CDJ Law Journals

1. The present adjudication arises under the extraordinary writ jurisdiction, wherein M/s. XIPHIAS Software Technologies Private Limited ("Petitioner") is seeking a Writ of Certiorari to quash an order of forfeiture issued by the Jharkhand Bijli Vitran Nigam Limited (referred to as "JBVNL" or "Respondent No. 2").

2. At its core, this case raises the question whether a state instrumentality can invoke the mechanism of security forfeiture to compel a contractor into providing services beyond a mutually agreed contractual term, and whether it is permissible in exceptional circumstances. An offshoot issue involved is whether such action of extension beyond contract tenure and forfeiture of security deposit require adherence to principles of natural justice. Background Facts:

3. The relationship between the Petitioner and the Respondent State utility is not a transient one; it is a decade-long professional contract. The Petitioner is a manufacturer and provider of “Any Time Payment” (ATP) machines, which serve as the primary interface for utility bill collection without human intervention.

4. The Petitioner’s journey with the Respondent began in 2011- 2012, following NIT No. 591/PR/11-12, where it was declared the successful bidder for the supply and maintenance of ATP machines. The evolution of the contract demonstrates the Petitioner's performance. Initially appointed for 30 machines, the Petitioner’s operations eventually expanded to 254 ATP machines situated throughout the State of Jharkhand, including several Naxal-affected areas where traditional bill collection was unfeasible.

5. To understand the legal basis of the current dispute, we examine the specific instruments that governed the relationship between the parties. The services were facilitated through three distinct work orders and a consolidated agreement, each specifying terms for the contract period and the security for performance.

Contractual Instrument	Issuance Date	Reference Number	Scope of Work
1st Work Order	15.02.2016	No. 01/C&R	Installation of 69 ATP Machines on BOOM basis
2nd Work Order	25.10.2016	No. 04/C&R	Additional 65 ATP Machines on repeat order terms
3rd Work Order	09.08.2018	No. 02/C.E. (C&R)	Installation of 120 ATP Machines in phases
Formal Agreement	31.10.2018	Agreement dtd. 31.10.2018	Consolidation of 120 machine terms under Master Agreement

                  The terms governing these instruments were largely consistent, particularly regarding the "Contract Period." Clause 7 of the 1st Work Order and Clause 8 of the 2018 Agreement stipulated a three-year term, which could be extended for a further two years "as per mutual consent". This requirement of mutuality is a significant legal safeguard, ensuring that neither party could be bound to an indefinite or non-consensual extension of liability. Regarding financial securities, the contracts provided for two distinct mechanisms:

                  i. Security Deposit (SD): 5% of the contract price, intended to be returned after the successful completion of the three-year period.

                  ii. Performance Bank Guarantee/Cash Guarantee (PBG/PCG): Originally set at 10% in the 2016 orders, later modified in 2018 to 5% Performance Cash Guarantee (deducted from verified bills) to total 10% when combined with the 5% SD.

6. The genesis of the litigation lies in JBVNL’s technical disqualification of the Petitioner in a new tender (NIT No. 112/PR/JBVNL/2021-22) in November 2021. The Petitioner was rejected by the Tender Committee for reasons the Petitioner alleges were non-cogent and designed to oust it in favour of a new entrant, M/s. Idea Infinity IT Solutions Private Limited. The Petitioner assailed this disqualification in WPC No. 4718/2021 but this case has been dismissed as infructuous on 11.02.2026. This second case was filed seeking refund of the security deposit for refusing to maintain the service in the transition period. This case is confined to the forfeiture of security deposit only.

7. Notably, the original NIT required new contractors to install machines within one month of receiving the Letter of Intent (LOI). However, JBVNL issued a corrigendum extending this transition period to three months, a move the Petitioner characterizes as unfair favouritism towards its successor.

8. As the Petitioner’s existing work orders entered an extension phase, JBVNL issued a letter on November 25, 2021, extending the term "till installation of ATP machines at respective locations by newly appointed agency or up to 28th February 2022, whichever is earlier". The Petitioner accepted this extension, interpreting the "whichever is earlier" clause as a definitive exit date of February 28, 2022.

