Supreme Court: After travelling through multiple rounds of litigation before the High Court and the Supreme Court with regards to enforceability of a contractual clause providing that a contractor’s security deposit shall not carry interest under a government mining contract, the ultimate question culminated in the present appeal was whether such an express contractual term could be invalidated on equitable grounds and whether the State becomes liable to pay interest if it retains the security deposit beyond the period stipulated for its refund. Reaffirming the principle that a court cannot rewrite or modify clear terms of a commercial contract merely on considerations of equity or perceived unfairness, the Division Bench of Surya Kant, CJ. and V. Mohana*, J., held that while the no-interest clause on security deposit is valid and binding, however, it does not authorise the State to retain the security deposit indefinitely without incurring liability to pay interest. Accordingly, the Court upheld the validity of Clause 19 and set aside the High Court’s declaration that the clause was contrary to law or public policy.
Factual Matrix
The Government of Haryana granted a mining contract for extraction of Yamuna sand from the Bega Murthal Sand Zone through a public auction. The respondent emerged as the highest bidder, and on 30 November 1998 the parties executed a statutory agreement in Form L under the Punjab Minor Minerals Concession Rules, 1964. The contract required the contractor to make monthly advance payments of contract money and furnish a security deposit. While Clause 2 imposed interest at 24 per cent per annum for delayed payment of instalments, Clause 19 expressly stipulated that the security deposit “shall not carry any interest” and would be refunded within 3 months of expiry or earlier determination of the contract.
The respondent defaulted in payment of monthly instalments from September 1999 onwards. Consequently, after issuing notice and providing an opportunity of hearing, the Director of Mines and Geology terminated the contract on 9 March 2000 and ordered forfeiture of the security deposit. On appeal, the departmental authority directed that the forfeited security be adjusted against the outstanding dues subject to specified conditions.
The respondent challenged the departmental action before the Punjab and Haryana High Court. Besides disputing the demand of contract money after termination, it questioned the validity of Clause 19 and sought interest on the security deposit at the same rate that the State charged for delayed instalments.
Issues for Determination
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Whether Clause 19 of Form L, which provides that the contractor’s security deposit shall not carry any interest, is valid and enforceable?
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Whether the respondent is entitled to interest on the security deposit after termination of the contract?
Analysis
The Court reaffirmed the settled principle that courts must interpret and enforce commercial contracts as agreed and cannot substitute their own notions of fairness by rewriting contractual terms. It observed that where parties “with their eyes open” voluntarily accept clear and unambiguous contractual stipulations, they cannot later avoid those obligations merely because the bargain appears onerous.
“Once the parties with their eyes open without any protest whatsoever and with free will accept certain terms of a contract they cannot afterwards be permitted to go back on the same merely because at a later point of time the stipulation proves to be onerous.”
The Court noted that the respondent had knowingly executed the statutory Form L after participating in an open auction. There was no allegation of coercion, fraud, undue influence or mistake. It noted that the High Court had concurrently found that termination resulted solely from the contractor’s repeated defaults in payment and not because of any failure on the part of the State. Those findings had attained finality.
Rejecting the High Court’s conclusion that Clause 19 was opposed to public policy, the Court held that such a contractual stipulation was “neither immoral nor unlawful”. It emphasised that Clauses 2 and 19 operated in distinct fields. Clause 2 imposed liquidated damages or compensation for the contractor’s own breach in delaying payment, whereas Clause 19 dealt with a performance guarantee held by the State. Equating the two would amount to “re-writing the contract which a writ court is not entitled to do”.
Nevertheless, the Court interpreted Clause 19 as a composite provision. While its first limb declared that the security deposit would not earn interest, the second required the State to refund it within 3 months from expiry or earlier determination of the contract. Reading both parts harmoniously, the Court held that the State could not retain the amount indefinitely without consequences. Once 3 months elapsed after termination, continued retention of the security deposit attracted liability to pay interest because the contractual obligation to refund had matured.
Decision
The Court partly allowed the appeals. It upheld the validity of Clause 19 and held that no interest was payable on the security deposit during the contractual period or for 3 months following determination of the contract. However, if the State retained the security deposit beyond the contractual period of 3 months after termination, the contractor became entitled to simple interest at 9 per cent per annum from 9 June 2000 until the date of adjustment or refund. It disposed of the appeals without any order as to costs.
[State of Haryana v. Jai Durgaa Finvest (P) Ltd., 2026 SCC OnLine SC 1323, decided on 13-7-2026]
*Judgment Authored by Justice V. Mohana
Advocates who appeared in this case:
For the Appellants: Mr. Akshay Amritanshu, AOR and Mr. Sarthak Srivastava, Adv.
For the Respondent: Mrs. Lalita Kaushik, AOR
