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Judgment
Tarlok Singh Chauhan, J.
1.Aggrieved by forfeiture of its earnest money of `25,00,000/-, the petitioner has filed this writ petition claiming therein the following substantive reliefs:
“(a) That a writ in the form of Certiorari may be issued against the respondent.
(b) That Annexure P-8 may be quashed and set-aside, being illegal and arbitrary and against the established principles of natural justice and fair play.
(c) That the respondents may be directed not to forfeit the earnest money deposited and also not to blacklist the petitioner and allow it to carry on its
business legally.â€
Brief facts leading to filing of the present writ petition are that respondent No.2 invited global tenders for the procurement of assorted pulses
namely (i) Malka (Red Lentil); (ii) Urd Sabut; (iii) Moong Sabut and (iv) Dal Channa. The last date for submission of online tender alongwith Earnest
Money Deposit (for short EMD), tender document fee and processing fee was 15.3.2017 upto 5.00 p.m. and the tenders in question was to be opened
on 16.3.2017 at 11.00 AM. The petitioner accordingly submitted his tender for Dal Chana on 11.3.2017 after completing all the formalities including
the deposit of EMD. According to the petitioner, the bids were not opened on the stipulated date and time and in the meanwhile due to abnormal
change in the market condition, the petitioner was forced to withdraw his bid vide its letter dated 30.3.2017 wherein the petitioner also requested the
respondent-Corporation to refund the EMD of ` 25 lacs. However, before the said letter could reach the respondents, the respondent No.2 vide letter
dated 31.3.2017 asked the petitioner to submit revised lower rates of pulses within two days, whereas according to the petitioner he had already
withdrawn from the bid on 30.3.2017.
The respondents vide their letter dated 13.4.2017 directed the petitioner to submit the samples of Dal Chana contained in 25 KG bag for lab testing.
The petitioner vide its reply dated 15.4.2017 again reiterated and informed the respondent No.2 that it had already withdrawn its bid vide letter dated
30.3.2017 and, therefore, there was no occasion left for the petitioner to submit the samples for testing and its earlier request to refund the EMD was
also reiterated. However, instead of refunding the EMD, the respondent No.2 by citing condition No.2(2) of the tender document, sent a letter dated
17.4.2017 to the petitioner whereby it threatened the petitioner-firm of adverse action in case the sample was not submitted by the petitioner within
two days. In the letter it was mentioned that the State Government had already approved the rate submitted by the petitioner for supplying of Dal
Chana, but the petitioner would claim that no intimation in regard to the same had earlier been communicated to him and the fact that its bid has been
accepted, was only came to his knowledge vide the aforesaid letter. The petitioner sent its reply dated 19.4.2017 whereby it drew the attention of
respondent No. 2 that the reliance being placed by respondent No.2 on the condition No.2(2) of the tender document was not correct. However,
instead of refunding the petitioner’s EMD, respondent No.2 sent it a show cause notice dated 3.5.2017 whereby the petitioner has been asked to
show cause as to why its earnest money deposited be not forfeited and why the petitioner should not be black listed from participating in further
tenders issued by the respondent No.2-Corporation.
The petitioner submitted the reply dated 12.5.2017 reiterating therein that respondent No.2 was liable to refund EMD of the petitioner as it had
already withdrawn from the tender vide letter dated 30.3.2017. However, when no action was taken, the petitioner was compelled to approach this
Court by filing the instant writ petition for the reliefs as already set out above.
The respondent No.2, who otherwise only is the contesting party, has filed its reply wherein number of preliminary submissions/objections have
been raised. It is averred that in 2007, the Government of Himachal Pradesh introduced the State Special Subsidized Scheme under which it was
decided to distribute pulses, edible oil and salt to the ration card holders of the State at subsidized prices. For this purpose, a State Level Purchase
Committee (for short ‘SLPC’) was constituted by the Government for calling and finalizing the tenders. The respondent No.2 was nominated as
the nodal agency for implementation of the said scheme under which the tenders are invited under the guidance of the SLPC and are opened and
processed by the said Committee. Thereafter, recommendations of the SLPC were sent to the Government for finalizing the tenders and fixing the
rates of the items to be distributed. The State Government in turn after considering the burden of subsidy involved, fixed the price of the articles to be
distributed under this Scheme, finalized the tenders and accorded its approval.
