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Forfeiture of earnest money

In a recent judgement, the Hon'ble Orissa High Court in the matter of CHANDANESWAR ENTERPRISES LTD. VERSUS INDUSTRIAL PROMOTION & INVESTMENT CORPORATION OF ORISSA LTD., addressed the issue of forfeiture of earnest money.

The fact was that the Corporation had auctioned some properties for which the petitioner appeared as the highest bidder and as per agreement deposited an EMD of Rs. 1 lacs. However, the Corporation as well as the petitioner laid down certain conditions which were not acceptable to either party. Under the circumstances, the sale did not go through and the Corporation forfeited the EMD and came out with further advertisements for sale/auction of the properties. On each occasion the petitioner remained the highest bidder. Finally, the Corporation decided to accept the petitioner as the highest bidder but refused to adjust the forfeited EMD with the new offer.

On petitioner appealing before the hon'ble court, the court opined that:-

5. The sole point that arises for our consideration is as to whether the opposite party was justified in forfeiting the E.M.D. of Rs.1.00 lakh of the petitioner.

6. Section 7 of the Indian Contract Act, 1872 provides that in order to convert a proposal into a promise, the acceptance must be absolute, unqualified and without conditions. The offer and acceptance must correspond. The acceptance must match with the terms of the offer. When there is a variation between the offer and acceptance even in respect of any material term, acceptance cannot be said to be absolute. It does not result in the formation of a contract. An acceptance does not convert a proposal into a promise, if it is qualified by conditions.

7. Bearing in mind the aforesaid principles of law, we have given our anxious consideration to the issue involved. The sale notice, vide Annexure-1, stipulates that "if the offer is accepted by the Corporation and the offerer (s) does not come forward to accept the same, the amount deposited with the offer shall be forfeited. The amount deposited with the offer will be refunded without any interest in case the offer is not accepted by the Corporation."

8. We find that final offer made by the petitioner, vide Annexure-4, was not accepted in toto. The balance down amount of Rs.75.00 lakhs, which was offered by the petitioner to be paid in five annual installments, was accepted by the opposite party with a condition that the deferred sale consideration of Rs.75.00 lakhs shall be treated as term loan and carry interest at the rate of 14% per annum (computed at quarterly rest) with a rebate of at the rate of 3% for timely payment. In the letter dated 7.5.2005, vide Annexure-6, the petitioner had categorically stated to modify and confirm the same, but then it was rejected by the opposite party, vide Annexure-7. The acceptance did not match with the terms of the offer. Thus the offer made by the petitioner was not accepted by the opposite party. Since the offer was not accepted by the opposite party, the question of forfeiture of E.M.D does not arise at all.

9. In the wake of the aforesaid, the letter dated 24/25.1.2006, vide Annexure-11, forfeiting the E.M.D. of the petitioner is quashed. The opposite party is directed to refund the said amount within a period of thirty days to the petitioner. The writ petition is allowed.

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