Supreme Court Upholds Tribunal’s Decision on Bank Guarantee Invocation in FM Radio License Dispute: Union of India vs. Millenium Delhi Broadcast LLP (2 May 2022)

Date of the Judgment: May 2, 2022
Citation: [Not Available in Source]
Judges: L. Nageswara Rao, J., B. R. Gavai, J.
Can a bank guarantee be invoked if the conditions for its invocation are not met? The Supreme Court addressed this question in a dispute regarding the licensing of private FM broadcasting services. The core issue revolved around whether the Union of India could encash a bank guarantee provided by Millenium Delhi Broadcast LLP, given the circumstances surrounding the operationalization of their FM radio stations. The judgment was delivered by a two-judge bench of Justices L. Nageswara Rao and B. R. Gavai, with Justice L. Nageswara Rao authoring the opinion.

Case Background

In 1999, the Ministry of Information and Broadcasting issued a notice inviting tenders for licensing private FM broadcasting services across 40 centers in India. This initiative aimed to open up FM broadcasting for commercial broadcasters, promote localized content, and supplement the services of All India Radio (AIR). The tender document specified that a license fee was payable annually in advance, with the balance for the first year due within 10 days of the Wireless Planning & Coordination Wing’s (WPC) intimation that the operational license was ready. The license period was to be reckoned from the date of the operational license issued by WPC.

Millenium Delhi Broadcast LLP (the respondent) bid for channels in Delhi and Chennai, depositing 50% of the reserve license fee. They signed an agreement on October 27, 2000, to operationalize FM stations in both cities. The agreement required the respondent to complete the installation of broadcasting facilities within 12 months from the date of frequency earmarking by WPC and to apply for the Wireless Operational Licence (WOL) within three months of the letter of intent. The agreement also mandated a bank guarantee equivalent to the first year’s license fee, valid for 10 years.

On October 30, 2000, the respondent applied for frequency allocation and was allocated 94.6 by WPC on December 29, 2000. However, the respondent issued a notice of termination of the agreement on August 27, 2002, and subsequently filed an arbitration petition in the High Court of Bombay seeking an injunction against the encashment of the bank guarantee. The High Court of Bombay granted an interim order on November 26, 2002, directing the appellant to keep the bank guarantee alive.

Timeline

Course of Proceedings

The respondent filed a petition under Section 14A(1) of the Telecom Regulatory Authority of India Act, 1997 before the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) on January 2, 2006. The respondent sought several reliefs, including a declaration that the delay in commencing broadcast was condoned, that they were not required to deposit the balance of the first year’s license fee before the WPC’s intimation of the readiness of the wireless operational license, and that the Union of India could not have issued a Deemed Operational Status. The respondent also sought the return of the bank guarantee, refund of advance license fee and earnest money deposit, and compensation for costs incurred.

The TDSAT allowed the respondent’s petition on September 14, 2007, declaring the invocation of the bank guarantee illegal and directing the appellants to return the bank guarantees. Aggrieved by the order of the TDSAT, the appellants approached the Supreme Court.

Legal Framework

The case primarily revolves around the interpretation of the tender document and the license agreement, specifically the clauses pertaining to license fees, operational licenses, and bank guarantees. According to Clause 8(f) of the tender document, the license fee has to be paid by each licensee every year in advance within seven days of the beginning of the year. For the first year, the balance of the license fee is to be paid within 10 days of the WPC’s intimation that the operational license is ready to be issued. The license period is reckoned from the date of issue of the operational license by WPC.

Article 2.1 of Schedule C to the agreement requires the licensee to complete the installation of broadcasting facilities within 12 months from the date of frequency earmarking by WPC. Article 2.3 requires the licensee to apply for WOL within three months from the date of issuance of the letter of intent. Article 16 of Schedule C requires the licensee to furnish a bank guarantee equivalent to the first year’s license fee, valid for 10 years, to be renewed until the expiry of the license period. Article 14 of Schedule C refers to Dispute Resolution and Jurisdiction, specifying that disputes shall be referred to the sole arbitration of the Secretary, Department of Legal Affairs or his nominee.

The Telecom Regulatory Authority of India Act, 1997, under which the petition was filed before the TDSAT, empowers the tribunal to adjudicate disputes related to telecommunication services.

