On a conspectus of the aforementioned authorities, it is evident that a clause for the forfeiture of earnest money is not penal in the ordinary sense, rendering Section 74 of the 1872 Act, inapplicable. In the present case, the stipulated amount under the ATS was in the nature of an earnest money deposit and thus, Section 74 of the 1872 Act cannot apply to the same. Further, the forfeiture clause was fair and equitable rather than one-sided and unconscionable, as it imposed liabilities on both the appellant purchaser and respondent-sellers, wherein the seller was obligated to pay twice the advance amount paid by the buyer in case of his default. {Para 51}
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 5822 OF 2025
@SPECIAL LEAVE PETITION (CIVIL) NO. 5630 OF 2023
K.R. SURESH Vs R. POORNIMA & ORS.
J.B. PARDIWALA, J.:
Citation: 2025 INSC 617.
Dated: May 02, 2025.
For the convenience of exposition, this judgment is divided into the following
parts: -
INDEX
A. FACTUAL MATRIX ........................................................................................ 2
i. Judgment of the Trial Court ........................................................................ 8
B. IMPUGNED JUDGMENT............................................................................. 11
C. SUBMISSIONS ON BEHALF OF THE APPELLANT.............................. 15
D. SUBMISSIONS ON BEHALF OF THE RESPONDENT
NOS. 1-4............................................................................................................ 16
E. SUBMISSIONS ON BEHALF OF THE RESPONDENT
NOS. 5-7............................................................................................................ 17
F. ANALYSIS....................................................................................................... 18
i. Validity of the Forfeiture of Advance Money.......................................... 19
a. Difference between Earnest Money and Advance Money ................. 19
b. Permissible Extent of Forfeiture .......................................................... 27
ii. Law on the Alternative Relief of Refund of Earnest Money under Section
22 of the 1963 Act ........................................................................................ 35
G. CONCLUSION................................................................................................ 42
1. Leave granted.
2. This appeal arises from the judgment and order passed by the High Court
of Karnataka at Bengaluru dated 05.08.2021 in R.F.A. No. 386/2013 (SP)
(“impugned judgment”) by which the High Court dismissed the appeal
preferred by the appellant (original plaintiff) and thereby affirmed the
judgment and order dated 24.11.2012 passed by the Court of V Additional
City Civil and Sessions Judge at Bengaluru City, dismissing O.S. No.
3559/2008 instituted by the appellant herein for the specific performance
of contract.
A. FACTUAL MATRIX
3. The position of the parties before this Court, the High Court and before
the Trial Court is tabulated as follows: -
BEFORE
THIS COURT
BEFORE THE
HIGH COURT
BEFORE THE
TRIAL COURT
REMARKS
Appellant Appellant Plaintiff Original
Purchaser/Agreement
of Sale Holder
Respondent
No. 1
Respondent
No. 1
Defendant No.
1
Original Owner (by
way of an
unregistered Will)
Respondent
No. 4
Respondent
No. 4
Defendant No.
4
Husband of
respondent no. 1 and
GPA Holder
Respondent
Nos. 2-3
Respondent
Nos. 2-3
Defendant Nos.
2-3
Minor children of
respondent no. 1 and
respondent no. 4
Respondent
No. 5
Respondent
No. 5
Defendant No.
5
Subsequent
Purchaser (wife of
defendant no. 6)
Srinivas S. - Defendant No.
6
Subsequent
Purchaser (Deceased
through his LRs)
Respondent
Nos. 6 and 7
Respondent
Nos. 6(a) and
6(b)
- Legal heirs of
defendant no. 6
For the sake of convenience, the parties shall be referred to in terms
of their status before the Trial Court.
4. The dispute arises from a claim for specific performance of the agreement
of sale (hereinafter referred to as “ATS”) dated 25.07.2007 in respect of
the property bearing Site No.307, situated at Kengeri Satellite Town
Layout, Kengeri Hobli, Bangalore South Taluk (hereinafter referred to as
“suit property”). The defendant no. 1 acquired absolute title over the suit
property by way of an unregistered Will dated 12.11.2002 executed by her
late mother.
5. The defendant nos. 1-4 executed an ATS dated 25.07.2007 in favor of the
plaintiff for the purchase of the Suit Property for total sale consideration of
Rs.55,50,000/-. The plaintiff issued two cheques dated 16.07.2007 of the
amount of Rs.10,00,000/- each towards part payment of the sale
consideration, the receipt of which was duly acknowledged by the
defendant no. 1. The said ATS stipulated that the sale transaction shall be
completed by payment of the balance sale consideration of Rs. 35,50,000/-
within four months from the date of the ATS, pursuant to which the sale
SLP (C) No. 5630 of 2023 Page 4 of 43
deed was to be executed. The contents of the said ATS are extracted
hereinbelow: -
“ADVANCE SALE AGREEMENT
This Advance Sale Agreement is executed on this Twenty fifth
day of July, Two Thousand Seven (25-07-2007) -BY-
Smt. R. Poornima, daughter of Late Rathnamma also wife of
Sri M.L. Harsha, aged about 32 years, and Sri Lakshmisha,
husband of Smt. R. Poornima, aged about 39 years, and the
children of Smt. Poornima and Sri M.L. Harsha, 1) Kum. H.R.
Anusha, aged about 7 years, 2) Chi. H. Amogham aged about 3
years, both are minors represented by their mother and natural
guardian Smt. R. Poornima, all are residing at House No.588,
Postal Colony, Visveshwaranagara Layout, Mysore CityIN FAVOUR OF:
Sri K.R. Suresh, aged about 42 years, son of Sri Rudrappa,
residing at K. Gollahalli Village, K. Gollahalli Post, Kengeri
Hobli, Bangalore South Taluk.
Whereas, the property mentioned in the schedule
hereunder i.e Site bearing No.307, situated at Kengeri Ssatellite
Town Layout, Kengeri Hobli, Bangalore South Taluk, the said
property originally belonged to Smt. Rathnamma, the mother of
Smt. R. Poornima, which is her self-acquired property. The said
site was allotted to her on dated ___ by the Bangalore City
Improvement Trust Board, represented by its Chairman, vide
allotment letter No. __ KST/ __ which was allotted, Thereafter
Lease-Cum-Sale Deed registered in the office of the SubRegistrar, Bangalore South Taluk, registered in Book-1 volume
2414 pages 16 to 19 as Document No.5734/85-86, thereafter the
possession certificate No.33.73-74 dated 16-11-1973 was
issued, during her life time she was in possession and enjoyment
of the said property as its absolute owner and the absolute sale
deed executed in her favour on 05-03-1986, in the office of the
Sub-Registrar, Bangalore South Taluk, vide Book-1 volume
2414 pages 95-96 as Document No.5734/85-86, during her life
time she was enjoying the same peacefully as its absolute owner
and on 12-12-2022 she has executed a WILL/TESTAMENT to
her only daughter Smt. R. Poormima and on 26-12-2002 she
passed away. After her death, her only daughter Smt. R.
Poormima and we became the sole and absolute owners,
SLP (C) No. 5630 of 2023 Page 5 of 43
successors, title holders in possession and enjoying the said
property. Khatha also got changed to the name of Smt. R.
Poormima in the Town Municipal Office, Kengeri and enjoying
the same happily.
In such a way we are in possession and enjoyment of the
schedule property and we are in need of funds to meet our urgent
necessities, hence we have sold the schedule property to you for
total sum of Rs.55,50,000/ (Rupees Fifty-five lakhs Fifty
Thousand only), out of the sale consideration Rs.20,00,000/-
(Rupees Twenty Thousand only) I have received advance as
hereunder:-
1. Rs. 10,00,000/- (Rupees Ten Lakhs only) through
cheque bearing No.110581 dated 16-07-2007 drawn on
Canara Bank, Yediyur Branch, Bangalore-560082.
2. Rs. 10,00,000/- (Rupees Ten Lakhs only) through
cheque bearing No.110582 dated 16-07-2007 drawn on
Canara Bank, Yediyur Branch, Bangalore-560082.
The remaining amount of Rs.35,50,000/- (Rupees ThirtyFive Lakhs Fifty Thousand only) we have agreed to receive the
same at the time of registration. Within 4(four) months by paying
the balance amount to us you can get registered sale deed either
to your name or to the name of person as suggested by you.
The aforesaid property except you we have not
encumbered the same in any manner to whomsoever, also in
respect of said property except ourselves there are no any other
title holders or successors, if any such dispute arisen in future
the same will be solved by us out of our own expenses and for
which we have agreed.
