Point of Law: A party to a contract taking security deposit from the other party to ensure due performance of the contract, is not entitled to forfeit the deposit on ground of default when no loss is caused to him in consequence of such default.

JUDGMENT :

C.S. Sudha, J.

This appeal filed under Section 37 of the Arbitration and Conciliation Act, 1996 (the Act), is against the order dated 04.12.2017 in O.P. (Arb.) No.105/2015 of the District Court, Kasaragod.

2. The appellant herein is the petitioner before the court below and the claimant before the Arbitral Tribunal (AT). The respondent herein is the respondent before the court below and the respondent before the AT. The parties in this appeal will be referred to as described in the arbitral proceedings.

3. The respondent awarded the work of ‘doubling of track between Shornur and Mangalore, Cannanore-Uppala section: collection and stacking of 50mm size machine crushed hard stone ballast alongside the alignment/station yards/ on top of the new formation between Kottikulam and Kasaragod stations (Balance works)’ to the claimant on 19.09.2000 for a value of Rs.1,19,39,274/-. Letter of Acceptance (LoA) was issued on 19.09.2000. The work was to be completed within a period of nine months, that is, by 18.06.2001. Alleging breach on the part of the claimant, the contract was terminated by the respondent before the expiry of the completion period. Disputes arose between the parties. Arbitration proceedings was initiated. The AT consisting of three Arbitrators passed an award on 24.04.2015. The AT disallowed all the claims of the claimant except claim no. 1 for release of an amount of Rs.3,46,959/-, which amount had been forfeited by the respondent towards risk liability amount. This claim was partly allowed to the tune of Rs.46,959/-. All the other claims including the prayer for return of the Earnest Money Deposit (EMD) was rejected. Aggrieved, the claimant/contractor took up the matter before the District Court. The said Original Application filed under s.34 of the Act was dismissed by the impugned order.

4. Heard Shri.Rahul Varghese, the learned counsel for the appellant and Shri.Ananthakrishnan, the learned Standing Counsel for the Railways.

5. In the appeal memorandum it is stated that during the pendency of the proceeding before the court below, the respondent released the EMD amounting to Rs.50,000/-. This according to the claimant has been done when the respondent realized that it was illegal for them to have withheld the same, especially when they had not suffered any loss or damage. Therefore, the only point to be decided in this appeal is whether there is any infirmity in the finding of the AT that the respondent is entitled to forfeit the security deposit of Rs.3 lakhs towards risk liability in the absence of any loss or damage. According to the AT, the claimant had failed to execute the work and hence the contract had been terminated at his risk and cost in terms of Clause 62 of the General Conditions of Contract. An amount of Rs.3 lakhs deposited as security deposit and an amount of Rs.46,959/-towards advertisement charges had been deducted by the respondent from the final bill as the amount towards risk liability. The AT concluded that since the breach of the contract had been committed by the claimant/contractor, the security deposit of Rs.3 lakhs is liable to be forfeited and therefore out of the total amount of Rs.3,46,959/-claimed by the claimant, only an amount of Rs.46,959/-was allowed. However, in the award itself it is stated that no loss/damage had been caused to the respondent. Therefore, it is submitted by the learned counsel for the claimant/contractor that in such circumstances the forfeiture of Rs.3 lakhs deposited as security deposit is patently wrong, illegal and perverse. Reference was made to the decisions in Fateh Chand vs. Balkishan Dass [1963 SC 1405]; State of Kerala vs. United Shippers and Dredgers Ltd. [AIR 1982 Ker 281]; Abdulla vs. State of Kerala [2001 KHC 822] and Kailash Nath Associates vs. Delhi Development Authority [(2015)4 SCC 136] in support of this argument.

6. Here we need to refer to Sections 73 and 74 of the Indian Contract Act, 1872. Section 74 of reads thus -

“74 Compensation fo