No, even if a court order delays payment, a company cannot reclaim earnest money forfeited for not paying a bid amount if the forfeiture complies with the terms of the contract.
Based on a real Supreme Court of Pakistan ruling from 2018, this story reveals a high-stakes telecom auction in which a company lost millions.
One company fought to recover its deposit after a courtroom drama that started with a daring bid for a mobile license.
In 2004, there were a lot of opportunities in Pakistan’s telecom industry. The government invited businesses to bid for mobile cellular licenses in an attempt to shake things up. Ambition was in the air because new companies could enter a market that was ready to expand. Eager to take advantage of this opportunity, one company formed a consortium with two foreign companies. They collectively submitted a huge $291 million bid for a license to run mobile services. With a $10 million earnest money deposit as a guarantee to demonstrate their seriousness, their hearts were racing as they made their offer.
On the day of the auction, their bid was successful. There was jubilation, but the conditions were straightforward: within ten days, pay 25% of the bid less the earnest money. By April 26, 2004, that amounted to $62.75 million. They believed the consortium was prepared. However, problems started to arise a few days prior to the deadline. Citing internal conflicts, two of the consortium’s international partners sued the telecom authority and their local partner. On April 23, a civil court in Islamabad intervened and issued an order permitting the foreign partners to place the money into an escrow account while they await additional court rulings. Paying directly could mean breaking the law, which put the local business in a difficult situation.
The due date passed. The consortium failed to make payment. The $10 million earnest money was forfeited, according to a letter sent by the telecom authority on April 27. The authority did not suffer any financial loss when the license was later given to a different bidder for the same $291 million. However, the forfeiture hurt the local business. They felt that they were powerless to make the payment on time because of the court order. They claimed it was unjust to lose their $5 million portion of the earnest money after a court stepped in and demanded it back. This marked the start of a legal battle that would eventually reach Pakistan’s highest court.
The main question was whether the company could get its earnest money back after a court order prevented it from paying the bid amount. The money wasn’t the only factor. Fairness, contract law, and the telecom authority’s right to retain the deposit were at issue. The business claimed that although they were prepared to pay, the court’s decision prevented them from doing so. They argued that it was unfair to keep the money since the authority did not lose anything. However, the authority refused to back down, citing the auction rules that permitted forfeiture in the event that payments were not made on time.
The Contract Act of 1872 in Pakistan became the focal point of the conflict. According to Section 74 of the Contract Act, whether or not a party suffered a loss, they are entitled to reasonable compensation if a contract is broken and a sum is specified as a penalty. In this instance, the Information Memorandum for the auction made it very clear that the earnest money would be forfeited if 25% of the bid was not paid within ten days. The purpose of earnest money, a deposit used to demonstrate a bidder’s commitment, was to safeguard the authority in the event that the deal fell through. The business also referenced Section 56, which states that if an act becomes impossible or illegal, such as paying against a court order, the contract is nullified.
The business sought justice in the courts. They first requested a reimbursement of their $5 million share in a letter to the telecom authority. Citing the auction terms, the authority declined. The business then submitted a writ petition to the Rawalpindi Bench of the Lahore High Court, which directed the authorities to fairly reexamine the claim. The authority denied the refund once more in 2006, claiming the forfeiture was lawful. Unfazed, the business appealed to the Islamabad High Court, submitting what was essentially a writ petition. The court requested that the authority review the case under Section 74 in 2009, but the authority upheld the forfeiture, stating that the $10 million, which was less than 3.5% of the bid, was a reasonable amount of compensation.
Disappointed, the business challenged the authority’s ruling in two additional cases filed in the Islamabad High Court. They relied on rulings such as Province of West Pakistan v. Mistri Patel & Co. (PLD 1969 Supreme Court 80), in which the court held that earnest money could not be retained in the event that the other party turned a profit. Khanzada Muhammad Abdul Haq Khan Khattak & Co. v. WAPDA (1991 SCMR 1436), which stated that courts could lessen penalties if they were oppressive, was another case they cited. Given that the authority did not suffer a financial loss, the company contended that the forfeiture was a penalty rather than a fair compensation.