In the event failure on your part to pay the remaining
amount within stipulated period, the advance amount paid by
you will be forfeited. In the event failure on our part to execute
the sale deed, even though you are ready to pay the balance sale
consideration and get registration of sale deed, in such an event
we agreed to pay the double amount of the advance which you
have paid as compensation. Hence, we have executed this
Advance Sale Agreement by affixing our signature.
SCHEDULE:-
SLP (C) No. 5630 of 2023 Page 6 of 43
All that part and parcel of the site bearing No.307, 5th Main
Road, Kengeri Satellite Town Layout, Kengeri Hobli, Bangalore
South Taluk, now comes under Kengeri Town Municipal limits,
old Khatha No.129, present khatha No.130, present property
No.307, which comes within the limits of Bruhat Bangalore
Mahanagara Paluk, bounded on the;
East by: Road
West by: Site No.317 & 318
North by: Site No.308
South by: Site No.306
As bounded above measuring East-West 60-0 (sixty) feet, North
South 40-0 (Forty) feet, together with house standing thereon is
covered under this Advance Sale Agreement.
WITNESSES:-
1.
2.
3. VENDOR
PURCHASER”
6. It is the case of the plaintiff that upon approaching the bank on 20.09.2007
for a loan to purchase the suit property, he was instructed by the bank
advocate to secure the original title documents and a probate certificate
from the defendant no. 1, as the defendant no. 1 had acquired title over the
suit property by virtue of an unregistered Will. Accordingly, the plaintiff
requested the defendant nos. 1 and 4 respectively to obtain the probate
certificate from the competent court to establish absolute and marketable
title over the suit property. However, despite allegedly promising to furnish
the required documents, the defendant no. 1 failed to do so. Further, the
plaintiff purports to have repeatedly approached the defendant nos. 1 and
4 respectively between 20.09.2007 and 18.02.2008, orally expressing his
readiness and willingness to complete the sale transaction, yet the
defendants did not come forward to perform their part of the contract.
SLP (C) No. 5630 of 2023 Page 7 of 43
7. It is the case of the plaintiff that having no other alternative left, he
ultimately issued a legal notice dated 18.02.2008 through his advocate,
expressing his readiness and willingness and calling upon defendant nos.
1-4 to execute the sale deed by receiving the balance sale consideration.
Thereafter, the plaintiff claims to have discovered that the defendant no. 1
was attempting to alienate the suit property in favour of the defendant nos.
5 and 6 respectively while the ATS dated 25.07.2007 was subsisting.
8. The defendant no. 1 issued a reply dated 15.03.2008 denying the
allegations levelled in the legal notice dated 18.02.2008, stating that the
advance amount of Rs.20,00,000/- paid by the plaintiff stood forfeited and
consequently, the ATS stood cancelled on account of the default by the
plaintiff in making the payment for the balance sale consideration within
the specified four-months.
9. Aggrieved by the foregoing, the plaintiff instituted original suit being O.S.
No. 3559 of 2008 before the Trial Court, praying for the following: (i) an
order directing defendant no. 1 to execute the sale deed in favour of the
plaintiff; (ii) deliver the possession of the suit property in favour of the
plaintiff and; (iii) a declaration to the effect that the subsequent sale deed
dated 15.02.2008 in favour of the defendant nos. 5 and 6 respectively is not
binding on the plaintiff.
10. It is the case of the defendant nos. 1-4 that they were in urgent need of the
sale consideration money to avail of the One-Time Settlement (for short,
“OTS”) benefit from the Indian Overseas Bank K.R. Mohalla, Mysore
Branch which was time-bound for 3 months, thereby making time the
essence of the contract. The defendant nos. 1-4 denied having ever agreed
to produce the probate or the original title deeds as contended by the
SLP (C) No. 5630 of 2023 Page 8 of 43
plaintiff. Furthermore, they have contended that owing to the plaintiff’s
non-performance of the contract, they suffered substantial losses.
11. Pursuant to this, the defendant nos. 1-4 terminated the ATS and forfeited
the advance paid by the plaintiff, going by the express covenant of the ATS.
According to the defendants, at no point of time during the validity of the
ATS did the plaintiff convey or express his readiness and willingness to
complete the transaction. The defendants have also asserted that the
plaintiff instituted the suit long after termination of the ATS.
12. The defendant nos. 5 and 6 respectively in their written statement took the
stance that they are bona fide purchasers of the suit property for a valuable
consideration of Rs.38,40,000/- through registered sale deed dated
15.02.2008. They averred that they had no knowledge of the prior ATS
between the plaintiff and the defendant nos. 1-4. Further, they argued that
the suit filed by the plaintiff was not maintainable against them as the sale
deed in their favor was not challenged by the plaintiff.
i. JUDGMENT OF THE TRIAL COURT
13. Upon appreciation of the oral as well as documentary evidence on record,
the Trial Court vide its judgment and order dated 24.11.2012 dismissed the
O.S. No. 3559/2008 filed by the plaintiff on the ground that the plaintiff
had not approached the Court with clean hands. The Trial Court framed the
following issues for its consideration:
“1. Whether the plaintiff proves the due execution of agreement
of sale dated 25.7.2007 for sale of suit property for total
consideration amount of Rs.55,50,000/- and paid the earnest
money of Rs.20,00,000/-?
2. Whether the plaintiff is always ready and willing to perform
his part of the contract?
SLP (C) No. 5630 of 2023 Page 9 of 43
3. Whether the first defendant proves the termination of
agreement of sale dated 25.7.2007?
4. Whether defendant No. 5 and 6 prove that they are bonafide
purchasers of the suit property for valuable consideration?
5. Whether plaintiff is entitled for relief claimed in the suit?
6. What order or decree?”
14. The findings recorded by the Trial Court in its judgment and order can be
better understood in five parts:
(i) First, on the issue of time being the essence of the contract, the Trial
Court recorded that the defendant nos. 1-4 were acting under a
necessity wherein they required the sale consideration money
urgently to discharge the loan availed for the purpose of their
business expansion which was in the nature of an OTS facility, a fact
which the plaintiff was cognizant of as per his testimony. The Trial
Court held that the defendants proved that time was the essence of
the contract and hence, it was the bounden duty of the plaintiff to
complete the transaction within the specified period.
(ii) Secondly, the Trial Court, while examining the issue of the
unregistered Will and probate, noted that the defendant no. 1, as the
sole legal heir of her mother, became the absolute owner of the suit
property upon her mother’s demise. The Court also underscored the
settled law that a Will need not be registered and lack of such
registration does not impute its authenticity, thus making the
procurement of probate unnecessary. Additionally, there was nothing
on record to indicate that the advocate for the bank insisted for a
probate certificate. The plaintiff claimed to have forgotten the name
of the said advocate and had no opinion in writing to rely upon.
Further, neither the legal advisor nor DW2 (defendant no. 4) was
examined on the issue of probate, leading to an adverse inference
SLP (C) No. 5630 of 2023 Page 10 of 43
against the plaintiff. The Court held that in the absence of any
recitals in the ATS requiring the defendants to furnish original title
deeds to the bank within four months, the plea taken by the plaintiff
was false, frivolous, and concocted.
(iii) Thirdly, on the issue of readiness and willingness to perform, the
Trial Court recorded that the plaintiff did not produce any bank
passbook, account extracts, ITR or other documents, to establish that
he had sufficient finances to pay the balance sale consideration
within the stipulated four-month period. The plaintiff, in his oral
evidence, admitted that he had no funds in his bank account and
lacked documentary evidence to substantiate possession of the
required amount. Further, in his oral evidence, the plaintiff
categorically conceded that his legal notice dated 18.02.2008 was
issued only after the four-month period had lapsed. In view of these
facts, the Court concluded that the plaintiff failed to prove his
readiness and willingness to perform the ATS.
(iv) Fourthly, the Trial Court held that the defendant nos. 1-4 were not
required to notify the plaintiff about the lapse of the four-month
period or the subsequent sale of the suit property to the defendant
nos. 5 and 6 respectively, as no such obligation was stipulated in the
ATS. It further ruled that the defendant no. 1 had the absolute legal
right to alienate the suit property. The Court, relying on the
testimony of DW1 (defendant no. 6), found the defendant nos. 5 and
6 respectively to be bona fide purchasers of the suit property, who
were unaware of the prior ATS and its cancellation. Consequently,
the allegation of collusion between the defendant nos. 1 and 4 & the
SLP (C) No. 5630 of 2023 Page 11 of 43
defendant nos. 5 and 6, as regards the subsequent sale of the suit
property, was found baseless.
