Premature termination of a contract does not grant right to forfeit the security deposit without proof of actual loss, as it constitutes a penalty under the contract law.

ORDER :

1. 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 drains and culverts at St.Thomas Mount and Pallavaram for 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 deposit of Rs.5 lakhs and execute an agreement with the petitioner. Pursuant to that, the petitioner and the respondent/ claimant entered into an agreement on 29.6.2017 and the respondent/claimant remitted a sum of Rs.5 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 31.12.2017. 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 the EMD and the security deposit were also forfeited. The respondent/claimant, through letters namely C.9 to C.11, sought for refund of the security deposit and thereafter initiated the arbitration proceedings, pursuant to which, the dispute was referred to 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.5 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.5,00,000/- by the respondent from the claimant is tenable and valid in law?

2) Whether the claimant is entitled for refund of the security deposit of Rs.5,00,000/-

as per the terms of the contract?

3) Whether the respondent is entitled to the counter claim of Rs.5,00,000/- for less and additional cost incurred by them?

4) Whether the claimant is entitled for interest from the date of terminati