As regards the instant case, the respondent No.2 had called for global e-tender under the State Special Subsidized Scheme for the procurement of
four numbers pulses namely (i) Malka Dal (ii) Urd Sabut (iii) Moong Sabut and (iv) Dal Chana to be supplied for a period of three months from
March, 2017 to May, 2017. The date of opening of the tender document was fixed on 16.3.2017. The SLPC constituted by the State Government
opened the tenders on 16.3.2017 and the petitioner was declared as the lowest bidder (L-1) for Dal Chana. Thereafter the proceedings of the SLPC
were sent to the Government of H.P. through letter dated 20.3.2017 for its approval and consideration. The State Government, in turn, vide its letter
dated 29.3.2017 addressed to the Corporation directed that the revised lower rates from all the successful bidders may be obtained and sent to the
Government for consideration, In the meanwhile, the petitioner informed the respondent through letter dated 30.3.2017 regarding the withdrawal of its
bid for the aforesaid commodity i.e. Dal Chana. The letter of response of the bidders in reference to the directions of the State Government was sent
for the Government for consideration on 3.4.2017. The State Government vide its letter dated 12.4.2017 accorded its approval to the recommendation
made by the SLPC dated 16.3.2017 and after approval thereof, the petitioner was directed to submit the sample of Dal Chana as per the terms and
conditions of the tender document on 13.4.2017. However, the petitioner vide letter dated 15.4.2017 informed that he had already withdrawn its bid on
30.3.2017 and, therefore, its EMD worth `25 lacs may be refunded. Thereafter, the petitioner was again requested by respondent No.2 to submit the
sample for Dal Chana vide letter dated 17.4.2017 because as per the terms and conditions of the tender document, the petitioner was not allowed to
withdraw its bid when it had already been opened in the presence of the other parties on 16.3.2017. The matter of the petitioner was thereafter
referred to the SLPC, who recommended that a show cause notice be issued to the petitioner and a short terms e-tender be invited for the
procurement of Dal Chana immediately. After the receipt of the recommendation of the SLPC, a show cause notice dated 3.5.2017 was issued to the
petitioner and the matter of the petitioner alongwith the reply was again placed before the SLPC in its meeting held on 30.5.2017. The SLPC
recommended that since the petitioner had violated the terms and conditions of the tender document, therefore EMD of `25 lacs may be forfeited,
besides blacklisting of the bidder as per Clause 2 (2) of the tender document. The averments made in the preliminary objections have been reiterated
in the meanwhile, therefore, we need not to advert to the same.
The petitioner has filed the rejoinder to the reply of respondent No.2, wherein its stand in the writ petition has been reiterated and the contrary
averments made in the reply have been denied.
It is vehemently argued by Mr. Atul Jhingan, learned counsel for the petitioner that the respondent No.2 being a public authority was bound to act in
a bonafide manner and in good faith and even otherwise it was bound to comply with the provisions of Section 74 of the Contract Act and having
failed to do so, its action intended to forfeit the EMD and also blacklisted the petitioner as per the terms of show cause notice dated 3.5.2017 cannot
withstand judicial scrutiny and therefore, the said notice deserves to be quashed and set-aside and the respondent deserves to be directed to refund the
EMD to the petitioner and also ensure that it is not blacklisted.
On the other hand Mr. Navlesh Verma, learned counsel for respondent No.2 would vehemently contend that the petitioner having participated in the
tender process is bound by all the terms and conditions thereof and can take no exception since the action of the respondent is strictly in accordance
with law and as the conditions as stipulated in the tender form. We have heard learned counsel for the parties and have gone through the records of
the case carefully.
The condition No.2 of the tender relates to Earnest Money Deposit (EMD) and Performance Security Deposit and reads thus: “1. Every bid
should be accompanied with documentary proof in token of having deposited the Earnest Money amounting to Rs.25,00,000/- (Rupees Twenty five
lacs only) in respect of each pulse subject to a maximum of Rs. 75,00,000/- (Rupees Seventy Five Lacs only) in case a bidder bids for three or more
pulses, through RTGs in Corporation’s Current Account No.10836143047 of State Bank of India Branch at Shimla IFS Code No. SBIN0000718)
failing which the bid shall be out-rightly rejected. The successful tenderer shall have to deposit a Performance Security equal to Five percent (5%) of
the cost of approved Pulse in the form of account payee demand draft or duly pledged fixed deposit receipt or bank guarantee from any scheduled
bank with the HP State Civil Supplies Corporation in the shape of Performance Security within a week from the issue of supply order. The Earnest
Money of successful bidder shall also be returned immediately after the submission of 5% Performance Security. No interest shall be payable on such
security. The Performance Security shall remain valid for a period of 60 days from the date of completion of the contract including warranty and
guarantee period to the best of satisfaction of the Corporation. The Earnest Money of the unsuccessful bidder will be returned through RTGs within
15 days after finalization of the tender. 2. EMD is liable to be forfeited in case the tenderer withdraws his offer after filing the tender or after the
acceptance of the offer by the HPSCSC Ltd. or fails to deposit the performance security deposit within the specified time, apart from blacklisting the
tenderer.â€
11.A perusal of the aforesaid condition, would clearly go to show that an amount of `25,00,000/- was towards the Earnest Money and in terms of
condition No. 2 (2), this amount was liable to be forfeited in case the tenderer:
(i) Withdraws his offer after filing the tender or ;
(ii) After the acceptance of the offer by the HPSCSC Ltd; or
(iii) fails to deposit the performance security deposit within the specified time, in addition thereof, it was also liable to be blacklisted.
Section 74 of the Indian Contract Act, which have been heavily relied upon by the petitioner reads thus: “74. Compensation for breach of
contract where penalty stipulated for:- 34 [When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of
such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual
damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding
the amount so named or, as the case may be, the penalty stipulated for. Explanation.â€" A stipulation for increased interest from the date of default
may be a stipulation by way of penalty.] (Exception) â€" When any person enters into any bail-bond, recognizance or other instrument of the same
nature or, under the provisions of any law, or under the orders of the 35 [Central Government] or of any 36 [State Government], gives any bond for
the performance of any public duty or act in which the public are interested, he shall be liable, upon breach of the condition of any such instrument, to
pay the whole sum mentioned therein. Explanation.â€" A person who enters into a contract with Government does not necessarily thereby undertake
any public duty, or promise to do an act in which the public are interested.â€
Relying upon the aforesaid provision, it is vehemently contended by Mr. Atul Jhingan, learned counsel for the petitioner that the respondent at best
could have forfeited a reasonable amount paid towards the Earnest Money but could not have forfeited the said amount in its entirety as that would
amount to imposing a penalty which is not permissible under Section 74 (supra).
