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Friday, October 19, 2012

whether the seller is entitled to forfeit the earnest money deposit where the sale of an immovable property falls through by reason of the fault or failure of the purchaser. - We are, 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. 20. Consequently, the appeal is allowed and the impugned judgment of the High Court is set aside. However, there will be no order as to costs.


                                                                  REPORTABLE
                        IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION
                        CIVIL APPEAL NO. 7588 OF 2012
                [Arising out of SLP (Civil) No. 4605 of 2012]
Satish Batra                                             .. Appellant
                                   Versus
Sudhir Rawal                                             .. Respondent

                               J U D G M E N T

K. S. Radhakrishnan, J.

1.    Leave granted.



2.    The question that has come up for  consideration  in  this  appeal  is
whether the seller is entitled to forfeit the earnest  money  deposit  where
the sale of an immovable property falls through by reason of  the  fault  or
failure of the purchaser.


3.    An Agreement for Sale  of  property  bearing  No.  14/11,  2nd  Floor,
Punjabi Bagh, New Delhi 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.


4.    Consequently, the purchaser,  as  plaintiff,  instituted  a  suit  No.
764/08/06 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/-.


5.    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.


6.    Aggrieved by the judgment of the  Additional  District  Judge,  Delhi,
plaintiff took up the matter in appeal before the High  Court  of  Delhi  by
filing R.F.A. No. 137 of 2010.  The High  Court,  placing  reliance  on  the
judgment of this Court in Fateh Chand v. Balkishan Dass AIR  1963  SC  1405,
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.


7.    Aggrieved by the said judgment of the High Court, the seller has  come
up with this appeal.


8.    We have heard the learned counsel on either  side  at  length.   Facts
are undisputed.  The only question is whether  the  seller  is  entitled  to
retain the entire amount of Rs.7,00,000/- received towards earnest money  or
not.  The fact that the purchaser was at fault in  not  paying  the  balance
consideration of Rs.63,00,000/- is also not disputed.  The question  whether
the seller can retain the entire amount of earnest money  depends  upon  the
terms of the agreement.  Relevant clause of the  Agreement  for  Sale  dated
29.11.2005 is extracted here under for easy reference:
      “e)    If  the  prospective  purchaser  fail  to  fulfill  the   above
           condition.  The transaction shall stand  cancelled  and  earnest
           money will be  forfeited.   In  case  I  fail  to  complete  the
           transaction as stipulated above.  The  purchaser  will  get  the
           DOUBLE amount of the earnest  money.   In  the  both  condition,
           DEALER will get 4% Commission from the faulty party.”


The clause, therefore, 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.  Indisputedly the purchaser failed  to  perform
his part of the contract, then  the  question  is  whether  the  seller  can
forfeit the entire earnest money.

9.    The question raised is no more res  integra.   In  (Kunwar)  Chiranjit
Singh v. Har Swarup AIR 1926 P.C. 1, it  has  been  held  that  the  earnest
money is part of the purchase price when the transaction  goes  forward  and
it is forfeited when the transaction falls through, by reason of  the  fault
or failure of the  purchaser.   In  Fateh  Chand  (supra),  this  Court  was
interpreting the conditions  of  an  agreement  dated  21.3.1949.   By  that
agreement, the plaintiff contracted to sell his rights in the land  and  the
building to Seth Fateh Chand (defendant). It was recited  in  the  agreement
that the plaintiff agreed to sell the  building  together  with  ‘pattadari’
rights appertaining to the land admeasuring 2433 sq. yards for Rs.1,12,500/-
 and that Rs.1,000/- was paid to him as earnest money at  the  time  of  the
execution of the  agreement.   The  conditions  of  the  agreement  were  as
follows:

      "(1) I, the executant,  shall  deliver  the  actual  possession,  i.e.
      complete vacant possession of kothi (bungalow) to the  vendee  on  the
      30th March, 1949, and the vendee shall have to give another cheque for
      Rs. 24,000/- to me, out of the sale price.


      (2) Then the vendee shall have to get the sale  (deed)  registered  by
      the 1st of June, 1949. If, on account of any reason, the vendee  fails
      to get the said sale-deed registered by June, 1949, then this  sum  of
      Rs. 25,000/- (twenty-five thousand) mentioned above shall be deemed to
      be forfeited and the agreement cancelled.  Moreover, the vendee  shall
      have to deliver back the  complete  vacant  possession  of  the  kothi
      (bungalow) to me, the executant. If due to certain reason,  any  delay
      takes place on my part in the registration of the  sale-deed,  by  the
      1st June 1949, then I, the executant, shall be liable to pay a further
      sum of Rs. 25,000/- as damages, apart from the aforesaid  sum  of  Rs.
      25,000/- to the  vendee,  and  the  bargain  shall  be  deemed  to  be
      cancelled."

Plaintiff, on 25.3.1949, received Rs.24,000/- and  delivered  possession  of
the building and the land in his occupation to the defendant.

