The Supreme Court has ruled that courts cannot rewrite the terms of a commercial contract merely because one party later considers a clause unfair. In a significant judgment concerning government mining contracts, the Court upheld a contractual provision stating that a contractor's security deposit would not earn interest. However, it also clarified that if the State retains the security deposit beyond the contractual refund period, it must pay interest for the delay.
Background of the Case
The dispute arose from a mining contract awarded by the State of Haryana for extraction of Yamuna sand from the Bega Murthal Sand Zone. M/s. Jai Durgaa Finvest Pvt. Ltd. emerged as the highest bidder in an auction held in April 1998 and entered into a three-year agreement with the State on 30 November 1998. Under the agreement, the contractor was required to pay contract money in monthly instalments and furnish a security deposit. Clause 19 of the statutory Form-L agreement specifically provided that the security deposit would not carry any interest and would be refunded within three months after expiry or earlier termination of the contract.
The contractor later defaulted in making monthly payments. Following notices issued under the agreement, the Director of Mines and Geology terminated the contract on 9 March 2000 and ordered forfeiture of the security deposit. Although the appellate authority later directed that the forfeited security be adjusted against outstanding dues if the contractor complied with payment conditions, disputes continued regarding the State's demand for contract money and the contractor's claim for interest on the security deposit.
The Punjab and Haryana High Court eventually held Clause 19 to be legally unsustainable and directed the State to refund the security amount with interest at 9% per annum from the date of deposit. The State challenged that decision before the Supreme Court.
Court's Observations
A Bench comprising Chief Justice Surya Kant and Justice V. Mohana observed that commercial contracts voluntarily entered into by parties must ordinarily be enforced according to their terms. The Court emphasised that a court's role is to interpret an agreement rather than rewrite it.
"The Court will not re-write the terms howsoever reasonable the substituted term may appear to be,"
the Bench observed while reiterating settled principles governing contractual interpretation.
The Court noted that the contractor had participated in an open auction, was fully aware of the contractual conditions and voluntarily accepted Clause 19 before executing the agreement. There was no allegation of coercion, fraud, mistake or undue influence at the time of signing the contract. Therefore, the contractor could not later challenge the clause merely because it had become burdensome.
Rejecting the High Court's reasoning that the State should also pay interest because it charged interest on delayed instalments, the Bench explained that the two clauses served entirely different purposes. Interest charged on delayed payments compensated the State for the contractor's default, whereas the security deposit functioned as a performance guarantee agreed upon by both parties.
"The public policy cannot be pressed into service to set at naught the commercial contract which expressly denies interest on security deposit,"
the Court observed, holding that Clause 19 was neither unlawful nor opposed to public policy.
Interpretation of Clause 19
While upholding the validity of Clause 19, the Supreme Court clarified that the provision had to be read as a whole.
The Bench pointed out that the clause not only stated that the security deposit would not carry interest but also required the State to refund it within three months from the expiry or earlier termination of the contract. These two parts, the Court held, were inseparable.
According to the Bench, the State could not retain an interest-free security deposit indefinitely. Once three months elapsed after termination of the contract, the contractor became entitled to interest if the amount had not been refunded or adjusted.
"The amount cannot be withheld by the State beyond three months," the Court observed while interpreting the contractual provision.
Supreme Court's Decision
Allowing the appeals in part, the Supreme Court set aside the High Court's declaration that Clause 19 was invalid and its direction granting interest from the date of deposit.
The Court declared Clause 19 to be valid and binding. It held that no interest was payable on the security deposit up to three months after termination of the contract. Since the contract had been terminated on 9 March 2000, the contractor was not entitled to interest until 9 June 2000.
However, the Bench directed that the contractor would receive simple interest at the rate of 9% per annum from 9 June 2000 until the date on which the security deposit was either adjusted towards outstanding dues or refunded. The Court maintained the 9% interest rate fixed by the High Court for this limited period and disposed of the appeals without any order as to costs.
Case Details:
Case Title: State of Haryana & Ors. v. M/s. Jai Durgaa Finvest P. Ltd.
Case Number: Civil Appeal Nos. 3145–3146 of 2012
Judge: Chief Justice Surya Kant and Justice V. Mohana
Decision Date: 13 July 2026
