Seller is entitled to forfeit earnest money where sale of immovable property falls through by reason of fault of purchaser: SC
AN Agreement for Sale of property was entered into between the appellant (Seller) and the respondent (Purchaser) on 29.11.2005 for a total consideration of Rs. 70,00,000/- to be paid on or before 5.3.2006 and, towards earnest money, an amount of Rs.4,00,000/- was paid on 29.11.2005 and another Rs.3,00,000/- on 30.11.2005, that means, altogether Rs.7,00,000/- was paid, being 10% of the total sale consideration. The purchaser, however, could not pay the balance amount of Rs. 63,00,000/- before 5.3.2006, consequently, the sale deed could not be executed. Seller, therefore, did not return the earnest money to the purchaser.
Consequently, the purchaser, as plaintiff, instituted a suit before the Additional District Judge, Delhi for recovery of Rs. 7,00,000/- from the seller-defendant of the earnest money paid by him. Defendant contested the suit stating that, as per the agreement, he is entitled to forfeit the amount of earnest money, if there was a failure on the part of the purchaser-plaintiff in paying the balance amount of Rs. 63,00,000/-.
The trial Court dismissed the suit holding that the defendant is entitled to retain the amount of earnest money since the plaintiff had failed to pay the balance amount of Rs. 63,00,000/- before 5.3.2006.
On appeal, the High Court took the view that the seller is entitled to forfeit only a nominal amount and not the entire amount of Rs. 7,00,000/-. The High Court further held that the seller can forfeit an amount of Rs.50,000/- out of the amount of Rs.7,00,000/- and he is bound to refund the balance amount of Rs. 6,50,000/- to the purchaser. To this extent, a decree was also passed in favour of purchaser against the seller. It was also held that the purchaser is also entitled to interest @ 12% per annum from 29.11.2005 till the amount is paid.
The matter reached the Supreme Court with the question, whether the seller is entitled to retain the entire amount ofRs.7,00,000/- received towards earnest money or not.
The Supreme Court referred to its own earlier decisions and observed that 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.
So, the Supreme Court held, "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. 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."