10.   Alleging that  the  agreement  was  rescinded  because  the  defendant
committed default in performing the agreement and  the  sum  of  Rs.25,000/-
paid by the defendant stood forfeited.  Plaintiff instituted  a  suit.   The
defendant resisted the  claim  contending  inter  alia  that  the  plaintiff
having committed breach of the contract could  not  forfeit  the  amount  of
Rs.25,000/- received by him.  The matter  ultimately  came  to  this  Court.
This Court considered as to whether the plaintiff could forfeit the  amount.
Noticing that the defendant had conceded that the plaintiff was entitled  to
forfeit the amount which was paid  as  earnest  money,  the  Court  held  as
follows:
      “(16)  ……….The  contract  provided  for  forfeiture  of  Rs.  25,000/-
      consisting of Rs. 1000/-paid as earnest money and Rs. 24,000/- paid as
      part of the purchase  price.  The  defendant  has  conceded  that  the
      plaintiff was entitled to forfeit the amount of Rs. 1,000/- which  was
      paid as earnest money. We cannot however agree  with  the  High  Court
      that  10  per  cent  of  the  price  may  be  regarded  as  reasonable
      compensation in relation to the value of the contract as a  whole,  as
      that in our opinion is assessed on arbitrary assumption. The plaintiff
      failed to prove the loss suffered by him in consequence of the  breach
      of the contract committed by the defendant, and we are unable to  find
      any principle on which compensation equal to ten percent of the agreed
      price could be awarded  to  the  plaintiff.  The  plaintiff  has  been
      allowed Rs. 1,000/-which was the earnest money as part of the damages.
      Besides he had use of the remaining sum of Rs. 24,000/-,  and  we  can
      rightly presume that he must have been deriving  advantage  from  that
      amount throughout this period. In the absence therefore of  any  proof
      of damage arising from the breach of the contract we  are  of  opinion
      that the  amount  of  Rs.  1,000/-  (earnest  money)  which  has  been
      forfeited, and the advantage that the plaintiff must have derived from
      the possession of the remaining sum of  Rs.  24,000/-during  all  this
      period would be sufficient compensation to him. It may be  added  that
      the plaintiff has separately claimed mesne profits for being kept  out
      of possession for which he has got a decree  and  therefore  the  fact
      that the plaintiff was out of possession cannot be taken into  account
      in determining damages for this purpose.' The  decree  passed  by  the
      High Court awarding Rs. 11,250/- as  damages  to  the  plaintiff  must
      therefore be set aside.”


11.   We are of the view that the High Court  has  completely  misunderstood
the dictum laid down in the above mentioned judgment and  came  to  a  wrong
conclusion of law for more than one reason, which will be more evident  when
we scan through the subsequent judgments of this Court.

12.    In Shree Hanuman Cotton Mills and Others v. Tata  Air  Craft  Limited
1969 (3) SCC 522, this Court  elaborately  discussed  the  principles  which
emerged from the expression “earnest money”.  That  was  a  case  where  the
appellant therein entered into a contract with the respondent  for  purchase
of aero scrap.   According to the contract, the buyer had  to  deposit  with
the company 25% of the total amount and that deposit was to remain with  the
company as the earnest money to be adjusted in the final bills.   Buyer  was
bound to pay the full value less the deposit before taking delivery  of  the
stores.  In case of default by  the  buyer,  the  company  was  entitled  to
forfeit unconditionally the earnest money paid by the buyer and  cancel  the
contract.   The appellant advanced a sum of Rs.25,000/- (being  25%  of  the
total  amount)  agreeing  to  pay  the  balance  in  two  installments.   On
appellant’s failure to pay any further amount, respondent forfeited the  sum
of Rs.25,000/-, which according to it, was earnest money and  cancelled  the
contract.  Appellant filed a suit for recovery  of  the  said  amount.   The
trial Court held that the sum was paid by way of deposit  or  earnest  money
which was primarily a security for the performance of the contract and  that
the  respondent  was  entitled  to  forfeit  the  deposit  amount  when  the
appellant committed a breach of the contract and dismissed  the  suit.   The
High Court confirmed the decision taken by the trial  Court.    This  Court,
considering the scope of the term “earnest”, laid down  certain  principles,
which are as follows:
           “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.”




13.   In Delhi  Development  Authority  v.  Grihstrapana  Cooperative  Group
Housing Society Ltd. 1995  Supp  (1)  SCC  751,  this  Court  following  the
judgment of the Privy Council in Har Swaroop and Shree Hanuman Cotton  Mills
(supra), held that the forfeiture of the earnest money was legal.

14.   In V. Lakshmanan v. B.R. Mangalgiri and others (1995) Suppl.  (2)  SCC
33, this Court held as follows:
           “The question then is whether the respondents  are  entitled  to
      forfeit the entire amount.  It is seen that a specific covenant  under
      the contract was that 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.”