(v) Lastly, on the issue of forfeiture of advance money, the Trial Court
held that the advance money, being primarily a security for the due
performance of the ATS, was rightfully forfeited by the defendant
nos. 1-4 in view of the plaintiff’s failure to perform and the resultant
huge loss sustained by the defendant nos. 1-4. The Court also took
note of the fact that the ATS contained explicit recitals regarding
forfeiture. In light of the aforesaid, it was held that the plaintiff was
not entitled to a refund of the advance money.
B. IMPUGNED JUDGMENT
15. Aggrieved by the judgment and order of the Trial Court, the
appellant/plaintiff, preferred First Appeal before the High Court in R.F.A.
No. 386/2013 (SP).
16. A Division Bench of the High Court dismissed the appeal and thereby
affirmed the judgment and decree passed by the Trial Court on the
following four grounds:
(i) First, the High Court held that, in the absence of any obligation
under the ATS for the defendant no. 1 to furnish probate certificate
before executing the sale deed, time was the essence of the contract.
Thus, the plaintiff, having failed to pay the balance sale
consideration within the stipulated four-month period, committed
breach of the conditions specified in the ATS. Further, the Court took
note of the fact that it was only after a lapse of three months from
the expiry of the stipulated four-month period that the plaintiff
SLP (C) No. 5630 of 2023 Page 12 of 43
issued legal notice dated 18.02.2008 to the defendant no.1 calling
upon her to execute the ATS. The relevant observations read as
under:
“14. […] There is no recital in the agreement of sale that
the defendant No.1 was required to furnish the probate
certificate from the competent Court before executing the
sale deed in favour of the plaintiff upon receipt of the
balance sale consideration. […] In the absence of
requirement for furnishing probate certificate, the
contention of the plaintiff that the defendant No.1 failed to
perform her part of the contract is not acceptable having
regard to the fact that it was well within his knowledge
that the defendant No.1 acquired the suit property by
virtue of the will executed in her favour by her mother,
and the same was acted upon and her name was entered
in the concerned revenue records.
15. The sale transaction was required to be completed
within four months from the date of execution of sale
agreement. The plaintiff failed to perform his part of the
contract by coming forward to pay the balance sale
consideration within four months as specified in the sale
agreement. It is only after expiry of three months from the
said date, the plaintiff issued the legal notice to the
defendant No.1 calling upon her to execute the sale
agreement.”
(ii) Secondly, the High Court observed that the plaintiff, in his crossexamination, admitted that he did not possess any documents to
establish his ability to pay the balance sale consideration. Further,
the application moved by the plaintiff for production of additional
documents, to show his ‘readiness’, was rejected by the Court, on
the ground that any prior lacuna could not be allowed to be filled up
at the appellate stage. Pursuant to the aforesaid, the High Court held
that the plaintiff, having failed to prove his readiness and willingness
to perform his part of the contract under Section 16(c) of the Specific
SLP (C) No. 5630 of 2023 Page 13 of 43
Relief Act, 1963 (for short, “the 1963 Act”), was not entitled to the
relief of specific performance. The relevant observations read as
under:
“17. PW1 in his cross-examination has clearly admitted
that he has no documents to show that he possessed the
requisite amount to pay the balance sale consideration.
The documents sought to be produced by the plaintiff by
way of additional evidence also discloses that the plaintiff
did not possess the requisite amount from the date of
execution of sale agreement till filing of the suit or had the
capacity to raise the requisite amount to pay the balance
sale consideration. Further, the said additional
documents cannot be permitted to be produced to fill up
the lacuna before the Appellate Court and the same
cannot be considered and accordingly, the application for
production of additional documents is rejected.
18. […] In view of the aforesaid proposition of law
enunciated by the Hon'ble Supreme Court and Division
Bench of this Court, it is held that plaintiff having failed
to prove that he had the requisite funds to pay the balance
consideration is not entitled for relief for granting the
decree for specific performance under Section 16(c) of the
Specific Relief Act, 1963.”
(iii) Thirdly, the High Court held that the defendant no. 1 failed to prove
the termination of the ATS in favour of the plaintiff, as no
documentary evidence to substantiate the same was placed on
record. However, the defendant nos. 5 and 6 respectively were
deemed bona fide purchasers for value, in view of the fact that the
sale deed dated 15.02.2008 was executed in their favour only after
the expiry of the four-month period in the ATS. Additionally, it is an
admitted position of the plaintiff that he had obtained the certified
copy of the sale deed executed in favor of the defendants nos. 5 and
6 respectively at the time of filing of the suit. On account of the
SLP (C) No. 5630 of 2023 Page 14 of 43
plaintiff’s omission to challenge the said sale deed, the Court held
that the suit was not maintainable against the defendant nos. 5 and 6
respectively. The relevant observations read as under:
“19. The defendant No.1 in her reply notice dated
15.3.2008 -Ex.P.13 has stated that the sale agreement was
terminated on the ground that the plaintiff has failed to
perform his part of the contract by paying the balance sale
consideration within the specified time vide letter.
However, the defendant No.1 has not placed any
documentary evidence to substantiate the said claim.
Hence, it is held that the defendant No.1 has failed to
prove that the sale agreement was terminated.
20. […] The sale deed executed in favour of defendants
No.5 and 6 after expiry of four months specified for
completion of sale transaction cannot be held to be
executed during subsistence of the sale agreement. Hence,
the defendants No.5 and 6 are held to be bonafide
purchasers for value.
21. The plaintiff in the cross-examination has admitted
that he obtained the certified copy of the sale deed
executed in favour of defendants No.5 and 6 at the time of
filing of the suit. However, the plaintiff for the reasons
best known to him has not challenged the sale deed. In the
absence of challenge to the same, the suit filed by the
plaintiff against defendants No.5 and 6 is not
maintainable.”
(i) Lastly, the High Court recorded that the plaintiff had not sought for
an alternative prayer for refund of the advance sale consideration in
the suit as mandated by Section 22 of the 1963 Act. In view of the
requirements under Sub-section 2 of the said Section, it was held
that, in the absence of a specific claim for refund of advance money,
the plaintiff was not entitled to such refund. The relevant
observations read as under:
“22. The plaintiff has not sought for an alternative prayer
for refund of the advance sale consideration in the suit as
required under Section 22 of the Specific Relief Act, 1963.
In the case of Sukhwinder Singh (supra), the Hon'ble
Supreme Court has held that the plaintiff therein is
entitled for refund of advance sale consideration from the
defendant No.2 - the purchaser of suit property from the
defendant No.1 who had remained absent since the
defendant No.2 benefited from the property. However, the
defendants No.5 and 6 cannot be directed to repay the
advance sale consideration and compensate the plaintiff
since the plaintiff had not sought for alternative prayer for
refund of earnest money in the suit as was done in the case
before the Hon'ble Supreme Court. In the absence of
alternative prayer for refund of earnest money, the prayer
for refund of earnest money cannot be granted in view of
Section 22 of the Specific Relief Act. Sub-Section 2 of
Section 22 of the said Act specifies that no relief under
clause (a) or clause (b) of sub-section (1) shall be granted
by the court unless it has been specifically claimed. In the
absence of such a claim, the plaintiff is held not entitled
for refund of earnest money.”
C. SUBMISSIONS ON BEHALF OF THE APPELLANT
17. Mr. Anand Sanjay M. Nuli, the learned Senior Counsel appearing for the
appellant/plaintiff, submitted that the defendant no. 1 failed to obtain the
promised probate certificate with respect to the suit property despite
multiple requests from the plaintiff. It was further submitted that the
defendant no. 4 has specifically admitted that between 18.02.2008 and
20.02.2008, the plaintiff voluntarily offered to pay an additional
Rs.10,00,000/- beyond the agreed sale consideration of Rs.55,50,000/-.
The learned Senior Counsel contended that the aforesaid admission proved
the readiness and willingness of the plaintiff to fulfill his part of the
contract.
SLP (C) No. 5630 of 2023 Page 16 of 43
18. Mr. Nuli submitted that the defendant nos. 1-4, exhibiting mala fide intent,
sold the suit property to the defendant nos. 5 and 6 respectively for
Rs.38,40,000/- within just two months after the expiry of the stipulated
four-month period. It was argued that the purported cancellation of the ATS
was allegedly effected via a letter from the defendant nos. 1-4, though the
said letter was never produced before the Trial Court. Further, he asserted
that no prior notice had been served on the plaintiff before forfeiting the
advance sale consideration or executing the sale deed in favour of the
defendant nos. 5 and 6 respectively.
