The Supreme Court has held that a clause in a commercial contract denying interest on a security deposit cannot be struck down as being against public policy merely because it does not provide for such payment.

A Bench of Chief Justice Surya Kant and Justice V Mohana set aside a Punjab and Haryana High Court ruling that had declared the clause invalid and directed the Haryana government to pay interest on the security deposit from the date it was made.

The dispute arose from a mining contract awarded by the state to Jai Durgaa Finvest for sand extraction.

Clause 19 of the agreement stated that the contractor’s security deposit would not carry interest and would be refunded within three months of the expiry or earlier termination of the contract.

After the contractor defaulted on payments, the state terminated the agreement in March 2000 and forfeited the security deposit. The High Court later held Clause 19 to be contrary to public policy and ordered a refund of the deposit with 9 per cent annual interest from the date of deposit.

Reversing the decision, the Supreme Court said courts cannot rewrite commercial contracts voluntarily entered into by parties.

“The public policy cannot be pressed into service to set at naught the commercial contract which expressly denies interest on security deposit… Once parties have voluntarily accepted a contract they cannot turn around and assail the same as oppressive.”

The court reiterated that contractual terms must be enforced as agreed.

“The Court will not re-write the terms… Once the parties… accept certain terms of a contract they cannot afterwards be permitted to go back on the same merely because… the stipulation proves to be onerous.”

The Bench held that Clause 19 was valid and binding.

However, it clarified that the clause also required the state to refund the security deposit within three months of the contract ending. While no interest would accrue during that period, the state could not retain the amount indefinitely.

The court ruled that the contractor would be entitled to simple interest at 9 per cent per annum from June 9, 2000, three months after the termination of the contract, until the security deposit was adjusted against outstanding dues or refunded. It set aside the High Court’s direction awarding interest from the date of deposit while retaining the 9 per cent rate for the delayed period.