15.   In Housing Urban Development Authority and another  v.  Kewal  Krishan
Goel  and  others  (1996)  4  SCC  249,  the  question  that  came  up   for
consideration before this Court was, where a land is allotted, the  allottee
deposited some installments but thereafter  intimated  the  authority  about
his incapacity to pay up the balance installments and requested  for  refund
of the money paid, was the  allotting  authority  entitled  to  forfeit  the
earnest money deposited by  the  allottee  or  could  be  only  entitled  to
forfeit 10% of the total amount deposited by the allottee till  the  request
is made?  Following the judgment in  Shree  Hanuman  Cotton  Mills  (supra),
this Court held that the allottee having accepted the allotment  and  having
made some payment on installments basis, then made a  request  to  surrender
the land, has committed default on his part and,  therefore,  the  competent
authority would be fully justified in forfeiting  the  earnest  money  which
had been deposited and not the 10% of the amount deposited, as held  by  the
High Court.  In that case, this Court took the view that the  earnest  money
represented the guarantee that the contract would be fulfilled.


 16.  This Court, again, in Videocon  Properties  Ltd.  v.  Dr.  Bhalchandra
 Laboratories and others (2004) 3 SCC 711, dealt with  a  case  of  sale  of
 immovable property. It  was  a  case  where  the  plaintiff-appellants  had
 entered into an agreement with the respondents-defendants on  13.5.1994  to
 sell  the  landed  property  owned  by  the  respondents  and  a   sum   of
 Rs.38,00,000/- was paid by the appellants as deposit or  earnest  money  on
 the execution of the agreement.  In that  case,  this  Court  examined  the
 nature and character of the earnest money deposit and took  the  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.  The  Court  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.   In
 that case, on facts, after interpreting various clauses of  the  agreement,
 the Court held as follows:
           “15.  Coming to the facts of the  case,  it  is  seen  from  the
      agreement dated 13.5.1994 entered into between parties -  particularly
      Clause 1, which specifies  more  than  one  enumerated  categories  of
      payment to be made by the  purchaser  in  the  manner  and  at  stages
      indicated therein, as consideration for the ultimate sale to  be  made
      and completed. The further fact that the sum of Rs. 38 lakhs had to be
      paid on the date of execution of the agreement itself, with the  other
      remaining categories of sums being stipulated for payment at different
      and subsequent stages as well as execution of the  sale  deed  by  the
      Vendors taken together with the contents of the  stipulation  made  in
      Clause 2.3, providing for the return of it,  if  for  any  reason  the
      Vendors fail to fulfill their obligations  under  Clause  2,  strongly
      supports  and  strengthens  the  claim  of  the  appellants  that  the
      intention of the parties in the case on hand is in effect to treat the
      sum of Rs. 38 lakhs to be part of the prepaid purchase-money  and  not
      pure and simple earnest money deposit  of  the  restricted  sense  and
      tenor, wholly unrelated to the purchase price as such in  any  manner.
      The mention made in the agreement or description of the same otherwise
      as "deposit or  earnest  money"  and  not  merely  as  earnest  money,
      inevitably leads to the inescapable conclusion that the  same  has  to
      and was really meant to  serve  both  purposes  as  envisaged  in  the
      decision noticed supra. In  substance,  it  is,  therefore,  really  a
      deposit or payment of advance as well and  for  that  matter  actually
      part payment of purchase price, only. In the teeth of the further fact
      situation that the sale could not be completed  by  execution  of  the
      sale deed in this case only due to lapses and inabilities on the  part
      of the respondents - irrespective of bonafides or  otherwise  involved
      in such delay and lapses,  the  amount  of  rupees  33  lakhs  becomes
      refundable by the Vendors to the purchasers as of the prepaid purchase
      price deposited with the Vendors. Consequently, the sum of  rupees  38
      lakhs to  be  refunded  would  attract  the  first  limb  or  part  of
      Section 55(6)(b) of the Transfer of Property Act itself and  therefore
      necessarily, as held by the learned Single Judge, the defendants prima
      facie became liable to refund the same with interest due  thereon,  in
      terms of Clause 2.3 of the agreement Therefore, the  statutory  charge
      envisaged therein would get attracted to and encompass  the  whole  of
      the sum of rupees 38 lakhs and the interest due thereon…….”

In the above mentioned case, the Court also held as follows:
      “14.  …………Further, it is not the description  by  words  used  in  the
      agreement only that would be determinative of the character of the sum
      but really the intention of parties and surrounding  circumstances  as
      well, that have to be baked into and what may be called an advance 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 price. Earnest money or deposit  also,  thus,  serves
      two purposes of being part payment of the purchase money and  security
      for the performances of the contract by the party concerned, who  paid
      it.”




17.   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.


18.   When we examine the clauses in the instant case,  it  is  amply  clear
that the clause extracted herein above was included in the  contract  at  the
moment at which the contract was entered into.  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.


19.   We are, 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.


20.   Consequently, the appeal is allowed and the impugned judgment  of  the
High Court is set aside.  However, there will be no order as to costs.



                                            ……………………………………….…J
                                            (K. S. RADHAKRISHNAN)





                                            ………………………………………..J.
                                            (DIPAK MISRA)
New Delhi,
October 18, 2012