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2008 DAILYLAW 1397 (DEL)

UPENDRA KUMAR SINGHAL v. UOI

2008-07-04

Siddharth Mridul, T S Thakur

body2008
T.S. THAKUR, J: 1. In terms of Office Memorandum No. DGW/CON/193 dated 29th June, 2004 the Central Public Works Department has stipulated payment of earnest money as an essential condition for the issue of tender documents to any contractor intending to submit a tender. Aggrieved, the petitioner who is a contractor by profession has assailed the said stipulation in the present writ petition. 2. Appearing for the petitioner, Mr. Bhatia placed reliance upon a decision of the High Court of Madhya Pradesh in Ajay Krishna Vs. Union of India and Ors. 2005 (1) CTLJ 441 (MP), to contend that the deposit of earnest money as a condition precedent for the purchase of tender documents is wholly unwarranted and unjustified. Earnest money deposit, it is argued, is given at the time of conclusion of the contract and not at the time of purchase of the tender documents which is only a step-in-aid of the finalization of a contract. The deposit is meant to guarantee the fulfillment of the contractual obligation. It may even be a part of the purchase price when the transaction is carried out and may be forfeited when the transaction falls through by reason of default or failure of the purchaser. Insistence upon payment of the earnest even in anticipation of submission of a proper tender is, therefore, wholly meaningless and irrational apart from being excessively onerous for any tenderer to even secure the documents without which he cannot determine whether or not to submit a tender. 3. The respondents have opposed the writ petition and filed a counter affidavit. The counter affidavit inter alia states that the respondent-CPWD has modified their policy in general public interest. Mr. Mehta, learned counsel for the respondent argued that the amendment of policy/rule was in no way arbitrary or in violation of Article 14 or 19(1)(g) of the Constitution of India. 4. We have given our careful consideration to the submissions made at the bar and perused the record. Para 19.1.1 of the CPWD Works manual deals with earnest money and provides as under: “19.1.1.According to the practice in CPWD, earnest money is paid by each tenderer to enable Government to ensure that a tenderer does not refuse to execute the work after it has been awarded to him. Para 19.1.1 of the CPWD Works manual deals with earnest money and provides as under: “19.1.1.According to the practice in CPWD, earnest money is paid by each tenderer to enable Government to ensure that a tenderer does not refuse to execute the work after it has been awarded to him. In case where a tenderer fails to commence the work awarded to him, the earnest money is absolutely forfeited to the President” 5. It is evident that the above envisages deposit of earnest money with the tenders submitted by different tenderers and that the purpose of such a deposit is to ensure that the tenderer does not refuse to execute the work after it has been awarded to him. A Committee was, all the same, constituted by the Ministry of Urban Development under the Chairmanship of Sh. Nitin Gadkari to suggest measures for reforms for the organizational, functional and financial areas to make the operations of CPWD more efficient. An interim report appears to have been submitted by the said Committee making recommendations for carrying out the changes in the CPWD Works Manual. Recommendations No. 3 to 11 of the said report were then accepted by the Ministry of Urban Development which included a recommendation regarding enhancement of earnest money to be deposited by each tenderer. That recommendation was in the following words: 1. Enhancement of earnest money to be deposited with each tender i) For all works costing up to Rs.25 Crores the EM should be 2% of the estimated cost put to tender. For works costing more than Rs.25 crores the EmM should be Rs.50 Lacs + 1% of the excess over Rs.25 crores. ii) EM should be deposited with each tender. iii) Lump sum deposit scheme for exemption from depositing EM with individual tenders should be stopped. iv) Earnest money of all unsuccessful bidders, except for first 3 valid tenders, should generally be returned with 10 working days, even without their requisition. The earnest money of remaining unsuccessful 2 bidders should be returned within 10 working days of the acceptance of successful bid.” 6. iv) Earnest money of all unsuccessful bidders, except for first 3 valid tenders, should generally be returned with 10 working days, even without their requisition. The earnest money of remaining unsuccessful 2 bidders should be returned within 10 working days of the acceptance of successful bid.” 6. It is common ground that while the Committee had recommended enhancement of earnest money to be deposited with each tender as indicated above, the deposit had to be made along with the tender submitted by the contractor till a decision was taken by the CPWD in the Senior Officers conference held on 21st May, 2004. According to the said decision, which culminated in an Office Memorandum dated 29th June, 2004 impugned in the present writ petition, in stead of earnest money being deposited along with the tender the same was stipulated as a condition for the issue of the tender documents to any contractor. The relevant portion of the said memorandum was in the following words: “The matter of taking Earnest Money from the contractors alongwith the application for issue of