Security Deposit for Road Construction Work Cannot Be Forfeited for Non-Performance of Routine Maintenance: Gauhati High Court - 2025-04-27

Gauhati High Court Rules Security Deposit for Construction Cannot Be Forfeited for Maintenance Failure

Guwahati , Assam - In a significant judgment concerning government contracts, the Gauhati High Court has ruled that the security deposit retained from a contractor for road construction work cannot be forfeited by the state authorities on the ground of non-performance of routine maintenance work, as per the specific terms of the contract.

Justice KaushikGoswami , presiding over the case of Muslim Ali vs. State of Assam and Others , held that the action of the Public Works Department (PWD) in withholding and forfeiting the security deposit related to the construction phase of the projects was arbitrary and illegal, violating the terms of the contract and Article 14 of the Constitution of India.

Background of the Case

The petitioner, Muslim Ali, a Class 1(A) Contractor, was awarded two road construction works under the PMGSY scheme in Nalbari District, Assam (Package No. AS-20-29 (ADB) and Package No. AS-20-33 (ADB)) in 2007. The contracts included both the construction of the roads and routine maintenance for a period of five years after completion.

According to the petitioner, he completed the construction works to the satisfaction of the authorities. During the payment of running account (RA) bills for the construction phase, the PWD deducted amounts as security deposit. However, despite repeated representations, the security deposit amounts were not released after the completion of the construction phase or even after the expiry of the maintenance period.

The PWD's stated reason for withholding the security deposit was the petitioner's alleged failure to carry out the routine maintenance work as required by the contract. The department contended that under the contract terms, specifically Clause 43.4, they were entitled to recover costs incurred for carrying out the maintenance work themselves from amounts due to the contractor, including the security deposit.

Arguments Presented

Mr. D. Das , Senior Counsel for the petitioner, argued that the security deposit retained during the construction phase was specifically linked to potential defects in the construction work and was repayable within three years of completion, subject to defect correction. He submitted that the contract clearly distinguished between this security deposit and the performance security related to routine maintenance. He asserted that the non-performance of maintenance work, even if true, did not permit the forfeiture of the security deposit related to construction. Mr. Das also highlighted that in similarly situated contracts with the same petitioner, the court had previously ruled against the PWD's practice of withholding construction security deposits for maintenance issues (citing WP(C) No. 5933/2015 and WP(C) No. 6154/2015).

Mr. B. Gogoi, Standing Counsel for the PWD, defended the department's action, relying primarily on Clause 43.4 of the contract. He argued that this clause allowed the employer to recover the cost of maintenance work not performed by the contractor from the Performance Security and/or from any amounts of the Contractor whatever is due. He contended that the security deposit lying with the department constituted an "amount due" and was therefore legitimately utilized to cover the costs of maintenance work that the petitioner failed to carry out. He also argued that the petitioner failed to maintain the Performance Security.

Court's Analysis and Findings

Justice Goswami meticulously examined the relevant clauses of the General Conditions of Contract, particularly Clauses 32 (Correction of Defects and Routine Maintenance), 33 (Uncorrected Defects), 38.2 (Payment for Routine Maintenance), 39 (Payments), and 43 (Security Deposit).

The court observed that the contract clearly bifurcated the work into two parts: Construction and Routine Maintenance. Crucially, Clause 43 explicitly stated:

• Clause 43.1: The employer retains a 5% security deposit from payments for Construction Work until completion. It explicitly states, " No security deposit/ retention shall be retained from the payments for Routine Maintenance of works. "
• Clause 43.2: This clause outlines the phased repayment of the security deposit for construction within three years of completion, subject to correction of construction defects.
• Clause 43.4: This clause deals with the Performance Security (equal to 5% of contract price) and additional performance security for Routine Maintenance . It states this is repaid when the five-year Routine Maintenance period is over and maintenance is certified satisfactory. It also states that if routine maintenance is not carried out, costs can be recovered from Performance Security and/or "any amounts of the Contractor whatever is due."

The court found the contract terms to be "absolutely clear and unambiguous." It held that the security deposit retained under Clause 43.1 and repayable under Clause 43.2 is specifically linked to the construction work and defects therein . The Performance Security under Clause 43.4 is linked to Routine Maintenance. The contract explicitly bars retaining security deposit from maintenance payments.

The court rejected the PWD's interpretation of "any amounts of the Contractor whatever is due" in Clause 43.4, stating that this phrase must be read in the context of the surrounding clauses and the clear distinction made between the two types of security/retention. It reasoned that "any amount due" in Clause 43.4 refers to amounts related to maintenance work or Performance Security, not the security deposit retained for construction. The court also noted that the Performance Securities for both packages had reportedly expired and had no monetary value according to the PWD's affidavit.

Furthermore, the court referred to its limited scope of judicial review in contractual matters but emphasized that state actions must still conform to Article 14, mandating fairness and non-arbitrariness, citing Supreme Court judgments in Kumari Shrilekha Vidyarthi and Sterling Computers Limited .

Crucially, the court found that the issue was squarely covered by the two previous judgments of a Co-ordinate Bench involving the same petitioner and similar facts, which had attained finality as no appeal was filed by the State. Those judgments similarly held that forfeiting the security deposit related to construction work for non-performance of routine maintenance was a violation of the contract terms.

The court noted that the respondents admitted the construction work was completed, and there was no plea that the construction work itself was defective. The dispute was solely related to the non-performance of maintenance.

Judgment

Finding the PWD's action of withholding and forfeiting the construction security deposit for the alleged failure to perform routine maintenance "totally unfair, arbitrary and illegal," Justice Goswami directed the respondents to pay:

1. The balance security deposit amount in relation to Package No. (i).
2. The entire security deposit amount in relation to Package No. (ii).

The court granted the respondents liberty to take any action available under the law, including penal provisions, regarding the non-performance of the routine maintenance work, but mandated that such action must follow the appropriate procedure of law.

The writ petition was accordingly disposed of.