Author: Parnika Choudhary, 3rd year student at Bharati Vidyapeeth University.
Citation: (2017) 16 SCC 757
Date of decision: October 25, 2017
Bench: R. K. Agrawal & A. M. Sapre
Original copy: View
Statutes involved: Indian Contract Act, 1872 & Code of Civil Procedure, 1908
Issue in question:
- Whether the forfeiture of the appellant’s security deposit was valid?
Background of the case:
- The litigant filed an appeal against the Madhya Pradesh High Court’s decision, which was dismissed and upheld the trial court’s ruling dismissing the Appellant’s application for disclosure and refund of security money held by the Respondent.
- The contract must include a forfeiture clause that allows the company to forfeit the sum paid as “earnest money” or “security” for the contract’s good fulfilment, according to Section 74 of the Contract Act.
- The plaintiff was the appellant, while the defendants were the respondents (the State of Madhya Pradesh and its officers). The third respondent, a Bhopal-based Nazul officer, issued an advertisement in a daily newspaper on January 7, 1996, saying that the Madhya Pradesh government would sell four Nazul lands in a public auction on January 11, 1996. The regulations and requirements of the auctioneers must be followed by interested candidates.
- The appellant was one of those who took part in the auction. According to the public notice’s clauses 2 and 3, the appellant submitted his Income Tax Return for the fiscal period 1994-1995 on January 10, 1996, and provided a payment of Rs. 3 lakhs as security to Respondent No. 3.
- During the auction on January 11, 1996, the appellant offered Rs.53,80,000/- for a property in Mahavir Nagar, Arera Colony. Among those who made bids, the appellant’s was the highest. As a result, Respondent No. 3 granted the appellant’s motion.
- Respondent No. 3 asked that the appellant deposit 1/4th of the entire sum on the same day as the public notice. As a result, on January 11, 1996, the appellant made a deposit of Rs.10.45 lakhs with respondent No. 3. The appellant also got a letter from respondent No. 3 on January 25, 1996, informing him that his bid for the property had been accepted subject to “particular conditions and circumstances.”
- Following receipt of the aforementioned letter on January 25, 1996, the appellant responded to respondent No.3 on January 29, 1996, claiming that the “specific contract terms” mentioned in the report had never been printed or reassured to him previously and that he had never been kept informed of any such contract terms until receiving the letter on January 25, 1996.
- On February 8, 1996, Respondent No. 2 served the appellant with a notice, arguing that the money of Rs.3 lakhs should not be “forfeited” and that the site in question should be re-auctioned. In his response dated February 12, 1996, the appellant stated that because he did not accept the “special contract terms” provided by respondent No. 3 in their acceptance letter, he is entitled to a refund of Rs.3 lakhs from respondent No. 3, and that respondent No. 2 has no right to forfeit such amount.
- Respondent No. 2 notified the appellant in writing on February 24, 1996, that a security deposit of Rs. 3 lakhs that he (appellant) had paid had been forfeited. The appellant served the defendants with a formal notice per Section 80 of the Code of Civil Procedure, 1908, asking for a reimbursement of Rs. 3 lakhs on February 28, 1996. Despite their best efforts, the rescuers were unable to recoup the funds.
- On February 24, 1996, respondent No. 2 notified the appellant in writing that he (appellant) had forfeited a security deposit of Rs. 3 lakhs. On February 28, 1996, the appellant issued the defendants with a legal notice according to Section 80 of the Code of Civil Procedure, 1908, demanding a refund of Rs. 3 lakhs. The money was not reimbursed by the responders, despite the effort.
- According to the Trial Court, the Appellant failed to deposit the 1/4th sum due to the public notice because he paid it by check and subsequently ceased paying it, resulting in a breach of the public notice’s requirements on his side. The Appellant’s demand for money under the “particular conditions and circumstances” mentioned in the acceptance letter was likewise judged to be in line with RBC Rules, and the Appellant was bound to guarantee compliance.
- Following that, Plaintiff filed an appeal against the final judgement of the Madhya Pradesh High Court, in which the High Court dismissed the Appellant’s appeal and affirmed the Trial Court’s judgement, which dismissed the Appellant’s suit for declaration and refund of the security deposit with the Respondents. It was, however, turned down.
- Finally, the appeal was granted without expense. The appellant’s (plaintiff’s) case against the respondents is dismissed, and the High Court’s and Trial Court’s disputed decisions and decrees are set aside (defendants).
- The respondents’ February 24, 1996 letter of forfeiture of the appellant’s security deposit is ruled unlawful and unenforceable. As a result, a money decree is issued in favour of the appellant (plaintiff) and against the defendants (defendants) for a return of Rs.3 lakhs, with interest at 9% per annum. In addition, a sum of Rs. 10,000 was decided to be awarded to the appellant as compensation for the cost of the appeal.
- By now, it should be clear that if the contract does not contain a forfeiture provision, the contractual party has no authority to forfeit the money and may only insist on the contract’s terms and conditions being followed.
- Similarly, the advertising in this matter simply specified a time limit for the Appellant to deposit the security amount of Rs. 3 lakhs, but it made no indication of whether the Appellant’s security sum is subject to forfeiture by the State, and if so, under what conditions.
- A security deposit demand should have been qualified by a specific clause including a forfeiture right to the state and the conditions under which the state might utilize judgment that forfeiture right against the bidder. The government would only then be able to take the required steps. However, the scenario was different in this case.
- The Appellant guaranteed that the deadline was satisfied in this case by depositing the check on the same day. The Respondents also accepted the Appellant’s cheque as one of the various payment choices. The Respondents would not have accepted the Appellant’s cheque if this were not the case. When he received the acceptance letter, the Appellant also stopped paying since it had four more criteria that he didn’t agree with. As a result, he was free to withdraw from the auction and stop paying on the contract. As a consequence, the actions of the appellant did not constitute a violation.
- The State lacked the jurisdiction to keep the security deposit, which should have been returned to the Appellant when he requested it.