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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL     APPEAL     NO.     7588     OF     2012   [Arising out of SLP (Civil) No. 4605 of 2012]

Satish Batra .. Appellant

Versus

Sudhir Rawal .. Respondent

J     U     D     G     M     E     N     T   

K.     S.     Radhakrishnan,     J.   

1. Leave granted.

2. The question that has come up for consideration in this appeal is  

whether the seller is entitled to forfeit the earnest money deposit  

where the sale of an immovable property falls through by reason of  

the fault or failure of the purchaser.  

 3. An Agreement for Sale of property bearing No. 14/11, 2nd Floor,  

Punjabi Bagh, New Delhi was entered into between the appellant  

(Seller) and the respondent (Purchaser) on 29.11.2005 for a total  

consideration of Rs.70,00,000/- to be paid on or before 5.3.2006 and,

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towards earnest money, an amount of Rs.4,00,000/- was paid on  

29.11.2005 and another Rs.3,00,000/- on 30.11.2005, that means,  

altogether Rs.7,00,000/- was paid, being 10% of the total sale  

consideration.   The purchaser, however, could not pay the balance  

amount of Rs.63,00,000/- before 5.3.2006, consequently, the sale  

deed could not be executed. Seller, therefore, did not return the  

earnest money to the purchaser.  

4. Consequently, the purchaser, as plaintiff, instituted a suit No.  

764/08/06 before the Additional District Judge, Delhi for recovery of  

Rs.7,00,000/- from the seller-defendant of the earnest money paid by  

him.  Defendant contested the suit stating that, as per the agreement,  

he is entitled to forfeit the amount of earnest money, if there was a  

failure on the part of the purchaser-plaintiff in paying the balance  

amount of Rs.63,00,000/-.

5. The trial Court dismissed the suit holding that the defendant is  

entitled to retain the amount of earnest money since the plaintiff had  

failed to pay the balance amount of Rs.63,00,000/- before 5.3.2006.   

6. Aggrieved by the judgment of the Additional District Judge, Delhi,  

plaintiff took up the matter in appeal before the High Court of Delhi by

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filing R.F.A. No. 137 of 2010.  The High Court, placing reliance on the  

judgment of this Court in Fateh Chand v. Balkishan Dass AIR 1963  

SC 1405, took the view that the seller is entitled to forfeit only a  

nominal amount and not the entire amount of Rs.7,00,000/-.  The  

High Court further held that the seller can forfeit an amount of  

Rs.50,000/- out of the amount of Rs.7,00,000/- and he is bound to  

refund the balance amount of Rs.6,50,000/- to the purchaser.  To this  

extent, a decree was also passed in favour of purchaser against the  

seller.  It was also held that the purchaser is also entitled to interest @  

12% per annum from 29.11.2005 till the amount is paid.   

7. Aggrieved by the said judgment of the High Court, the seller has  

come up with this appeal.

8. We have heard the learned counsel on either side at length.  

Facts are undisputed.  The only question is whether the seller is  

entitled to retain the entire amount of Rs.7,00,000/- received towards  

earnest money or not.  The fact that the purchaser was at fault in not  

paying the balance consideration of Rs.63,00,000/- is also not  

disputed.  The question whether the seller can retain the entire  

amount of earnest money depends upon the terms of the agreement.

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Relevant clause of the Agreement for Sale dated 29.11.2005 is  

extracted hereunder for easy reference:

“e) If the prospective purchaser fail to fulfill the above  condition.  The transaction shall stand cancelled and  earnest money will be forfeited.  In case I fail to  complete the transaction as stipulated above.  The  purchaser will get the DOUBLE amount of the earnest  money.  In the both condition, DEALER will get 4%  Commission from the faulty party.”

The clause, therefore, stipulates that if the purchaser fails to fulfill the  

conditions mentioned in the agreement, the transaction shall stand  

cancelled and earnest money will be forfeited.  On the other hand, if  

the seller fails to complete the transaction, the purchaser would get  

double the amount of earnest money.  Indisputedly the purchaser  

failed to perform his part of the contract, then the question is whether  

the seller can forfeit the entire earnest money.

