A) ABSTRACT / HEADNOTE

The judgment examines the obligation of a statutory maritime authority to act fairly while refunding contractual consideration and interest where a public contract becomes commercially unviable due to the authority’s inaction. The dispute arose from the allotment of a ship-breaking plot by the Gujarat Maritime Board, where despite receipt of earnest money and substantial premium, the allotted land remained unusable owing to unremoved rocks and lack of infrastructure. The respondent company sought refund with interest after prolonged correspondence and inaction by the Board.

The Supreme Court scrutinised whether interest could be awarded in the absence of an express contractual clause and without a formal finding of breach. The Court emphasised that interest is compensatory in nature, especially where a public authority retains money without justification. It held that arbitrariness, discrimination, and deliberate inaction by a State instrumentality violate constitutional norms of fairness under Article 14 of the Constitution of India.

While affirming the High Court’s direction to refund the principal with interest, the Supreme Court corrected the commencement date for interest calculation, holding that interest could only accrue from the date on which the full consideration was actually paid and not from the earlier date of earnest money deposit. The judgment reinforces that public bodies cannot compel parties to litigate for legitimate refunds and must act proactively, transparently, and equitably.

Keywords: Public Contract, Refund with Interest, Arbitrary State Action, Gujarat Maritime Board, Compensatory Interest, Article 14

B) CASE DETAILS

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The dispute arose from a tender issued by the Gujarat Maritime Board for allotment of ship-breaking plots at Sosiya, Gujarat. The respondent company emerged as the highest bidder and deposited earnest money on 08.11.1994 and subsequently remitted the principal consideration in foreign currency on 22.03.1995. The plot was allotted for breaking VLCC/ULCC class vessels.

Soon after allotment, the respondent and other bidders raised serious concerns regarding the physical unsuitability of the plots due to the presence of rocks obstructing ship beaching and absence of promised infrastructure. Despite repeated representations, board meetings, and assurances, the Board failed to remove the impediments or even respond decisively.

While similarly placed allottees approached the High Court and secured refunds with interest, the respondent attempted an amicable resolution and delayed litigation. Eventually, in May 1998, the respondent abandoned the contract and sought refund with interest. The Board agreed to refund the principal but refused interest, compelling the respondent to initiate proceedings.

The High Court allowed the writ petition and directed payment of interest. The Board challenged this before the Supreme Court, primarily disputing the liability to pay interest and the commencement date.

D) FACTS OF THE CASE

The tender dated 02.08.1994 invited bids for ship-breaking plots. The respondent’s bid was accepted on 08.11.1994 for a consideration of ₹3,61,20,000. An earnest money deposit of ₹5,00,000 was paid immediately. The balance amount equivalent to USD 1,153,000 was remitted on 22.03.1995.

Shortly thereafter, through meetings and correspondence, the respondent pointed out that rocks and a rocky island near the plot rendered it commercially unusable. Minutes dated 23.02.1995 record the Board’s acknowledgment and promise to prepare estimates for rock removal. Letters dated 26.04.1996 and 22.05.1996 reiterated the grievance, including an offer by the respondent to remove rocks at the Board’s cost.

The Board neither acted nor responded. Other bidders approached the High Court in 1995 and obtained refunds with interest. The respondent, seeking amicable settlement, waited until 19.05.1998 before demanding refund with 10% interest. The Board offered refund without interest and insisted payment be made to the original allottee entity.

A civil suit was filed and later withdrawn. The writ petition resulted in an interim order directing deposit of principal with 10% interest. Ultimately, the High Court directed interest from 08.11.1994 to 19.05.1998, which led to the present appeal.

E) LEGAL ISSUES RAISED

i. Whether a public authority can retain contractual consideration without interest despite abandoning the contract?
ii. Whether interest is payable absent a contractual clause or proof of breach?
iii. From which date should interest on refunded consideration commence?
iv. Whether differential treatment of similarly placed allottees violates Article 14?

F) PETITIONER / APPELLANT’S ARGUMENTS

The counsels for the appellant submitted that the dispute was purely contractual and could not attract writ jurisdiction. It was argued that Sections 64 and 65 of the Contract Act apply only to void or voidable contracts, which was not pleaded.

It was contended that no breach was established against the Board and hence Sections 73 and 75 were inapplicable. The respondent had inspected the site and accepted it on an “as is where is” basis. Interest, it was argued, could not be awarded as compensation without proof of loss.

G) RESPONDENT’S ARGUMENTS

The counsels for the respondent submitted that the Board failed to provide a usable plot despite repeated assurances. The contract never fructified as possession was never effectively handed over.

Reliance was placed on Union of India v. Tata Chemicals Ltd., (2014) 6 SCC 335, holding that interest is compensation for wrongful retention of money. The respondent highlighted discriminatory treatment as other allottees were refunded with interest.

H) RELATED LEGAL PROVISIONS

i. Article 14, Constitution of India
ii. Article 226, Constitution of India
iii. Sections 64, 65, 73, 75, Indian Contract Act, 1872

I) JUDGEMENT

The Supreme Court held that the Board’s prolonged silence and selective action amounted to arbitrariness. As a State instrumentality, the Board was bound to act fairly and could not compel a party to litigate for refund.

The Court affirmed that interest is compensatory and payable where money is unjustly retained. However, it corrected the High Court’s error in awarding interest from 08.11.1994, noting that the principal amount was paid only on 22.03.1995.

Accordingly, interest was directed on ₹3,61,20,000 from 22.03.1995 to 19.05.1998. The appeal was dismissed with this modification.

a) RATIO DECIDENDI

The ratio rests on the principle that retention of money by a public authority without justification attracts compensatory interest. The Court reiterated that equality before law mandates consistent treatment of similarly placed parties.

Reliance was placed on Dilbagh Rai Jarry v. Union of India, [1974] 2 SCR 178 and Gurgaon Gramin Bank v. Khazani, [2012] 8 SCR 225, underscoring the duty of the State as a “virtuous litigant”.

b) OBITER DICTA

The Court observed that State bodies should avoid unnecessary litigation and proactively resolve claims. Deliberate inaction undermines public trust and burdens courts.

c) GUIDELINES

i. Public authorities must decide refund claims proactively.
ii. Interest must reflect the actual period of money retention.
iii. Discriminatory treatment among similarly placed parties is impermissible.

J) CONCLUSION & COMMENTS

The judgment strengthens administrative accountability in public contracts. It clarifies that interest is not punitive but restitutive. The correction of the interest commencement date balances equity with factual precision. The ruling reinforces constitutional fairness as a controlling standard in contractual dealings by State instrumentalities.

K) REFERENCES

a) Important Cases Referred

i. Union of India v. Tata Chemicals Ltd., (2014) 6 SCC 335
ii. Dilbagh Rai Jarry v. Union of India, [1974] 2 SCR 178
iii. Gurgaon Gramin Bank v. Khazani, [2012] 8 SCR 225
iv. State of A.P. v. Pioneer Builders, [2006] 6 Supp SCR 571

b) Important Statutes Referred

i. Constitution of India
ii. Indian Contract Act, 1872