Forfeiture of earnest money does not infringe statutory rights

There is a clear difference between revocation of a ‘tender’ and revocation of the ‘tender notice’. While revocation of the tender notice is the prerogative of the Corporation, revocation of the ‘tender’ could be only by the bidder/tenderer concerned.

The Court in the instant matter dealt with the rights of bidder to claim earnest money deposited with the bid in the event of revocation thereof qua applicability of Section 5 of the Indian Contract Act.

NTPC (Corporation) had floated two tenders for construction of a shed and a boundary wall, pursuant to which the Respondent-contractor in the instant matter submitted two separate tenders enclosing therewith an amount towards earnest money deposit. The tenders were in two parts – technical and commercial. While the technical bids were opened and found compliant, the financial bids had yet to be opened when the Respondents moved an application to the Corporation withdrawing the bids submitted by it and asking for being excluded from consideration besides praying for refund of the earnest money deposited with the bids. 

The Corporation in response stated that although the bids offered were not being considered, the prayer for refund of earnest money could not be considered as the same stood forfeited. The refusal of refund lead to filing of writ petition, and the same was allowed by the Division Bench holding that since Respondent’s case was not covered by relevant condition of the Special Conditions of contract, the refusal of refund of the earnest money was unjustified and hence the present appeal was filed. 

It was contended as per the relevant special Condition, revocation of tender was by itself sufficient to call for forfeiture of the earnest money and finding of the High Court was thus incorrect.

It was observed that earnest money accompanying the bid would be forfeited in any one of the three contingencies referred to in relevant condition and one such contingency was revocation of the tender. It was held that the expression “revocation of tender” does not obviously refer to revocation by the Corporation, which 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 tender notice is the prerogative of the Corporation, revocation of the ‘tender’ could be only by the bidder/tenderer concerned. The expression “revocation” may have been loosely used by the Corporation, but, in the context in which the same appears in the Special Conditions of Contract only means withdrawal/cancellation/ recall of the bid or tender submitted by the bidder. In any such event, the earnest money deposited by the bidder would be liable to the forfeited

The next limb of contention was that the provision empowering the Corporation to forfeit earnest money upon withdrawal of offer even before such offer was opened/ accepted by the authority inviting the same would be impermissible in law. The financial bid in the instant case was not opened by the Corporation. Only the technical bid was opened and was found to be compliant. The Respondent could even so, at any time, before acceptance of the offer withdraw his bid and by doing so he was well within his rights to demand refund of earnest money accompanying the bids. 

Corporation on the other hand contended that opening of the bid or acceptance thereof in terms of Section 5 of the Contract Act, 1872 was wholly immaterial and irrelevant to the validity of the forfeiture ordered by the Corporation.
It was observed that while a person may have a right to withdraw his offer at any time before the acceptance is conveyed to him if the offer is itself subject to the condition that the earnest money will be forfeited for not entering into contract or if some other act is not performed, then, even though he may have a right to withdraw his offer he will have no right to claim the refund of the earnest money. Forfeiture of the earnest money, in any such case, does not 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. It is only in the event of absence of any term stipulating forfeiture of the earnest money may lead to situations where even those 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 is to see that only genuine bids are received. 

It was held 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 bid the earnest money stand forfeited. The High Court by directing refund of the earnest money, committed an error.

[National Thermal Power Corporation Ltd. vs. M/s Ashok Kumar Singh & Ors.]
(SC, 13.02.2015) 
(Civil Appeal No. 1852 of 2015)