As per case facts, the Petitioner invited e-tenders, and after the Respondent's bid was accepted, an agreement was signed, security deposit remitted, and a work order issued. However, the Respondent ...
Arb.O.P.(Com.Div.) No.693 of 2022
In the High Court of Judicature at Madras
Reserved on:
09.2.2026
Delivered on:
18.2.2026
Coram:
The Honourable Mr.Justice N.ANAND VENKATESH
Arbitration O.P.(Com.Div.) No.693 of 2022
Cantonment Board,
St.Thomas Mount &
Pallavaram, rep.by its
Chief Executive Officer,
Chennai-16 …Petitioner
Vs
M/s.Babuji Civil Constructions,
Rep.by its Proprietor
C.Saravanan, No.50/1,
Bajanai Koil Street,
Mambalapattu, Villupuram.
602309 …Respondent
PETITION under Section 34 of the Arbitration and Conciliation
Act, 1996 praying to set aside the arbitral award in O.P.No.342 of
2020 dated 16.8.2022 passed by the learned Arbitrator and direct the
respondent to bear the costs herein.
For Petitioner : Mr.C.Mohan &
Ms.Rexy Josephine Mary for
M/s.King & Patridge
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For Respondent: Mr.A.K.Sriram, SC for
Mr.K.J.Parthasarathy
ORDER
This petition has been filed under Section 34 of the Arbitration
and Conciliation Act, 1996 (for short, the Act) challenging the award
dated 16.8.2022 passed by the sole Arbitrator.
2. Heard both.
3. The facts leading to filing of this petition are as follows:
(i) The petitioner invited e-tenders dated 24.3.2017 for the work
of maintenance and repairs to miscellaneous and public improvement
during the year 2017-18. The earnest money deposit (EMD) was fixed
as 1% of the estimated cost and the EMD would be returned to the
unsuccessful tenderer. The security deposit of 5% of the contract
value would also be received from the successful tenderer at the time
of award of the contract.
(ii) The respondent/claimant participated in the tender and their
bid was accepted by the petitioner vide letter dated 12.6.2017.
Further, the respondent/claimant was directed to deposit the security
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deposit of Rs.8.5 lakhs and execute an agreement with the petitioner.
The petitioner and the respondent/claimant entered into an agreement
on 29.6.2017 and the respondent/claimant remitted a sum of Rs.8.50
lakhs towards security deposit and the work order was issued to the
respondent/claimant.
(iii) The respondent/claimant had to complete the work on or
before 31.3.2018. It was alleged that the respondent/claimant did not
show any progress in the work and numerous complaints were
received from the public. Hence, a show cause notice came to be
issued by the petitioner to start/speed up the work, failing which, the
respondent company/claimant would be blacklisted and the EMD and
the security deposit would be forfeited. In turn, the respondent/
claimant gave reply and took a stand, which was not agreeable for the
petitioner.
(iv) Ultimately, the petitioner, through letter dated 17.8.2017,
terminated the contract thereby the respondent/claimant was
blacklisted and both the EMD as well as the security deposit were also
forfeited. The respondent/claimant, through letters C.8 to C.10, sought
for refund of the security deposit and thereafter initiated the
arbitration proceedings, pursuant to which, the dispute was referred to
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the sole Arbitrator.
(v) Before the sole Arbitrator, the respondent/claimant filed a
statement of claim seeking for refund of the security deposit of
Rs.8.50 lakhs along with interest.
(vi) Before the sole Arbitrator, the petitioner filed a statement of
defence and took a stand that the respondent/claimant failed to carry
out the work and thereby violated Clause 6 of the agreement, that
there was absolutely no improvement in the work for more than one
month from the date of the contract, that therefore, the petitioner had
no other alternative except to terminate the contract and blacklist the
respondent/claimant and also forfeit the security deposit and that such
forfeiture was enabled in the agreement under Clause 3. Ultimately,
the petitioner sought for dismissal of the statement of claim. The
petitioner also made a counter claim for the loss sustained by them
due to re-tender and increase in costs.
(vii) The sole Arbitrator framed the following issues for
consideration:
“1) Whether the forfeiture of security deposit
of Rs.8,50,000/- by the respondent from the
claimant is tenable and valid in law?