9. The question raised is no more res integra.  In (Kunwar)  

Chiranjit Singh v. Har Swarup AIR 1926 P.C. 1, it has been held  

that the earnest money is part of the purchase price when the  

transaction goes forward and it is forfeited when the transaction falls  

through, by reason of the fault or failure of the purchaser.  In Fateh  

Chand (supra), this Court was interpreting the conditions of an  

agreement dated 21.3.1949.  By that agreement, the plaintiff

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contracted to sell his rights in the land and the building to Seth Fateh  

Chand (defendant). It was recited in the agreement that the plaintiff  

agreed to sell the building together with ‘pattadari’ rights appertaining  

to the land admeasuring 2433 sq. yards for Rs.1,12,500/- and that  

Rs.1,000/- was paid to him as earnest money at the time of the  

execution of the agreement.  The conditions of the agreement were as  

follows:

"(1) I, the executant, shall deliver the actual possession,  i.e. complete vacant possession of kothi (bungalow) to the  vendee on the 30th March, 1949, and the vendee shall have  to give another cheque for Rs. 24,000/- to me, out of the  sale price.

(2) Then the vendee shall have to get the sale (deed)  registered by the 1st of June, 1949. If, on account of any  reason, the vendee fails to get the said sale-deed registered  by June, 1949, then this sum of Rs. 25,000/- (twenty-five  thousand) mentioned above shall be deemed to be forfeited  and the agreement cancelled.  Moreover, the vendee shall  have to deliver back the complete vacant possession of the  kothi (bungalow) to me, the executant. If due to certain  reason, any delay takes place on my part in the registration  of the sale-deed, by the 1st June 1949, then I, the  executant, shall be liable to pay a further sum of Rs.  25,000/- as damages, apart from the aforesaid sum of Rs.  25,000/- to the vendee, and the bargain shall be deemed to  be cancelled."

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Plaintiff, on 25.3.1949, received Rs.24,000/- and delivered possession  

of the building and the land in his occupation to the defendant.

  10. Alleging that the agreement was rescinded because the  

defendant committed default in performing the agreement and the  

sum of Rs.25,000/- paid by the defendant stood forfeited.  Plaintiff  

instituted a suit.  The defendant resisted the claim contending inter  

alia that the plaintiff having committed breach of the contract could  

not forfeit the amount of Rs.25,000/- received by him.  The matter  

ultimately came to this Court. This Court considered as to whether the  

plaintiff could forfeit the amount. Noticing that the defendant had  

conceded that the plaintiff was entitled to forfeit the amount which  

was paid as earnest money, the Court held as follows:

“(16) ……….The contract provided for forfeiture of Rs.  25,000/- consisting of Rs. 1000/-paid as earnest money  and Rs. 24,000/- paid as part of the purchase price. The  defendant has conceded that the plaintiff was entitled to  forfeit the amount of Rs. 1,000/- which was paid as earnest  money. We cannot however agree with the High Court that  10 per cent of the price may be regarded as reasonable  compensation in relation to the value of the contract as a  whole, as that in our opinion is assessed on arbitrary  assumption. The plaintiff failed to prove the loss suffered by  him in consequence of the breach of the contract committed  by the defendant, and we are unable to find any principle  on which compensation equal to ten percent of the agreed  price could be awarded to the plaintiff. The plaintiff has  been allowed Rs. 1,000/-which was the earnest money as  part of the damages. Besides he had use of the remaining

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sum of Rs. 24,000/-, and we can rightly presume that he  must have been deriving advantage from that amount  throughout this period. In the absence therefore of any  proof of damage arising from the breach of the contract we  are of opinion that the amount of Rs. 1,000/- (earnest  money) which has been forfeited, and the advantage that  the plaintiff must have derived from the possession of the  remaining sum of Rs. 24,000/-during all this period would  be sufficient compensation to him. It may be added that the  plaintiff has separately claimed mesne profits for being kept  out of possession for which he has got a decree and  therefore the fact that the plaintiff was out of possession  cannot be taken into account in determining damages for  this purpose.' The decree passed by the High Court  awarding Rs. 11,250/- as damages to the plaintiff must  therefore be set aside.”

11. We are of the view that the High Court has completely  

misunderstood the dictum laid down in the above mentioned judgment  

and came to a wrong conclusion of law for more than one reason,  

which will be more evident when we scan through the subsequent  

judgments of this Court.