In support of his contention, he has placed reliance upon the decision of three Judges of the Hon’ble Supreme Court in Maula Bux vs. Union
of India 1969 (2) SCC 554, more particularly, the following observations: “4. Under the terms of the agreements the amounts deposited by the
plaintiff as security for due performance of the contracts were to stand forfeited in case the plaintiff neglected to perform his part of the contract. The
High Court observed that the deposits so made may be regarded as earnest money. But that view cannot be accepted. According to Earl Jowitt in
The Dictionary of English Law"" at p. 689: ""Giving an earnest or earnest-money is a mode of signifying assent to a contract of sale or the like, by
giving to the vendor a nominal sum (e.g. a shilling) as a token that the parties are in earnest or have made up their minds."" As observed by the Judicial
Committee in Kunwar Chiranjit Singh v. Har Swarup, AIR (1926) PC 1: ""Earnest money is part of the purchase price when the transaction goes
forward: it is forfeited when the transaction falls through, by reason of the fault or failure of the vandee."" In the present case the deposit was made
not of a sum of money by the purchaser to be applied towards part payment of the price when the contract was completed and till then as evidencing
an intention on the part of the purchaser to buy property or goods. Here the plaintiff had deposited the amounts claimed as security for guaranteeing
due performance of the contracts. Such deposits cannot be regarded as earnest money. Section 74 of the Contract Act provides: ""When a contract
has been broken, if a sum is named in the contract as the amount to be paid in case (1) A.I.R. 1926 P.C. 1 of such breach, or if the contract contains
any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been
caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case
may be, the penalty stipulated for. There is authority, no doubt coloured by the view which was taken in English cases, that s. 74 of the Contract Act
has no application to cases of deposit for due performance of a contract which is stipulated to be forfeited for breach: Natesa Aiyar v. Appavu
Padayachi (1913) ILR 38 Mad 178; Singer Manufacturing Company v. Raja Prosad(1909) ILR 36 Cal 960; Manian Patter v. The Madras Railway
Company (1906) ILR 19 Mad 188. But this view is no longer good law in view of the judgment of this Court in Fateh Chand's case (supra). This Court
observed at p. 526: ""Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases (i) where the contract names a
sum to be paid in case of breach, and (ii) where the contract contains any other stipulation by way of penalty…….â€. “The measure of damages
in the case of breach of 'a stipulation by way of penalty is by Section 74, reasonable compensation no t exceeding the penalty stipulated for."" The
Court also observed: ""It was urged that the section deals in terms with the right to receive from the party who has broken the contract reasonable
compensation and not the right to forfeit what has already been received by the party aggrieved. There is however no warrant for the assumption
made by some of the High Courts in India, that Section 74, applies only to cases where the aggrieved party is seeking to receive some amount on
breach of contract and not to cases whereupon breach of contract an amount received under the contract is sought to be forfeited. In our judgment
the expression ""the contract contains any other stipulation by way of penalty"" comprehensively applies to every covenant involving a penalty whether it
is for payment on breach of contract of money or delivery of property in future, or for forfeiture of right to money or other property already delivered.
Duty not to enforce the penalty clause but only to award reasonable compensation is statutorily imposed upon courts by Section 74. In all cases,.
therefore, where there is a stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the terms of contract which expressly
provides for forfeiture, the court has jurisdiction to award such sum only as it considers reasonable but not exceeding the amount specified in the
contract as liable to. forfeiture."", and that, ""There is no. ground for holding that the expression ""contract contains any other stipulation by way of
penalty"" is limited to cases of stipulation in the nature of an agreement to. pay money or deliver property on breach and does not comprehend
covenants under which amounts paid or property delivered under the contract, which by the terms of the contract expressly or by clear implication are
liable to be forfeited."" 5. Forfeiture of earnest money under a contract for sale of property-movable or immovable--if the amount is reasonable, does
not fall within s. 74. That has been decided in several cases: Kunwar Chiranjit Singh v. Hat Swarup (t); Roshan Lal v. The Delhi Cloth and General
Mills Company Ltd., Delhi(2); Muhammad Habibullah v. Muhammad Shafi(3); Bishan Chand v. Radha Kishan Das(4); These cases are easily
explained, for forfeiture of a reasonable amount paid as earnest money does not amount to. imposing a penalty. But if forfeiture is of the nature of
penalty, s. 74 applies. Where under the terms of the contract the party in breach has undertaken to pay a sum of money or to forfeit a sum of money
which he has already paid to the party complaining of a breach of contract, the undertaking is of the nature of a penalty.â€
Reliance is further placed upon the judgment of the Hon’ble Supreme Court in Saurabh Prakash vs. DLF Universal Ltd. (2007) 1 SCC 228
and Yogesh Mehta vs. Custodian Appointed under the Special Court and others (2007) 2 SCC 624, wherein the ratio laid down in (1969) Maula Bux
(supra) has been reiterated.
