Courts Cannot Rewrite Commercial Contracts; No Interest On Security Deposit Unless Refund Delayed Beyond Agreed Period: Supreme Court

"Public policy cannot be pressed into service to set at naught the commercial contract which expressly denies interest on security deposit. Such a stipulation is neither immoral nor unlawful nor can it be classified as unsustainable in the legal sense." Supreme Court, in a significant ruling dated July 13, 2026, held that a Writ Court is not entitled to rewrite the terms of a commercial contract or add new terms that were not agreed upon by the parties.

A bench of CJI Surya Kant and Justice V. Mohana observed that while a "no interest" clause on security deposits is legally binding during the currency of a contract, the State cannot retain such interest-free money in perpetuity if the contract stipulates a specific refund timeline after termination.

The case involved a mining contract for sand extraction where the Respondent-contractor defaulted on monthly instalments, leading to the termination of the agreement. The High Court of Punjab and Haryana had declared the "no interest" clause in the contract as "unsustainable in law" and "opposed to public policy," directing the State to pay 9% interest from the date the security was deposited. The State of Haryana challenged this finding, arguing that the contract was a standard statutory form (Form-L) accepted voluntarily by the contractor.

The primary question before the court was whether the amount of security deposit given by a contractor can carry interest despite an express contractual bar. The court was also called upon to determine if the High Court was justified in striking down a contractual clause as being against public policy in a commercial transaction between parties on equal footing.

Courts Function To Interpret And Enforce Terms, Not Substitute Them

The Supreme Court emphasized that in matters of commercial contracts where parties stand on equal footing, the function of a Court is strictly to interpret and enforce the agreed terms. The bench noted that courts will not rewrite terms, no matter how reasonable a substituted term may appear to be, as parties are bound by the language they accepted with "eyes open" and without protest.

The bench referred to the Constitution Bench decision in General Assurance Society Ltd. v. Chandumull Jain, reiterating that it is not for the court to make a new contract if the parties have not made it themselves. The Court stressed that in interpreting such documents, the actual meaning of the words contained in the contract must be given effect without substituting the court's own view of presumed commercial understanding.

"It is well settled that in matters of contract between the parties the function of a Court is to interpret and enforce the terms as has been agreed between parties. The Court will not re-write the terms howsoever reasonable the substituted term may appear to be."

No Reciprocal Obligation On State To Pay Interest On Performance Guarantees

The court rejected the Respondent's argument that because the State charges 24% interest on delayed instalments, it must also pay interest on the security deposit. The bench clarified that the interest charged on instalments under Clause 2 functions as liquidated damages or compensation for the contractor's default. In contrast, the security deposit under Clause 19 serves as a performance guarantee held by the State.

The Court held that these two clauses operate in different fields and serve distinct purposes. Since the parties had clearly agreed that the performance guarantee would carry no interest, there was no reciprocal obligation on the State to pay interest. The bench noted that the contractor, as a commercial entity, participated in an open auction and signed the statutory Form-L with full knowledge of these conditions.

"The stipulations in Clause 2 and in Clause 19 operate in different fields and they serve different purposes. While Clause 2 provides for liquidated damages or compensation... the security deposit in Clause 19 is a performance guarantee held by the State and the parties have clearly agreed that it would carry no interest."

The Two Limbs Of Clause 19: Protection Against Perpetual Retention

While upholding the validity of the "no interest" clause, the Supreme Court introduced a nuanced interpretation of Clause 19, which required the refund of the deposit within three months of the contract's expiry or determination. The bench held that the two limbs of this clause—the "no interest" rule and the "three-month refund" rule—are interdependent and must be read together.

The Court observed that the State cannot use the first portion of the clause to retain money interest-free in perpetuity. If the State fails to refund or adjust the security deposit within the contractually prescribed three-month window following termination, the "no interest" protection ceases to apply. In such instances, the contractor becomes entitled to interest for the period of delay beyond the stipulated three months.

"On a proper reading of the Clause 19 it is clear that the Appellant cannot retain the money which is interest free, in perpetuity. If the State retains the security deposit beyond three months the Respondent-contractor is entitled for interest which is very clear from a proper reading of Clause 19."

Final Directions And Modification Of Interest Period

The Supreme Court set aside the High Court’s finding that Clause 19 was unsustainable in law. However, it noted that since the contract was terminated on March 9, 2000, the three-month grace period for refund expired on June 9, 2000. Consequently, while the contractor was not entitled to interest from the date of deposit, they were entitled to interest for the period of the State's delay.

The Court partly allowed the appeals by declaring Clause 19 valid and binding. It modified the High Court's order by ruling that no interest is payable for the period up to the expiry of three months from the date of determination. The Respondent was held entitled to simple interest at 9% per annum only from June 9, 2000, until the date the amount was finally adjusted or refunded.

The judgment clarifies that while commercial autonomy and contractual "no interest" clauses are to be respected, the State's immunity from paying interest is not absolute and is tethered to its own compliance with contractual timelines for the return of deposits.

Date of Decision: July 13, 2026