Pre-Bid Forfeiture | Auction Authority Can't Claim Damages On "Guesstimates", Amount Must Be Established With Reasonable Certainty: Calcutta HC

The Calcutta High Court has recently held that damages being claimed by a party, must satisfy the threshold of credibility, and not be mere “guesstimates” made without legal basis.

Petitioner was aggrieved by the decision of National Jute Manufactures Corporation Limited (“NJMC/respondent no 1”) to forfeit the pre-bid earnest money deposited by the petitioner in response to a call for e-auction by the respondents.

In allowing the petitioner’s plea for refund of pre-bid earnest money withheld by the respondent, a single-bench of Justice Moushumi Bhattacharya held:

The right to forfeiture of earnest money cannot survive in the absence of proof of actual loss. Therefore, NJMC must prove that it has suffered loss or damage consequent to such refusal and is entitled to compensation. It is evident from the second affidavit of NJMC that the estimation of damages is inflated, exaggerated, unreasonable and remote, apart from failing to disclose any basis for the computation. NJMC simply seeks to make a windfall at the expense of the petitioner. As a Government of India undertaking, the act of forfeiture is also discriminatory and in breach of equality and fair play.

Brief facts of the case

Petitioner had deposited Rs 2.2 crores pursuant to a call for e-auction for movable assets of Khardah Jute Mills and was intimated that his bid was the highest and was accepted, further directing him to deposit another sum of approx. 10.6 crores, since the security was 25% of the sale value.

Petitioner, prior to making the payment of security approached the respondent and sought clarifications regarding the modalities of demarcation of assets, as well as removal of materials from the Mills premises, but to no avail.

Upon not receiving any clarifications from the respondent, the petitioner did not want to expose himself to any further liabilities, and refused to accept the offer of the respondent for issuance of a sale order in his favour, offering to compensate the respondent for the e-auction.

Arguments of the Parties

The crux of the dispute revolved around Clause 2.0 of the e-Auction Catalogue’s Terms & Conditions which related to the forfeiture of the pre-bid amount by the successful bidder on account of failure to fulfil any of the terms & conditions of the e-auction.

Petitioner argued that such a clause for forfeiture of earnest money was “unconscionable and un-behoving of a public entity with the constitutional mandate to treat all persons and entities equally.” Petitioner was also aggrieved by the consequence of the forfeiture, which he contended was in the nature of damages. It was contended that damages, if at all, may arise naturally and could not be assessed on remote and unreasonable grounds.

NJMC argued that the petitioner had participated in the entire tender process, being fully aware of the terms & conditions and that no complaints could be entertained at the present stage. It was submitted that the petitioner could not argued that the sale order had not been finalised and that no right had accrued to the NJMC to forfeit the pre-bid amount.

Decision of the Court

Upon hearing all parties, the Court was of the opinion that the NJMC’s decision to forfeit the pre-bid earnest money was unfair.

It was held that the respondent, as a government entity would fall within the confines of Article 12 and 226 of the Constitution and that it had to work within the aegis of Article 14 of the Constitution, thereby being answerable for any violation of Article 14 even in the contractual sphere on grounds of arbitrariness.

Court observed that the forfeiture clause in the in the bid document was unconscionable since the successful bidder would experience a penal clause, even before signing a formal contract, rendering such a clause in deviation of the principles of equity and natural justice.

Fairness of action is all the more sacrosanct where one of the contracting parties is the State and the other party does not have equal bargaining power to negotiate the terms of the contract, it was held.

Court further relied on various Apex Court decisions to substantiate that the right to forfeit earnest money could not survive in the absence of actual loss, since the same came within the purview of Section 73 of the Indian Contract Act wherein actual loss was a sine qua non.

It was held that even so, forfeiture could only be effected after giving the opposite side an opportunity to show-cause, in the absence of which the same would be violative of the principles of natural justice.

It was further clarified that forfeiture of earnest money was not permissible before the execution of a contract, which had yet not been signed between the NJMC and petitioner.

Finally, in assessing the NJMC’s forfeiture of earnest money as akin to damages, the Court held that damages under Section 73 of the Contract Act were only assessed on the basis of breach of contractual terms.

It was held that in such cases, the damages had to naturally arise out of course of business with or without the party’s knowledge, and be direct and foreseeable in nature.

Court noted that it was the onus of the NJMC to prove that it had suffered a loss or damages consequent to the petitioner’s refusal to sign the contract in order to claim compensation.

It was held that the absence of any reasoning for withholding the pre-bid earnest money leads to the inescapable conclusion that the damages imposed are speculative and remote.

Court observed that such forfeiture based on future loss, without any reasonable estimate in the nature of damages, was unforeseeable.

In going through the NJMC’s breakup of damages claimed, the Court held that the same was only in the nature of a “guesstimate” with no sound legal or factual backing and that the respondent’s claims were “remote, exaggerated, and unreasonable.”

'Guesstimates' are commonly used to undermine a claim for damages. The law however is that in admitting proof of such damage, the amount must be established with reasonable certainty. The uncertainty of damages is not by reason of the loss sustained being incapable of proof or that the certainty requires mathematical precision, it was held.

In conclusion, the Court noted that the NJMC had been unable to discharge its burden to prove the basis for claiming damages, and that the records produced did not disclose any evidence of the damages being reasonable compensation for the breach suffered by NJMC.

Accordingly, the NJMC was directed to quash its order withholding pre-bid earnest money of the petitioner, and to refund the same within 3 weeks of the present judgement.

Citation: 2023 LiveLaw (Cal) 303

Case: Sushil Kumar Thard vs. National Jute Manufactures Corporation Limited & Ors.

Case No: WPA 4751 of 2023

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