19. The learned Senior Counsel for the appellant/plaintiff submitted that the
plaintiff, as an alternative to the relief of specific performance, is entitled
to a refund of the advance money paid by him. Mr. Nuli relied upon the
judgments of this Court in Desh Raj v. Rohtash Singh, reported in (2023)
3 SCC 714 and Kamal Kumar v. Premlata Joshi, reported in (2019) 3
SCC 704, to argue that the relief of refund of advance money can be
granted under Prayer (C) of the plaint which beseeches the Court to pass
any order as it deems fit, despite there being no specific prayer to that
effect.
D. SUBMISSIONS ON BEHALF OF THE RESPONDENT NOS. 1-4
20. Ms. Supreeta Sharanagouda, the learned Counsel for
respondent/defendant Nos. 1-4, submitted that the plaintiff, in his crossexamination, admitted that he had no documents to show that he possessed
the requisite amount to pay the balance sale consideration. Further, it was
argued that the additional documents sought to be produced by the plaintiff
SLP (C) No. 5630 of 2023 Page 17 of 43
also disclosed his financial incapacity from the date of execution of the
ATS until the filing of the suit. The learned Counsel, relying upon Pydi
Ramana v. Davarasety Manmadha Rao, reported in (2024) 7 SCC 515,
asserted that the plaintiff failed to show his “readiness” and “willingness”
to perform the contract.
21. Ms. Sharanagouda argued, that having regard to the fact that the balance
sale consideration of Rs.35,50,000/- was to be paid within four months
from the date of the execution of the ATS, time was evidently the essence
of the contract. This was further established by the very purpose of the sale,
which was the urgent business requirement of the defendant nos. 1 and 4,
that got frustrated owing to the failure of the plaintiff to pay the balance
consideration on time.
22. The learned Counsel further contended that pursuant to the recitals in the
ATS, there was consensus between the parties with respect to the forfeiture
of advance money in the event of the purchaser’s default in fulfilling the
terms of the agreement.
E. SUBMISSIONS ON BEHALF OF THE RESPONDENT NOS. 5-7
23. Mr. Dhawesh Pahuja, the learned Counsel appearing for the respondent
nos. 5-7 herein, submitted that the original defendant nos. 5 and 6 fall under
the exception carved out by Section 19(b) of the1963 Act, having
purchased the suit property in good faith and without notice of the prior
ATS in favour of the plaintiff. It was argued that the factum of the prior
ATS was suppressed and could not be discovered even on thorough due
diligence, considering that the ATS was unregistered. An encumbrance
SLP (C) No. 5630 of 2023 Page 18 of 43
certificate was placed on record to substantiate the same, which did not
reveal any prior agreement in relation to the Suit Property.
24. The learned Counsel argued that the defendant nos. 5 and 6 respectively
issued a legal notice dated 05.05.2008 against defendant nos. 1-4 soon after
receiving objections regarding transfer of Khata from Bruhat Bengaluru
Mahanagara Palike (for short, “BBMP”). It was asserted that only in the
reply dated 23.05.2008 to the said legal notice that the defendant nos. 5 and
6 respectively were informed about the prior ATS dated 25.07.2007 and the
eventual lapse of the said ATS on 25.11.2007 due to the default on part of
the plaintiff.
25. In the last, it was argued that it would be too much to ask the bona fide
purchasers to refund Rs.20,00,000/- to the appellant/plaintiff. Such a
liability ought to be fastened upon the party guilty of suppression, i.e. the
respondent/defendant nos. 1-4.
F. ANALYSIS
26. In view of the order dated 20.03.2023 passed by this Court, we are
limiting our consideration in this matter solely to the issue of refund of
earnest money.
27. Having heard the learned counsel appearing for the parties and having
gone through the materials on record, the only question that falls for our
consideration is whether the appellant (original plaintiff) is entitled to the
refund of the amount of Rs.20,00,000/- purportedly paid as “advance
money”?
SLP (C) No. 5630 of 2023 Page 19 of 43
28. We intend to answer the aforesaid question in two parts, carefully
delineating the following:
i. Validity of the Forfeiture of Advance Money; and
ii. Law on the Alternative Relief of Refund of Earnest Money under
Section 22 of the 1963 Act.
29. At the cost of repetition, we deem it necessary to state that there existed
an explicit forfeiture clause in the ATS, which stipulated that the advance
money paid would stand forfeited in the event of default by the buyer in
fulfilling the terms of the contract. Similarly, in case of default on part of
the seller, the advance money was to be doubled and paid back to the buyer.
Pursuant to the aforesaid forfeiture clause, the respondent nos. 1-4 herein
forfeited the advance money on account of the default by the appellant in
paying the balance sale consideration of Rs.35,50,000/- within the
stipulated four-month period.
i. Validity of the Forfeiture of Advance Money
a. Difference between Earnest Money and Advance Money
30. At the outset, it is pertinent to distinguish between “advance money” and
“earnest money”. The said terms are often used interchangeably. The
distinction becomes all the more essential, given that the ATS explicitly
refers to the forfeited sum as “advance money”.
31. Here, we consider it apposite to refer to the meanings of the said terms.
The word “advance” means money in whole or in part, forming the
consideration of an agreement paid before the same is completely payable.
On the other hand, the word “earnest” stands for a sum of money given for
SLP (C) No. 5630 of 2023 Page 20 of 43
the purpose of binding a contract, which is forfeited if the contract does not
go off and adjusted in price if the contract goes through. [See: P Ramanatha
Aiyar in “Advanced Law Lexicon”, 7th Edn.]
32. The principles governing the scope of “earnest money” were succinctly
explained in the case of Shree Hanuman Cotton Mills v. Tata Air Craft
Ltd., reported in (1969) 3 SCC 522, reproduced as under:
“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.
(3) It is part of the purchase price when that 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.’”
(Emphasis supplied)
33. In the case of Videocon Properties Ltd. v. Bhalchandra Laboratories
reported in (2004) 3 SCC 711, while assessing the difference between
“advance” and “earnest”, this Court took the view that the words used in
the agreement alone cannot be determinative of the true nature of the
amount advanced. Instead, the intention of the parties and the surrounding
circumstances serve as more apt indicators. Further, the Court observed
that earnest money fulfils a dual purpose: first, it operates as part-payment
of the purchase price and; secondly, as security for the performance of the
contractual obligations. Thus, its true character and purpose can only be
SLP (C) No. 5630 of 2023 Page 21 of 43
canvassed on a close reading of the agreement, and the relevant contextual
factors. The relevant observations are reproduced hereinbelow:
“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 looked 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.”
(Emphasis supplied)
34. In Satish Batra v. Sudhir Rawal, reported in (2013) 1 SCC 345, this Court
emphatically held that it is only the “earnest money”, paid as a pledge for
the due performance of the contract, that can be forfeited by the seller on
account of the buyer’s default. In the same vein, earnest money can also be
doubled and paid back to the buyer if the contract falls through due to the
seller’s default. An amount which is in nature of an “advance” or serves as
part-payment of the purchase price cannot be forfeited unless it is a
guarantee for the due performance of the contract. The Court further held
that despite the existence of an outright forfeiture clause, it shall not apply
if the amount stipulated in the contract is found to be only in the nature of
part-payment of the purchase price. Consequently, the forfeiture of
“advance money” as part of earnest money can only be justified if the terms
of the contract are clear and explicit to that effect. The relevant
observations are reproduced hereinbelow:
“6. […] In Chiranjit Singh v. Har Swarup [(1926) 23 LW 172 :
AIR 1926 PC 1] it has been held that (LW p. 174) the earnest
money is part of the purchase price when the transaction goes
SLP (C) No. 5630 of 2023 Page 22 of 43
forward and it is forfeited when the transaction falls through, by
reason of the fault or failure of the purchaser. […]
xx xx xx
10. In DDA v. Grihsthapana Coop. Group Housing Society Ltd.
[1995 Supp (1) SCC 751], this Court following the judgment of
the Privy Council in Har Swarup [(1926) 23 LW 172 : AIR 1926
PC 1] and Shree Hanuman Cotton Mills [(1969) 3 SCC 522] ,
held that the forfeiture of the earnest money was legal. In V.
