Concept of Earnest Money - Indian Laws - General

Concept of Earnest Money The privy council in Kunwar Chiranjit Singh v. Har Swarup- 1925 (12) TMI 2 - PRIVY COUNCIL , while dealing with the concept of earnest money, had observed as follows: - 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 fault or failure of the vendee. ( Emphasis supplied ) The above referred decision of the Privy Council has been referred to and relied upon by the High Court of Bombay in the case of Dinanath Damodar Kale v. Malvi Mody Ranchhoddas and Co. reported in AIR 1930 Bom 213. The Court observed as under: - Turning to the law in England we have a series of decisions showing that a deposit by way of earnest in a contract for the sale of land is distinguishable from a penalty for breach of the contract. The cases cited to us by the appellant s counsel are all cases in which either an instalment of the price or a part payment was by the terms of the contract to be forfeited on breach by the purchaser. If any authority be needed to show what the law in England is, it may be found in the passage in Halsbury, Vol. 25, p. 398, para 681, which was cited to us by respondents counsel. There it is clearly laid down that there is a distinction between a deposit and a penalty. This distinction was referred to by the majority of the Bench in the case of Bishan Chand v. Radha Kishan Das [(1897) 19 All. 489 = (1897) A.W.N. 123], where it was stated that a deposit is a payment actually made or advanced and therefore Ss. 73 and 74 of the Contract Act, have no application in such a case and are not intended to apply to it. These sections show what is the compensation to the seller, who is not responsible for the breach. They contemplate a case in which he is seeking to recover compensation for the breach. They do not contemplate a case in which a sum of money has been paid by way of earnest. Nor is the Contract Act necessarily exhaustive: see P. R. Co. v. Bhagwandas [(1909) 34 Bom. 192, = 2 I.C. 475 = 11 Bom. L.R. 335]. Furthermore, it is to be noted that in this particular contract there was a specific condition of the sale by auction that the deposit was to be forfeited in case of default by the purchaser and we think that such a clause is not unreasonable and must be given effect to. Our own High Court rules regarding the sale by the Sheriff s office (R. 391) specifically allow a deposit to be forfeited and the mere fact that the word may is used in that Rule cannot be taken to mean that only such sum out of the deposit can be forfeited as the Court may think proper as damages following the failure of the buyer to complete the sale. ( Emphasis supplied ) In Satish Batra- 2012 (10) TMI 595 - SUPREME COURT , after taking note of the decisions in Delhi Development Authority v. Grihshapana Cooperative Group Housing Society Ltd. 1995 (2) TMI 457 - SUPREME COURT , V. Lakshmanan v. B.R. Mangalagiri Ors. 1994 (12) TMI 322 - SUPREME COURT and HUDA v. Kewal Krishnan Goel - [ 1996 (5) TMI 439 - SUPREME COURT] , concluded that only that deposit which has been given as an earnest-money for the due performance of the obligation is liable to be forfeited in the event of a breach. The relevant observations read as under: - 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. THE AUTHORISED OFFICER, CENTRAL BANK OF INDIA VERSUS SHANMUGAVELU- 2024 (2) TMI 291 - SUPREME COURT (LB)