K.R. Suresh v. R. Poornima & Ors., 2025
The Supreme Court upheld the forfeiture of earnest money under an Advance Sale Agreement, ruling that such forfeiture is valid.
Judgement Details
Court
Supreme Court of India
Date of Decision
2 May 2025
Judges
Justices J.B. Pardiwala ⦁ Justice R. Mahadevan.
Citation
Acts / Provisions
Section 13(1)(ia), Hindu Marriage Act, 1955
Section 25, Hindu Marriage Act, 1955
Facts of the Case
-
A purchaser paid Rs. 20 lakh as earnest money under an Advance Sale Agreement (ATS) for a property transaction.
-
The purchaser failed to pay the balance amount of Rs. 35.5 lakh within the stipulated time of four months, leading to the forfeiture of the earnest money by the seller.
-
The purchaser challenged the forfeiture, arguing that the earnest money could not be forfeited as part of the sale consideration.
Issues
-
Whether the earnest money paid under the ATS can be forfeited upon the purchaser's default in paying the balance sale consideration?
Held
-
The Court referenced the judgment in Fateh Chand v. Balkishan Dass, affirming that earnest money is a pledge for the performance of the contract and can be forfeited in case of a breach.
-
The Court stated that Section 74 applies to penalties, not earnest money, and clarified that forfeiture of earnest money does not constitute a penalty.
-
It also noted that time was of the essence in the agreement, as acknowledged by the Trial Court.
-
The difference between earnest money and an advance payment was highlighted, with the Court explaining that earnest money is a guarantee for contract performance, whereas an advance payment is part of the sale price and may not be forfeited unless it serves as a guarantee for contract performance.
Analysis
-
The forfeiture clause in the agreement was found to be justified since the earnest money served to bind the contract and ensure the purchaser's compliance.
-
Section 74 of the Indian Contract Act does not apply to earnest money forfeiture since it is not a penalty.
-
The seller’s action was deemed justified due to the breach of contract by the purchaser.
-
The Court emphasized that such clauses should be fair and not unconscionable to be enforceable.
-
The Supreme Court dismissed the appellant's appeal, affirming the forfeiture of Rs. 20 lakh as earnest money, in line with the terms of the Advance Sale Agreement.