Delhi High Court Upholds Forfeiture of Earnest Money by DDA in Arbitration Dispute

Court dismisses Sunlight Project Pvt Ltd’s challenge against the arbitral award; finds forfeiture of earnest money justified and not penal.  

In a significant ruling, the Delhi High Court has upheld the decision of the arbitral tribunal, dismissing the petition filed by Sunlight Project Pvt Ltd challenging the forfeiture of its earnest money by the Delhi Development Authority (DDA). The judgment was delivered by Mr. Justice Jasmeet Singh, who confirmed that the forfeiture of the earnest money was reasonable and not penal in nature, thus supporting the decision made by the sole arbitrator in the arbitration proceedings.  

Sunlight Project Pvt Ltd had participated in an open auction conducted by the DDA for the sale of plots at Sector 20, Part II, Dwarka, New Delhi. The company emerged as the successful bidder for a plot with a bid amount of Rs. 17.51 crores. As per the auction terms, the company deposited 25% of the total bid amount, amounting to Rs. 4.45 crores, as earnest money. However, it failed to pay the remaining 75% within the stipulated time, leading to the DDA's decision to forfeit the earnest money.  

The petitioner approached the arbitral tribunal challenging the forfeiture, claiming it to be unreasonable and penal in nature. After the arbitral tribunal ruled in favor of the DDA, upholding the forfeiture, Sunlight Project Pvt Ltd moved the Delhi High Court under Section 34 of the Arbitration and Conciliation Act, 1996, seeking to set aside the arbitral award.  

In its judgment, the Delhi High Court reiterated the limited scope of interference under Section 34, emphasizing that the court does not sit in appeal over arbitral awards or reappraise evidence. The court found that the arbitral tribunal had correctly interpreted the terms of the auction and the Indian Contract Act, 1872, particularly Section 74, which deals with compensation for breach of contract.  

The court noted that the earnest money was a genuine pre-estimate of loss, not penal in nature, and that the petitioner failed to prove otherwise. The judgment also highlighted that the forfeiture was justified due to the petitioner's failure to fulfill payment obligations despite being granted an extension. The court rejected the petitioner's contentions, including the alleged lack of civic amenities and claims of arbitrariness, as grounds for setting aside the award.  

The judgment underscores the principle that earnest money serves as a guarantee for contract fulfillment, and its forfeiture is valid when a party defaults on its obligations. The court's decision aligns with previous rulings by the Supreme Court and High Courts, reinforcing the enforceability of contractual terms in public auctions.  

Bottom Line:

Arbitration and Conciliation Act, 1996 - Limited scope under Section 34 for interference against Arbitral Award - Court does not sit in appeal or re-appreciate evidence - Findings of Arbitrator upheld regarding forfeiture of earnest money as reasonable and not penal in nature.

Statutory provision(s): Arbitration and Conciliation Act, 1996 - Section 34; Indian Contract Act, 1872 - Section 74.

Sunlight Project Pvt Ltd v. Delhi Development Authority, (Delhi) : Law Finder Doc Id # 2806693