The Supreme Court has held that while a contract may provide that a security deposit will not earn interest, the State cannot keep that money indefinitely after the contract ends.
What happened?
M/s Jai Durgaa Finvest P. Ltd. had entered into a sand mining contract with the State of Haryana in 1998 and deposited a security amount as required under the agreement.
The contract was later terminated after the contractor defaulted on its payment obligations.
The agreement contained an important condition: the security deposit would not carry interest, but would be refunded within three months of the expiry or earlier termination of the contract.
The problem was that the State did not refund the deposit within that period.
The contractor therefore sought interest on the amount for the period during which the State continued to hold it.
What did the Supreme Court say?
The Court looked at the two parts of the contractual clause together.
The agreement said:
- the security deposit would not carry interest; and
- it would be refunded within three months after termination.
The Court held that the State could not rely on the first part while ignoring the second.
Once the three-month period had passed, the State’s continued retention of the money triggered liability to pay interest.
The Court observed:
“The Appellant cannot retain the money, which is interest-free, in perpetuity.”
And further:
“If the State retains the security deposit beyond three months, the Respondent-contractor is entitled to interest.”
What about the termination of the contract?
The Court upheld the termination.
The contractor was bound by the terms of the agreement under Form-L, had been given the required notice, and had failed to fulfil its payment obligations.
The Court also noted that the validity of the termination had already attained finality in an earlier Supreme Court judgment in 2009.
Why does this matter?
The judgment draws an important distinction:
“No interest” does not mean “no refund.”
A contractual clause excluding interest on a security deposit remains valid. But once the agreed deadline for returning that deposit has passed, the State cannot continue holding the money indefinitely and still rely on the same clause to avoid interest.
For contractors dealing with government contracts, the message is straightforward: read the refund timeline as carefully as the interest clause.
Case Details
Case: State of Haryana & Ors. v. M/s Jai Durgaa Finvest P. Ltd.
Court: Supreme Court of India
Bench: Surya Kant, CJI and V. Mohana, J.
Date: July 13, 2026
Citation: [2026] 8 S.C.R. 88; 2026 INSC 678
Key provisions: Mines & Minerals (Regulation and Development) Act, 1957; Punjab Minor Minerals Concession Rules, 1964; Form-L, Clause 19
Read the judgment: State of Haryana & Ors. v. M/s Jai Durgaa Finvest P. Ltd.
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