Lakshmanan v. B.R. Mangalagiri [1995 Supp (2) SCC 33] this
Court held as follows : (SCC p. 36, para 5)
“5. 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 the
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.”
xx xx xx
15. The 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 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.”
(Emphasis supplied)
35. A forfeiture clause identical to the one in the present ATS was found in the
case of Satish Batra (supra). It provided for the forfeiture of earnest money
SLP (C) No. 5630 of 2023 Page 23 of 43
in case of the purchaser’s default, as well as the payment of double the
amount of earnest money in case of the vendor’s default. This Court
allowed the forfeiture of the earnest money, which was held to be security
for the due performance of the contract, by the seller when the transaction
fell through on account of the purchaser’s fault. The relevant forfeiture
clause and observations are reproduced hereinbelow:
“5. […] The question whether the seller can retain the entire
amount of earnest money depends upon the terms of the
agreement. The relevant clause of the agreement for sale dated
29-11-2005 is extracted hereunder for easy reference:
“(e) If the prospective purchaser fails to fulfil 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 DOUBLE the amount of the earnest money. In both
conditions, the DEALER will get 4% commission from the
faulting party.”
The clause, therefore, stipulates that if the purchaser fails to
fulfil 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.
Undisputedly, the purchaser failed to perform his part of the
contract, then the question is whether the seller can forfeit the
entire earnest money.
xx xx xx
17. 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. […]”
(Emphasis
supplied)
36. A three-Judge Bench of this Court, of which one of us (J.B. Pardiwala, J.)
was a part, reiterated the distinction between “earnest” and “advance” in
SLP (C) No. 5630 of 2023 Page 24 of 43
Central Bank of India v. Shanmugavelu, reported in (2024) 6 SCC 641,
thus stating that “earnest” differs from “advance money”, though the
former can be treated as part-payment of the sale consideration if the
contractual terms are duly honoured. In other words, earnest money is
adjusted against the total sale consideration if the contract goes through.
The relevant observations are reproduced hereinbelow:
“84. The difference between an earnest or deposit and an
advance part-payment of price is now well established in law.
Earnest is something given by the promisee to the promisor to
mark the conclusiveness of the contract. This is quite apart from
the price. It may also avail as a part-payment if the contract goes
through. But even so it would not lose its character as earnest,
if in fact and in truth it was intended as mere evidence of the
bargain. An advance is a part to be adjusted at the time of the
final payment. If the promisee defaults to carry out the contract,
he loses the earnest but may recover the part-payment leaving
untouched the promisor's right to recover damages. […]”
(Emphasis supplied)
37. From the above exposition of law, it becomes amply clear that the amount
of Rs.20,00,000/- termed as “advance money” in the ATS, was essentially
“earnest money”. In other words, it was in the nature of a guarantee for the
due performance of the contract. In a fashion akin to earnest money, the
said amount was paid at the very execution of the ATS. It was meant to be
adjusted against the total sale consideration of Rs.55,50,000/- if the
transaction was carried out, which is evident from the ATS clause that
states the balance sale consideration to be as Rs.35,50,000/-. Further, it was
liable to be forfeited in the event that the transaction fell through by reason
of the default on part of the purchaser. Consequently, when the appellantpurchaser failed to comply with the contractual stipulation of paying the
balance sale consideration within a period of four months from the date of
SLP (C) No. 5630 of 2023 Page 25 of 43
the agreement, the respondent nos. 1-4 (vendors) were justified in
forfeiting the advance money.
38. We consider it apposite at this juncture to take note of the conditions that
make time the essence of a contract. Such conditions were precisely
outlined by this Court in Chand Rani v. Kamal Rani, reported in (1993) 1
SCC 519, which are reproduced hereunder:
“25. From an analysis of the above case-law it is clear that in
the case of sale of immovable property there is no presumption
as to time being the essence of the contract. Even if it is not of
the essence of the contract the Court may infer that it is to be
performed in a reasonable time if the conditions are:
1. From the express terms of the contract;
2. from the nature of the property; and
3. from the surrounding circumstances, for example: the
object of making the contract.”
(Emphasis supplied)
39. This Court recently reaffirmed the principles for deeming whether time is
of the essence in a contract in Welspun Specialty Solutions Ltd. v. ONGC,
reported in (2022) 2 SCC 382. It held that the determination must be made
by reading and analysing the contract in its entirety, taking into account the
surrounding circumstances. An explicit clause stating that time is of the
essence is not, by itself, sufficient. The Court further observed that any
provision allowing extensions under a contract effectively negates such a
clause, thereby indicating that time is not of the essence. The relevant
observations are reproduced hereinbelow:
“34. In order to consider the relevancy of time conditioned
obligations, we may observe some basic principles:
(a) Subject to the nature of contract, general rule is that
promisor is bound to complete the obligation by the date
for completion stated in the contract. [Refer to Percy
SLP (C) No. 5630 of 2023 Page 26 of 43
Bilton Ltd. v. Greater London Council [Percy Bilton
Ltd. v. Greater London Council, (1982) 1 WLR 794 (HL)]
]
(b) That is subject to the exception that the promisee is not
entitled to liquidated damages, if by his act or omissions
he has prevented the promisor from completing the work
by the completion date.
[Refer Holme v. Guppy [Holme v. Guppy, (1838) 3 M &
W 387 : 150 ER 1195] ]
(c) These general principles may be amended by the
express terms of the contract as stipulated in this case.
35. It is now settled that “whether time is of the essence in a
contract”, has to be culled out from the reading of the entire
contract as well as the surrounding circumstances. Merely
having an explicit clause may not be sufficient to make time the
essence of the contract. As the contract was spread over a long
tenure, the intention of the parties to provide for extensions
surely reinforces the fact that timely performance was necessary.
The fact that such extensions were granted indicates ONGC's
effort to uphold the integrity of the contract instead of
repudiating the same.”
(Emphasis supplied)
40. Having regard to the aforesaid authorities, the intention of the parties and
the surrounding circumstances in the present case, it can be sufficiently
inferred that the inclusion of the forfeiture clause in the ATS was intended
to bind the contracting parties and ensure the due performance of the
contract. This is particularly significant given the stipulated four-month
period for completing the sale transaction and the primary object of
executing the ATS, being the urgency of the respondent nos. 1–4 regarding
the OTS, which was known to the appellant, as recorded by the Trial Court.
The findings of the Trial Court, along with the impugned judgment
affirming that time was of the essence, further substantiate the said intent.
SLP (C) No. 5630 of 2023 Page 27 of 43
41. Furthermore, the appellant neither sought any extension for performing
his part of the contract nor was any extension of time granted by the
respondent nos. 1-4. On the contrary, within two months of the stipulated
period’s expiry, the respondent nos. 1–4 proceeded with a distress sale of
the suit property to the respondent nos. 5–7 (subsequent purchasers),
further underscoring the urgency underlying the contract.
b. Permissible Extent of Forfeiture
42. The issue at hand may be looked at from another angle. Having reached
the aforesaid conclusion that the forfeiture of advance money by the
respondent nos. 1-4 herein was lawful, it appears fitting to determine
whether they were entitled to the entire amount of Rs.20,00,000/-.
43. At this juncture, we deem it appropriate to take note of Section 74 of the
Indian Contract Act, 1872 (for short, “the 1872 Act”). Section 74 of the
1872 Act deals with the compensation for loss or damage caused by a
breach of the contract when a particular sum of liquidated damages or
penalty is already set forth under the terms of the contract. It further
provides that such compensation must be reasonable and it cannot, in any
circumstance, exceed the amount stipulated in the contract. The same is
extracted below:
“74. Compensation for breach of contract where penalty
stipulated for.—When a contract has been broken, if a sum is
named in the contract as the amount to be paid in case of such
breach, or if the contract contains any other stipulation by way
of penalty, the party complaining of the breach is entitled,
whether or not actual damage or loss is proved to have been
caused thereby, to receive from the party who has broken the
contract reasonable compensation not exceeding the amount so
named or, as the case may be, the penalty stipulated for.
