The Supreme Court has asserted that an express contractual clause providing that the security deposit shall carry no interest is valid and binding in a commercial contract, and courts cannot strike it down merely on equitable considerations or rewrite the bargain between the parties. However, where the same clause also requires refund of the security within a specified time after expiry or determination of the contract, the State cannot continue to retain that deposit beyond that period without consequence.
The Court held that the interest becomes payable only for the period of retention beyond the contractually permitted three months, and not from the original date of deposit. Applying that interpretation, the Supreme Court held that since the mining contract by Haryana Government was terminated on March 09, 2000, the three-month period under Clause 19 expired on June 09, 2000. Accordingly, no interest was payable on the security deposit of Rs.37 lakhs up to June 09, 2000. However, the respondent i.e., Jai Durgaa Finvest was held entitled to simple interest at 9% per annum from June 09, 2000 until the date the security amount was appropriated towards the respondent’s dues or refunded.
A Two-Judge Bench comprising the Chief Justice Surya Kant and Justice V. Mohana reiterated the settled principle that in commercial contracts, courts must interpret and enforce the agreement as it stands and cannot rewrite contractual terms merely because a different arrangement may appear more equitable. It emphasized that where parties knowingly and voluntarily accept clear and unambiguous terms, they are bound by them.
The Court noted that the respondent had full knowledge of the statutory Form-L and its clauses at two stages: first, when participating in the bid process, and second, when signing the agreement on Nov 30, 1998. The respondent was aware that the security deposit would not carry interest, and there was no case of coercion, mistake, or undue influence.
The Court also accepted the concurrent findings that the contractor itself was responsible for the termination, as the High Court had already found that there was no failure by the State in complying with statutory obligations and that the contractor had defaulted in monthly payments and had not substantiated its plea that obstruction by landowners prevented mining operations.
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On the validity of Clause 19, the Supreme Court held that the High Court was wrong in declaring it unsustainable or opposed to public policy. According to the Court, a clause denying interest on security deposit in a commercial contract is neither immoral nor unlawful. The Court rejected the High Court’s reasoning that because the State charges interest on delayed instalments, it must also pay interest on the contractor’s security.
The Court clarified that Clause 2 and Clause 19 operate in different fields. Clause 2 imposes interest as compensation for the contractor’s default in making timely payments, whereas Clause 19 deals with a performance security deposited with the State and expressly agreed to be non-interest bearing. Therefore, there is no reciprocal obligation on the State to pay interest merely because the contractor is liable to pay interest for its own breach.
At the same time, the Supreme Court held that Clause 19 could not be read only partially. It contains two linked parts: first, that the security deposit carries no interest; and second, that it must be refunded within three months from expiry or sooner determination of the contract. Reading both parts together, the Court held that the State cannot retain the money interest-free indefinitely. If the State keeps the security deposit beyond the contractual period of three months after determination, the contractor becomes entitled to interest for the delayed period.
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Briefly, the appeals arose from the Punjab and Haryana High Court on a narrow issue: whether the security deposit furnished by a mining contractor would carry interest despite an express contractual clause stating that no such interest would be payable. The dispute arose under the Punjab Minor Minerals Concession Rules, 1964, and the statutory Form-L contract executed for extraction of Yamuna sand from the Bega Murthal Sand Zone. Under the contractual framework, the contractor had to pay contract money in advance on a monthly basis. Clause 2 of Form-L provided that delayed payment of instalments would attract interest at 24% per annum, while Clause 19 specifically stated that the security deposit would not carry any interest and would be refunded within three months from expiry or sooner determination of the contract.
The respondent company became the highest bidder in the auction held on April 06, 1998 for a three-year mining contract ending on March 31, 2001, and a formal agreement was executed on Nov 30, 1998. After execution of the contract, the respondent defaulted in payment of instalments from September 1999 onward. A notice for termination was issued on Jan 19, 2000, and on March 09, 2000 the contract was terminated and the security amount was forfeited for breach of contractual terms.
On appeal, the departmental appellate authority held that the forfeited security could be adjusted against the outstanding contract money and interest, subject to payment of the balance within the stipulated timeline. The State then demanded Rs. 68.35 lakhs, of which the respondent paid Rs.26 lakhs, but it deposited contract money only up to March 09, 2000, namely the date of termination, and not beyond.
The contractor challenged the State’s demand before the High Court and also questioned Clause 19, arguing that if the State could charge 24% interest for delayed instalments, the contractor should also get interest on the security amount. The Single Judge initially rejected that claim, holding that the contractor had voluntarily entered into the agreement knowing fully well that the security deposit would not carry interest.
After remand from the Supreme Court, the High Court re-examined the matter. The Single Judge found that the State had not failed in its statutory obligations, that the contractor itself was responsible for non-performance and failure to pay instalments, and that the termination was lawful. However, the High Court still held Clause 19 to be unsustainable in law and directed refund of the security amount of Rs.37 lakhs with 9% interest from the date of deposit. That view was affirmed by the Division Bench.