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2) Whether the claimant is entitled for
refund of the security deposit of Rs.8,50,000/- as
per the terms of the contract?
3) Whether the respondent is entitled to the
counter claim of Rs.5,00,000/- for loss and
additional cost incurred by them?
4) Whether the claimant is entitled for
interest from the date of termination till the date of
award at PLR plus 2%?
5) Whether the claimant is entitled for
interest at 18% per annum from the date of award
till the date of actual payment? and
6) Whether the parties are entitled to the
costs of the proceedings before the Arbitral
Tribunal?”
(viii) Both parties did not let in any evidence, but they relied
upon certain documents. The respondent/claimant relied upon C.1 to
C.12 and the petitioner relied upon D.1 to D.3.
(ix) The sole Arbitrator, on considering the facts and
circumstances of the case and on appreciation of evidence, directed
the petitioner to refund the security deposit of Rs.8.50 lakhs with 9%
simple interest from 17.8.2017 till the date of actual payment and
rejected the counter claim made by the petitioner. Aggrieved by that,
the above petition has been filed before this Court.
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4. Learned counsel appearing on behalf of the petitioner
submitted as follows:
(a) The respondent/claimant did not show any progress of work
for more than a month and therefore, a show cause notice was issued
and thereafter, the contract was terminated. The contract itself
provided for forfeiture of the security deposit. It was a pre-estimated
compensation that was fixed in the contract itself and in so far as the
loss sustained by the petitioner was concerned, the respondent/
claimant had quoted at the rate of 55.77% above the Military Engineer
Services Standard Schedule of Rates, 2010 (MES SSR 2010). But,
after termination of the contract, this cost escalated to 68% above the
MES SSR 2010.
(b) Apart from that, considering the fact that the respondent/
claimant did not even commence the work, it was not possible for the
petitioner to demonstrate the actual loss. In view of the same, the
claim made by the respondent/claimant was liable to be rejected and
the counter claim must be ordered in favour of the petitioner.
5. Per contra, the learned Senior Counsel appearing on behalf of
the respondent/claimant submitted as follows:
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(a) The contract was terminated hardly within 30 days from the
date of commencement and the petitioner proceeded to forfeit the
security deposit, which amounted to penalty and therefore, unless the
petitioner proved the loss sustained by them, they would not be
entitled to forfeit the security deposit.
(b) In order to substantiate this submission, he relied upon the
judgment of the Hon’ble Apex Court in Kailash Nath Associates Vs.
Delhi Development Authority [reported in 2015 (4) SCC 136].
(c) The petitioner did not prove any loss or damages suffered by
them by means of examining any witness or filing any documents.
Therefore, they were not entitled to the counter claim made by them.
Accordingly, the learned Senior Counsel sought for dismissal of this
petition.
6. This Court has carefully considered the submissions of the
learned counsel on either side and perused the materials available on
record and more particularly the impugned award.
7. The agreement contemplated completion of work within a
period of one year from the date of issuance of the work order. The
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agreement under Clause 11 also provided that in the event of the work
remaining incomplete or uncommenced for more than 15 days from
the date of issuance of the work order, the petitioner would be at
liberty to terminate or rescind the contract. Clause 15 provided that
where the contract was rescinded, the petitioner would be entitled to
forfeit whole or part of the security deposit.
8. On carefully going through C.4, which was the work order, it
is seen that the nature of works have been defined and that those
works would have to be completed on or before 31.3.2018.
9. The petitioner issued a communication dated 08.8.2017 (C.5)
informing that the respondent/claimant had not even started the work,
that there was absolutely no progress in the work and that several
complaints were received by the petitioner. Hence, the respondent/
claimant was informed that they should commence the work
immediately, failing which, the contract would be cancelled, the
security deposit would be forfeited and the respondent/claimant would
also be blacklisted.
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10. On receipt of the notice, the respondent/claimant gave a
reply dated 14.8.2017 (C.6) informing about the progress of work and
undertaking to complete the work in all respects within the stipulated
agreement time. The petitioner, not being satisfied with the progress
of work made by the respondent/claimant, issued the letter of
termination dated 17.8.2017 (C.7), terminated the agreement with
immediate effect, blacklisted the respondent/claimant and forfeited the
EMD and the security deposit as per the tender conditions.
