Public Bidding and Forfeiture of Earnest Money

The Supreme Court of Pakistan’s judgment in Space Telecom (Pvt.) Ltd. vs. Pakistan Telecommunication Authority (PTA), reported as 2019 SCMR 101, presents a significant interpretation of contractual obligations, particularly in the context of public bidding and the forfeiture of earnest money.

Background:

The case arose when Space Telecom, part of a consortium with two foreign companies, successfully bid for a National Mobile Cellular License in a PTA-conducted auction, offering USD 291 million. Per the auction terms, the consortium was required to deposit 25% of the bid amount within ten days, after adjusting for the USD 10 million earnest money already deposited. Due to internal disputes within the consortium and subsequent legal actions, the payment was not made, leading PTA to forfeit the earnest money.

Space Telecom challenged the forfeiture, arguing that a civil court's interim injunction prevented it from making the payment, thereby making compliance impossible under Section 56 of the Contract Act, 1872. The company further argued that PTA suffered no loss since the license was later awarded to another bidder at the same price, and hence, the forfeiture was neither justified nor lawful.

Key Issues:

Forfeiture of Earnest Money: Whether PTA was justified in forfeiting the USD 10 million earnest money due to the consortium’s failure to make the required payment.

Application of Section 74 of the Contract Act, 1872: Whether the forfeiture constituted "reasonable compensation" under Section 74, given that PTA did not suffer any actual financial loss.

Impossibility of Performance under Section 56 of the Contract Act, 1872: Whether the injunction that prevented Space Telecom from making the payment could be considered a lawful excuse for non-performance.

Court’s Analysis:

Enforceability of Forfeiture Clauses: The court emphasized that the consortium had accepted the auction terms, which explicitly allowed for the forfeiture of earnest money in the event of non-payment. The court noted that the earnest money, representing less than 3.5% of the total bid amount, was a reasonable security measure and that PTA's decision to enforce the forfeiture was within its rights.

Application of Section 74 of the Contract Act, 1872: The court referred to the precedent set in Mistri Patel & Co. and Khanzada Muhammad Abdul Haq Khan Khattak & Co. vs. WAPDA, affirming that under Section 74, a party is entitled to reasonable compensation for breach of contract, even without proof of actual damages. The court upheld PTA’s decision, concluding that the forfeited amount was not "oppressive" or "highly penal" and thus constituted reasonable compensation.

Doctrine of Impossibility: The court rejected Space Telecom’s reliance on Section 56, stating that the company did not take adequate steps to contest or modify the injunction to fulfill its payment obligations. The court further noted that Space Telecom had not demonstrated readiness or financial capacity to make the payment even if the injunction had been lifted.

Court’s Conclusion: The Supreme Court dismissed Space Telecom’s petitions, upholding PTA’s forfeiture of the earnest money. The court found that the forfeiture was consistent with the terms of the auction and the principles of contract law, particularly under Sections 56 and 74 of the Contract Act. The decision underscores the necessity for strict adherence to contractual obligations, especially in public tenders, and clarifies the limited applicability of the doctrine of impossibility.

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