NATIONAL THERMAL POWER CORP. LTD. vs. M/S ASHOK KUMAR SINGH .

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

JUDGMENT passed by the High Court of Judicature at Allahabad, whereby M.B. No. 9620 of 2013 filed by the respondents has been allowed and order dated 19/09/2013 passed by the appellant-corporation declining refund of the earnest money quashed with a direction to the corporation to refund to the respondents the amount deposited by them.

dated 17/10/2012 and the other dated 19/11/2012 for 1 Page 1 construction of a shed and a boundary wall. The respondent- contractor submitted two separate tenders in response to the said tender notices enclosing therewith an amount of

respondent once again asked for the return of the earnest JUDGMENT money deposited by them. In response to the said representation, the appellant-corporation issued a letter

respondent were not being considered, the prayer for refund of earnest money could not be considered as the same stood forfeited. Aggrieved by the said order, the respondent filed Writ Petition No. 9620 (MB) of 2013 before the High Court 2 Page 2 challenging the refusal of refund of the earnest money deposit. The said petition was opposed by the appellant herein but was allowed by a Division Bench of the High Court of Judicature at Allahabad, Lucknow Bench, in terms of a brief order holding that since respondent’s case was not covered by condition No. 2 of the Special Conditions of contract of the appellant-corporation, the refusal of refund of the earnest money deposited by the respondent was unjustified. The High Court observed as under:

Writ petition, thus, stands disposed of.”

JUDGMENT order as noticed earlier.

S.K. Dhingra argued that the High Court was in error in directing refund of the earnest money deposited by the respondent. It was contended that in terms of condition No. 2 of the Special Conditions of Contract revocation of tender was by itself sufficient to call for forfeiture of the earnest 3 Page 3 money. Inasmuch as the High Court had held that the respondent’s case was not covered under condition No. 2, it committed a palpable error.

any one of the three contingencies referred to in Condition JUDGMENT No. 2 (supra). One of these contingencies was revocation of the tender, which would in the context in which the special provision is made imply any withdrawal of the bid/tender by the bidder concerned. The High Court appears to have confused revocation of the tender with revocation of the tender notice. The expression “revocation of tender” does not obviously refer to revocation by the appellant- 4 Page 4 corporation, who had issued the tender notice. There is a clear difference between revocation of a ‘tender’ and revocation of the ‘tender notice’. While revocation of the

manifest error in holding that the forfeiture did not fall within JUDGMENT the purview of Condition No. 2.

provision empowering the appellant to forfeit earnest money upon withdrawal of offer even before such offer was opened/accepted by the authority inviting the same will be impermissible in law. The financial bid in the instant case, it was contended, had not been opened by the appellant- 5 Page 5 corporation although the technical bid was opened and had been found to be compliant. The respondent could even so, at any time, before acceptance of the offer withdraw his bid.

thereof in terms of Section 5 of the Contract Act, 1872 was, JUDGMENT in that view, wholly immaterial and irrelevant to the validity of the forfeiture ordered by the appellant-corporation. Reliance in support of the submission was placed by Mr.

Highways Authority of India v. Ganga Enterprises and

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SCC 200 .