9. However, the new vendor delayed the takeover process. On February 24, 2022, the Petitioner formally notified JBVNL through email that it would withdraw all machinery and manpower by noon on February 28, 2022, in accordance with the prior extension letter which mentions February 28 as a firm date for transition.

10. In a reactionary move, JBVNL issued a second extension letter on February 25, 2022 after it was informed by the Petitioner regarding withdrawal and only three days before the deadline— unilaterally extending the work until March 31, 2022. The Petitioner responded on February 28, 2022, informing the Respondent No. 02 that a last-minute extension was logistically impossible and that it would only consider a six-month extension if its current security deposits were released.

11. The JBVNL issued a show-cause notice on March 1, 2022, accusing the Petitioner of mala fide conduct and granting 24 hours to respond. The Petitioner complied with its response dated March 2, 2022 reminding the Respondent No. 02 that the contract was already over and that it had already cooperated with the JBVNL by providing service till February 28, 2022. It termed any further last hour extension as unfair and unacceptable as it had to remove 254 machines and all its manpower which requires both time and money.

12. The dispute, quite surprisingly, remained dormant for over a year until the Petitioner issued a demand notice under the Insolvency and Bankruptcy Code (IBC) for its dues. In the interregnum the Petitioners sent several letters for refund of security deposit under its previous contracts. Only then did JBVNL issue the impugned order dated March 16, 2023, forfeiting approximately Rs. 3.15 Crores of Security Deposit and Performance Cash Guarantee on the grounds that the Petitioner refused to work during the second, unilateral extension period. Aggrieved, the Petitioner is before this Court.

13. The Petitioner argues that this case is an open and shut case of excessive abuse of power and apparent illegality as the contract had lapsed after three years and the JBVNL could not thrust upon it a one-sided extension without mutual consent. The forfeiture action for not accepting an extended contract is unsustainable.

14. The Respondents, particularly, JBVNL has not even filed their counter affidavit in this case to rebut the facts as narrated in the writ petition. However, it has vehemently defended its actions by asserting that the Petitioner was reasonably expected to cooperate with the transition. The Petitioner should not have left during the transition.

15. It has also been buttressed by the Respondents that the refusal by the Petitioner to continue its service beyond February 28, 2022 was malicious and not due to any genuine cause. The forfeiture was preceded by show cause notice dated March 1, 2022 and some delay does not defeat the right of JBVNL to take penal action. It has also been argued that the right of forfeiture of security deposit survives the contract itself and such action can be taken even after the contract period is over. The Respondent JBVNL is heavily banking on Indian Railway Construction Co. Ltd. v. National Buildings Construction Corpn. Ltd., (2023) 7 SCC 390 which permits forfeiture when the contractor fails to complete the work even in extended time. Specifically, the Respondent, JBVNL relies on paragraphs no. 19 to 21 which are extracted below:

                  “19. Even otherwise, from the material on record and even the notice dated 21-2-1994 and the subsequent notice dated 7-3-1994, we are satisfied that Ircon was satisfied that the work could not be completed by the contractor even within further extension of time. Clause 17.4 provides that if the company (Ircon) is not satisfied that the works can be completed by the contractor and in the event of failure on the part of the contractor to complete the works within further extension of time allowed, Ircon shall be entitled, without prejudice to any other right or remedy available in that behalf, to appropriate the contractor's security deposits and rescind the contract, whether or not actual damage is caused by such default.

                  20. Even Clause 60.1 also provides for determination of contract owing to default of contractor. It provides that if the contractor should abandon the contract, or persistently disregard the instructions of the Project Manager or contravene any provisions of the contract… then the Project Manager on behalf of the Company may serve the contractor with a notice in writing to that effect and if the contractor does not within 7 days after the delivery to him of such notice proceed to make good his default insofar as the same is capable of being made good and carry on the work or comply with such directions as aforesaid to the entire satisfaction of the Project Manager, the Company (Ircon) shall be entitled after giving 48 hours notice in writing under the hand of the Project Manager (to remove the contractor from the whole or any portion or portions as may be specified in such notice) of the works without thereby avoiding the contract or releasing the contractor from any of his obligations or liabilities. It further provides that in such a case the Project Manager on behalf of Ircon shall be entitled to rescind the contract, in which case the security deposit shall stand forfeited to Ircon without prejudice to Ircon's right to recover from the contractor any amount by which the cost of completing the works by any other agency shall exceed the value of the contractor.