We have gone through the aforesaid decisions of the Hon’ble Supreme Court in Maula Bux case (supra) and find that the ratio laid down
therein is not at all applicable to the facts of the present case for the simple reason that the said case did not relate to earnest money and, therefore,
the observations made therein that the forfeiture of earnest money under a contract if unreasonable does not fall within Section 74 and would fall
within Section 74 only if earnest money is considered as a penalty is not a matter that directly arose for decision in that case. This was so held by the
Hon’ble Supreme Court in Kailash Nath Associates vs. Delhi Development Authority and another (2015) 4 SCC 136 and it is apt to reproduce the
relevant observations which read thus: “35. Similarly, in Maula Bux v. Union of India (UOI), 1970 (1) SCR 928, it was held: ""35. Forfeiture of
earnest money under a contract for sale of property- movable or immovable-if the amount is reasonable, does not fall within Section 74. That has been
decided in several cases :Kunwar Chiranjit Singh v. Har Swarup, A.I.R.1926 P.C.1; Roshan Lal v. The Delhi Cloth and General Mills Company Ltd.,
Delhi, I.L.R. All.166; Muhammad Habibullah v. Muhammad Shafi, I.L.R. All. 324; Bishan Chand v. Radha Kishan Das, I.D. 19 All. 49. These cases
are easily explained, for forfeiture of a reasonable amount paid as earnest money does not amount to imposing a penalty. But if forfeiture is of the
nature of penalty, Section 74 applies. Where under the terms of the contract the party in breach has undertaken to pay a sum of money or to forfeit a
sum of money which he has already paid to the party complaining of a breach of contract, the undertaking is of the nature of a penalty. Counsel for
the Union, however, urged that in the present case Rs. 10,000/- in respect of the potato contract and Rs. 8,500 in respect of the poultry contract were
genuine pre-estimates of damages which the Union was likely to suffer as a result of breach of contract, and the plaintiff was not entitled to any relief
against forfeiture. Reliance in support of this contention was placed upon the expression (used in Section 74 of the Contract Act), ""the party
complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has
broken the contract reasonable compensation"". It is true that in every case of breach of contract the person aggrieved by the breach is not required to
prove actual loss or damage suffered by him before he can claim a decree, and the Court is competent to award reasonable compensation in case of
breach even if no actual damage is proved to have been suffered in consequence of the breach of contract. But the expression ""whether or not actual
damage or loss is proved to have been caused thereby"" is intended to cover different classes of contracts which come before the Courts. In case of
breach of some contracts it may be impossible for the Court to assess compensation arising from breach, while in other cases compensation can be
calculated in accordance with established rules. Where the Court is unable to assess the compensation, the sum named by the parties if it be regarded
as a genuine pre-estimate may be taken into consideration as the measure of reasonable compensation, but not if the sum named is in the nature of a
penalty. Where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him. In the present case, it
was possible for the Government of India to lead evidence to prove the rates at which potatoes, poultry, eggs and fish were purchased by them when
the plaintiff failed to deliver ""regularly and fully"" the quantities stipulated under the terms of the contracts and after the contracts were terminated.
They could have proved the rates at which they had to be purchased and also the other incidental charges incurred by them in procuring the goods
contracted for. But no such attempt was made.
In Shree Hanuman Cotton Mills and Anr. v. Tata Aircraft Limited, (1969) 3 SC 522 it was held:""From a review of the decisions cited above, the
following principles emerge regarding ""earnest"":
(1) It must be given at the moment at which the contract is concluded.
(2) It represents a guarantee that the contract will be fulfilled or, in other words, 'earnest' is given to bind the contract.
(3) It is part of the purchase price when the transaction is carried out.
(4) It is forfeited when the transaction falls through by reason of the default or failure of the purchaser.
(5) Unless there is anything to the contrary in the terms of the contract, on default committed by the buyer, the seller is entitled to forfeit the earnest.
The learned Attorney General very strongly urged that the pleas covered by the second contention of the appellant had never been raised in the
pleadings nor in the contentions urged before the High Court. The question of the quantum of earnest deposit which was forfeited being unreasonable
or the forfeiture being by way of penalty, were never raised by the appellants. The Attorney General also pointed out that as noted by the High Court
the appellants led no evidence at all and, after abandoning the various pleas taken in the plaint, the only question pressed before the High Court was
that the deposit was not by way of earnest and hence the amount could not be forfeited. Unless the appellants had pleaded and established that there
was unreasonableness attached to the amount required to be deposited under the contract or that the clause regarding forfeiture amounted to a
stipulation by way of a penalty, the respondents had no opportunity to satisfy the Court that no question of unreasonableness or the stipulation being by
way of penalty arises. He further urged that the question of unreasonableness or otherwise regarding earnest money does not at all arise when it is
forfeited according to the terms of the contract. In our opinion the learned Attorney General is well founded in his contention that the appellants raised
no such contentions covered by the second point, noted above. It is therefore unnecessary for us to go into the question as to whether the amount
deposited by the appellants, in this case, by way of earnest and forfeited as such, can be considered to be reasonable or not. We express no opinion on
the question as to whether the element of unreasonableness can ever be considered regarding the forfeiture of an amount deposited by way of earnest
and if so what are the necessary factors to be taken into account in considering the reasonableness or otherwise of the amount deposited by way of
earnest. If the appellants were contesting the claim on any such grounds, they should have laid the foundation for the same by raising appropriate
pleas and also led proper evidence regarding the same, so that the respondents would have had an opportunity of meeting such a claim.
