Supreme Court upholds no-interest security clause, but caps State's right to withhold deposit
A Bench of CJI Surya Kant and Justice V. Mohana restored Clause 19 barring interest on security, while holding the State must refund the deposit within three months of contract termination.
The Supreme Court has held that a clause in a standard statutory mining contract stating that a security deposit will carry no interest is a valid and binding term that a writ court cannot strike down as opposed to public policy. Deciding State of Haryana & Ors. v. M/s. Jai Durgaa Finvest P. Ltd., a Bench of Chief Justice Surya Kant and Justice V. Mohana set aside the Punjab and Haryana High Court's finding that Clause 19 of Form-L was “unsustainable in law”.
The Court, however, read the same clause as having two interdependent limbs. While the deposit carries no interest during the contract, the State is obliged to refund it within three months of the contract's determination. If the State retains the amount beyond that window, the contractor becomes entitled to interest. The appeals were partly allowed on 13 July 2026.
How the mining dispute reached the Court
The Punjab Minor Minerals Concession Rules, 1964, framed under the Mines and Minerals (Regulation and Development) Act, 1957, require a successful bidder to execute an agreement in Form-L. Clause 2 of the Form imposes interest at 24 percent per annum on delayed instalments. Clause 16 permits termination and forfeiture of the security deposit on default. Clause 19 states that the security deposit shall carry no interest and shall be refunded within three months of expiry or sooner determination of the contract.
An auction was held on 6 April 1998 for extraction of Yamuna sand from the Bega Murthal Sand Zone. The respondent firm was the highest bidder at Rs. 1.48 crores per annum for a three-year contract running up to 31 March 2001. A contract in Form-L was executed on 30 November 1998.
The respondent began defaulting on instalments from September 1999. A termination notice was issued on 19 January 2000 under Clause 16, and the contract was terminated on 9 March 2000 with forfeiture of the security amount. The Appellate Authority, by order dated 10 July 2000, allowed adjustment of the forfeited security against outstanding contract money and interest, subject to timely deposit.
The path through the High Court
The respondent filed CWP No. 12114 of 2000 challenging the demand and the validity of Clause 19. The Single Judge partly allowed it in 2002, but the matter was remanded by the Supreme Court on 5 January 2004 for re-examination.
On remand, the Single Judge found the contractor had failed to prove any breach of statutory obligation by the State, that the termination was caused by the contractor's own default, and that the contractor had made a false plea about obstruction by land owners while working elsewhere. Yet the Single Judge held Clause 19 “unsustainable in law” and directed refund of the Rs. 37 lakh security with interest at 9 percent per annum from the date of deposit.
The Division Bench dismissed the cross-appeals and upheld that view. The State's challenge, after being granted liberty to file a review, reached the Supreme Court in these appeals, in which leave was granted and interim stay made absolute on 16 March 2012.
Why the Court refused to rewrite the contract
The Court held that a court's function in matters of contract is to interpret and enforce agreed terms, not to substitute its own. Where commercial parties on equal footing accept unambiguous terms, they are bound by them and cannot resile merely because a stipulation later proves onerous.
The Bench relied on National Highways Authority of India v. Ganga Enterprises, Shri Hanuman Cotton Mills v. Tata Aircraft Limited, and Venkataraman Krishnamurthy v. Lodha Crown Buildmart, drawing on the principle that a court cannot make a new contract, however reasonable, if the parties have not made it themselves.
The respondent had two opportunities to read the terms — when bidding and when signing on 30 November 1998 — and did not allege coercion, mistake, or undue influence. The Court found Clause 19 neither immoral nor unlawful, and held public policy could not be invoked to nullify a commercial contract expressly denying interest on the deposit.
Rejecting the reasoning that the State must pay interest because it charges interest on delayed instalments, the Court held Clause 2 and Clause 19 operate in different fields. Clause 2 is compensation for the contractor's own default, while the security deposit is a performance guarantee held by the State with no reciprocal obligation to pay interest.
Reading the clause as time-bound
The Court held that Clause 19's two limbs must be read together. The first states the deposit carries no interest; the second requires refund within three months of expiry or determination. On a proper reading, the State cannot retain interest-free money in perpetuity.
Since the contract was determined on 9 March 2000, the three-month period expired on 9 June 2000. The Court held the respondent was entitled to interest from 9 June 2000 until the security was appropriated towards dues or refunded. The High Court's direction awarding interest from the date of deposit was set aside as contrary to the agreed terms.
The 9 percent per annum rate fixed by the High Court was retained as reasonable.
Order
The appeals were partly allowed. The Court set aside the finding that Clause 19 is unsustainable in law and the grant of interest from the date of deposit. Clause 19 was declared valid and binding, with no interest payable on the Rs. 37 lakh security up to 9 June 2000. The respondent was held entitled to simple interest at 9 percent per annum on the security from 9 June 2000 until the amount was appropriated towards dues or refunded. There was no order as to costs.