                  21. Thus, both, under Clauses 17.4 and 60.1, on failure of the contractor to complete the work, Ircon is justified in rescinding the contract and forfeit the security deposit. At the cost of repetition it is observed that the learned Arbitral Tribunal on appreciation of entire evidence on record, had specifically observed that the contractor failed to complete the work even within the stipulated extended period of time and even abandoned the work and therefore, Ircon was justified in rescinding the contract. The said finding as observed hereinabove has attained finality. Therefore, Ircon was absolutely justified in forfeiting the security deposits and therefore, the learned Arbitral Tribunal was absolutely justified in rejecting Claims 33 and

                  34, which were with respect to forfeiture of security deposits by Ircon.”

                  Points for Determination:

16. The adjudication of this writ petition requires a detailed examination of several questions of law that raise following issues:

                  (i) Can a state instrumentality unilaterally extend a contract period even when the underlying agreement specifically mentions "mutual consent" for renewal?

                  (ii) Is the forfeiture of security deposit sustainable in the absence of quantifiable loss suffered by the State?

                  (iii) Does an administrative order that visits an entity with civil consequences require recording reasons, and does a one-year delay followed by a decision of forfeiture of security deposit is justified?

                  (iv) Does forfeiture of a security deposit require compliance with the principles of natural justice and must be reasoned and speaking?

Findings:

17. The bedrock of contract law is the meeting of minds— consensus ad idem. In government contracts, while the State usually occupies a dominant bargaining position, it is not exempt from the requirement that both parties must agree to be bound by extended obligations unless a specific "unilateral option" clause is clearly outlined in the original deed/Agreement.

18. The Agreement dated October 31, 2018, explicitly stated in Clause 8 that the contract could be extended "as per mutual consent of both the parties". The contract term is reproduced below:

                  Clause 8. CONTRACT AND CONTRACT PERIOD

                  The contract period of ATP system will be for three (3) years, which may be extended for further two (2) years after reviewing the performance of ATP system by JBVNL as per mutual consent of both the parties.

                  The use of the word "mutual" signifies a bipartite process. The Petitioner’s contract was for three years only which lapsed on November 1, 2021. The Respondent JBVNL had already chosen not to extend this arrangement beyond the original three-year tenure and floated fresh NIT No. 112/PR/JBVNL/2021-22, awarded the work to Ms. Idea Infinity and issued a letter dated 25/11/2022 to this Petitioner which was the first extension (until February 28, 2022 or till installation of machines by the new contractor, whichever was earlier.) This letter was the first unilateral extension which had the agreement of this Petitioner for ensuring smooth transition. The Petitioner continued to provide the service until February 28, 2022 and by the later half initiated its withdrawal process. The withdrawal intimation was given on February 24, 2022. This however, did not grant JBVNL a perpetual right to further extension without the Petitioner's fresh consent. The subsequent extension on February 25, 2022 was not only unilateral but delayed action.

19. The next issue that confronts us is whether the Petitioner’s refusal was reasonable and justified. The Petitioner accepted the first extension for three months to enable the takeover process. If JBVNL had to ensure proper transition it was incumbent upon it to properly assess the time period required for this process. The new contractor itself was required to install its machines within three months. JBVNL had directed this Petitioner to continue till the takeover by the new contractor or February 28, 2022, whichever was earlier. If a longer duration was required, the least it could do was to monitor the process efficiently and offer a second extension well within time. Instead it chose to sleep over the whole process. The second extension letter was issued only on February 25, 2022, just three days before the deadline. Not only is this second extension without mutual consent and, hence illegal, it is also, in fact, arbitrary, unreasonable and heavy handed.