And finally in ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705, it was held: (SCC Pp 740-43, paras 64 & 67-68) ""64. It is apparent from the
aforesaid reasoning recorded by the Arbitral Tribunal that it failed to consider Sections 73 and 74 of the Indian Contract Act and the ratio laid down in
Fateh Chand case [AIR 1963 SC 140: (1964) 1 SCR 515 at p. 526] wherein it is specifically held that jurisdiction of the court to award compensation
in case of breach of contract is unqualified except as to the maximum stipulated; and compensation has to be reasonable. Under Section 73, when a
contract has been broken, the party who suffers by such breach is entitled to receive compensation for any loss caused to him which the parties knew
when they made the contract to be likely to result from the breach of it. This section is to be read with Section 74, which deals with penalty stipulated
in the contract, inter alia (relevant for the present case) provides that when a contract has been broken, if a sum is named in the contract as the
amount to be paid in case of such breach, the party complaining of breach is entitled, whether or not actual loss is proved to have been caused,
thereby to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named. Section 74 emphasizes
that in case of breach of contract, the party complaining of the breach is entitled to receive reasonable compensation whether or not actual loss is
proved to have been caused by such breach. Therefore, the emphasis is on reasonable compensation. If the compensation named in the contract is by
way of penalty, consideration would be different and the party is only entitled to reasonable compensation for the loss suffered. But if the
compensation named in the contract for such breach is genuine pre-estimate of loss which the parties knew when they made the contract to be likely
to result from the breach of it, there is no question of proving such loss or such party is not required to lead evidence to prove actual loss suffered by
him. … 67........In our view, in such a contract, it would be difficult to prove exact loss or damage which the parties suffer because of the breach
thereof. In such a situation, if the parties have pre-estimated such loss after clear understanding, it would be totally unjustified to arrive at the
conclusion that the party who has committed breach of the contract is not liable to pay compensation. It would be against the specific provisions of
Sections 73 and 74 of the Indian Contract Act. There was nothing on record that compensation contemplated by the parties was in any way
unreasonable. It has been specifically mentioned that it was an agreed genuine pre-estimate of damages duly agreed by the parties. It was also
mentioned that the liquidated damages are not by way of penalty. It was also provided in the contract that such damages are to be recovered by the
purchaser from the bills for payment of the cost of material submitted by the contractor. No evidence is led by the claimant to establish that the
stipulated condition was by way of penalty or the compensation contemplated was, in any way, unreasonable. There was no reason for the Tribunal
not to rely upon the clear and unambiguous terms of agreement stipulating pre-estimate damages because of delay in supply of goods. Further, while
extending the time for delivery of the goods, the respondent was informed that it would be required to pay stipulated damages.
From the aforesaid discussions, it can be held that:
(1) Terms of the contract are required to be taken into consideration before arriving at the conclusion whether the party claiming damages is entitled
to the same.
(2) If the terms are clear and unambiguous stipulating the liquidated damages in case of the breach of the contract unless it is held that such estimate
of damages/compensation is unreasonable or is by way of penalty, party who has committed the breach is required to pay such compensation and that
is what is provided in Section 73 of the Contract Act.
(3) Section 74 is to be read along with Section 73 and, therefore, in every case of breach of contract, the person aggrieved by the breach is not
required to prove actual loss or damage suffered by him before he can claim a decree. The court is competent to award reasonable compensation in
case of breach even if no actual damage is proved to have been suffered in consequence of the breach of a contract.
(4) In some contracts, it would be impossible for the court to assess the compensation arising from breach and if the compensation contemplated is not
by way of penalty or unreasonable, the court can award the same if it is genuine pre-estimate by the parties as the measure of reasonable
compensation.
It will be seen that when it comes to forfeiture of earnest money, in Fateh Chand's case, counsel for the appellant conceded on facts that
Rs.1,000/-deposited as earnest money could be forfeited. (See: 1964 (1) SCR Page 515 at 525 and 531).
Shree Hanuman Cotton Mills & Another which was so heavily relied by the Division Bench again was a case where the appellants conceded that
they committed breach of contract. Further, the respondents also pleaded that the appellants had to pay them a sum of Rs.42,499/- for loss and
damage sustained by them. (See: 1970 (3) SCR 127 at Page 132). This being the fact situation, only two questions were argued before the Supreme
Court: (1) that the amount paid by the plaintiff is not earnest money and (2) that forfeiture of earnest money can be legal only if the amount is
considered reasonable. (at page 133). Both questions were answered against the appellant. In deciding question two against the appellant, this Court
held:- ""But, as we have already mentioned, we do not propose to go into those aspects in the case on hand. As mentioned earlier, the appellants never
raised any contention that the forfeiture of the amount amounted to a penalty or that the amount forfeited is so large that the forfeiture is bad in law.
Nor have they raised any contention that the amount of deposit is so unreasonable and therefore forfeiture of the entire amount is not justified. The
decision in Maula Bux's [1970]1SCR928 had no occasion to consider the question of reasonableness or otherwise of the earnest deposit being
forfeited. Because, from the said judgment it is clear that this Court did not agree with the view of the High Court that the deposits made, and which
were under consideration, were paid as earnest money. It is under those circumstances that this Court proceeded to consider the applicability of
Section 74 of the Contract Act.
