By Ramasubramanian Ammamuthu
BE, LLB, FCIArb Managing Director / Lead Consultant (Arbitration)
Adroit Project Management Consultancy Pvt. Ltd.

The Delhi High Court has recently reiterated a significant principle in contract law: the forfeiture of a bank guarantee or bid security without actual loss is unjustified. This ruling came in the matter of Simplex Infrastructures Limited vs. National Highways Authority of India and Ors. [(10.03.2017 - DELHC) MANU/DE/0623/2017].

In this case, Simplex Infrastructures Limited had filed a writ petition challenging the rejection of its bid for a highway project and the subsequent forfeiture of the pre-bid security amount by the National Highways Authority of India (NHAI).

The key question before the Court was whether Simplex was entitled to a refund of the forfeited amount.

After hearing the arguments, the Court observed that the rejection of Simplex’s bid had not caused any loss to NHAI equivalent to the entire pre-bid security amount. It found the forfeiture to be unjust, unwarranted, and appearing to be aimed at unjust enrichment of the respondent authority. There was no occasion that Simplex had attempted to manipulate or influence the bidding process.

The Court held that the forfeiture of the entire bid security was penal in nature and unreasonable, especially since no loss had been incurred by NHAI in terms of time or resources. Citing Section 74 of the Indian Contract Act, 1872, the Court emphasized that imposing a penalty without proving actual loss cannot be justified.

Accordingly, the Delhi High Court directed NHAI to refund the pre-bid security amount to Simplex within four weeks, thereby partly allowing the writ petition.

What Happened Next: Supreme Court Upholds High Court’s Reasoning

The decision of the Delhi High Court was subsequently challenged through a Special Leave Petition in the Supreme Court of India in National Highways Authority of India vs. Simplex Infrastructure Ltd and Anr. [(03.07.2017 - SC Order) MANU/SCOR/23631/2017].

The Supreme Court noted that the respondent contractor (Simplex Infrastructure Ltd) had not been given an opportunity to show cause regarding the reasons behind the cancellation of their bid. Such a cancellation, it held, was a clear violation of the elementary principles of natural justice.

In line with the Delhi High Court’s ruling, the Supreme Court also directed NHAI to refund the security amount to Simplex within a period of two weeks.

This case underscores a critical point for both public authorities and contractors: Forfeiture of bid security must be justified with proof of actual loss, and due process must be followed in all bid-related decisions.