It is a common practice that a tender notice is generally issued by government companies and even by big private companies for high-value contracts. Usually, there is a condition of deposit of an earnest money along with submission of the bid / tender, and generally there are also conditions for forfeiture of earnest money in certain situations.
A bid or tender is like a proposal or offer under the Contract Act, 1872.
Section 5 of the Contract Act lays down that a proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer.
A relevant question that arises is whether a person, who has submitted a tender or a bid in response to a tender notice, along with deposit of earnest money, can withdraw his tender or bid before the acceptance of the bid? And, if so, can his earnest money be forfeited if such bid is withdrawn?
Answer to the first question is quite obvious that a tender or a bid, being a proposal under the Contract Act can be revoked or withdrawn at any time before it is accepted in terms of Section 5 of the Contract Act, as noted above. So, let us consider the second question.
A similar question arose in the case of National Highways Authority of India v. Ganga Enterprises, (2003) 7 SCC 410, and the Supreme Court held as under:
“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.”
A similar decision was given in the case of State of Maharashtra v. A.P. Paper Mills Ltd., (2006) 4 SCC 209, by the Supreme Court.
Likewise, in the case of State of Haryana v. Malik Traders, (2011) 13 SCC 200, the Supreme Court held as under:
“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 [Contract] 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.”
Recently, in the case of NTPC v. Ashok Kumar Singh, (2015) 4 SCC 252, the Supreme Court similarly held 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.
In view of these judgments of the Supreme Court, it is quite clear that if a person has submitted his tender or bid 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 bid or tender, he has no right to claim that the earnest/security be returned to him. His earnest money in such situations may be forfeited if the terms of the tender notice have such a condition.
Nicely written and explained👍