What is difference between advance amount and earnest amount?

 Difference between 'advance amount' and the 'earnest money' has been considered by the Supreme Court in number of cases. In Shree Hanuman Cotton Mills v. Tata Air-Craft Ltd. MANU/SC/0086/1969 : (1969) 3 SCC 522 : (AIR 1970 SC 1986) the Supreme Court laid down certain principles to determine as to when the amount paid as 'advance' be treated as 'earnest money' and the seller is entitled to forfeit the same. Para 21 of the judgment is reproduced hereunder. "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 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.

10. In the matter of DDA v. Grihsthapana Coop. Group Housing Society Ltd., MANU/SC/0247/1995 : 1995 Supplementary (1) SCC 751 : (AIR 1995 SC 1176) the Supreme Court, following privy council's decision in the matter of Chiranjit Singh v. Har Swamp, MANU/PR/0083/1925 : ATR 1926 PC 1, held that for the question whether the respondents are entitled to forfeit the entire amount, it is to be 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.

11. In Videocon Properties Ltd. v. Bhalchandra Laboratories MANU/SC/1097/2003 : (2004) 3 SCC 711 : AIR 2004 SC 1787) the Supreme Court examined the nature and character of the earnest money and took a 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. It 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.

12. It is not the description by word used in the agreement only that would be determinative of the character of the sum but really the intention of the party have to be looked into and what may be called as an 'advance money' 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

13. In Satish Batra (MANU/SC/0887/2012 : 2012 AIR SCW 5869, paras 17 and 18) (supra), the Supreme Court considered the issue and held thus in paragraphs 15 and 16.

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 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.

IN THE HIGH COURT OF CHHATTISGARH

First Appeal No. 316 of 2017

Decided On: 14.09.2018

 Sunil Jain Vs Vishal Ram Sahu

Hon'ble Judges/Coram:

Prashant Kumar Mishra and Vimla Singh Kapoor, JJ.

Citation: AIR 2019 Chhat 37

Print Page

Whether court can extend time for payment of consideration amount in execution of consent decree?

 In the present case, there was a decree for a sum of Rs.1,04,50,000/-. On the judgment debtor's application, by consent of parties, a concession was granted to the judgment debtor to pay an amount of Rs.90,00,000/- in two instalments of Rs.45,00,000/- each in full and final settlement of the Plaintiff's claim. On failure of such payment, the order provided for the entire decretal amount becoming due and the decree being liable to be executed on that basis. The case clearly comes within the dicta of the Full Bench judgment of our court in the case of Waman Vishwanath. A clause providing for execution of the decree for the entire decretal amount on failure of payment of a concessional amount within a stipulated time is not in the nature of penalty or forfeiture and there is no question of this court relieving the judgment debtor of its consequences. Mr.Cama tries to distinguish the consent order in the present case as an order providing for payment of a larger amount in default of payment of the decretal sum in instalments. The submission is that the original decree was set aside and substituted by a decree for payment of a smaller sum and in default, for payment of the larger sum, i.e. the original decretal sum. The suggestion seems to be that to come within the principle of Waman Vishwanath, the original decree had to be retained and its satisfaction had to be provided in terms of payment in instalments of a lesser sum (i.e. the concessional sum). This is nothing but a matter of semantics. In substance, the original decree is given a go by only on the basis of a concessional payment, failure of such payment resulting into an entitlement to execution of the decree already passed, and that cannot be termed as a penalty or a forfeiture. The application for extension of time is, accordingly, rejected.

Bombay High Court

Sonal Deepak Shah vs Rachna Developers And Marketing ... on 30 August, 2016

Bench: S.C. Gupte

Citation:2016(6) ALLMR 222

Print Page

When court should not order forfeiture of earnest money in suit for specific performance of contract?

Revision would be proper if the Judge had omitted to notice that their Lordships of the Privy Council had decided a question which frequently arises in money suits. In Chiranjit Singh v. Har Swarup, A. I. R. 1926 P. C. 1, their Lordships of the Privy Council state:

Earnest money is part of the purchase price when the transaction goes forward: it is forfeited when the transaction falls through by reason of the default or failure of the vendee.

2. This remark however must be considered with reference to the facts of the case which their Lordships were considering. In that case the sum paid as earnest money was less than 5 per cent of the total sum to be paid. Their Lordships wore not considering a case in which a large proportion of the total sum due was paid. In such a case it is necessary to consider whether or not the payment, although termed earnest money is in reality earnest money. The facts considered in In re, Dagenham (Thames) Dock Co. Ex parte Hulse (1873) 8 Ch A 1022, appear similar to the facts I am considering, A company agreed to purchase a piece of land for £4000 of which £2000 was to be paid at once and the remaining £2000 on a future day named in the agreement, with a provision that if the whole of the £ 2,000 with interest was not paid by that day, the vendors might re-possess the land' as of their former estate without any obligation to repay-any part of the purchase money. It was held that this stipulation was in the nature of a penalty. In the case I am considering it was understood that Rs. 530 out of Rs. 720 had been paid. The agreement was that if the balance was not paid, the plaintiff would have no title to the decree which was the subject of the proposed contract and would have no right to reclaim any part of the purchase money. In Sedgwick on Damages, 9th Edn., Vol. 1, Section 414, it is stated:

Where the instrument refers to a sum deposited as security for performance, or paid in advance to be forfeited on default, the forfeiture, if reasonable in amount, will be enforced as liquidated damages.

3. In my opinion the forfeiture of Rupees 530 was not a reasonable amount. The general rule laid down in Chiranjit Singh v. Har Swarup, A. I. R. 1928 P C 1, is therefore not applicable to this case. The stipulation that the sum of Rs. 530 should be forfeited on default is of the nature of a penalty. The description of this sum as earnest money appears to be merely an amplification of the stipulation. The defendants then were entitled to reasonable compensation and such compensation has been allowed. 

IN THE HIGH COURT OF NAGPUR

Decided On: 26.10.1932

Appellants: Kanhai Lal and Anr.
Vs.
Respondent: Lakshmichand Oswal and Anr.

 Citation: AIR1933Nag223

Macnair, J.C.

Print Page

When earnest money can be forfeited?

Forfeiture of earnest money under a contract for sale of property-movable or immovable-if the amount is reasonable, does not fall within Section74. That has been decided in several cases : Kunwar Chiranjit Singh v. Har Swarup A.I.R.1926 P.C.1 RoshanLal v. The Delhi Cloth and General Mills Company Ltd., Delhi I.L.R. All.166 Muhammad Habibullah v. Muhammad Shafi I.L.R. All. 324 Bishan Chand v. Radha Kishan Das I.D. 19 All. 490.; These cases are easily explained, for forfeiture of a 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.

Supreme Court of India

Maula Bux vs Union Of India on 19 August, 1969

Equivalent citations: 1970 AIR 1955, 1970 SCR (1) 928

Bench: Shah, J.C. (Cj)

Print Page