he will have no right to claim the refund of the earnest JUDGMENT money. Forfeiture of the earnest money, in any such case, does not, observed this Court, infringe any statutory right under the Contract Act, 1872 for earnest/security is given and taken in such cases only to ensure that a contract comes into existence. What is important is that this Court recognised that absence of any term stipulating forfeiture of the earnest money may lead to situations where even those 7 Page 7 who do not have the capacity or intention of entering into a contract venture into the bidding process for at times extraneous reasons. The purpose of such a clause providing for forfeiture of the earnest money clearly was to see that only genuine bids are received. This Court observed: “… … …The Indian Contract Act merely provides that a person can withdraw his offer before its acceptance. But withdrawal of an offer, before it is accepted, is a completely different aspect from forfeiture of earnest/security money which has been given for a particular purpose. A person may have a right to withdraw his offer but if he has made his offer on a condition that some earnest money will be forfeited for not entering into contract or if some act is not performed, then even though he may have a right to withdraw his offer, he has no right to claim that the earnest/security be returned to him. Forfeiture of such earnest/security, in no way, affects any statutory right under the Indian Contract Act. Such earnest/security is given and taken to ensure that a contract comes into existence. It would be an anomalous situation that a person who, by his own conduct, precludes the coming into existence of the contract is then given advantage or benefit of his own wrong by not allowing forfeiture. It must be remembered that, particularly in government contracts, such a term is always included in order to ensure that only a genuine party makes a bid. If such a term was not there even a person who does not have the capacity or a person who has no intention of entering into the contract will make a bid. The whole purpose of such a clause i.e. to see that only genuine bids are received would be lost if forfeiture was not permitted.” JUDGMENT 11. In A.P. Paper Mills (supra) this Court was dealing with almost similar situation where according to Clause 5 of the 8 Page 8 tender notice the tenderer would withdraw the tender only on the pain of forfeiture of the earnest money. While refusing to interfere with the forfeiture of the earnest money this Court observed: “… … …But it is a case of withdrawal of tender and the effect of it is to be considered. Since the tender is valid for a period of 45 days and withdrawal is before expiry of the period the earnest money is to be forfeited. The stand of the respondent that because of delay in declaration of the final sale results there was no bar on withdrawal of the tender is clearly untenable. Once the tender is withdrawn the result is that the tenderer who withdraws the tender cannot take the stand that since the final sale result has not been declared there is no bar on the withdrawal.” 12. Reference may also be made to a decision of this Court in Malik Traders (supra). Even in this case this Court was dealing with the effect of withdrawal of a bid before acceptance in the context of Section 5 of the Contract Act, JUDGMENT 1872. Rejecting the submission that the bid can be withdrawn without any forfeiture in view of Section 5 of the Contract Act, this Court observed: “… … …Thus, even though under Section 5 of the Act a proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, the respondent was bound by the agreement contained in its offer/bid to keep the bid open for acceptance up to 90 days after the last date of receipt of bid and if the respondent withdrew 9 Page 9 its bid before the expiry of the said period of 90 days the respondent was liable to suffer the consequence (i.e. forfeiture of the full value of bid security) as agreed to by the respondent in Para 10 of the offer/bid. Under the cover of the provisions contained in Section 5 of the Act, the respondent cannot escape from the obligations and liabilities under the agreements contained in its offer/bid. The right to withdraw an offer before its acceptance cannot nullify the agreement to suffer any penalty for the withdrawal of the offer against the terms of agreement. A person may have a right to withdraw his offer, but if he has made his offer on a condition that the bid security amount can be forfeited in case he withdraws the offer during the period of bid validity, he has no right to claim that the bid security should not be forfeited and it should be returned to him. Forfeiture of such bid security amount does not, in any way, affect any statutory right under Section 5 of the Act. The bid security was given by the respondent and taken by the appellants to ensure that the offer is not withdrawn during the bid validity period of 90 days and a contract comes into existence. Such conditions are included to ensure that only genuine parties make the bids. In the absence of such conditions, persons who do not have the capacity or have no intention of entering into the contract will make bids. The very purpose of such a condition in the offer/bid will be defeated, if forfeiture is not permitted when the offer is withdrawn in violation of the agreement.” JUDGMENT 13. The upshot of the above discussion is that it is no longer possible for the respondents to contend that the right to withdraw the bid in terms of Section 5 of the Contract Act, 1872 would entitle them to withdraw without suffering forfeiture of the earnest money even in cases where the submission and receipt of bids is itself subject to the condition that in the event of a withdrawal of the 10 Page 10 bid the earnest money stand forfeited. Inasmuch as the High Court remained totally oblivious of the true legal position while directing refund of the earnest money, it committed an error.

(R.K. AGRAWAL) JUDGMENT …………………………..……………... (ADARSH KUMAR GOEL) New Delhi; February 13, 2015 11 Page 11