The rules for the auction were the telecom authority’s response. Clauses 9(k), 9(n), and 10(a) of the Information Memorandum made it very clear that if the payment deadline was missed, the earnest money would be forfeited. The authority maintained that this was a safeguard to make sure serious bidders followed through rather than a penalty. They emphasized that when the local company and the consortium placed their bid, they accepted these terms. The authority also pointed out that the business failed to contest the court order or provide proof that they had the money on hand to make the payment. The process wasn’t interrupted because the license was given to another bidder at the same price, but that didn’t mean the business could avoid the repercussions.
In 2017, the two cases were heard jointly by the Islamabad High Court. The judge decided that the forfeiture was lawful under Section 74 and the auction terms, siding with the authority. At less than 3.5% of the bid, the earnest money wasn’t overly high or coercive. The company did not contest the civil court’s order or demonstrate that they were prepared to pay, the court found. Since the bid was a team effort, the company’s case was further undermined by their failure to include their consortium partners in the lawsuits. The Supreme Court of Pakistan was the company’s only remaining hope after the High Court upheld the authority’s ruling.
The business reiterated its arguments before the Supreme Court. Citing Section 56 of the Contract Act, which nullifies contracts when performance turns illegal, they claimed the court order prevented payment. They maintained that the forfeiture was unjust because the authority benefited from re-awarding the license. However, the court looked further. They pointed out that the business did not dispute the civil court’s ruling or demonstrate that they had the $62.75 million on hand. The contract was with the consortium as a whole, so the authority wasn’t responsible for the internal conflicts within the consortium. The company’s silence regarding their civil suit defense was also deemed suspicious by the court. Why didn’t they put up a stronger fight to have the order lifted?
The Contract Act’s Section 74 was cited by the Supreme Court. Even in cases where no loss is incurred, it permits the forfeiture of a specified amount for a breach, provided that it is reasonable. The government made a profit in Mistri Patel, so the claim was rejected even though the court had decided that reasonable compensation could be demanded without demonstrating loss. The $10 million in this case was less than 3.5% of the bid, which is by no means oppressive. The court determined that the forfeiture in this case was reasonable, but it also took into account Khanzada, which permitted courts to modify penalties if they were disproportionate. The company had accepted the clear terms of the auction.
The Supreme Court rendered its decision on October 16, 2018. The petitions filed by the company were denied. The forfeiture was lawful, as the consortium failed to meet the payment deadline, and the earnest money was a reasonable safeguard, not a penalty. The company did not demonstrate that they were prepared to pay or that they contested the civil court’s ruling, the court stressed. The company’s internal conflicts did not warrant a refund, and the authority complied with the regulations. A costly lesson in the dangers of high-stakes bidding, the $5 million was lost.
It was a bitter pill for the business. They had gone into the auction hoping to get into Pakistan’s telecom market, but they lost a lot of money due to a combination of consortium disputes and legal obstacles. The ruling clarified that earnest money isn’t just a deposit — it’s a commitment. The telecom authority was concerned with maintaining the fairness of the bidding procedure. The case served as a cautionary tale for future bidders: get to know your partners, read the fine print, and be prepared to pay at all costs. The lesson persisted even after the mobile license dream faded.
This narrative is based on an actual ruling rendered by Pakistan’s Supreme Court in 2018.
FAQs
Can a business get its earnest money back if it didn’t pay the bid amount?
No, even if a court order delays payment, the company cannot recover earnest money if the forfeiture complies with the terms of the contract, as demonstrated in a 2018 Supreme Court case.
In a bidding process, what is earnest money?
Earnest money is a deposit that bidders make to demonstrate their seriousness; it may be rescinded if they don’t fulfill their end of the bargain, such as paying the bid amount on schedule.
Can nonpayment of a bid amount be justified by a court order?
Not always. According to a 2018 ruling, a business must demonstrate that it made a concerted effort to comply with the court order or contest it, failing which it will forfeit its earnest money.
What does Section 74 of the Contract Act say about forfeiture?
As applied in the 2018 Supreme Court case, Section 74 permits the forfeiture of a named sum for a breach of contract if it is reasonable, even in the absence of proof of loss.
If the other party doesn’t lose money, can a business get their earnest money back?
No, the Supreme Court affirmed in 2018 that the other party may retain the earnest money if the contract permits forfeiture and the sum is reasonable.
What occurs if a bid amount is not paid by a consortium?
According to the 2018 ruling, a consortium’s earnest money may be forfeited if they miss a payment deadline, and all members are responsible unless they can demonstrate external barriers.
Disclaimer
This blog is not legal advice; it is merely for public awareness.