11. The respondent/claimant, after nearly 8 months, gave a
reply dated 13.4.2018 (C.8) and sought for refund of the security
deposit to the tune of Rs.8.5 lakhs. Thereafter, further
communications were sent by the respondent/claimant and it did not
evoke any response from the petitioner.
12. The sole Arbitrator came to the conclusion that time was
allowed upto 31.3.2018 for completion of work. Clause 3 of the
agreement provided for the forfeiture of security deposit only where
the work remained uncommenced and unfinished after the stipulated
date. The stipulated date in this case is 31.3.2018.
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13. In the case in hand, the contract was terminated much
before the stipulated date and the security deposit was forfeited.
Therefore, a finding was rendered that unless and otherwise the party
complaining proved the loss they suffered, the security deposit could
not be forfeited.
14. Clause 15 provided that where the contract was rescinded in
accordance with any of the conditions of the contract, the petitioner
would be at liberty to forfeit whole or a part of the security deposit
when any penalty or any other amount due from the contractor was
recovered from the security deposit of the contractor.
15. In the case in hand, the contract was terminated within one
month and three days from the date of issuance of the work order.
Therefore, the only question that had to be answered by the sole
Arbitrator was as to whether the petitioner could have forfeited the
entire security deposit in view of the premature termination of the
contract.
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16. It was contended on the side of the petitioner that the
contract could be rescinded where the work remained incomplete or
uncommenced for more than 15 days from the date of issuance of the
work order and that there was no defect in the power vested with the
petitioner to cancel/rescind the contract.
17. The only issue is as to whether it can further lead to
forfeiture of the security deposit.
18. The sole Arbitrator took into consideration the above two
clauses and came to the conclusion that the petitioner was not entitled
to forfeit the security deposit. Thereafter, the sole Arbitrator went into
the issue of proof of loss if such forfeiture of security deposit was in
the nature of penalty. The sole Arbitrator rendered a finding that the
respondent/claimant did not let in any evidence to show that they had
sustained the loss.
19. The learned counsel appearing on behalf of the petitioner
submitted that the respondent/claimant had not challenged the
termination or the blacklisting of the respondent/claimant, that the
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only relief that was sought for was refund of the security deposit and
that therefore, unless the termination was challenged, the
consequences of termination namely forfeiture of the security deposit
could not be challenged.
20. In the considered view of this Court, it is not necessary for
the respondent/claimant to challenge the termination of contract if
they are not inclined and the respondent/claimant will be entitled to
seek for refund of the security deposit if they are satisfied with that
relief.
21. The premature termination of the contract will not
automatically entitle the petitioner to forfeit the entire security
deposit. The Hon’ble Apex Court in the decision in Kailash Nath
Associates made it clear that if the pre-estimated compensation is in
the nature of penalty, the party has to necessarily prove the loss,
failing which, the requirements under Section 74 of the Indian
Contract Act will not be satisfied.
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22. The sole Arbitrator considered all the relevant judgments on
this issue and also took into consideration the fact that the
respondent/claimant did not let in any evidence for sustaining the loss
and therefore, ordered for the refund of the security deposit with
interest. This finding rendered by the sole Arbitrator certainly does not
suffer from any perversity or patent illegality.
23. In so far as the rejection of counter claim was concerned, the
learned counsel appearing on behalf of the petitioner submitted that
the rate submitted by the respondent/claimant was 55.77% above the
MES SSR 2010 whereas at the time of re-tender, the cost escalated to
68% above the MES SSR 2010 and that therefore, the petitioner
certainly sustained the loss.
24. The sole Arbitrator, while dealing with this issue, rendered a
finding that the petitioner had neither let in oral evidence nor any
documentary evidence to prove that they sustained loss. Hence, the
sole Arbitrator refused to award the counter claim sought for by the
petitioner. This finding certainly does not suffer from any perversity or
patent illegality.
