscience.
All of which is most humbly and respectfully submitted.
Date: 1 March 2025 Code: 2337D
Place: Mumbai Counsel for Defendant