20. The Respondent No. 02 misused its dominant position and mismanaged the transition process. JBVNL was retaining the security deposit and its officers used it as a weapon to coerce the Petitioner to submit to its demands. It goes without saying that one party cannot unilaterally extend a contract without the other's consent unless the original agreement explicitly empowers one party. There is no such stipulation in any of the work orders or the Agreement. Recently, in Mandeepa Enterprises v. State of Jharkhand (2025) SCC Online Jhar 719 this Court has quashed a unilateral extension of a toll collection contract, declaring that demanding performance post-contract without consensus is arbitrary and violative of Article 14. The relevant paragraph no. 14 reads as under:

                  “14. The stand of Respondent-State of Jharkhand that in terms of clause 1.1.1 of the tender document, contract period was for a period of two years or until the Plaza is handover to other Collection Agency, is completely misconceived. Clause 1.1.1, which provides that contract period would be for two years or until the Plaza is handed over to other Collection Agency is merely as stop gap arrangement for administrative convenience and the same cannot override the specific terms and conditions of the contract, which provided that contract period would be for two years and can be extended for a further period of six months only with mutual consent. The purpose of clause 1.1.1 was to facilitate handing over and taking over of Toll Plaza after expiry of the contract period of two years, but said clause cannot, by any stretch of imagination, be invoked by Respondent- authorities for compelling the Petitioner to continue with the work of collection of toll despite end of contract period and unwillingness shown by the Petitioner to carry out the activity of toll collection.”

                  Emphasis supplied

21. JBVNL’s letter of February 25, 2022, was a proposal for a new extension. The Petitioner’s rejection on February 28, 2022, meant that no contract existed for the month of March, 2022. Therefore, the Petitioner’s withdrawal of services on the original deadline of February 28 was a lawful exercise of its contractual right to exit at the end of the agreed term. The JBVNL cannot create a breach by unilaterally creating a contract that the other party never accepted.

22. The Respondent’s forfeiture of the Security Deposit and Performance Cash Guarantee falls squarely under the ambit of Section 74 of the Indian Contract Act, 1872. This section governs the State's power to appropriate penalties for breach of contract.

23. At this juncture, we deem it necessary to take note of Section 74 of the Indian Contract Act, 1872 (for short, “the 1872 Act”). Section 74 of the 1872 Act deals with the compensation for loss or damage caused by a breach of the contract when a particular sum of liquidated damages or penalty is already provided under the terms of the contract. It further provides that such compensation must be reasonable and it cannot, in any circumstance, exceed the amount stipulated in the contract. The same is extracted below:

                  “74. Compensation for breach of contract where penalty stipulated for.—

                  When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for. […]”

24. The decision of this Court in Maula Bux v. Union of India, reported in (1969) 2 SCC 554, lays down the law that forfeiture of earnest money is not deemed as penal and that Section 74 of the 1872 Act will only apply where the forfeiture is in the nature of a penalty. The relevant observations are extracted hereunder:

                  “5. Forfeiture of earnest money under a contract for sale of property — movable or immovable — If the amount is reasonable, it does not fall within Section 74. That has been decided in several cases : Chiranjit Singh v. Har Swarup [Chiranjit Singh v. Har Swarup, 1925 SCC OnLine PC 63 : (1926) 23 LW 172] ; Roshan Lal v. Delhi Cloth & General Mills Co. Ltd. [Roshan Lal v. Delhi Cloth & General Mills Co. Ltd., 1910 SCC OnLine All 98 : ILR (1911) 33 All 166] ;

                  Mohd. Habib-Ullah v. Mohd. Shafi [Mohd. Habib-Ullah v. Mohd. Shafi, 1919 SCC OnLine All 87 : ILR (1919) 41 All 324] ; Bishan Chand v. Radha Kishan Das [Bishan Chand v. Radha Kishan Das, 1897 SCC OnLine All 52 : ILR (1897) 19 All 489 : 1897 AWN 123]. These cases are easily explained, for forfeiture of reasonable amount paid as earnest money does not amount to imposing a penalty. But if forfeiture is of the nature of penalty, Section 74 applies. Where under the terms of the contract the party in breach has undertaken to pay a sum of money or to forfeit a sum of money which he has already paid to the party complaining of a breach of contract, the undertaking is of the nature of a penalty.”