[…]”
SLP (C) No. 5630 of 2023 Page 28 of 43
44. A conjoint reading of Section 74 of the 1872 Act and the principles
underlying forfeiture clauses was undertaken in the case of Fateh Chand
v. Balkishan Dass, reported in 1963 SCC OnLine SC 49. This Court held
that Section 74 of the 1872 Act will apply to every covenant involving a
penalty, whether it is for a future payment on breach of the contract or the
forfeiture of a sum already paid. Ergo, a forfeiture clause in a contract
would ordinarily fall within the ambit of the words “any other stipulation
by way of penalty”. Further, it was held that supplying evidence of a loss
incurred by the vendor on account of the breach of contract by the buyer
would be mandatory to justify forfeiture, and only a reasonable amount,
commensurate with such loss, can be forfeited. The relevant observations
are extracted hereinbelow:
“14. […] The words “to be paid” which appear in the first
condition do not qualify the second condition relating to
stipulation by way of penalty. The expression “if the contract
contains any other stipulation by way of penalty” widens the
operation of the section so as to make it applicable to all
stipulations by way of penalty, whether the stipulation is to pay
an amount of money, or is of another character, as, for example,
providing for forfeiture of money already paid. There is nothing
in the expression which implies that the stipulation must be one
for rendering something after the contract is broken. There is no
ground for holding that the expression ‘contract contains any
other stipulation by way of penalty’ is limited to cases of
stipulation in the nature of an agreement to pay money or deliver
property on breach and does not comprehend covenants under
which amounts paid or property delivered under the contract,
which by the terms of the contract expressly or by clear
implication are liable to be forfeited.
xx xx xx
16. There is no evidence that any loss was suffered by the
plaintiff in consequence of the default by the defendant, save as
to the loss suffered by him by being kept out of possession of the
SLP (C) No. 5630 of 2023 Page 29 of 43
property. There is no evidence that the property had depreciated
in value since the date of the contract provided; nor was there
evidence that any other special damage had resulted. The
contact provided for forfeiture of Rs 25,000 consisting of Rs.
1039 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 1000 which was paid as
earnest money. We cannot however agree with the High Court
that 13 percent 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 an 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. […]”
(Emphasis supplied)
45. It is imperative to mention herein that in Fateh Chand (supra), this Court,
while setting “earnest money” apart from a “penalty”, held that insofar as
forfeiture of earnest money is concerned, Section 74 of the 1872 Act will
not apply. The relevant observations are reproduced hereinbelow:
“7. The Attorney General appearing on behalf of the defendant
has not challenged the plaintiff's right to forfeit Rs 1000 which
were expressly named and paid as earnest money. He has,
however, contended that the covenant which gave to the plaintiff
the right to forfeit Rs 24,000 out of the amount paid by the
defendant was a stipulation in the nature of penalty, and the
plaintiff can retain that amount or part thereof only if he
establishes that in consequence of the breach by the defendant,
he suffered loss, and in the view of the Court the amount or part
thereof is reasonable compensation for that loss. We agree with
the Attorney General that the amount of Rs 24,000 was not of the
nature of earnest money. The agreement expressly provided for
payment of Rs 1000 as earnest money, and that amount was paid
by the defendant. The amount of Rs 24,000 was to be paid when
vacant possession of the land and building was delivered, and it
was expressly referred to as “out of the sale price.” If this
amount was also to be regarded as earnest money, there was no
SLP (C) No. 5630 of 2023 Page 30 of 43
reason why the parties would not have so named it in the
agreement of sale. […]”
(Emphasis supplied)
46. To the same effect is the decision of this Court in Maula Bux v. Union of
India, reported in (1969) 2 SCC 554, wherein it was held that forfeiture of
earnest money is not deemed as penal and that Section 74 of the 1872 Act
will only apply where the forfeiture is in the nature of a penalty. The
relevant observations are extracted hereunder:
“5. Forfeiture of earnest money under a contract for sale of
property — movable or immovable — If the amount is
reasonable, it does not fall within Section 74. That has been
decided in several cases: Chiranjit Singh v. Har
Swarup [Chiranjit Singh v. Har Swarup, 1925 SCC OnLine PC
63 : (1926) 23 LW 172] ; Roshan Lal v. Delhi Cloth & General
Mills Co. Ltd. [Roshan Lal v. Delhi Cloth & General Mills Co.
Ltd., 1910 SCC OnLine All 98 : ILR (1911) 33 All 166] ; Mohd.
Habib-Ullah v. Mohd. Shafi [Mohd. Habib-Ullah v. Mohd.
Shafi, 1919 SCC OnLine All 87: ILR (1919) 41 All 324] ; Bishan
Chand v. Radha Kishan Das [Bishan Chand v. Radha Kishan
Das, 1897 SCC OnLine All 52 : ILR (1897) 19 All 489 : 1897
AWN 123]. These cases are easily explained, for forfeiture of
reasonable amount paid as earnest money does not amount to
imposing a penalty. But if forfeiture is of the nature of penalty,
Section 74 applies. Where under the terms of the contract the
party in breach has undertaken to pay a sum of money or to
forfeit a sum of money which he has already paid to the party
complaining of a breach of contract, the undertaking is of the
nature of a penalty.”
(Emphasis supplied)
47. In Shanmugavelu (supra), this Court emphasized upon the fundamental
difference between the forfeiture of “earnest money” and forfeiture of “any
other amount”, wherein the former constitutes a general forfeiture clause,
while the latter qualifies as a penal clause. A clause for forfeiture of earnest
money thus, only intended as a deterrent to ensure due performance of the
SLP (C) No. 5630 of 2023 Page 31 of 43
contractual obligations, will not be deemed penal in the ordinary sense. The
relevant observations are reproduced hereunder:
“81. Even otherwise, what is discernible from the abovereferred
decisions of Fateh Chand [Fateh Chand v. Balkishan Dass,
1963 SCC OnLine SC 49 : AIR 1963 SC 1405] , Maula
Bux [Maula Bux v. Union of India, (1969) 2 SCC 554]
and Satish Batra [Satish Batra v. Sudhir Rawal, (2013) 1 SCC
345 : (2013) 1 SCC (Civ) 483] is that there lies a difference
between forfeiture of any amount and forfeiture of earnest money
with the former being a penal clause and the latter a general
forfeiture clause. A clause providing for forfeiture of an amount
could fundamentally be in the nature of a penalty clause or a
forfeiture clause in the strict sense or even both, and the same
has to be determined in the facts of every case keeping in mind
the nature of contract and the nature of consequence envisaged
by it.
82. Ordinarily, a forfeiture clause in the strict sense will not be
a penal clause, if its consequence is intended not as a sanction
for breach of obligation but rather as security for performance
of the obligation. This is why Fateh Chand [Fateh
Chand v. Balkishan Dass, 1963 SCC OnLine SC 49 : AIR 1963
SC 1405] Maula Bux [Maula Bux v. Union of India, (1969) 2
SCC 554] and Satish Batra [Satish Batra v. Sudhir Rawal,
(2013) 1 SCC 345 : (2013) 1 SCC (Civ) 483] held that forfeiture
of earnest money deposit is not a penal clause, as the deposit of
earnest money is intended to signify assent of the purchaser to
the contract, and its forfeiture is envisaged as a deterrent to
ensure performance of the obligation.”
(Emphasis supplied)
48. A different view was taken by this Court in Kailash Nath Associates v.
DDA, reported in (2015) 4 SCC 136, wherein it held that Section 74 of the
1872 Act applies to the forfeiture of earnest money deposit. It further held
that proof of actual damage or loss is a sine qua non for invoking the said
section and thereby, only a reasonable amount will be permissible for
forfeiture upon the breach of contract. The relevant observations are
reproduced hereinbelow:
“43. […]
xx xx xx
43.2. Reasonable compensation will be fixed on well-known
principles that are applicable to the law of contract, which are
to be found inter alia in Section 73 of the Contract Act.
43.3. Since Section 74 awards reasonable compensation for
damage or loss caused by a breach of contract, damage or loss
caused is a sine qua non for the applicability of the section.
43.5. The sum spoken of may already be paid or be payable in
future.
43.6. The expression “whether or not actual damage or loss is
proved to have been caused thereby” means that where it is
possible to prove actual damage or loss, such proof is not
dispensed with. It is only in cases where damage or loss is
difficult or impossible to prove that the liquidated amount named
in the contract, if a genuine pre-estimate of damage or loss, can
be awarded.
43.7. Section 74 will apply to cases of forfeiture of earnest
money under a contract. […]”
(Emphasis supplied)
49. This Court expounded on the question of loss in Lakshmanan v. B.R.
Mangalagiri, reported in 1995 Supp (2) SCC 33, holding that when the
contract falls through due to the default on part of the appellant-purchaser,
and the resulting loss suffered by the respondent-vendors exceeds the
amount forfeited under the contract, the forfeiture cannot, by any measure,
be seen as unjustified. The relevant observations are extracted below:
“5. 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 the 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. In this case even
otherwise, we find that the respondents had suffered damages,
firstly for one year they were prevented from enjoying the
property and the appellant had cut off 150 fruit-bearing coconut
trees and sugarcane crop was destroyed for levelling the land
apart from cutting down other trees. Pending the appeal, the
respondents sought for and were granted permission by the court
for sale of the property. Pursuant thereto, they sold the land for
which they could not secure even the amount under contract and
the loss they suffered would be around Rs 70,000. Under those
circumstances, their forfeiting the sum of Rs 50,000 cannot be
said to be unjustified. The appeal is accordingly dismissed with
costs.”
