Contractual forfeiture decision set aside for failure to afford a prior show-cause opportunity.

The petitioners challenged the memorandum dated 29 July 2026 issued by the Chairman of Darjeeling Municipality, informing them that Clause 3 of the agreement had been invoked and that forfeiture of the security deposit and earnest money deposit would be initiated pursuant to the tender conditions.

The petitioners had been awarded contracts relating to the Darjeeling water-supply projects under AMRUT, including works for laying rising-main pipelines and supplying MS pipes.

Although the contracts originally prescribed completion periods of 180 and 365 days, the respondents granted successive extensions, the last being from 30 November 2025 to 31 July 2026, citing the circumstances recorded in the petitioners’ extension request, including site difficulties, climatic conditions, non-availability of materials, and pending permissions.

The petitioners contended that substantial work had been executed, including more than 80% of the Package-3 work, but that the respondents had sought to invoke the contractual forfeiture and rescission provisions without issuing a show-cause notice.

The municipality alleged that the petitioners had abandoned the works and relied upon a site inspection report and a meeting notice which, according to it, the petitioners did not attend.

Upon production of the records, including the measurement book, the Court found that work had in fact been executed after the extensions had been granted.

The municipality subsequently agreed to reconsider its decision after issuing a show-cause notice.

Whether the respondents could invoke Clause 3 of the agreement and initiate forfeiture of the security deposit and earnest money deposit without first issuing a show-cause notice and affording the petitioners an opportunity of hearing?

Whether the communication dated 29 July 2026 and the underlying resolution of the Board of Councillors were liable to be set aside for failure to comply with the principles of natural justice, without the Court determining the merits of the contractual dispute?

The Court applied the principles of natural justice and procedural fairness, particularly the rule of audi alteram partem, which requires that a person be given notice of the proposed adverse action and a reasonable opportunity to respond before a decision affecting their rights or interests is taken.

The Court also recognised that although the dispute arose from contractual tender conditions, the public authority was required to follow a fair and non-arbitrary decision-making process before invoking Clause 3 and initiating forfeiture of contractual deposits.

No specific statutory provision or judicial precedent was cited, and the Court expressly refrained from deciding the merits of the parties’ contractual claims.

The Court found from the record and measurement book that the petitioners had continued executing the works even after the extensions were granted, contrary to the respondents’ initial assertion that the works had been abandoned.

The last extension had itself been granted on grounds recorded in the petitioners’ extension request, making the factual basis for the proposed contractual action a matter requiring consideration after hearing the petitioners.

Since no show-cause notice had been issued before the adverse decision to invoke Clause 3 and initiate forfeiture, the decision-making process violated the requirements of natural justice.

In view of the municipality’s undertaking to issue a show-cause notice and reconsider the matter, the Court considered it appropriate to set aside the impugned decision on procedural grounds without adjudicating whether the petitioners had actually breached or abandoned the contracts.

The municipality was directed to issue a show-cause notice to Petitioner No. 1 within ten working days, permit the petitioners to submit their response within ten days thereafter, and then pass a reasoned decision after granting them an opportunity of hearing.

The Court did not decide the merits of the proposed forfeiture or the underlying contractual dispute.

The writ petition was accordingly disposed of.