From the above, it is clear that this Court held that Maula Bux's case was not, on facts, a case that related to earnest money. Consequently, the
observation in Maula Bux that forfeiture of earnest money under a contract if reasonable does not fall within Section 74, and would fall within Section
74 only if earnest money is considered a penalty is not on a matter that directly arose for decision in that case. The law laid down by a Bench of 5
Judges in Fateh Chand's case is that all stipulations naming amounts to be paid in case of breach would be covered by Section 74. This is because
Section 74 cuts across the rules of the English Common Law by enacting a uniform principle that would apply to all amounts to be paid in case of
breach, whether they are in the nature of penalty or otherwise. It must not be forgotten that as has been stated above, forfeiture of earnest money on
the facts in Fateh Chand's case was conceded. In the circumstances, it would therefore be correct to say that as earnest money is an amount to be
paid in case of breach of contract and named in the contract as such, it would necessarily be covered by Section 74.â€
At this stage, it needs to be observed that the instant is not a simple case of tender, but it relates to procurement of pulses under the State Special
Subsidized Scheme, which in turn, thereafter are distributed under the Public Distribution System (PDS) to the Below Poverty Line (BPL), Antodaya
families apart from others. Therefore, it is of utmost importance that there is timely supply of the pulses in terms of the tender or else, there will be no
pulses for distribution under the Public Distribution System more especially the far flung and tribal areas of the State. Now, in case there is absence of
any term stipulating forfeiture of the earnest money that 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 was clearly to see that only genuine bids are received.
As a matter of fact, somewhat identical issue, as is involved in the present case, came up before three Judges Bench of the Hon’ble Supreme
Court in National Thermal Power Corporation Limited vs. Ashok Kumar Singh and others (2015) 4 SCC 252, wherein it was held that the forfeiture of
earnest money when it is made for breach of auction/tender condition a pre-contractual stage when no contract has yet come into existence, does not
infringe any statutory right under the Contract Act, 1872 since the earnest/ security is given and taken in such cases only to ensure that a contract
comes into existence. It was further held that even though the tenderer has a right to withdraw his offer, but he will have no right to claim refund of
earnest money if such offer is subjected to the condition that earnest money will be forfeited, if the order is withdrawn. It is apt to reproduce the
relevant observations as contained in paras 6 to 13 which read thus:“6. Condition No. 2 of Special Conditions of Contract may be extracted. It
reads: ""2. The earnest money shall be forfeited on the following grounds:
(a) On revocation of the tender or,
(b) On refusal to enter into a Contract afterward to a Contractor or,
(c) If the work is not commenced after the work is awarded to a Contractor."" A plain reading of the above would show that one of the Special
Conditions of Contract, subject to which the intending bidders could submit their bids, was that the earnest money accompanying the bid shall be
forfeited in any one of the three contingencies referred to in Condition 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-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 tender notice is the prerogative of the appellant-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 is the plain and the simple meaning of the
Condition No. 2 extracted above. The High Court was in manifest error in holding that the forfeiture did not fall within the purview of Condition No. 2.
It was next argued on behalf of the respondent that the 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-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. Inasmuch as respondent had done so, he was well within his
rights to demand refund of earnest money accompanying the bids. The forfeiture of the amount was illegal and the High Court justified in holding that
the respondent entitled to a refund.
On behalf of the appellant-corporation it was contended that the submission of the bid itself was subject to the condition that it shall be accompanied
by an earnest money deposit which was liable to be forfeited in the event of the withdrawal of the bid. Opening of the bid or acceptance thereof in
terms of Section 5 of the Contract Act, 1872 was, 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. Dhingra upon the decisions of this Court in National Highways
Authority of India v. Ganga Enterprises and another (2003) 7 SCC 410; State of Maharashtra and others v. A.P. Paper Mills Ltd. (2006) 4 SCC 209;
and State of Haryana and others v. Malik Traders (2011) 13 SCC 200.
In Ganga Enterprises case (supra) 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. 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: ""9.... ... ...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.
In A.P. Paper Mills (supra) this Court was dealing with almost similar situation where according to Clause 5 of the 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: (SCC p.23, para 13) “13. ….. 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.
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, 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: ""11…..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 its bid before the expiry of the said period of 90 [pic]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.
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 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.â€
Therefore, we find no difficulty in upholding the action of the respondents whereby they have issued show cause notice and the petitioner has been
asked to show cause as to why its EMD amounting to `25 lacs may not be forfeited. However, as regards, the show cause notice for blacklisting, we
have strong reservations for the same. At this stage, it would be apposite to reproduce the relief born of the show  cause notice, which reads thus:
“…..In view of above, you are hereby informed through this Show Cause Notice, as to why your EMD amounting to Rs.25.00 lakhs may not be
forfeited apart from blacklisting you. Your reply to this Show Cause Notice must reach this office within 15 days from the issue of this Show Cause
Notice else it will be presumed that you have nothing to say in this regard and necessary action as per the terms and conditions of the tender
document will be initiated against you.â€
It is more than settled that the fundamental purpose behind the serving of show cause notice is to make the noticee understand the precise case
set up against him which he has to meet. Therefore, this not only requires the statement of imputations detailing out the alleged breaches and defaults
one has committed, so that he gets an opportunity to rebut the same, but another requirement is the nature of the action, which is proposed to be taken
for such a breach, that has to be clearly set out so that the noticee is able to point out that proposed action is not warranted in the given case, even if
the defaults/breaches complained of are not satisfactorily. When it comes to black listing, this requirement becomes all the more imperative, having
regard to the fact that it is the harshest possible action.