(Emphasis supplied)
50. We may as well refer to a recent judgment of this Court in Godrej Projects Development Ltd. v. Anil Karlekar, reported in 2025 SCC OnLine SC 222, wherein this Court examined one-sided and unconscionable forfeiture clauses. It was held that a forfeiture clause, if found to be unfair and unreasonable, cannot be enforced by this Court. Further, while citing the clause providing for “forfeiture of earnest money deposit” in Satish Batra (supra), it held that the said clause could not be said to be one-sided and accordingly, upheld the same. The relevant observations are extracted as under:
“26. In the case of Central Inland Water Transport Corporation
Limited v. Brojo Nath Ganguly8
, this Court, by taking recourse
to Article 14 of the Constitution of India, has held that the courts
will not enforce an unfair and unreasonable contract or an
unfair and unreasonable clause in a contract, entered into
between Parties who are not equal in bargaining power. It will
be relevant to refer to the following observations of this Court in
the said case:
“89. […] It will also apply where a man has no choice, or
rather no meaningful choice, but to give his assent to a
contract or to sign on the dotted line in a prescribed or
standard form or to accept a set of rules as part of the
contract, however unfair, unreasonable and
unconscionable a clause in that contract or form or rules
may be. This principle, however, will not apply where the
bargaining power of the contracting parties is equal or
almost equal. This principle may not apply where both
parties are businessmen and the contract is a commercial
transaction.”
33. Insofar as the judgment in the case of Satish Batra (supra) is
concerned, the clause providing for “forfeiture of earnest money
deposit” cannot be said to be one-sided. […]
34. It can thus be seen that in the aforesaid case though the term
in the Agreement provided for forfeiture of the earnest money in
the event the prospective purchaser fails to fulfill the conditions,
it also provided for payment of double the amount of earnest
money by the vendor to the purchaser in case the vendor fails to
complete the transaction. As such, the said term cannot be said
to be one-sided.”
(Emphasis supplied)
51. On a conspectus of the aforementioned authorities, it is evident that a clause for the forfeiture of earnest money is not penal in the ordinary sense, rendering Section 74 of the 1872 Act, inapplicable. In the present case, the stipulated amount under the ATS was in the nature of an earnest money deposit and thus, Section 74 of the 1872 Act cannot apply to the same. Further, the forfeiture clause was fair and equitable rather than one-sided and unconscionable, as it imposed liabilities on both the appellantpurchaser and respondent-sellers, wherein the seller was obligated to pay twice the advance amount paid by the buyer in case of his default.
52. Even, for argument’s sake, if we have to apply the principle under Section 74 of the 1872 Act to the present case in line with Kailash Nath (supra), the forfeiture of the entire amount of advance money by the respondent nos. 1-4 would still be justified on the ground that there was breach of contract by the appellant, which led to financial losses for the respondent nos. 1-4. Such losses, as specifically pleaded and proved by the evidence led before the Trial Court, far exceeded the amount forfeited under the ATS, a position that was duly noted and accepted by the Trial Court.
ii. Law on the Alternative Relief of Refund of Earnest Money under
Section 22 of the 1963 Act
53. The High Court denied the relief of refund of advance money to the
appellant herein, having regard of the fact that the appellant had not sought
for an alternative prayer for refund of the advance sale consideration in the
suit as mandated by Section 22(2) of the 1963 Act.
54. Before we proceed to answer the question formulated by us in para 27, we
deem it necessary to examine Section 22 of the 1963 Act. It reads thus:
“22. Power to grant relief for possession, partition, refund of
earnest money, etc.— (1) Notwithstanding anything to the
contrary contained in the Code of Civil Procedure, 1908 (5 of
1908), any person suing for the specific performance of a
contract for the transfer of immovable property may, in an
appropriate case, ask for—
(a) possession, or partition and separate possession, of
the property, in addition to such performance; or
(b) any other relief to which he may be entitled, including
the refund of any earnest money or deposit paid or [made
by] him, in case his claim for specific performance is
refused.
(2) No relief under clause (a) or clause (b) of sub-section (1)
shall be granted by the court unless it has been specifically
claimed:
Provident that where the plaintiff has not claimed any such relief
in the plaint, the court shall, at any stage of the proceeding,
allow him to amend the plaint on such terms as may be just for
including a claim for such relief.
(3) The power of the court to grant relief under clause (b) of subsection (1) shall be without prejudice to its powers to award
compensation under section 21.”
55. Sir Frederick Pollock, 3rd Baronet, in Pollock & Mulla: The Indian
Contract and Specific Relief Acts, 16th Edn., has discussed the object and
scope of Section 22 of the 1963 Act and the alternative relief of refund of
earnest money deposit, as follows:
“[s 22.6.2] Refund of Earnest Money or Deposit
[…] The relief of refunding of earnest money or deposit cannot
be granted unless specifically claimed. Further such a plea
cannot be considered in a second appeal, particularly when the
issue of execution of the agreement has been held as not having
been proved.
Refund of amounts paid may also be ordered when specific
performance has been refused on the ground of unexplained
delay by the plaintiff in approaching the Court. It is also open to
a plaintiff to give up his prayer for specific performance at the
hearing, or before the hearing, and ask for return of the earnest
money or deposit.
Where a clause entitling forfeiture of earnest money is contained
in the agreement, it would not be refundable to the plaintiff who
has failed to perform his part of the contract. Forfeiture of
earnest money should not be allowed where the vendor has not
suffered any loss, but has actually gained, viz., on account of
frustration of contract. Where the value of land had
considerably increased after the sale agreement, the Court,
while refusing a decree for specific performance, ordered a
refund of the earnest amount on the ground that the plaintiff did
not suffer any loss, but had gained due to the default of the
plaintiff.
xx xx xx
[s 22.7] Pleadings and Amendment to Pleadings
Section 22 enacts a rule of pleading. It enables the plaintiff to
ask for possession in the suit for specific performance and
empowers the Court to provide, in the decree itself, that upon
payment by the plaintiff of the consideration money within the
given time, the defendant should execute the deed and put the
plaintiff in possession. If the said relief is not claimed in the
plaint, the Court shall permit the plaintiff at any stage of the
proceedings, including execution proceedings, to amend the
plaint on such terms as it deems proper. The purpose is to avoid
multiplicity of suits. This provision overrides the provisions of
SLP (C) No. 5630 of 2023 Page 37 of 43
Order VI, rule 17 of CPC, 1908. Omission to seek alternative
relief is not a ground to reject the plaint.
A plaintiff may amend the plaint to include a claim for refund to
advance money paid to the defendant. The amendment may be
made at any stage of the proceeding, including the appellate
stage. The option vests with the plaintiff to claim alternative
relief, and unless he claims such a relief, the Court is not
empowered to grant it.”
(Emphasis supplied)
56. The expression “at any stage of the proceeding” has been judicially
interpreted to include the appellate stage as well, as affirmed by a catena
of High Court decisions. This interpretation entails that that an amendment
of the plaint to incorporate a prayer for the alternative relief of refund of
earnest money may be sought even during the first appeal from the original
decree passed in a suit for specific performance. The non-obstante clause
attached to Section 22(1) of the 1963 Act grants it an overriding effect,
thereby excluding the operation of the Code of Civil Procedure, 1908.
Further, the use of the word “shall” in the proviso to Section 22(2) imposes
a mandate upon the court to allow the amendment of plaint, as sought by
the party, at any stage. [See: Sahida Bibi v. Sk. Golam Muhammad, 1982
SCC OnLine Cal 59; Tarit Bhowmik v Mukul Day, 2014 SCC Cal 5361]
57. In Manickam v. Vasantha, reported in 2022 SCC OnLine SC 2096, this
Court was dealing with the question of whether the executing court could
deliver possession in execution of a decree where no specific prayer for
possession had been made in a suit for specific performance. It held that
the proviso appended to Sub-section (2) of Section 22 of the 1963, which
mandates the Court to allow an amendment of the plaint at any stage of the
SLP (C) No. 5630 of 2023 Page 38 of 43
proceeding to include a claim for such relief under Clause (a) or (b) of
Section 22(1), renders the provision directory in nature. The Court opined
that Section 22(2) is qualified by the phrase “in an appropriate case”,
referring to situations where such relief does not necessarily flow from a
decree for specific performance of a sale agreement. Accordingly, if such
relief under Clause (a) or (b) of Section 22(1) appears as a necessary
implication of the decree for specific performance, a specific prayer for
claiming such relief would not be required. In light of these principles, this
Court held that the relief of possession was inherently included in a decree
for specific performance and need not be specifically pleaded.
