At the time of floating of tenders by a company, those submitting their bids / tenders are generally required to deposit a certain amount of earnest money to be able to participate in the tendering process. This is done in order to ensure that only serious parties take part in the tendering process.
Sometimes, a party submitting its bid has a change of mind after the tendering process has begun but before the bids are yet to be opened. What happens to the earnest money deposited by such party, if it does not want its bid to be considered and withdraws from the tender? Will its earnest money be refunded or will it be forfeited? This question has to be seen in the light of the fact that generally in most of the tenders floated by companies, there is a condition that in the event of withdrawal of bid/tender by a party, its earnest money would be forfeited.
This question has come up before the courts on several occasions.
In the case of National Highways Authority of India v. Ganga Enterprises, (2003) 7 SCC 410, the Supreme Court held that the earnest money in essence was an earnest to be given to ensure that the bidder did not withdraw his bid during the period of bid validity and/or that after acceptance the performance security is furnished and the agreement signed. It was observed that:
“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.”
Thus, it was held that forfeiture of earnest money was valid if the bid was withdrawn by the party before opening of the tenders.
Similarly, in the case of State of Maharashtra v. A.P. Paper Mills Ltd., (2006) 4 SCC 209, where according to Clause 5 of the tender notice the tenderer could withdraw the tender only on the pain of forfeiture of the earnest money, the Supreme Court refused to interfere with the forfeiture of the earnest money.
In another case of State of Haryana v. Malik Traders, (2011) 13 SCC 200, the Supreme Court held that:
“…even though under Section 5 of the [Contract] Act a proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, the respondent was bound by the agreement contained in its offer/bid to keep the bid open for acceptance up to 90 days after the last date of receipt of bid and if the respondent withdrew its bid before the expiry of the said period of 90 days the respondent was liable to suffer the consequence (i.e. forfeiture of the full value of bid security) as agreed to by the respondent in Para 10 of the offer/bid. Under the cover of the provisions contained in Section 5 of the Act, the respondent cannot escape from the obligations and liabilities under the agreements contained in its offer/bid.”
In this case, the Supreme Court further held that:
“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.”
The case of National Thermal Power Corporation Limited v. Ashok Kumar Singh, (2015) 4 SCC 252, was also decided by the Supreme Court in a similar manner.
From these judgments, it is thus quite clear that if there is a provision in the tender document that the earnest money may be forfeited if the bid is withdrawn by the party concerned during the validity of the bid and before opening of tenders, then there is nothing wrong if the earnest money is forfeited on withdrawal of the bid by a party. Forfeiture of earnest money is irrespective of the right of the party to withdraw its offer before its acceptance as per Section 5 of the Contract Act. As held by the Court, it is clear that the purpose of asking for earnest money is to ensure that only genuine and serious parties take part in the tender process and that they abide by the process and not take it lightly.