While taking the aforesaid view, we draw support from the judgement of the Hon’ble Supreme Court in Gorkha Security Services vs.
Government (NCT of Delhi) and others (2014) 9 SCC 105, wherein it was observed as follows:- “Necessity of serving show cause notice as a
requisite of the Principles of Natural Justice:
It is a common case of the parties that the blacklisting has to be preceded by a show cause notice. Law in this regard is firmly grounded and does
not even demand much amplification. The necessity of compliance with the principles of natural justice by giving the opportunity to the person against
whom action of blacklisting is sought to be taken has a valid and solid rationale behind it. With blacklisting many civil and/ or evil consequences follow.
It is described as “civil death†of a person who is foisted with the order of blacklisting. Such an order is stigmatic in nature and debars such a
person from participating in Government Tenders which means precluding him from the award of Government contracts.
Way back in the year 1975, this court in the case of M/s. Erusian Equipment & Chemicals Ltd. v. State of West Bengal & Anr. (1975) 1 SCC 70 ,
highlighted the necessity of giving an opportunity to such a person by serving a show cause notice thereby giving him opportunity to meet the
allegations which were in the mind of the authority contemplating blacklisting of such a person. This is clear from the reading of Para Nos. 12 and 20
of the said judgment. Necessitating this requirement, the court observed thus: “12. Under Article 298 of the Constitution the executive power of the
Union and the State shall extend to the carrying on of any trade and to the acquisition, holding and disposal of property and the making of contracts for
any purpose. The State can carry on executive function by making a law or without making a law. The exercise of such powers and functions in trade
by the State is subject to Part III of the Constitution. Article 14 speaks of equalitybefore the law and equal protection of the laws. Equality of
opportunity should apply to matters of public contracts. The State has the right to trade. The State has there the duty to observe equality. An ordinary
individual can choose not to deal with any person. The Government cannot choose to exclude persons by discrimination. The order of blacklisting has
the effect of depriving a person of equality of opportunity in the matter of public contract. A person who is on the approved list is unable to enter into
advantageous relations with the Government because of the order of blacklisting. A person who has been dealing with the Government in the matter
of sale and purchase of materials has a legitimate interest or expectation. When the State acts to the prejudice of a person it has to be supported by
legality.
Blacklisting has the effect of preventing a person from the privilege and advantage of entering into lawful relationship with the Government for
purposes of gains. The fact that a disability is created by he order of blacklisting indicates that the relevant authority is to have an objective
satisfaction. Fundamentals of fair play require that the person concerned should be given an opportunity to represent his case before he is put on the
blacklistâ€.
Again, in Raghunath Thakur v. State of Bihar and Ors. (1989) 1 SCC 229 the aforesaid principle was reiterated in the following manner:- 4.
Indisputably, no notice had been given to the appellant of the roposal of blacklisting the appellant. It was contended on behalf of the State Government
that there was no requirement in the rule of giving any priornotice before blacklisting any person. Insofar as the contention that there is no requirement
specifically of giving any notice is concerned, the respondent is right. But it is an implied principle of the rule of law that any order having civil
consequence should e passed only after following the principles of natural justice. It has to be realised that blacklisting any person in respect of
business ventures has civil consequence for the future business of the person concerned in any event. Even if the rules do not express so, it is an
elementary principle of natural justice that parties affected by any order should have right of being heard and making representations against the order.
In that view of the matter, the last portion  of the order insofar as it directsblacklisting of the appellant in respect of future contracts, cannot be
sustained in law. In the premises, that portion of the order directing that the appellant be placed in the blacklist in respect of future contracts under the
Collector is set aside. So far as the cancellation of the bid of the appellant is concerned, that is not affected. This order will, however, not prevent the
State Government or the appropriate authorities from taking any future steps for blacklisting the appellant if the Government is so entitled to do in
accordance with law i.e. after giving the appellant due notice and an opportunity of making representation. After hearing the appellant, the State
Government will be at liberty to pass any order in accordance with law indicating the reasons therefor. We, however, make it quite clear that we are
not expressing any opinion on the correctness of otherwise of the allegations made against the appellant. The appeal is thus disposed of.â€
Recently, in the case of Patel Engineering Ltd. v. Union of India and Anr. (2012) 11 SCC 257 speaking through one of us (Jasti Chelameswar,J.)
this Court emphatically reiterated the principle by explaining the same in the following manner: “ “13. The concept of “blacklisting†is
explained by this Court in Erusian Equipment & Chemicals Ltd. v. State of W.B. as under:
‘20. Blacklisting has the effect of preventing a person from the privilege and advantage of entering into lawful relationship with the Government for
purposes of gains.’ 14. The nature of the authority of the State to blacklist the persons was considered by this Court in the abovementioned case
and took note of the constitutional provision (Article 298), which authorises both the Union of India and the States to make contracts for any purpose
and to carry on any trade or business. It also authorises the acquisition, holding and disposal of property. This Court also took note of the fact that the
right to make a contract includes the right not to make a contract. By definition, the said right is inherent in every person capable of entering into a
contract. However, such a right either to enter or not to enter into a contract with any person is subject to a constitutional obligation to obey the
command of Article 14. Though nobody has any right to compel the State to enter into a contract, everybody has a right to be treated equally when the
State seeks to establish contractual relationships. The effect of excluding a person from entering into a contractual relationship with the State would be
to deprive such person to be treated equally with those, who are also engaged in similar activity.