12.  In Shree Hanuman Cotton Mills and Others v. Tata Air  

Craft Limited 1969 (3) SCC 522, this Court elaborately discussed the  

principles which emerged from the expression “earnest money”.  That  

was a case where the appellant therein entered into a contract with  

the respondent for purchase of aero scrap.   According to the contract,  

the buyer had to deposit with the company 25% of the total amount

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and that deposit was to remain with the company as the earnest  

money to be adjusted in the final bills.   Buyer was bound to pay the  

full value less the deposit before taking delivery of the stores.  In case  

of default by the buyer, the company was entitled to forfeit  

unconditionally the earnest money paid by the buyer and cancel the  

contract.   The appellant advanced a sum of Rs.25,000/- (being 25%  

of the total amount) agreeing to pay the balance in two installments.  

On appellant’s failure to pay any further amount, respondent forfeited  

the sum of Rs.25,000/-, which according to it, was earnest money and  

cancelled the contract.  Appellant filed a suit for recovery of the said  

amount.  The trial Court held that the sum was paid by way of deposit  

or earnest money which was primarily a security for the performance  

of the contract and that the respondent was entitled to forfeit the  

deposit amount when the appellant committed a breach of the contract  

and dismissed the suit.  The High Court confirmed the decision taken  

by the trial Court.   This Court, considering the scope of the term  

“earnest”, laid down certain principles, which are as follows:

“21. From a review of the decisions cited above, the  following principles emerge regarding “earnest””

(1) It must be given at the moment at which the  contract is concluded.

(2) It represents a guarantee that the contract will  be fulfilled or, in other words, “earnest” is given  to bind the contract.

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(3) It is part of the purchase price when the  transaction is carried out.

(4) It is forfeited when the transaction falls through  by reason of the default or failure of the  purchaser.

(5) Unless there is anything to the contrary in the  terms of the contract, on default committed by  the buyer, the seller is entitled to forfeit the  earnest.”

13. In Delhi Development Authority v. Grihstrapana  

Cooperative Group Housing Society Ltd. 1995 Supp (1) SCC 751,  

this Court following the judgment of the Privy Council in Har Swaroop  

and Shree Hanuman Cotton Mills (supra), held that the forfeiture of  

the earnest money was legal.

14. In V. Lakshmanan v. B.R. Mangalgiri and others (1995)  

Suppl. (2) SCC 33, this Court held as follows:

“The question then is whether the respondents are  entitled to forfeit the entire amount.  It is seen that a  specific covenant under the contract was that respondents  are entitled to forfeit the money paid under the contract.  So when the contract fell through by the default committed  by the appellant, as part of the contract, they are entitled  to forfeit the entire amount.”

15. In Housing Urban Development Authority and another v.  

Kewal Krishan Goel and others (1996) 4 SCC 249, the question  

that came up for consideration before this Court was, where a land is

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allotted, the allottee deposited some installments but thereafter  

intimated the authority about his incapacity to pay up the balance  

installments and requested for refund of the money paid, was the  

allotting authority entitled to forfeit the earnest money deposited by  

the allottee or could be only entitled to forfeit 10% of the total amount  

deposited by the allottee till the request is made?  Following the  

judgment in Shree Hanuman Cotton Mills (supra), this Court held  

that the allottee having accepted the allotment and having made some  

payment on installments basis, then made a request to surrender the  

land, has committed default on his part and, therefore, the competent  

authority would be fully justified in forfeiting the earnest money which  

had been deposited and not the 10% of the amount deposited, as held  

by the High Court.  In that case, this Court took the view that the  

earnest money represented the guarantee that the contract would be  

fulfilled.

16. This Court, again, in Videocon Properties Ltd. v. Dr.  

Bhalchandra Laboratories and others (2004) 3 SCC 711, dealt  

with a case of sale of immovable property. It was a case where the  

plaintiff-appellants had entered into an agreement with the  

respondents-defendants on 13.5.1994 to sell the landed property

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owned by the respondents and a sum of Rs.38,00,000/- was paid by  

the appellants as deposit or earnest money on the execution of the  

agreement.  In that case, this Court examined the nature and  

character of the earnest money deposit and took the view that the  

words used in the agreement alone would not be determinative of the  

character of the “earnest money”  but really the intention of the  

parties and surrounding circumstances.  The Court held that the  

earnest money serves two purposes of being part-payment of the  

purchase money and security for the performance of the contract by  

the party concerned.  In that case, on facts, after interpreting various  

clauses of the agreement, the Court held as follows:

“15. Coming to the facts of the case, it is seen from  the agreement dated 13.5.1994 entered into between  parties - particularly Clause 1, which specifies more than  one enumerated categories of payment to be made by the  purchaser in the manner and at stages indicated therein, as  consideration for the ultimate sale to be made and  completed. The further fact that the sum of Rs. 38 lakhs  had to be paid on the date of execution of the agreement  itself, with the other remaining categories of sums being  stipulated for payment at different and subsequent stages  as well as execution of the sale deed by the Vendors taken  together with the contents of the stipulation made in Clause  2.3, providing for the return of it, if for any reason the  Vendors fail to fulfill their obligations under Clause 2,  strongly supports and strengthens the claim of the  appellants that the intention of the parties in the case on  hand is in effect to treat the sum of Rs. 38 lakhs to be part  of the prepaid purchase-money and not pure and simple  earnest money deposit of the restricted sense and tenor,

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wholly unrelated to the purchase price as such in any  manner. The mention made in the agreement or description  of the same otherwise as "deposit or earnest money" and  not merely as earnest money, inevitably leads to the  inescapable conclusion that the same has to and was really  meant to serve both purposes as envisaged in the decision  noticed supra. In substance, it is, therefore, really a deposit  or payment of advance as well and for that matter actually  part payment of purchase price, only. In the teeth of the  further fact situation that the sale could not be completed  by execution of the sale deed in this case only due to lapses  and inabilities on the part of the respondents - irrespective  of bonafides or otherwise involved in such delay and lapses,  the amount of rupees 33 lakhs becomes refundable by the  Vendors to the purchasers as of the prepaid purchase price  deposited with the Vendors. Consequently, the sum of  rupees 38 lakhs to be refunded would attract the first limb  or part of Section 55(6)(b) of the Transfer of Property Act  itself and therefore necessarily, as held by the learned  Single Judge, the defendants prima facie became liable to  refund the same with interest due thereon, in terms of  Clause 2.3 of the agreement Therefore, the statutory  charge envisaged therein would get attracted to and  encompass the whole of the sum of rupees 38 lakhs and the  interest due thereon…….”

In the above mentioned case, the Court also held as follows:

“14. …………Further, it is not the description by words used  in the agreement only that would be determinative of the  character of the sum but really the intention of parties and  surrounding circumstances as well, that have to be baked  into and what may be called an advance may really be a  deposit or earnest money and what is termed as 'a deposit  or earnest money' may ultimately turn out to be really an  advance or part of purchase price. Earnest money or  deposit also, thus, serves two purposes of being part  payment of the purchase money and security for the  performances of the contract by the party concerned, who  paid it.”

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17. Law is, therefore, clear that to justify the forfeiture of advance  

money being part of ‘earnest money’ the terms of the contract should  

be clear and explicit.  Earnest money is paid or given at the time when  

the contract is entered into and, as a pledge for its due performance  

by the depositor to be forfeited in case of non-performance, by the  

depositor.  There can be converse situation also that if the seller fails  

to perform the contract the purchaser can also get the double the  

amount, if it is so stipulated.  It is also the law that part payment of  

purchase price cannot be forfeited unless it is a guarantee for the due  

performance of the contract.  In other words, if the payment is made  

only towards part payment of consideration and not intended as  

earnest money then the forfeiture clause will not apply.

18. When we examine the clauses in the instant case, it is amply  

clear that the clause extracted hereinabove was included in the  

contract at the moment at which the contract was entered into.  It  

represents the guarantee that the contract would be fulfilled.  In other  

words, ‘earnest’  is given to bind the contract, which is a part of the  

purchase price when the transaction is carried out and it will be  

forfeited when the transaction falls through by reason of the default or

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failure of the purchaser.  There is no other clause militates against the  

clauses extracted in the agreement dated 29.11.2011.  

19. We are, therefore, of the view that the seller was justified in  

forfeiting the amount of Rs.7,00,000/- as per the relevant clause,  

since the earnest money was primarily a security for the due  

performance of the agreement and, consequently, the seller is entitled  

to forfeit the entire deposit.  The High Court has, therefore, committed  

an error in reversing the judgment of the trial court.

20. Consequently, the appeal is allowed and the impugned judgment  

of the High Court is set aside.  However, there will be no order as to  

costs.

……………………………………….…J (K. S. RADHAKRISHNAN)

………………………………………..J. (DIPAK MISRA)

New Delhi, October 18, 2012