Karnataka High Court Upholds Forfeiture of EMD: “Forfeiture Justified When Successful Bidder Fails to Enter into Contract as per Tender Conditions and Cannot Expect Refunds”

Court’s Decision

The Karnataka High Court allowed the writ appeal and set aside the order of the Single Judge, which had directed the Public Works Department (PWD) to refund the Earnest Money Deposit (EMD) of the successful bidder. The Court ruled that the forfeiture of the EMD was justified, as the bidder had failed to enter into the contract despite being declared successful. It was further held that courts should not interfere in tender-related decisions unless the action of the authority is arbitrary.

The High Court emphasized that a bidder cannot, after being declared successful, refuse to enter into the contract while expecting the return of their EMD. The Court found that the action of the PWD was in strict accordance with the terms of the Standard Bid Document (SBD), which allowed forfeiture in such circumstances.

Facts of the Case

1. The Karnataka Public Works Department (PWD) floated a tender for the periodical maintenance of National Highway 48 covering KM 263.00 to KM 288.00, with an estimated cost of ₹570.74 lakhs.
2. The respondent (bidder) submitted a bid and was declared the successful bidder.
3. The PWD issued a Letter of Acceptance (LoA) on 19.07.2008, requiring the bidder to furnish a performance security and enter into the contract within the stipulated period.
4. The bidder submitted a bank guarantee of ₹11,42,000, but instead of signing the agreement, the bidder:
   • Sent multiple letters and representations raising concerns about the scope of work and additional payments.
   • Sought modifications and clarifications regarding overhead costs and maintenance expenses.
5. The PWD did not entertain these requests, as the pre-bid meeting was held earlier (on 05.02.2008), during which the bidder had the opportunity to raise such concerns but failed to do so.
6. After repeated notices, the PWD canceled the contract and forfeited the EMD.
7. The bidder filed W.P.No.14091/2008, challenging the forfeiture. The Single Judge allowed the petition, quashing the PWD’s action and directing the department to reconsider the bidder’s representations.
8. The PWD appealed (W.A.No.3450/2010), but the Division Bench dismissed the appeal, only directing that the bidder’s representations be considered again. The court also imposed a cost of ₹50,000 on the PWD.
9. In compliance with the order, the PWD reconsidered the representations and reaffirmed its decision to forfeit the EMD in an order dated 06.07.2011.
10. The bidder once again challenged this decision in W.P.No.23789/2012, and the Single Judge allowed the petition, directing the PWD to refund the EMD.
11. The PWD filed the present appeal, challenging the Single Judge’s order.

Issues Before the Court

1. Whether the forfeiture of Earnest Money Deposit (EMD) was legally valid under the tender conditions.
2. Whether the Single Judge erred in ruling that the forfeiture was arbitrary.
3. Whether a successful bidder can refuse to enter into a contract and still demand a refund of the EMD.
4. Whether the court has the authority to interfere in contractual matters involving tenders.

Petitioner’s (PWD’s) Arguments

1. The respondent (successful bidder) failed to fulfill the contract terms, as they did not:
   • Furnish the required performance security.
   • Enter into the contract agreement despite repeated notices.
2. As per Clause 16.6 of the Standard Bid Document (SBD), EMD must be forfeited if the successful bidder fails to enter into the contract.
3. Clause 34.3 of the SBD explicitly states that failure to comply with contract terms leads to cancellation and forfeiture.
4. The bidder had the opportunity to raise concerns in the pre-bid meeting (05.02.2008) but failed to do so. Raising concerns after bid acceptance was an afterthought.
5. The PWD followed proper procedure, reconsidered the representations of the bidder as directed by the earlier judgment, and passed a detailed order rejecting their claims and forfeiting the EMD.
6. The judicial review in tender matters is limited, and courts should not interfere unless the action is arbitrary.
7. Relying on Canara Bank v. Subramanya Rao K. (W.A.No.349/24 dated 16.10.24), the PWD argued that bid security can be forfeited if the bidder does not fulfill contractual obligations.

Respondent’s (Bidder’s) Arguments

1. The delay in issuing the letter of acceptance (8 months) caused difficulties in executing the work.
2. The bidder raised legitimate concerns under Clause 32 of the SBD, which allows bidders to highlight difficulties to the employer.
3. The forfeiture of EMD was arbitrary, as the bidder was not given an opportunity of hearing.
4. The Single Judge rightly ordered the refund, as the PWD’s actions were unjustified.

Analysis of the Law

1. Judicial Review in Tender Matters is Limited

• Courts generally do not interfere in contractual matters, especially in tenders, unless the decision is arbitrary or unfair.
• The PWD’s action was strictly in accordance with the tender terms, meaning there was no reason for judicial interference.

2. Contractual Obligations Must be Fulfilled

• Clause 16.6 of the SBD allows forfeiture of bid security if the bidder:
  • Withdraws after bid acceptance.
  • Fails to sign the contract.
  • Fails to furnish the performance security.
• Clause 34.3 of the SBD states that failure to comply leads to forfeiture.
• The bidder accepted these conditions when participating in the tender.

3. Raising Queries After Bid Acceptance is Not Permissible

• The bidder had a chance to raise concerns in the pre-bid meeting but failed to do so.
• Later representations were an attempt to modify contract terms, which is not allowed.

4. The PWD Followed Due Process

• The PWD reconsidered the bidder’s representations as directed in the earlier case.
• The order dated 06.07.2011 was a reasoned order, meaning the decision was not arbitrary.

Court’s Reasoning

1. The PWD’s decision to forfeit the EMD was valid, as the bidder failed to comply with the contractual terms.
2. Judicial intervention in tenders is limited, and courts cannot rewrite contractual terms.
3. The respondent had ample opportunity to raise concerns in the pre-bid meeting but did not do so.
4. Allowing bidders to withdraw after bid acceptance while retaining their EMD would disrupt tender processes.

Conclusion

• The writ appeal was allowed.
• The Single Judge’s order directing the refund of EMD was set aside.
• The Court upheld the forfeiture of EMD.
• The bidder was found at fault for failing to comply with contractual obligations.

Implications

1. Bidders must comply with tender conditions and cannot raise concerns post-acceptance.
2. Government departments can enforce tender terms, including forfeiting bid security.
3. Judicial interference in tender disputes is limited.
4. Authorities must follow due process, and as long as they do, courts will uphold their decisions.

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