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25. Even in so far as the award of interest was concerned, only
9% interest had been awarded from 17.8.2017 till the date of actual
payment and the same is reasonable and does not warrant the
interference of this Court.
26. In the light of the above discussions, this Court does not find
any ground to interfere with the award passed by the sole Arbitrator
dated 16.8.2022 under Section 34 of the Act.
27. Accordingly, the above petition stands dismissed with
costs of Rs.25,000/- (Rupees twenty five thousand only)
payable by the petitioner to the respondent/claimant.
18.2.2026
RS
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N.ANAND VENKATESH,J
RS
Arb.O.P.(Com.Div.) No.693 of 2022
18.2.2026
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In the landmark judgment of Cantonment Board, St. Thomas Mount & Pallavaram Vs. M/S. Babuji Civil Constructions, the Madras High Court provides a definitive clarification on whether the termination of a contract automatically permits the forfeiture of a security deposit. This analysis, now featured on CaseOn, explores the intricate balance between contractual autonomy and statutory limitations under the Indian Contract Act. As a pivotal CaseOn entry, this ruling serves as a vital resource for legal professionals navigating the complexities of arbitration and compensatory damages.
The primary questions that required judicial determination were:
Whether termination of the contract automatically entitled the employer to forfeit the entire security deposit?
Whether forfeiture of security deposit, when treated as a penalty, required proof of actual loss under section 74 of the Indian Contract Act, 1872?
Whether the arbitral award refund of the security deposit suffered from perversity or patent illegality warranting interference under section 34?
The legal foundation of this case rests on the interplay between contract law and arbitration statutes:
The dispute arose from an e-tender invited on 24 March 2017 by the petitioner for maintenance and repairs to miscellaneous and public improvement during the year 2017-2018. The security deposit of 5% of the contract value would be received from the successful tenderer at the time of award of the contract. On 12 June 2017, the bid was accepted and the respondent was directed to deposit the security of 8.5 lakhs and execute an agreement, which was entered into on 29 June 2017.
The respondent had to complete the work on or before 31 March 2018; however, it was alleged that the respondent did not show any progress. Consequently, a show cause notice was issued, the respondent company was blacklisted, and the EMD and security deposit were forfeited on 17 August 2017.
Before the Arbitral tribunal, the petitioner—Cantonment board—placed heavy reliance on specific contractual clauses:
Clause 6: Required the contractor to commence and diligently proceed with work.
Clause 3 & 15: Empowered the petitioner to forfeit the security if the work remained uncommenced or unsatisfactory.
Counterclaim: The petitioner alleged that re-tendering the work required a higher rate, resulting in financial loss.
The respondent-Contractor contested that forfeiture attracts Section 74 of the Indian Contract Act. They argued that since the termination occurred on 17 August 2017—well before the 31 March 2018 expiry—the petitioner had no right to forfeit the deposit.
Professional Insight: Staying updated on complex timelines and clauses is easier than ever. CaseOn’s 2-minute audio briefs help legal professionals analyze these specific rulings and catch key details like the Section 74 implications while on the go.
The sole Arbitrator took into consideration the fact that the petitioner did not let in any evidence for sustaining the loss and therefore ordered the refund of the security deposit with an interest of 9% from 17 August 2017 to the date of actual payment.
Upon review, the Madras High Court did not re-examine the contractual controversy but confined itself to testing whether the award suffered from perversity or patent illegality. Finding none, it upheld the award.
The Madras High Court clarified a crucial principle in contractual jurisprudence: termination of a contract does not grant an automatic right to penal forfeiture without proof of loss. The court solidified that contractual autonomy is not absolute and remains subject to statutory limitations.
For Law Students: The case bridges theory and reality by demonstrating how Section 74 operates beyond textbooks. It concretely illustrates the distinction between termination and penalty, and shows how arbitral awards are tested under Section 34. The judgment transforms abstract doctrine into practical judicial reasoning.
About the Author
Shreya Sharma is a Bsc.llb. student at NLIU Bhopal. This analysis aims to simplify complex judicial pronouncements for the benefit of law students and young professionals. This analysis was curated and formatted by the CaseOn Editorial Team.
Disclaimer: This case study is for educational purposes only and does not constitute legal advice.
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