Suppression of Material Litigation History in Tender Bids Justifies EMD Forfeiture: Madras High Court - 2025-04-18

Madras High Court Upholds Forfeiture of EMD for Non-Disclosure of Litigation in Tender Bid

Chennai, India – The Madras High Court has ruled in favor of HSCC (India) Limited, upholding its decision to forfeit the Earnest Money Deposit (EMD) of M/s. P.S.T. Engineering Construction for suppressing material information regarding pending litigation in their tender bid. Justice D.Bharatha Chakravarthy presided over the case, dismissing the writ petition filed by PST Engineering Construction.

Background of the Case

The case arose from a tender issued by HSCC (India) Limited on behalf of the Government of Maharashtra for the construction of a medical college and hospital in Nashik. PST Engineering Construction submitted a bid for the project, which had a tender value of Rs. 318.40 Crores, along with an EMD of Rs. 3,28,40,000/- in the form of a bank guarantee.

During the bid evaluation process, HSCC discovered that PST Engineering Construction had failed to disclose a pending lawsuit (C.S.No.108 of 2021) in Madras High Court related to quality concerns in a previous construction project. Form – N of the tender documents required bidders to disclose all litigation history, including court cases, investigations, and arbitrations, regardless of whether they were directly 'quality-related'. PST had submitted 'Nil' in Form N regarding litigation history. Consequently, HSCC issued a show cause notice to PST, and subsequently forfeited the EMD and invoked the bank guarantee citing the submission of false information.

Arguments Presented

PST Engineering Construction argued that the non-disclosure was an unintentional mistake, stemming from their interpretation that Form – N only required disclosure of litigation directly related to "quality-related matters". They contended that the pending suit was about "arbitrary action" by the Tamil Nadu Urban Habitat Development Board, not directly quality, and that the forfeiture of the entire EMD was disproportionate, especially as there was no loss to HSCC and the contract was yet to be awarded. PST's counsel cited Supreme Court precedents arguing for a more lenient approach towards genuine mistakes in tender processes and emphasized that forfeiture should be considered a penalty under Section 74 of the Indian Contract Act, requiring proof of actual loss.

HSCC (India) Limited countered that the tender conditions unequivocally mandated the disclosure of all litigation history, not just quality-related cases. They argued that PST’s non-disclosure constituted a material suppression of facts, justifying the EMD forfeiture as per the tender terms and the submitted affidavit. HSCC asserted that the undisclosed litigation was in fact related to serious quality concerns. They relied on Supreme Court judgments to argue that forfeiture is permissible to ensure only genuine bids are submitted and that Section 74 of the Contract Act is not applicable when a contract has not been concluded due to bidder misconduct.

Court's Reasoning and Decision

Justice Bharatha Chakravarthy rejected PST's arguments, stating that Form – N clearly required disclosure of all "court cases, investigations, and arbitration" independently of "quality-related matters". The court found PST's claim of misinterpretation to be disingenuous, particularly noting the quality-related nature of the undisclosed litigation.

The High Court emphasized the importance of transparency and full disclosure in tender processes, citing precedents that uphold forfeiture of EMD when bidders fail to comply with tender conditions. The court referenced the Supreme Court's view in National Highways Authority of India Vs. Ganga Enterprises and Another that forfeiture is permissible when a party's conduct prevents the contract from coming into existence.

Addressing the applicability of Section 74 of the Indian Contract Act, the court distinguished the present case, noting that tender conditions explicitly allowed for EMD forfeiture for submission of incorrect information, even before contract finalization. The court reiterated that EMD serves to ensure the genuineness of bids and deter non-serious bidders.

Pivotal Excerpt :

> “Thus, it can be seen that based on a review and reading of the tender conditions as a whole, HSCC is entitled to forfeit the EMD in the event of any incorrect or false information… This is not a case where Section 74 would apply, and the entire EMD amount, as agreed upon by the parties, has to be forfeited. HSCC is entitled to this, as the clause is solely for ensuring the performance of the contract, meaning that only genuine parties bid in the tender.”

The court concluded that PST’s suppression of material information justified the forfeiture of the entire EMD amount of Rs. 3,28,40,000/-. The Writ Petition was dismissed, and the court found no need to relegate the matter to a civil court for quantum determination, considering the forfeited sum reasonable in the context of the Rs. 318.40 Crore project.

Implications

This judgment underscores the critical importance of truthful and complete disclosure in tender submissions. It reaffirms the right of tendering authorities to forfeit EMD when bidders suppress material information, even if the contract is not finalized. The ruling serves as a reminder to bidders to diligently comply with all tender conditions, particularly those related to disclosure of litigation history, to avoid facing financial penalties and potential disqualification.