tender (instead of present system of depositing the same at the time of submission of tender) was discussed in the Senior Officers conference held on 31.5.2004. It was decided that the stage for taking Earnest Money be altered and it should be stipulated to be taken alongwith the application for tender However, if the intending tenderers want to see the tender document before giving application(and Earnest Money), a few sets of tender should be made available in the division and register should be maintained with a designated official to obtain signatures of the intending tenderers as a proof of their having seen the schedule etc.” 7. The above modification was, however, quashed by the High Court of Madhya Pradesh in Ajay Krishnas Case, relied upon by the petitioner. The Court in that case held that since earnest money is always for the performance of the contract, pre-deposit of the same even before a contractor submits a tender was unnecessary and unjustified. We find ourselves in respectful agreement with that view. The legal character of earnest money is fairly well settled by the decisions of the Supreme Court in Hanuman Cotton Mills Vs. Tata Air Craft Ltd., AIR 1970 SC 1986 . We find ourselves in respectful agreement with that view. The legal character of earnest money is fairly well settled by the decisions of the Supreme Court in Hanuman Cotton Mills Vs. Tata Air Craft Ltd., AIR 1970 SC 1986 . The Court described the characteristics of earnest money deposited in the following words: “(1) It must be given at the moment at which the contract is concluded. .(2) It represents a guarantee that the contract will be fulfilled or, in other words, “earnest” is given to bind the contract. .(3) It is a part of the purchase price when the transaction is carried out. .(4) It is forfeited when the transaction fails though by reason of the default or failure of the purchaser. .(5) Unless there is anything to the contrary in the terms of the contract, on default committed by the buyer, the seller is entitled to forfeit the earnest.” 8. To the same effect is the decision of the Supreme Court in Videocon Properties Ltd. Vs. Dr. Bhalchandra Laboratories, (2004) 3 SCC 711 , where the Court observed: “14. ....The further aspect that requires to be noticed is as to the nature and character of earnest money deposit and in that context the distinguishing features, which help to delineate the differences, if any. The matter is not, at any rate, res integra. In (Kunwar) Chiranjit Singh Vs. Har Swarup, AIR 1926 PC 1, it was held that the earnest money is part of the purchase price when the transaction goes money is part of the purchase price when the transaction goes forward and it is forfeited when the transaction falls through, by reason of the fault or failure of the purchaser. This statement of law had the approval of this Court in Maula Bux Vs. Union of India, AIR 1970 SC 1955 . Further, it is not the description by words used in the agreement only that would be determinative of the character of the sum but really the intention of parties and surrounding circumstances as well, that have to be looked into and what may be called an advance may really be a deposit or earnest money and what is termed as “a deposit or earnest money” may ultimately turn out to be really an advance or part of purchase price. Earnest money or deposit also, thus, serves two purposes of being part payment of the purchase money and security for the performances of the contract by the party concerned, who paid it.” 9. It is evident from the above that an earnest money deposit is always meant to secure the performance of a contract. The CPWD would be justified in demanding earnest money deposit but only if the contractor makes an offer in response to the tender notice. So long as there is no offer by the contractor, there is no question of demanding any earnest money deposit from him. The purchase of tender documents for which the contractor may be asked to pay separately cannot be confused with the submission of a tender. A contractor may, even after purchasing the tender document, change his mind and ignore the tender notice but the mere fact that he approaches the authorities for the purchase of a document cannot justify a demand for deposit of the earnest money. Insistence upon making a deposit towards earnest money at the stage of purchase of the tender document even otherwise is likely to scare away tenderers and thereby reduce competition among those interested in securing a contract. While recovery of the cost of tender document may be perfectly justified, stipulation of a pre-deposit of earnest money for the issue of the documents would be wholly unwarranted. Respondents have, no doubt, sought to justify the amendment introduced by the impugned memorandum on the ground of public interest but neither the counter affidavit nor the submissions made at the bar have substantiated that contention. How is the public interest served by preponing the making of the earnest money deposit is not understandable. Such a deposit could and indeed ought to be made only if the intending tenderer who has purchased the tender documents actually submits a tender in response to the notice inviting the same. 10. In the result, this petition succeeds and is hereby allowed. The modification introduced by memorandum dated 29th June, 2004 to the extent the same stipulates deposit of earnest money along with the application for tender documents shall stand quashed. The parties are left to bear their own costs.