Furthermore, it reiterated that the words “at any stage of the proceeding”
have a wide amplitude, encompassing both the appellate stage and
execution proceedings. The relevant observations are reproduced
hereinbelow:
“22. The Bombay High Court in a judgment reported as Lotu
Bandu Sonavane v. Pundalik Nimba Koli held that relief of
possession is to be claimed “in an appropriate case”. It means
a case in which the relief does not necessarily flow from the
decree for specific performance of the agreement of sale. If such
a relief is ancillary to and necessarily flows from a decree for
specific performance, then it is not necessary to specifically seek
such a relief and the bar of S. 22(2) would not be attracted. If
the defendant is in possession of the property agreed to be sold
and the decree directs a specific performance of the agreement
of sale, the defendant is bound to execute the sale deed as per
the decree and to put the plaintiff in possession of the property
as contemplated by S. 55(1)(f) of the Transfer of Property Act.
In such a case it is not necessary to specifically claim the relief
of possession in the suit.
xx xx xx
9. The term “proceeding” is a very wide and
comprehensive term and it includes execution proceeding
also. The expression “at any stage of the proceeding”
gives widest permission to the Court to allow amendment
at any stage of the proceeding including execution of the
decree. The amendment can be allowed even in an appeal
arising out of the order passed by the executing Court
rejecting the prayer for permission. The proviso
recognises the well settled position that the Court passing
a decree for specific performance retains control over the
subject matter as long as anything remains to be done in
the case.”
xx xx xx
26. The matter can be examined from another angle as well.
Section 22(2) of the Act, though is worded in negative language,
“no relief under clause (a) or clause (b) of sub-section (1) shall
be granted by the court unless it has been specifically claimed”,
but the proviso takes out the mandatory nature from the
substantive provision of sub-section (2) when the plaintiff is
allowed to amend the plaint on such terms as may be just for
including the plaint for such relief “at any stage of the
proceeding”. “At any stage of the proceeding” would include
the proceeding in suit or in appeal and also in execution. The
proviso to sub-section (2) of Section 22 of the Act contemplates
that the Court shall, at any stage of the proceedings, allow the
plaintiff to amend the plaint on such terms as may be just for
including a claim for such relief. The said proviso makes the
provision directory as no penal consequences follow under subsection (2) of Section 22. […]
xx xx xx
29. To examine whether a provision is directory or mandatory,
one of the tests is that the court is required to ascertain the real
intention of the legislature by carefully attending to the whole
scheme of the statute. Keeping in view the scheme of the statute,
we find that Section 22(2) of the Act is only directory and thus,
the decree-holder cannot be non-suited for the reason that such
relief was not granted in the decree for specific relief.
30. The defendant in terms of the agreement is bound to
handover possession of the land agreed to be sold. The
expression “at any stage of proceeding” is wide enough to allow
the plaintiffs to seek relief of possession even at the appellate
stage or in execution even if such prayer was required to be
claimed. This Court in Babu Lal has explained the
circumstances where relief of possession may be necessary such
as in a suit for partition or in a case of separate possession
where the property conveyed is a joint property. In the suit for
specific performance, the possession is inherent in such suit,
therefore, we find that the decree-holders are in fact entitled to
possession in pursuance of the sale deed executed in their
favor.”
(Emphasis supplied)
58. It is thus a settled position of law that the plaint may be amended at any
stage of the proceedings to enable the plaintiff to seek an alternative relief,
including that of refund of earnest money, and the courts have been vested
with wide judicial discretion to permit such amendments. However, under
Section 22 of the 1963 Act, the courts cannot grant such relief suo moto,
since the inclusion of the prayer clause remains a sine qua non for the grant
of such a relief. In other words, when an “appropriate case” exists for
seeking the said relief under this provision, it must be specifically sought
either in the original plaint or by way of an amendment. This has been
emphatically held by this Court in Desh Raj v. Rohtash Singh, reported in
(2023) 3 SCC 714. The relevant observations are reproduced hereunder:
“35. On a plain reading of the above-reproduced provision, we
have no reason to doubt that the plaintiff in his suit for specific
performance of a contact is not only entitled to seek specific
performance of the contract for the transfer of immovable
property but he can also seek alternative relief(s) including the
refund of any earnest money, provided that such a relief has been
specifically incorporated in the plaint. The court, however, has
been vested with wide judicial discretion to permit the plaintiff
to amend the plaint even at a later stage of the proceedings and
seek the alternative relief of refund of the earnest money. The
litmus test appears to be that unless a plaintiff specifically seeks
the refund of the earnest money at the time of filing of the suit or
by way of amendment, no such relief can be granted to him. The
prayer clause is a sine qua non for grant of decree of refund of
earnest money.
36. Applying these principles to the facts of the case in hand, we
find that the respondent has neither prayed for the relief of
refund of earnest money in the original plaint nor he sought any
amendment at a subsequent stage. In the absence of such a
prayer, it is difficult to accept that the courts would suo motu
grant the refund of earnest money irrespective of the fact as to
whether Section 22(2) of the SRA Act is to be construed directory
or mandatory in nature.”
(Emphasis supplied)
59. The judgment in Desh Raj (supra) has been relied upon by the learned
counsel appearing for the appellant herein. However, it is difficult to
understand how this judgment furthers their case. On the contrary, this
judgment clearly contradicts their position, stating in unequivocal terms
that, in the absence of a prayer for the relief of refund of earnest money,
such relief cannot be granted by this Court.
60. Another judgment which has been relied upon by the learned counsel for the appellant in reference to the issue of refund of earnest money, is the case of Kamal Kumar v. Premlata Joshi, reported in (2019) 3 SCC 704. Notably, the ruling in this case also stands contrary to the arguments advanced by the appellant on account of the fact that the relief of refund of earnest money was denied therein. The relevant observations are extracted hereunder:
“9. In the case at hand, we find that the two courts below have
gone into these questions in the light of pleadings and evidence
and recorded a categorical finding against the plaintiff holding
that the plaintiff was neither ready nor willing to perform his
part of the contract and, therefore, he was not entitled to claim
the relief of specific performance of the contract against the
defendants in relation to the suit land. It was also held that the
plaintiff was not entitled to claim any relief of refund of earnest
money because it was liable to be adjusted as agreed between
them.”
(Emphasis supplied)
61. Applying these principles to the facts of the case at hand, we find ourselves unable to accept the submissions of the appellant that, in the absence of a specific prayer for the refund of advance money paid by them, Prayer (c) of the plaint which specifies the grant of “such other relief(s) as the Hon’ble Court deems fit in the facts and circumstances of the case in the interest of justice”, can be construed to include a prayer for such an alternative relief.
62. The reasoning set forth in the case of Manickam (supra) as regards the relief of possession under Section 22(1)(a) of the 1963 Act, can be appropriately imported in the present case to say that the relief of refund of earnest money under Section 2 2(1)(b) is not a relief that automatically flows from a decree for specific performance of a sale agreement and must, therefore, be explicitly sought.
63. In our considered opinion, the law contained under Section 22(2) of the 1963 Act is adequately broad and flexible to allow the appellant to seek an amendment of the plaint for the said relief, even at the appellate stage. However, no such application for an amendment of the plaint was moved either before the trial court or during the course of the first appeal before the High Court. That is to say, the appellant never prayed for the refund of the advance money. Here, it would be redundant to state that the law aids the vigilant, not those who sleep over their rights.
E. CONCLUSION
64. For all the foregoing reasons, we have reached the conclusion that theforfeiture of advance money by the respondent nos. 1-4 was justified. In such circumstances, we are not inclined to grant the relief of refund of advance money to the appellant.
65. We are unable to find any kind of perversity or illegality in the impugned
judgment passed by the High Court. As a result, the present appeal stands
dismissed.
66. Parties shall bear their own costs. Pending application(s), if any, stand
disposed of.
…………………………………………J.
(J.B. PARDIWALA)
…………………………………………J.
(R. MAHADEVAN)
New Delhi
May 02, 2025
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