In above noted matter bearing Civil Appeal No. 7588 of 2012 arising out of Special Leave Petition (Civil) No. 4605 of 2012, hon’ble bench of Supreme Court of India comprising of Mr. K. S. Radhakrishanan J. and Mr. Dipak Mishra J has allowed the appeal and set aside impugned High Court judgment on October 18, 2012 while holding that earnest money is primarily a security for the due performance of the agreement to sell and, consequently, the seller is entitled to forfeit the entire earnest money.
The question of law to be decided by hon’ble court was whether the seller is entitled to forfeit the entire earnest money deposit where the sale of an immovable property falls through by reason of the fault or failure of the purchaser?
In order to come for any conclusion, hon’ble Court relied on Shree Hanuman Cotton Mills and Others v. Tata Air Craft Limited 1969 (3) SCC 522 wherein principles for earnest money was made as follows:
- It must be given at the moment at which the contract is concluded.
- It represents a guarantee that the contract will be fulfilled or, in other words, “earnest” is given to bind the parties to the contract.
- It is part of the purchase price when the transaction is carried out.
- It is forfeited when the transaction falls through by reason of the default or failure of the purchaser.
- 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 money.
In addition to above precedent, hon’ble Suprme Court referred to various other judgments of its own including V. Lakshmanan vs. B.R. Mangalgiri and others (1995) Suppl. (2) SCC 33; Housing Urban Development Authority and another vs. Kewal Krishan Goel and others (1996) 4 SCC 249; Videocon Properties Ltd. vs. Dr. Bhalchandra Laboratories and others (2004) 3 SCC 711; etc.
Finally, Supreme Court held that:
- 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 and can be forfeited in case of non-performance by the depositor.
- To justify the forfeiture of advance money being part of ‘earnest money’ the terms of the contract should be clear and explicit.
- If the payment is made only towards part payment of consideration and not intended as earnest money then the forfeiture clause will not apply, until otherwise agreed in contract between the parties.
- There should be fault of purchaser, Seller cannot get benefit of its own fault and If there is default of seller himself, then he cannot have right to forfeit earnest money.