                  (Emphasis supplied)

25. The Respondent, JBVNL has placed reliance on this decision to contend that the forfeiture action does not require proof of actual loss and the delay is also inconsequential. On examining the Agreement between the Parties to the contract, it is found that there is a stipulation for Performance Bank Guarantee in Clause 11 but it does not confer the right of forfeiture in case of default. The Performance Bank Guarantee (5%) and the Security Deposit (5%) were collected from the running bills of the contractor and had to be refunded after three years. Even if a right of forfeiture existed, it had to be exercised within three years only. Moreover, no liquidated damages have been prescribed which makes Section 74 inapplicable to the facts. In the case Suresh Kumar Wadhwa v. State of M.P., reported in (2017) 16 SCC 757 following pertinent observations were made:

                  23. Reading of Section 74 would go to show that in order to forfeit the sum deposited by the contracting party as “earnest money” or “security” for the due performance of the contract, it is necessary that the contract must contain a stipulation of forfeiture. In other words, a right to forfeit being a contractual right and penal in nature, the parties to a contract must agree to stipulate a term in the contract in that behalf. A fortiori, if there is no stipulation in the contract of forfeiture, there is no such right available to the party to forfeit the sum.

26. Hon’ble Supreme Court’s decision in the case of Kailash Nath Associates v. Delhi Development Authority v. DDA, reported in (2015) 4 SCC 136 has also redefined the law of forfeiture in India. The Court held that Section 74 is a compensatory provision, not a punitive one. For the State to forfeit a security, it must satisfy three conditions:

                  (i) Existence of a Breach: There must be a valid, existing contract that has been broken.

                  (ii) Quantification of Loss: The party complaining of the breach must prove that it suffered actual damage or loss, especially when such loss is possible to prove.

                  (iii) Reasonable Compensation: The amount forfeited cannot exceed a "reasonable" estimate and cannot be a "windfall" for the state.

27. The Hon’ble Apex Court held that proof of actual damage or loss is a sine qua non for invoking the said section and thereby, only a reasonable amount will be permissible for forfeiture upon the breach of contract. The relevant observations are reproduced hereinbelow:

                  “43. […] xx xx xx

                  43.6. The expression “whether or not actual damage or loss is proved to have been caused thereby” means that where it is possible to prove actual damage or loss, such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a genuine pre-estimate of damage or loss, can be awarded.

                  In this case, JBVNL has not provided any shred of evidence regarding loss. The Petitioner successfully worked for ten years and fulfilled its obligations until the last consensual date of February 28, 2022. If JBVNL suffered a disruption in collection in March 2022, that disruption was a direct result of its own failure to ensure the new vendor, Idea Infinity, was ready to take over as per the NIT timelines.

28. The Respondent’s reliance on Indian Railway Construction Co. Ltd. v. National Buildings Construction Corpn. Ltd., reported in (2023) 7 SCC 390 is also misplaced as it is based on totally different facts. This was a construction contract for railway station which was not completed even after extension of contract granted in favour of the contractor for completing the work. Eventually, the contractor in this case abandoned the work and forfeiture of security was found just and proper. We fail to fathom how this case applies to the facts of the present case. This is a service contract which has lapsed and could be extended only with mutual consent.

29. A critical distinction exists as in this case there is not even an express forfeiture clause in the contracts. The Petitioner’s securities were "Performance Securities" accumulated through bill deductions over years of work. If the work was executed satisfactorily for the duration of the actual contract, the security must be returned. The Respondent, JBVNL, as an instrumentality of the State under Article 12, is bound by the doctrine of fairness.

30. The Respondent No. 02 has also not followed due process and there is an erratic and irregular compliance with natural justice principles. JBVNL served show-cause notice dated March 1, 2022, demanding a reply by March 2, 2022. This notice was issued on the day of Shivratri, a national holiday. Procedural fairness is an implied mandatory requirement in any administrative action that visits a party with civil consequences. The Petitioner, nonetheless, complied by sending an email explaining that there was no contract in existence which could justify its actions. The order passed on March 16, 2023, (after unexplained delay of one year) simply records that the Petitioner’s reply was "found not satisfactory". It failed to address the following substantial defenses raised by the Petitioner:

                  i. The Petitioner in its defence submitted that the November 25 letter established a definitive exit date of February 28.

                  ii. The Petitioner informed JBVNL that its software was designed to be shut down in entirety at the project's end, and could not be deactivated machine-by-machine as per JBVNL's schedule.

