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Villayati Ram Mittal Private Limited v. Union Of India And Another
Factual and Procedural Background
The petitioner, a private limited construction company, responded to an April 2004 notice inviting tenders for the construction of married accommodation at Shankar Vihar II, Delhi Cantonment, estimated at ₹40 crore. Clause 6 of the notice required an earnest money deposit of ₹40 lakh by fixed deposit receipt (FDR) from a nationalised bank and provided that the deposit would be forfeited if the tenderer revoked its offer during the bid-validity period.
The petitioner submitted the lowest bid of ₹32 crore on 5-5-2004 together with an FDR issued by UTI Bank. On 6-5-2004, it sent a letter correcting one figure in its tender from ₹23,76,000 to ₹32,76,000, which increased its overall offer to approximately ₹41 crore. Treating this correction as a revocation of the original offer, Respondent 2 forfeited the petitioner’s earnest money.
The petitioner’s writ petition (W.P. (C) No. 14998/2004) challenging the forfeiture was dismissed by the Delhi High Court on 15-10-2008. The present special leave petition under Article 136 of the Constitution seeks to overturn that High Court judgment.
Legal Issues Presented
- Whether the petitioner’s letter dated 6-5-2004 correcting the bid amount constituted a revocation of its original offer within the meaning of Clause 6 of the tender notice.
- Consequently, whether Respondent 2 was entitled to forfeit the earnest money deposit of ₹40 lakh.
- Whether the later cancellation of the entire tender process required the respondents to refund the forfeited earnest money.
Arguments of the Parties
Petitioner’s Arguments
- The original earnest money was defective because the FDR was issued by UTI Bank, not a nationalised bank as required; thus the tender was already imperfect and the correction should not be treated as revocation.
- The correction from ₹23,76,000 to ₹32,76,000 merely rectified an arithmetical mistake discovered immediately after opening the bids.
- Since the entire tender was later recalled and a fresh notice issued, the earnest money should have been returned.
Respondents’ Arguments
- The High Court correctly held that the petitioner’s correction enhanced its bid from ₹32 crore to ₹41 crore, thereby revoking the original offer.
- Letters were sent offering the petitioner an opportunity to withdraw its corrective letter by 4-6-2004, but it declined, confirming its intention not to honour the ₹32 crore bid.
- Owing to the petitioner’s non-compliance, the tender had to be reinvited at revised costs, justifying forfeiture under Clause 6.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Chiranjit Singh v. Har Swarup, AIR 1926 PC 1 | Earnest money forms part of the purchase price if the contract proceeds; it is forfeited when the transaction fails due to the vendee’s fault. | Used to affirm that a tenderer at fault cannot reclaim earnest money once the contract collapses through its own default. |
| Shri Hanuman Cotton Mills v. Tata Air Craft Ltd., (1969) 3 SCC 522 | Reiteration of principles governing forfeiture of earnest money. | Cited to reinforce the enforceability of earnest-money forfeiture clauses. |
| HUDA v. Kewal Krishan Goel, (1996) 4 SCC 249 | Definition of “earnest” as security to bind the contract and apply pressure on the defaulting party. | Relied on to show that earnest money is meant to secure performance and may be forfeited on default. |
| Sumner & Leivesley v. John Brown & Co., (1909) 25 TLR 745 | Explained that earnest binds the bargain and is forfeited if the giver defaults. | Quoted (via HUDA) to illustrate historical understanding of earnest money’s purpose. |
Court's Reasoning and Analysis
The Supreme Court first noted the explicit wording of Clause 6, which permits forfeiture if a firm “revokes its offer during the validity period.” The petitioner’s corrective letter increased the bid by about ₹9 crore, materially altering—and therefore revoking—the original ₹32 crore offer. Respondents had even invited the petitioner to withdraw the correction, but it refused, underscoring its unwillingness to honour the initial bid.
