2012 (10) TMI 595 - SC - Indian Laws

Forfeiture of earnest money deposit - fault or failure of the purchaser - High court ordered seller is entitled to forfeit only a nominal amount and not the entire amount of Rs.7,00,000/- Held that - Law is 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. Considering the clauses of contract in the instant case, it is amply clear that the clause extracted 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. It was included in the contract at the moment at which the contract was entered into, thus 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 failure of the purchaser. There is no other clause militates against the clauses extracted in the agreement dated 29.11.2011. 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 - in favour of purchaser.

Summary

Issues Involved:
1. Whether the seller is entitled to forfeit the earnest money deposit when the sale of an immovable property falls through due to the purchaser's fault or failure.

Issue-wise Detailed Analysis:

1. Forfeiture of Earnest Money Deposit:

The primary issue in this case is whether the seller is entitled to forfeit the earnest money deposit when the purchaser fails to fulfill the terms of the sale agreement. The agreement for the sale of property was entered into on 29.11.2005 between the seller (appellant) and the purchaser (respondent) for a total consideration of Rs.70,00,000/-. The purchaser paid Rs.7,00,000/- as earnest money but failed to pay the remaining Rs.63,00,000/- by the stipulated date of 5.3.2006. Consequently, the sale deed was not executed, and the seller retained the earnest money.

The purchaser filed a suit for recovery of the earnest money, which the trial court dismissed, holding that the seller was entitled to retain the earnest money due to the purchaser's failure to pay the balance amount. The High Court, however, ruled that the seller could only forfeit a nominal amount of Rs.50,000/- and must refund the remaining Rs.6,50,000/- with interest. Aggrieved, the seller appealed to the Supreme Court.

The Supreme Court examined the terms of the agreement, particularly the clause stating that if the purchaser fails to fulfill the conditions, the transaction shall stand canceled, and the earnest money will be forfeited. The Court referred to several precedents, including Fateh Chand v. Balkishan Dass, Shree Hanuman Cotton Mills v. Tata Air Craft Limited, and others, to establish the principles governing the forfeiture of earnest money.

In Fateh Chand, it was held that earnest money is part of the purchase price when the transaction goes forward and is forfeited when the transaction falls through due to the purchaser's fault. The Court in Shree Hanuman Cotton Mills elaborated that earnest money serves as a guarantee for the contract's fulfillment and can be forfeited if the purchaser defaults.

The Supreme Court concluded that the seller was justified in forfeiting the entire earnest money of Rs.7,00,000/- as it was a security for the due performance of the agreement. The Court held that the High Court erred in reversing the trial court's judgment and ruled in favor of the seller.

Conclusion:

The appeal was allowed, and the High Court's judgment was set aside, affirming the seller's right to forfeit the entire earnest money deposit of Rs.7,00,000/- due to the purchaser's failure to fulfill the contract terms. No order as to costs was made.