Security Deposit Cannot Be Forfeited Without Hearing: Himachal Pradesh High Court Orders Refund Of ₹15.67 Lakh To Contractor

The Himachal Pradesh High Court has set aside an order forfeiting over ₹15 lakh from a contractor's security deposit related to the Kullu Dussehra festival, holding that the action was taken in violation of the principles of natural justice as the contractor was never issued a show-cause notice.

A Division Bench comprising Chief Justice G. S. Sandhawalia and Justice Jiya Lal Bhardwaj allowed the petition filed by M/s Zenith-Event & Services and another and directed the authorities to refund ₹15,67,597 that had been deducted from the contractor's security deposit.

Speaking for the bench Chief Justice G.S.Sandhawalia pointed that the law laid down in State or Punjab and others Vs. Mehar Din (2022) 5 SCC 648 has to be kept in mind that the decision was not furthering the public interest or could be termed as a fair play by the executive and it was always open for the respondents as such to have duly issued notice during the time the German Hangers stood erected at the spot so that the petitioners had adequate opportunity to respond to the same and out forward their stands.

Having not done so and in spite of the fact that there was a Committee as such which had been set in place for the said exercise, the action taken by the respondents cannot be held to be justified in an manner and cannot be sustained, added the Court.

The case arose from a tender issued by the Dussehra Festival Committee, Kullu for allotment of space and erection of four German hangers (temporary dome structures) at the Dhalpur ground during the 2023 Dussehra festival. The petitioner firm had emerged as the highest bidder and was allotted four hangers through an approval letter dated October 6, 2023.

In accordance with the tender conditions, the petitioner deposited ₹16 lakh as earnest money and performance security through fixed deposit receipts (FDRs). The festival concluded on November 12, 2023, after which the contractor sought release of the security deposit.

However, by an endorsement dated February 9, 2024, the authorities forfeited ₹15,67,597 out of the ₹16 lakh deposit, returning only ₹46,887. The deduction was based on an allegation that the contractor had encroached upon additional space around the German hangers during the festival.

Challenging the action before the High Court, the petitioners argued that the forfeiture was arbitrary and carried out without issuing any show-cause notice or giving them an opportunity to explain the alleged encroachment. They also contended that reports relied upon by the authorities were prepared months after the festival had concluded and behind their back.

The State defended the action, claiming that inspection committees had found unauthorized encroachment beyond the allotted area and that the contractor had gained additional financial benefit by subletting that space. The State also argued that the dispute was contractual in nature and that the petitioners should pursue a civil remedy instead of invoking writ jurisdiction.

Rejecting the State's objection, the Court held that writ jurisdiction could be exercised where State action was arbitrary and had civil consequences.

The Bench noted that the authorities forfeited a substantial portion of the security deposit without issuing any notice to the petitioners or providing an opportunity of hearing. Such action, the Court held, violated the fundamental rule of audi alteram partem, which requires that a person affected by adverse action must be heard before a decision is taken.

The Court further observed that the alleged inspection report relied upon by the State was prepared after the festival had ended and after the contractor had already dismantled the structures and vacated the site.

“It was the bounden duty of the respondents to issue the necessary show-cause notice for the area allegedly occupied outside the German hangers while the structures were still standing at the site,” the Court said.

The Bench found the explanation of the authorities—that the administration was busy with festival duties and therefore could not issue notice during the event—unconvincing, especially since committees had been constituted to monitor encroachments and possession of allotted spaces.

The Court also noted that the photographs and reports relied upon by the authorities did not clearly establish that the alleged encroachments were carried out by the petitioners.

Holding that the forfeiture of such a large amount without hearing the contractor amounted to manifest arbitrariness, the Court said the action had serious civil consequences and could also affect the petitioner's future business prospects.

Relying on several Supreme Court rulings, including Erusian Equipment & Chemicals Ltd. v. State of West Bengal and Gorkha Security Services v. Govt. of NCT of Delhi, the Bench reiterated that principles of natural justice must be followed when the State takes action that adversely affects a person's rights or business interests.

Although the Court noted that it normally could have remanded the matter for fresh consideration, it declined to do so since the temporary structures had already been dismantled and no useful purpose would be served by conducting a factual inquiry at this stage.

Accordingly, the Court quashed the order dated February 9, 2024 and directed the State authorities to refund ₹15,67,597 to the petitioners within four weeks.

Since the petitioners had not sought interest on the amount, the Court declined to award any additional compensation.

Mr. R.K. Bawa, Senior Advocate with Mr. Ajay Kumar, Advocate for the petitioners.

Mr. Pranay Pratap Singh, Additional Advocate General for the respondents.

Title: M/s Zenith-Event & Services and another v. State of HP and others

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