Breach Of Contract U/S 74 Not Applicable At Pre-Formation Stage: Delhi High Court Directs State To Refund ₹20 Crore Forfeited Amount

In this single bench judgment, Justice Yashwant Varma held that the state's (respondent) action of forfeiture of the bid security, having no basis in any clause of the request for proposal (RFP) but merely being on the basis of certain communication during the pre-bid stage, was wholly unjustified. The respondent had invited bids for selecting a developer cum operator for a proposed a five-star hotel to be built at the International Exhibition cum Convention Centre, Pragati Maidan, New Delhi by way of the RFP.

The Bench highlighted that law provides that the terms of the contract should be clear and explicit such that forfeiture of earnest money be justified, as held in a previous decision of the Delhi High Court in M.C. Luthra v Ashok Kumar Khanna 2018 SCC OnLine Del 7462.

"As this Court reads the RFP and the relevant clauses extracted above, it is of the firm view that none of them stood attracted in the facts of the present case. The action of forfeiture when tested on the anvil of the provisions contained in the RFP would thus clearly appear to be ultra vires."

Importantly, the court reiterated the well settled position of law that allegation of breach of contract under Section 74 of the Contract Act 1872 (compensation of breach of contract where penalty stipulated for) would not apply at pre-formation of contract stage.

As part of the pre-bid formalities, the respondent had informed all bidders that bid security would not be refunded if the bidder withdraws from further participation after opening of technical bids. After IHCL was found to be eligible and had passed the technical bids stage, it disclosed its relationship with another qualified bidder. However, the respondent did not find this amiss and did not disqualify IHCL from participating in the bidding process. IHCL raised the same issue again and indicated that it would be participating in the bid under coercion and protest, and so did not submit a higher bid amount than that submitted by other bidders during the e-auction.

The respondent did not accept the bids received, cancelled the auction process altogether and issued a fresh request for proposal (RFP). Later, the respondent informed IHCL of the forfeiture of its bid security. Since the initial bidding process in which IHCL participated was cancelled, IHCL requested for a refund. When the respondent did not pay heed to repeated requests, IHCL was led to file this writ petition.

IHCL contended the RFP does not permit forfeiture of the bid security in the event a bidder does not propose a higher sum than a competitor. It submitted that law does not impose any compulsion on the participant to continue in the bidding process or to submit a higher bid, and that a financial bid is purely a commercial decision of the bidder. Finally, IHCL submitted that in the absence of an explicit clause in the RFP entitling the respondent to forfeit the security deposit, the forfeiture would amount to an unjust enrichment by a public body and is arbitrary.

The respondent had submitted that it had explicitly assured IHCL that its relationship with another competing bidder would not lead to its disqualification. It put forth that the pre-bid security was liable to be forfeited in the event the bidder withdraws after qualifying the scrutiny process for technical bids. It argued that IHCL's failure to increase the bid amount meant that the bidder has withdrawn from the auction altogether without a justifiable cause. In addition, the respondent argued that IHCL's actions forced the former to annul the entire bidding process, and that a breach of contract by IHCL justified forfeiture of the bid security.

The court considered whether a bidder who failed to better the prevailing highest offer could be said to have "withdrawn" from the auction and, whether this justified a forfeiture of bid security by the contractor, and found both in the negative. On this, the court noted that the RFP imposed upon the bidder to submit a bid which was higher than the one displayed on the portal at the relevant point in time. The bidder was not given an option to bid with a price bid which had already been submitted. The court noted that if a bidder chose not to increase the bid or better the existing or prevailing offer, the same cannot be interpreted as amounting to a withdrawal from the-auction process.

Finally, accepting IHCL's arguments, the court directed the respondents to refund the amount of INR 20 crores to IHCL.

Case Title: The Indian Hotels Company Ltd. v. Union Of India And Ors. WP. (C) 8779/2019, CM APPLs. 36308/2019 & 44738/2019

Citation: 2022 LiveLaw (Del) 287