Applying the jurisprudence on earnest money from Chiranjit Singh, Shri Hanuman Cotton Mills, and HUDA, the Court observed that such a deposit is forfeitable when the transaction fails owing to the tenderer’s default. Because the petitioner’s conduct necessitated re-invitation of tenders at revised costs, the failure of the original transaction was attributable to the petitioner. Consequently, Respondent 2’s action of forfeiture was squarely within the contractual terms and established legal principles.
The Court also rejected the argument that subsequent cancellation of the tender nullified the forfeiture, noting that the cancellation itself was precipitated by the petitioner’s revocation.
Holding and Implications
DISMISSED: The Supreme Court declined to interfere with the Delhi High Court’s judgment, thereby upholding the forfeiture of the petitioner’s ₹40 lakh earnest money deposit.
Implications: The decision reinforces that (a) a material alteration of a bid amounts to revocation under typical tender conditions, and (b) earnest money may be forfeited where the tenderer’s own action causes the contract to fail. The ruling applies settled law without creating new precedent but serves as a cautionary reminder to contractors to ensure accuracy and compliance when submitting tenders.
A.K Patnaik, J.— This special leave petition under Article 136 of the Constitution of India has been filed against the judgment dated 15-10-2008 of the Division Bench of the High Court of Delhi in Writ Petition (C) No. 14998 of 2004.
2. The relevant facts very briefly are that the petitioner is a private limited company carrying on inter alia the business of construction. In April 2004, Respondent 2 published a notice inviting tenders for construction of married accommodation at Shankar Vihar II, Pocket, Delhi Cantonment, at an estimated cost of Rs. 40 crores (for short “the Notice”). Clause 6 of the Notice stipulated that the tenderer shall furnish earnest money of Rs. 40 lakhs in the form of FDR from a nationalised bank drawn in favour of the Director General, Married Accommodation Project, Kashmir House, Rajaji Marg, New Delhi. Clause 6 also stipulated that if the firm revokes its offer during the validity period, the earnest money furnished by the firm shall be forfeited.
3. In response to the Notice, the petitioner submitted its offer along with earnest money of Rs. 40 lakhs. When the tenders were opened on 5-5-2004, the offer of the petitioner was found to be the lowest at Rs. 32 crores for the work. On 6-5-2004, however, the petitioner sent a letter to Respondent 2 making a correction of a figure in its tender to read as Rs. 32,76,000 instead of Rs. 23,76,000. As a result of this correction, the offer of the petitioner for the work increased from Rs. 32 crores to Rs. 41 crores. Respondent 2 treated this correction made by the petitioner in its tender as revocation of its offer and forfeited the earnest money of Rs. 40 lakhs furnished by the petitioner.
4. Aggrieved, the petitioner filed Writ Petition (C) No. 14998 of 2004 under Article 226 of the Constitution before the High Court of Delhi, but by the impugned judgment the High Court dismissed the writ petition after holding that the correction of the bid made by the petitioner amounted to revocation of its original offer and hence Respondent 2 was entitled to forfeit the earnest money furnished by the petitioner in terms of Clause 6 of the Notice.
5. The learned counsel for the petitioner submitted that the High Court failed to appreciate that the tender of the petitioner was initially defective inasmuch as the earnest money, which was furnished by the petitioner, was not in accordance with Clause 6 of the Notice. He explained that Clause 6 of the Notice provided that the earnest money was to be in the form of FDR from a nationalised bank, but the FDR of Rs. 40 lakhs furnished by the petitioner was from UTI Bank, which was not a nationalised bank. He further submitted that the petitioner had to make the correction in the figure so as to read as Rs. 32,76,000 instead of Rs. 23,76,000 because a mistake had been committed by the petitioner while calculating the figure and, therefore, soon after the tender was opened on 5-5-2004 the petitioner submitted the letter dated 6-5-2004 to Respondent 2 correcting the aforesaid mistake in the calculation of the figure. He submitted that Respondent 2 ought not to have treated the letter dated 6-5-2004 as revocation of the offer of the petitioner.
