Madras High Court Upholds Arbitral Award Directing Refund of Forfeited Security Deposit

A single‑judge bench of Justice N. Anand Venkatesh heard a petition under Section 34 of the Arbitration and Conciliation Act, 1996 challenging an arbitral award dated 16.08.2022 in a dispute arising from a municipal tender and the forfeiture of a security deposit. The Cantonment Board, St. Thomas Mount & Pallavaram sought to set aside the award which had directed refund of a Rs.5 lakh security deposit furnished by the contractor along with interest and had dismissed the Board’s counterclaim.

The Court dismissed the petition and upheld the sole Arbitrator’s award directing refund of the security deposit with 9% simple interest from 17.08.2017 until actual payment and refusing the Board’s counterclaim. The judge observed that premature termination did not automatically justify forfeiture of the entire security deposit and that the power to rescind the contract under the tender did not dispense with the requirement to prove loss if the forfeiture was in the nature of a penalty. The Court, in its reasoning, observed: “The Hon'ble Apex Court in the decision in Kailash Nath Associates made it clear that if the pre‑estimated compensation is in the nature of penalty, the party has to necessarily prove the loss, failing which, the requirements under Section 74 of the Indian Contract Act will not be satisfied.” The judgment further noted that the contract itself provided that “where the contract was rescinded, the petitioner would be entitled to forfeit whole or a part of the security deposit,” but emphasised that the Board had not produced evidence of actual loss to justify forfeiture.

Background

The dispute arose from e‑tenders invited on 24.03.2017 for maintenance and repairs to drains and culverts, where the earnest money was fixed at 1% and the security deposit at 5% of contract value. The contractor’s bid was accepted and an agreement was executed on 29.06.2017; the work order required completion by 31.12.2017. The Board issued a show‑cause communication on 08.08.2017 alleging no commencement or progress; the contractor replied on 14.08.2017, but the Board terminated the contract on 17.08.2017, blacklisted the contractor and forfeited the EMD and security deposit.

The contractor moved arbitration seeking refund of the Rs.5 lakh security deposit with interest; the Board counterclaimed for loss on re‑tender. The sole Arbitrator framed six issues, considered documentary material (no oral evidence), and concluded that since the contract’s stipulated completion date was 31.12.2017 and termination occurred prematurely, the Board could not forfeit the entire security deposit without proving actual loss; the Arbitrator ordered refund with 9% interest and rejected the counterclaim. The Board challenged the award under Section 34.

The High Court analysed relevant contract clauses (Clauses 3, 11 and 15) and the authorities relied upon by parties, including Kailash Nath Associates v. DDA. The Court found no perversity or patent illegality in the Arbitrator’s findings that the Board had not established loss and that the award of interest at 9% was reasonable. The petition was dismissed and the Board was directed to pay costs of Rs.25,000 to the contractor. No interim directions were necessary.

Case Details:
Case No.: Arb.O.P.(Com.Div.) No.692 of 2022
Case Title: Cantonment Board, St. Thomas Mount & Pallavaram, rep. by its Chief Executive Officer, Chennai‑16 vs M/s. Babuji Civil Constructions, Rep. by Proprietor C. Saravanan
Appearances:
For the Petitioner(s): Mr. C. Mohan; Ms. Rexy Josephine Mary (for M/s. King & Patridge)
For the Respondent(s): Mr. A.K. Sriram, Senior Counsel (for Mr. K.J. Parthasarathy)

Source: 2026 CaseBase(MAD) 16