It follows from the above judgment in Erusian Equipment case that the decision of the State or its instrumentalities not to deal with certain persons
or class of persons on account of the undesirability of entering into the contractual relationship with such persons is called blacklisting. The State can
decline to enter into a contractual relationship with a person or a class of persons for a legitimate purpose. The authority of the State to blacklist a
person is a necessary concomitant to the executive power of the State to carry on the trade or the business and making of contracts for any purpose,
etc. There need not be any statutory grant of such power. The only legal limitation upon the exercise of such an authority is that the State is to act
fairly and rationally without in any way being arbitraryâ€"thereby such a decision can be taken for some legitimate purpose. What is the legitimate
purpose that is sought to be achieved by the State in a given case can vary depending upon various factors.â€
Thus, there is no dispute about the requirement of serving show cause notice. We may also hasten to add that once the show cause notice is given
and opportunity to reply to the show cause notice is afforded, it is not even necessary to give an oral hearing. The High Court has rightly repudiated
the appellant's attempt in finding foul with the impugned order on this ground. Such a contention was specifically repelled in Patel Engineering (supra).
Contents of Show Cause Notice
The Central issue, however, pertains to the requirement of stating the action which is proposed to be taken. The fundamental purpose behind the
serving of Show Cause Notice is to make the noticee understand the precise case set up against him which he has to meet. This would require the
statement of imputations detailing out the alleged breaches and defaults he has committed, so that he gets an opportunity to rebut the same. Another
requirement, according to us, is the nature of action which is proposed to be taken for such a breach. That should also be stated so that the noticee is
able to point out that proposed action is not warranted in the given case, even if the defaults/ breaches complained of are not satisfactorily explained.
When it comes to black listing, this requirement becomes all the more imperative, having regard to the fact that it is harshest possible action.
The High Court has simply stated that the purpose of show cause notice is primarily to enable the noticee to meet the grounds on which the action
is proposed against him. No doubt, the High Court is justified to this extent. However, it is equally important to mention as to what would be the
consequence if the noticee does not satisfactorily meet the grounds on which an action is proposed. To put it otherwise, we are of the opinion that in
order to fulfil the requirements of principles of natural justice, a show cause notice should meet the following two requirements viz:
i) The material/ grounds to be stated on which according to the Department necessitates an action;
ii) Particular penalty/action which is proposed to be taken. It is this second requirement which the High Court has failed to omit. We may hasten to
add that even if it is not specifically mentioned in the show cause notice but it can be clearly and safely be discerned from the reading thereof, that
would be sufficient to meet this requirement.†“27. We are, therefore, of the opinion that it was incumbent on the part of the Department to state
in the show cause notice that the competent authority intended to impose such a penalty of blacklisting, so as to provide adequate and meaningful
opportunity to the appellant to show cause against the same. However, we may also add that even if it is not mentioned specifically but from the
reading of the show cause notice, it can be clearly inferred that such an action was proposed, that would fulfill this requirement. In the present case,
however, reading of the show cause notice does not suggest that noticee could find out that such an action could also be taken. We say so for the
reasons that are recorded hereinafter.†“29. No doubt, rules of natural justice are not embodied rules nor can they be lifted to the position of
fundamental rights. However, their aim is to secure justice and to prevent miscarriage of justice. It is now well established proposition of law that
unless a statutory provision either specifically or by necessary implication excludes the application of any rules of natural justice, in exercise of power
pre-judicially affecting another must be in conformity with the rules of natural justice.†“31. When it comes to the action of blacklisting which is
termed as 'Civil Death' it would be difficult to accept the proposition that without even putting the noticee to such a contemplated action and giving him
a chance to show cause as to why such an action be not taken, final order can be passed blacklisting such a person only on the premise that this is one
of the actions so stated in the provisions of NIT.â€
In view of the law propounded by the Hon’ble Supreme Court in the aforesaid decision, the show cause notice to the petitioner wit h respect
to blacklisting of its firm cannot be countenanced. The mere fact that the petitioner could have blacklisted in terms of condition No. 2(2) of the
agreement entered into between the parties, does not meet the mandatory requirement of the show cause notice in which it ought to have been either
specifically mentioned or could clearly and safely be discerned from the reading thereof that would be sufficient to meet the requirement and the
petitioner could thereafter be black-listed. Therefore, in absence of any specific stipulation in the show cause notice, the same cannot withstand
judicial scrutiny and to that extent the same is quashed and set - aside. However, this would not preclude the respondent No.2 from issuing a fresh
show cause notice to the petitioner in terms and in accordance with law.
Consequently, the writ petition is partly allowed to the aforesaid extent. However, it is once again made clear that it would be open to the
respondents to take action against the petitioner after complying with the necessary procedure and formalities as delineated above. The parties are left
to bear their own costs. Pending application, if any, stands disposed of.