Contract Denying Interest On Security Deposit Not Against Public Policy

Source: Supreme Court 

Why in News? 

A bench of Chief Justice Surya Kant and Justice V. Mohana, in State of Haryana & Ors. v. M/s. Jai Durgaa Finvest P. Ltd. (2026), held that a clause in a commercial contract cannot be declared contrary to law and public policy merely because it does not provide for payment of interest on a security deposit, setting aside a contrary ruling of the Punjab and Haryana High Court. 

What was the Background of State of Haryana & Ors. v. M/s. Jai Durgaa Finvest P. Ltd. (2026) Case? 

• The dispute arose from a mining contract awarded by the State of Haryana for extraction of Yamuna sand from the Bega Murthal Sand Zone. 
• M/s. Jai Durgaa Finvest Pvt. Ltd. emerged as the highest bidder in an auction held in April 1998 and entered into a three-year agreement with the State on November 30, 1998. 
• Clause 19 of the statutory Form-L agreement provided that the security deposited by the contractor would not carry any interest and would be refunded within three months from the date of expiry or earlier determination of the contract. 
• The contractor subsequently defaulted in making monthly payments; following notices under the agreement, the Director of Mines and Geology terminated the contract on March 9, 2000, and ordered forfeiture of the security deposit. 
• The Punjab and Haryana High Court declared Clause 19 "unsustainable in law" and directed the State to refund the security amount with interest at 9% per annum from the date of deposit. 
• The State challenged this decision before the Supreme Court. 

What were the Court's Observations? 

• On the validity of the "no interest" clause: The Court held that public policy cannot be invoked to nullify a commercial contract that expressly denies interest on a security deposit, since such a stipulation is neither immoral nor unlawful nor legally unsustainable. 
• On the conduct of the parties: The Court noted that the respondent, a commercial entity, had participated in the open auction, emerged as the highest bidder, and executed the standard statutory Form-L with full knowledge, furnishing an undertaking to abide by its terms. 
• On re-writing of contractual terms: The Court reiterated that courts are not empowered to re-write contractual terms contrary to what was agreed between the parties, and that awarding interest contrary to the agreement amounted to the High Court re-writing the contract. 
• On sanctity of commercial contracts: The Court observed that where parties to a commercial contract stand on equal footing and commit to unambiguous terms, they are bound by the plain language of the contract and cannot resile from it later merely because a stipulation proves onerous. 
• On harmonious construction of Clause 19: The Court clarified that Clause 19 had to be read as a whole — while it excluded interest on the security deposit, it also obliged the State to refund the amount within three months of termination, meaning the State could not retain the deposit indefinitely without consequence. 
• On relief granted: Since the contract was terminated on March 9, 2000, the Court held that the contractor would be entitled to simple interest at 9% per annum from June 9, 2000 (i.e., after the three-month refund period) until the deposit was adjusted or refunded, setting aside the High Court's direction awarding interest from the date of deposit itself. 

What is Section 23 of the Indian Contract Act, 1872? 

Section 23. What considerations and objects are lawful, and what not: 

• General rule: The consideration or object of an agreement is lawful, unless— 
• Forbidden by law: it is forbidden by law; or 
• Defeats provisions of law: is of such a nature that, if permitted, it would defeat the provisions of any law; or 
• Fraudulent: is fraudulent; or 
• Injury to person or property: involves or implies, injury to the person or property of another; or 
• Immoral or opposed to public policy: the Court regards it as immoral, or opposed to public policy. 
• Effect: In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void. 

Illustrations: 

• (a) A agrees to sell his house to B for 10,000 rupees. Here B's promise to pay the sum of 10,000 rupees is the consideration for A's promise to sell the house, and A's promise to sell the house is the consideration for B's promise to pay the 10,000 rupees. These are lawful considerations. 
• (b) A promises to pay B 1,000 rupees at the end of six months, if C, who owes that sum to B, fails to pay it. B promises to grant time to C accordingly. Here, the promise of each party is the consideration for the promise of the other party, and they are lawful considerations.