Arguments

Submissions by the Appellants (Union of India):

• The appellants contended that the respondent failed to adhere to the timelines stipulated in the license agreement, specifically by not operationalizing the FM service within the scheduled time.
• The appellants argued that the respondent failed to deposit the license fee within 7 days of the beginning of the first year, which, according to them, triggered the invocation of the Bank Guarantee.
• The appellants submitted that the conditions prescribed in Clause 9 of the tender document pertaining to the bank guarantee were satisfied and the Tribunal erred in holding otherwise.

Submissions by the Respondent (Millenium Delhi Broadcast LLP):

• The respondent argued that the delay in operationalizing the services was due to unforeseen circumstances, such as the withdrawal of several bidders, which increased the cost of co-location.
• The respondent contended that the government had acknowledged the difficulties faced by the broadcasters and had agreed to extend the time for operationalization.
• The respondent submitted that the insistence on payment of the balance 50% license fee before the issuance of the Wireless Operational License (WOL) was not in accordance with the agreement.
• The respondent argued that the bank guarantee was a performance guarantee, and the stage of performance had not arisen as the WOL was never issued.
• The respondent relied on the official Policy on Expansion of FM Radio Broadcasting Services, which condoned delays in operationalization in certain cases.
• The respondent stated that the Deemed Operational License was not contemplated in the agreement and there was no occasion for invocation of the bank guarantee.

Innovativeness of the argument: The respondent’s argument that the bank guarantee was a performance guarantee and could not be invoked until the stage of performance (issuance of WOL) had arrived was innovative. They also effectively argued that the ‘Deemed Operational Licence’ was not contemplated in the agreement.

Issues Framed by the Supreme Court

The Supreme Court did not frame specific issues but addressed the core question of whether the invocation of the bank guarantee by the appellants was justified. The primary issue was whether the conditions for encashing the bank guarantee, as stipulated in the tender document and agreement, were met.

The sub-issue that the court dealt with was whether the Deemed Operational License was contemplated in the agreement.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court did not rely on any specific case laws or books in this judgment. However, the court did refer to the following legal provisions:

• Clause 8(f) of the Tender Document: This clause specifies the payment of license fees and the conditions for the first year’s payment.
• Article 2.1 of Schedule C to the agreement: This article specifies the timeline for completion of broadcasting facilities.
• Article 2.3 of Schedule C to the agreement: This article specifies the timeline for applying for WOL.
• Article 16 of Schedule C to the agreement: This article specifies the requirement for a bank guarantee.
• Article 14 of Schedule C to the agreement: This article specifies the dispute resolution mechanism.
• Section 14A(1) of the Telecom Regulatory Authority of India Act, 1997: This provision provides the basis for the petition before the TDSAT.

The court considered these provisions to determine if the conditions for the invocation of the bank guarantee were met. The court found that the conditions were not met, as the Wireless Operational License (WOL) had not been issued, and the Deemed Operational License was not contemplated in the agreement.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Clause 8(f) of the Tender Document: The Court interpreted this clause to determine the conditions for payment of license fees, noting that the balance payment was due after the WPC’s intimation that the operational license was ready, which never happened.
• Article 2.1 of Schedule C to the agreement: The Court considered this article to understand the timeline for completion of broadcasting facilities, but it did not form the basis of its decision.
• Article 2.3 of Schedule C to the agreement: The Court considered this article to understand the timeline for applying for WOL, but it did not form the basis of its decision.
• Article 16 of Schedule C to the agreement: The Court considered this article to understand the requirement for a bank guarantee, stating that it was a performance guarantee.
• Article 14 of Schedule C to the agreement: The Court considered this article to understand the dispute resolution mechanism, but it did not form the basis of its decision.
• Section 14A(1) of the Telecom Regulatory Authority of India Act, 1997: The Court acknowledged that this provision provided the basis for the petition before the TDSAT.

What weighed in the mind of the Court?

The Court’s decision was primarily influenced by the interpretation of the license agreement and the tender document, particularly the clauses pertaining to the bank guarantee and the issuance of the Wireless Operational License (WOL). The court emphasized that the bank guarantee was a performance guarantee, and its invocation was contingent upon the fulfillment of certain conditions, which were not met in this case. The absence of the issuance of WOL and the fact that the Deemed Operational License was not contemplated in the agreement weighed heavily in the court’s decision.

