Earnest money and performance guarantee amount can be forfeited upon rescinding a contract

Delhi High Court: A Single Judge Bench comprising of Valmiki J. Mehta, J, dismissed an appeal before it setting aside an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996.

The facts of the case were that a contract was entered into between the appellant and the respondent for a sum of Rs. 67.62 lakhs. The performance was to begin from 04.12.2012, the contract was for removal of obstructions in the drainage system and construction of protection work on both banks of the drain on Mall Road Bridge.

The work was started but had to be abandoned on account of heavy seepage which could not be overcome despite dewatering operations being carried. The appellant claimed impossibility of performance. The respondent then, rescinded the contract vide letter dated 15.06.2013, which was after the six month period allowed in the contract. The respondent forfeited the earnest money and the performance guarantee amount. The appellant argued that the earnest money and performance guarantee could not be forfeited unless losses were proved by the respondent as required under Section 74 of the Contract Act, 1872.

The Court noted that there was no provision for extension of time of the contract and that the appellant was found to have abandoned the contract. As for losses, the Court held that such conditions have to be looked into depending upon the nature of the contract. If nature of losses cannot be proved then there is no requirement of losses having to be proved.  [M/S Moni Traders v. Govt. of NCT of Delhi, 2017 SCC OnLine Del 9526, decided on 01.08.2017]

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