31. It is settled law that an administrative order must contain reasons clear and explicit enough to show that the authority applied its mind to the controversy. A non-speaking order is the negation of the rule of law. By failing to give reasons for rejecting the Petitioner’s detailed defense, JBVNL’s order becomes perverse. [Refer: Kranti Associates Pvt Ltd. & Anr. v. Masood Ahmed Khan & Others reported in (2010) 9 SCC 496 paragraphs no. 47]

32. The fact that JBVNL sat on the show-cause reply for over a year and only issued the forfeiture order after the Petitioner initiated recovery proceedings under the IBC suggests that the order was not a bona fide action but a retaliatory measure. If this time was spent for collecting data regarding loss, it would reflect in the forfeiture order. Undue haste in processing a case can indicate malice but so can excessive, unexplained delay followed by sudden punitive action. The Petitioner alleges that JBVNL acted with malice in law to favour M/s. Idea Infinity. Malice in law imports an absence of elements of justification or the exercise of power for an improper purpose.

33. The Security Deposit and Performance Guarantee amount of Rs. 3.15 Crores approximately ought to have been refunded. The retention of this amount by JBVNL without a valid contractual breach or a speaking order is a deprivation of its own money without the authority of law. The Supreme Court in Maa Tarini Poultries emphasized that public law duties include the immediate return of securities once a liability is settled. Here, the Petitioner had completed the liability period of the consensual contract, and thus the continued retention of the funds is an unlawful seizure by a state entity.

34. The total retained amount of Rs. 3.15 Crores represents the accumulation of a decade of hard-earned revenue. For JBVNL to forfeit this entire sum based on a one-month disagreement over a non-consensual extension is a classic example of "shockingly disproportionate" punitive action.

Conclusion:

35. Upon a comprehensive review of the facts and the law, this Court arrives at the following findings:

36. JBVNL’s power to extend the contract was subject to Clause 8’s "mutual consent" requirement. The Petitioner explicitly declined the extension proposed on February 25, 2022, due to valid concerns and was under no legal obligation to accept the extended contract. Thus, after February 28, 2022, no contract existed between the parties. The Petitioner cannot be held in breach of a contract that did not exist.

37. The impugned order is non-speaking and cryptic. It fails to address the Petitioner's arguments regarding the terms "whichever is earlier" clause in the previous extension letter, which created a legitimate expectation of a February 28 exit.

38. Following the mandate of Kailash Nath (supra), JBVNL was required to quantify any loss caused by the Petitioner's exit. No such quantification exists in the record. The state cannot use forfeiture as a penal tool to penalise a contractor for refusing non-contractual work.

39. The 24-hour notice period and issuing a notice on a public holiday was a gross violation of the audi alteram partem rule, especially given the significant financial consequences involved.

40. The judicial review of state action in contractual matters is not intended to micromanage commercial decisions but to ensure that the state remains within the bounds of rationality and fairness. When a state instrumentality like JBVNL seeks to strip a private enterprise of Rs. 3.15 Crores of its legitimate earnings without a valid contract, without proof of loss, and through a process that mocks the principle of natural justice, the Court must intervene to uphold the Rule of Law.

41. The Respondents' actions are found to be arbitrary, capricious, and actuated by malice in law. The forfeiture of the Security Deposit and Performance Cash Guarantee relates to a contract that was successfully executed and completed by the Petitioner until the last consensual date. The attempt to transform a refusal to accept a unilateral extension into a "breach of contract" is legally unsustainable.

42. The order/decision contained in Letter No. 231 dated 16.03.2023 issued by the General Manager (Revenue), JBVNL, forfeiting the Security Deposit and Performance Cash Guarantee of the Petitioner, is hereby quashed and set aside. The Respondents No. 02 to 05 are directed to release the entire Security Deposit and Performance Cash Guarantee amount retained by them, aggregating to approximately Rs. 3.15 Crores, to the Petitioner. Since the retention of this amount has been found to be arbitrary and without authority of law, the Respondents shall pay interest at the rate of 7% per annum from the date of the Petitioner's exit (01.03.2022) until the date of actual payment. The entire payment, including interest and costs, shall be made to the Petitioner within a period of twelve weeks from the date of receipt/production of copy of this order.

43. With the above directions, the instant writ applications stand allowed. Pending I.A.s if any also stands disposed of.

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