Logical Reasoning:

The Court considered the argument of the appellant that the respondent had failed to deposit the license fee within 7 days of the beginning of the first year. The Court rejected the argument by stating that the bank guarantee was a performance guarantee and was intended to ensure the due performance of the license agreement. The Court noted that the license period was to be reckoned from the date of issuance of WOL by the WPC. The Court also noted that the Deemed Operational License was not contemplated in the agreement.

The Court stated: “A perusal of the conditions of the relevant clauses of the agreement clearly show that according to Article 1.1 of Schedule ‘C’ to the agreement, the license was granted for period of 10 years which has to be reckoned from the date of issuance of WOL by the WPC. Admittedly, WOL was never issued by WPC.”

The Court further stated: “A Deemed Operational License, which was to be issued by the appellant, was not contemplated in the agreement.”

The Court concluded: “We are of the opinion, that Tribunal did not commit any error in its interpretation of the clause pertaining to bank guarantee by holding that the conditions provided therein have not been satisfied for the invocation of the bank guarantee.”

There were no minority opinions in this judgment. The decision was unanimous.

Key Takeaways

• Bank guarantees, especially performance guarantees, can only be invoked if the conditions for their invocation are clearly met.
• The terms of the agreement, particularly regarding the conditions precedent for performance, must be strictly adhered to.
• A “Deemed Operational License” cannot be imposed if it is not explicitly provided for in the agreement.
• The judgment emphasizes the importance of adhering to the specific terms and conditions of contracts, particularly in the context of government tenders and licenses.

Directions

The Supreme Court upheld the judgment of the TDSAT and dismissed the appeals filed by the Union of India. The Court directed the appellants to return the bank guarantees to the respondent.

Development of Law

The ratio decidendi of this case is that a bank guarantee, particularly a performance guarantee, cannot be invoked unless the specific conditions for its invocation, as laid down in the agreement, are met. This judgment reinforces the principle that contractual obligations must be strictly adhered to, and that a party cannot unilaterally impose conditions or interpretations not explicitly provided in the agreement. There was no specific change in the previous position of law.

Conclusion

The Supreme Court dismissed the appeals filed by the Union of India, affirming the TDSAT’s decision that the invocation of the bank guarantee was illegal. The Court emphasized that the bank guarantee was a performance guarantee, and its invocation was contingent upon the issuance of the Wireless Operational License (WOL) by the WPC, which never occurred. The Court also noted that the “Deemed Operational License” was not contemplated in the agreement. This judgment underscores the importance of adhering to the specific terms and conditions of contracts and highlights that a bank guarantee cannot be invoked if the conditions for its invocation are not met.

Category

Parent Category: Contract Law

Child Category: Bank Guarantee, Performance Guarantee, Tender Document, License Agreement

Parent Category: Telecom Regulatory Authority of India Act, 1997

Child Category: Section 14A, Telecom Regulatory Authority of India Act, 1997

FAQ

Q: What is a performance bank guarantee?

A: A performance bank guarantee is a type of guarantee that ensures one party will fulfill its obligations under a contract. If the party fails to perform, the other party can claim the guaranteed amount.

Q: What did the Supreme Court decide about the bank guarantee in this case?

A: The Supreme Court decided that the bank guarantee could not be invoked because the conditions for its invocation, specifically the issuance of the Wireless Operational License (WOL), were not met.

Q: What is a Wireless Operational License (WOL)?

A: A Wireless Operational License (WOL) is a license issued by the Wireless Planning & Coordination Wing (WPC) that allows a company to operate a wireless communication service, such as an FM radio station.

Q: What was the significance of the “Deemed Operational License” in this case?

A: The “Deemed Operational License” was significant because the Union of India tried to use it as a basis for demanding payment of the license fee and invoking the bank guarantee. However, the Supreme Court noted that the “Deemed Operational License” was not contemplated in the agreement, and therefore, could not be used as a basis for invoking the bank guarantee.

Q: What does this judgment mean for future cases involving bank guarantees?

A: This judgment reinforces the principle that bank guarantees, especially performance guarantees, can only be invoked if the conditions for their invocation are clearly met as per the agreement. It also highlights the importance of adhering to the specific terms and conditions of contracts.