2015 (2) TMI 1422 - SC - Indian Laws

Section 5 withdrawal allowed but earnest money forfeiture valid when tender terms permit, no refund to bidders

SC allowed the corporation's appeal and set aside the HC order directing refund of earnest money to the bidders. Relying on Ganga Enterprises, SC held ... Declining refund of the earnest money quashed with a direction to the corporation to refund to the respondents the amount deposited by them - HELD THAT:- In Ganga Enterprises case [2003 (8) TMI 546 - SUPREME COURT] this Court was examining a similar question. The argument in that case, as is the position even before us, was that withdrawal of an offer before it was accepted could not result in forfeiture of the earnest money/security money given by the bidder. Repelling that contention this Court held 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, 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 who do not have the capacity or intention of entering into a contract venture into the bidding process for at times extraneous reasons. Thus, 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. Inasmuch as the High Court remained totally oblivious of the true legal position while directing refund of the earnest money, it committed an error. The order passed by the High Court is set aside - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether 'revocation of the tender' in Condition No. 2 of the Special Conditions of Contract covered withdrawal of bids by the bidder, thereby attracting forfeiture of earnest money. 1.2 Whether forfeiture of earnest money on withdrawal of a bid prior to opening or acceptance is legally permissible in view of Section 5 of the Contract Act, 1872. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Interpretation of Condition No. 2 - 'revocation of the tender' and forfeiture of earnest money Legal framework (as discussed): 2.1 Condition No. 2 of the Special Conditions of Contract stipulated that earnest money shall be forfeited on: (a) revocation of the tender; (b) refusal to enter into a contract after award; or (c) non-commencement of work after award. Interpretation and reasoning: 2.2 The Court held that Condition No. 2 was one of the terms subject to which intending bidders could submit bids, and it clearly contemplated forfeiture of earnest money upon occurrence of any of the three specified contingencies. 2.3 The expression 'revocation of the tender' in this context was construed to mean withdrawal/cancellation/recall of the bid or tender by the bidder, not revocation of the tender notice by the procuring entity. 2.4 The Court distinguished between 'revocation of the tender' and 'revocation of the tender notice', observing that the latter is within the prerogative of the authority issuing the notice, whereas revocation of the tender is an act of the bidder. 2.5 The Court noted that even if the term 'revocation' was loosely used, its contextual meaning in the Special Conditions of Contract could only be withdrawal of the bid by the bidder, which squarely attracted forfeiture of earnest money. 2.6 The High Court's view that the respondent's case did not fall under Condition No. 2 was held to be a manifest error arising from confusing revocation of tender by bidder with revocation of the tender notice by the corporation. Conclusions: 2.7 Withdrawal of the bids by the bidder amounted to 'revocation of the tender' within the meaning of Condition No. 2. 2.8 Forfeiture of the earnest money on such withdrawal was within the contractual stipulation, and the High Court erred in holding that Condition No. 2 was inapplicable. Issue 2: Validity of forfeiture clause where bid is withdrawn before opening/acceptance in light of Section 5 of the Contract Act, 1872 Legal framework (as discussed): 2.9 Section 5 of the Contract Act, 1872, provides that a proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer. 2.10 The Court relied on its earlier decisions in: (i) National Highways Authority of India v. Ganga Enterprises; (ii) State of Maharashtra v. A.P. Paper Mills Ltd.; and (iii) State of Haryana v. Malik Traders, all dealing with forfeiture of earnest/bid security on withdrawal of bids. Interpretation and reasoning: 2.11 The respondent contended that since the financial bid had not been opened or accepted, it was entitled under Section 5 to withdraw its offer without suffering forfeiture of earnest money. 2.12 The Court held that while a proposer has a statutory right to revoke an offer before acceptance, this right does not negate a contractual term that provides for forfeiture of earnest/bid security upon such withdrawal. 2.13 Following Ganga Enterprises, the Court reiterated that where an offer is made subject to a condition that earnest money will be forfeited if the bidder does not enter into a contract or does not perform a stipulated act, the bidder may withdraw the offer but cannot claim refund of the earnest money if the agreed contingency occurs. 2.14 The Court emphasized that forfeiture of earnest money in such cases does not infringe any statutory right under the Contract Act; earnest/security is taken to ensure that a contract comes into existence and to screen out non-genuine bidders. 2.15 Referring to A.P. Paper Mills, the Court noted that where the tender is valid for a fixed period and withdrawal is effected before expiry of that period, the agreed consequence of forfeiture of earnest money follows, regardless of delay in declaration of sale results or award. 2.16 Relying on Malik Traders, the Court affirmed that an agreement to keep the bid open for a specified validity period, coupled with a term permitting forfeiture of the bid security on withdrawal during that period, binds the bidder. Section 5 cannot be used to avoid the agreed penalty for premature withdrawal. 2.17 The Court underscored that such forfeiture clauses aim to ensure that only serious and capable bidders participate, and absence of such conditions would encourage bids by parties lacking intention or capacity to contract. 2.18 The Court held that the timing of bid opening or acceptance is irrelevant to the validity of forfeiture, where the submission and receipt of bids is expressly made subject to a condition providing for forfeiture upon withdrawal. Conclusions: 2.19 The bidder's statutory right under Section 5 to revoke its offer before acceptance does not confer a right to avoid forfeiture of earnest money when the contract documents expressly stipulate such forfeiture on withdrawal. 2.20 Forfeiture of earnest money on withdrawal of the bid, even prior to opening or acceptance, was legally valid and enforceable under the contract. 2.21 The High Court, in directing refund of the earnest money without adverting to the binding contractual clause and the settled legal position, committed an error. 2.22 The Court therefore set aside the High Court's order and upheld the forfeiture of the earnest money, dismissing the writ petition.