The Supreme Court has ruled that courts cannot rewrite the terms of a commercial contract merely on grounds of equity or perceived unfairness, upholding a contractual clause that denied interest on a contractor’s security deposit during the subsistence of the contract.
However, the bench of Justice Surya Kant and Justice V. Mohana clarified that once the contractual period for refund expires, the State becomes liable to pay interest for any delay in returning or adjusting the security deposit.
The dispute arose from a mining contract awarded by the Haryana Government in 1998 for extraction of Yamuna sand from the Bega Murthal Sand Zone. The respondent company emerged as the highest bidder with an annual bid of ₹1.48 crore for a three-year contract ending on 31 March 2001. The agreement, executed under Form-L prescribed by the Punjab Minor Minerals Concession Rules, 1964, required the contractor to pay monthly installments in advance and furnish a security deposit.
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Under the contract, delayed payment of instalments attracted interest at 24% per annum, while Clause 19 expressly stipulated that the contractor’s security deposit would not carry any interest and would be refunded within three months of expiry or earlier termination of the contract.
The contractor subsequently defaulted in making installments from September 1999 onwards. After issuing notice and considering the contractor’s response, the State terminated the contract on 9 March 2000 and forfeited the security deposit in accordance with the agreement. Although the appellate authority later permitted adjustment of the forfeited security against outstanding dues, disputes continued regarding the contractor’s liability and entitlement to interest on the security deposit.
The contractor challenged the State’s demand before the Punjab and Haryana High Court and also questioned the validity of Clause 19. While the Single Judge upheld the termination of the contract and found that the contractor had voluntarily accepted the contractual terms, the matter eventually reached the Supreme Court, which remanded it for reconsideration.
Upon reconsideration, the High Court concluded that the State had not failed in performing its statutory obligations and that the contractor itself was responsible for non-performance. Nevertheless, it declared Clause 19 to be legally unsustainable and directed the State to refund the ₹37 lakh security deposit with interest at 9% per annum from the date of deposit. The Division Bench affirmed this view, leading to the present appeals before the Supreme Court.
The Supreme Court emphasised that judicial review does not permit courts to rewrite commercial bargains voluntarily entered into by parties standing on equal footing.
The Bench observed that where contractual terms are clear and unambiguous, courts are required to enforce them rather than substitute what they consider to be a more equitable arrangement. Once parties knowingly accept contractual conditions without coercion, mistake or undue influence, they cannot later challenge those terms simply because they have become burdensome.
The Court noted that the respondent had participated in an open auction, accepted the standard statutory contract, signed the agreement with full knowledge of Clause 19, and never questioned the clause during the currency of the contract or in statutory proceedings. The challenge was raised only after disputes had arisen.
Rejecting the High Court’s reasoning, the Supreme Court held that Clause 19 was neither unlawful nor opposed to public policy.
The Court explained that the clause denying interest on security deposits serves a purpose entirely different from the clause imposing interest on delayed instalments. While interest on delayed payments compensates the State for the contractor’s default, the security deposit functions as a performance guarantee. Therefore, there is no principle requiring reciprocity between the two provisions merely because both concern payment of interest.
According to the Bench, the High Court effectively rewrote the contract by introducing an obligation to pay interest which the parties had consciously excluded.
Although the Court upheld the validity of Clause 19, it clarified that the provision must be read as a whole.
The clause not only states that the security deposit will not carry interest but also mandates that it must be refunded within three months of the expiry or earlier determination of the contract. The Court held that these two parts are interdependent and cannot be read separately.
Accordingly, while no interest is payable during the three-month period following termination, the State cannot continue to retain the deposit indefinitely without financial consequences. Once the contractual period for refund expires, the contractor becomes entitled to interest for the delayed period.
Since the contract had been terminated on 9 March 2000, the Court held that the three-month period expired on 9 June 2000.
The respondent was therefore held entitled to simple interest at 9% per annum only from 9 June 2000 until the date the security deposit was appropriated towards outstanding dues or refunded, and not from the date the deposit was originally made.
The Supreme Court consequently upheld the validity of Clause 19; set aside the High Court’s declaration that the clause was unsustainable in law; held that no interest was payable on the ₹37 lakh security deposit up to 9 June 2000; directed payment of simple interest at 9% per annum thereafter until adjustment or refund; and partly allowed the State’s appeals without any order as to costs.
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