6. The learned counsel for the petitioner further submitted that in any case the entire Notice was recalled and a fresh Notice was issued by Respondent 2 inviting tenders at a revised estimated cost. According to the learned counsel for the petitioner, since the tender process in respect of which the petitioner had furnished the earnest money was cancelled, Respondent 2 should have refunded the earnest money to the petitioner.
7. The learned counsel for the respondents, on the other hand, supported the impugned judgment of the High Court and relied on the counter-affidavit filed on behalf of the respondents in the High Court as well as in this Court.
8. We find that Clause 6 of the Notice clearly stipulated that “if any firm revokes its offer during the validity period, its earnest money shall be forfeited”. Hence, the question that arose before the High Court for decision was whether the petitioner by revising one of the figures in its tender from Rs. 23,76,000 to Rs. 32,76,000 revoked its offer and the High Court has taken the view in the impugned judgment that as a consequence of the change in the figures, the offer of the petitioner for the work was enhanced from Rs. 32 crores to Rs. 41 crores and, therefore, the original offer of Rs. 32 crores for the work stood revoked.
9. In Para 12 of the counter-affidavit filed in reply to the writ petition in the High Court the respondents have stated that after receiving the letter dated 6-5-2004 of the petitioner correcting the figures in its tender, the respondents sent letters to the petitioner giving opportunity to the petitioner to withdraw its letter dated 6-5-2004 on or before 4-6-2004 and yet the petitioner did not withdraw its letter dated 6-5-2004. These facts clearly establish that the petitioner was not willing to stand by its original offer of Rs. 32 crores for the work and was willing to do the work only at the revised bid of Rs. 41 crores. The High Court was thus right in coming to the conclusion that the petitioner had revoked its offer of Rs. 32 crores for the work.
10. The legal principles relating to “earnest money” are well settled. In Chiranjit Singh v. Har Swarup AIR 1926 PC 1 the Judicial Committee of the Privy Council held: (AIR p. 2)
“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 vendee.”
These observations of the Judicial Committee have been quoted in the judgment of this Court in Shri Hanuman Cotton Mills v. Tata Air Craft Ltd. (1969) 3 SCC 522 in which the principles relating to earnest money have been laid down.
11. Similarly, in HUDA v. Kewal Krishan Goel (1996) 4 SCC 249 this Court quoted the following observations of Hamilton, J. in Sumner and Leivesley v. John Brown & Co. (1909) 25 TLR 745 with regard to the meaning of “earnest”: (HUDA case (1996) 4 SCC 249)
“10. … ‘ “Earnest” … meant something given for the purpose of binding a contract, something to be used to put pressure on the defaulter if he failed to carry out his part. If the contract went through, the thing given in earnest was returned to the giver, or, if money, was deducted from the price. If the contract went off through the giver's fault the thing given in earnest was forfeited.’ ”
12. It is thus clear that when earnest money is furnished by a tenderer it forms part of the price if the offer of the tenderer is accepted or it is refunded to the tenderer if someone else's offer is accepted, but if for some fault or failure on the part of the tenderer the transaction or the contract does not come through, the party inviting the tender is entitled to forfeit the earnest money furnished by that tenderer.
13. In the facts of the present case, the respondents have stated in their reply to the writ petition before the High Court that as a consequence of the failure of the petitioner to stand by its offer dated 5-5-2004 the tender for the work had to be reinvited by Respondent 2 on revised costs of the construction and in the circumstances, Respondent 2 had to forfeit the earnest money of the petitioner. This was thus a case where on account of failure on the part of the petitioner to stand by its offer, the transaction or the contract did not come through and therefore the respondents were entitled to forfeit the earnest money furnished by the petitioner in terms of Clause 6 of the Notice.
14. For these reasons, we are not inclined to interfere with the impugned judgment of the High Court and we accordingly dismiss the special leave petition with no order as to costs.
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