SATISH BATRA vs. SUDHIR RAWAL

Full Judgment Text

1 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 S. K. Radhakrishnan, J. 1. Leave granted. 2. The question that has come up for consideration in this appeal is JUDGMENT 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, Page 1 2 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

haser, ho	wever, c

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 JUDGMENT 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 Page 2 3 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

the enti	re amou

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. JUDGMENT 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. Page 3 4 Relevant clause of the Agreement for Sale dated 29.11.2005 is extracted hereunder for easy reference:

will be<br>ransactio	forfeited<br>n as sti

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. JUDGMENT 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 Page 4 5 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

2433 sq.	yards f

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 th vendee on the 30 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." JUDGMENT Page 5 6 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:

“		) ………				.The		co	ntract pr	ovided f	or forfeiture				of	Rs.
25,000/-					c	onsisting			of Rs. 1	000/-pai	d as e	arnest			money
and		Rs.			J<br>24,000/- p				UDG<br>aid as pa	MEN<br>rt of the	T<br>purchase		price.			The
defendant						has		conceded that		the pla	intiff w	as	entitle			d	to
forfeit			the a			mount o			f Rs. 1,00	0/- which	was p	aid	as	earnest
money.				We		cannot			however a	gree wit	h the H	igh	Court			that
10		pe	r	cen		t	of	the	price ma	y be reg	arded	as	reasonable
compensation							i	n rel	ation to t	he value	of the	contract				as		a
whole,				as		that		in	our opini	on is as	sessed	on		arbitrary
assumption						. Th		e pla	intiff faile	d to prov	e the lo	ss s	uffere			d	by
him		in	consequence						of the bre	ach of th	e contract		committed
by	t	he		defendant, a					nd we ar	e unable	to find	any		principle
on	w	hich			c	ompensation equal				to ten p	ercent	of	the		agreed
pric		e	could			be		awarded to t		he plaint	iff. Th	e plaintiff				has
bee		n a	llowed				R	s. 1	,000/-whic	h was t	he earnest		mone			y	as
part		o	f	the		damage			s. Besides	he had	use of	the	remaining

Page 6 7

sum of Rs. 24,000/-, and we can rightly presume that he<br>must have been deriving advantage from that amount<br>throughout this period. In the absence therefore of any<br>proof of damage arising from the breach of the contract we<br>are of opinion that the amount of Rs. 1,000/- (earnest<br>money) which has been forfeited, and the advantage that<br>the plaintiff must have derived from the possession of the<br>remaining sum of Rs. 24,000/-during all this period would<br>be sufficient compensation to him. It may be added that the<br>plaintiff has separately claimed mesne profits for being kept<br>out of possession for which he has got a decree and<br>therefore the fact that the plaintiff was out of possession<br>cannot be taken into account in determining damages for<br>this purpose.' The decree passed by the High Court<br>awarding Rs. 11,250/- as damages to the plaintiff must<br>therefore be set aside.”
11.		We are of the view t		hat the High Court	has	completely

misunderstood the dictum laid d				own in the above mentione		d judgment

and	came to a wrong conclusi			on of law for more than o		ne reason,

which			will be more evident w	hen we scan through	the	subsequent

sum of Rs. 24,000/-, and		we can rightly presume th		at he
must have been derivin		g advantage from that a		mount
throughout this period. I		n the absence therefore o		f any
proof of damage arising fr		om the breach of the c	ontra	ct we
are of opinion that the		amount of Rs. 1,000/	- (e	arnest
money) which has been f		orfeited, and the advantag		e that
the plaintiff must have de		rived 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 th		at the
plaintiff has separately cla		imed mesne profits for	being	kept
out of possession for w		hich he has got a d	ecree	and
therefore the fact that th		e plaintiff was out of	possession
cannot be taken into acc		ount in determining damag		es for
this purpose.' The decr		ee passed by the H	igh	Court
awarding Rs. 11,250/- a		s damages to the plaintiff		must

judgments of this Court. JUDGMENT

12.			In Shree Hanuman Co	tton Mills and Others v	. Tata		Air

Craft	Limited 1969 (3) SCC 52	2, this Court elaborately dis	cussed		the

principles which emerged from	the expression “earnes	t mo	ney”	.		That

was		a		case where the appellan	t therein entered into	a co	ntract		with

the	respondent for purchase of	aero scrap. According	to th	e contract,

the	buyer had to deposit with	the company 25% of t	he to	tal amount

Page 7 8

an	d	that d	eposit was to remain	with the company		as th	e earnest

money to b	e adjusted in the final b	ills. Buyer was bound	to pay	the

full	value le	ss the deposit before ta	king delivery of the		store	s. In	case


of	default	by the buyer, the	company was entitled			to fo	rfeit

uncondition		ally the earnest money	paid by the buyer		and	cance	l the

contract.		The appellant advanced	a sum of Rs.25,000/- (			being	25%

of	the total	amount) agreeing to p	ay the balance in two in			stallments.

On	appellan	t’s failure to pay any fu	rther amount, responden			t forfeited

the sum of Rs.25,000/-, which acco			rding to it, was earnest			money and
cancelled the contract. Appellant f			iled a suit for recovery			of the said

amount. Th		e trial Court held that t	he sum was paid by		way	of deposit

or	earnest	money which was prima	rily a security for	the pe		rformance

of	the cont	ract and that the resp	ondent was entitled		to	forfeit	the

deposit amo	unt when the appellant	committed a breach	of th	e contract

an	d	dismiss	ed the suit. The High	Court confirmed the	decision	t	aken

by	the trial	Court. This Court,	considering the scope of	the	term

“	earnest”, la	id down certain principl

“	21. From a review of t	he decisions cited	above
followi	ng principles emerge re
(<br>(	1) It must be given<br>contract is conclude<br>2) It represents a gu<br>be fulfilled or, in ot<br>to bind the contract	at the moment at		which

arantee that the contrac
her words, “earnest	” is

Page 8 9

(3) It is part of the purchase price when the<br>transaction is carried out.<br>(4) It is forfeited when the transaction falls through<br>by reason of the default or failure of the<br>purchaser.<br>(5) Unless there is anything to the contrary in the<br>terms of the contract, on default committed by<br>the buyer, the seller is entitled to forfeit the<br>earnest.”
13.		In	Delhi Developme		nt Authority		v.		Gr	ihstrapana

Cooperati			ve Group Housing		Society Ltd.	1995		S	upp (	1) SCC		751,

this	Court		following the judgmen		t of the Privy	Council			in Ha	r Swaroop
and Shree Hanuman Cotton Mills (supra), held that the forfeiture of
the earnest money was legal.
14.		In V.	Lakshmanan v. B		.R. Mangalgir		i	an	d others		(1995)
Suppl. (2) SCC 33, this Court held as follows:
Suppl. (2)			SCC	33, this Court he	ld as follows:

the purchas	e	price	whe	n	the

hen the transaction f				alls t	hrough
the default	o	r	failure		of	the

anything to	th	e	contrary		in	the
ntract, on default			co	mmitted		by
seller is entitled			to	forf	eit	the

the	earnes

	“The	is whether t	he	responden			ts	are
entitl	JUD<br>ed to forfeit the ent	GMEN<br>ire amount.	T<br>I	t	is	seen	tha	t	a
specif	ic covenant under th	e contract was		that		respondents
are e	ntitled to forfeit the	money paid	under t			he co	ntract.
So w	hen the contract fell t	hrough by th	e d	efaul		t committed
by th	e appellant, as part	of the contract,		they		are e	ntitled
to for	feit the entire amoun	t.”

15.		In H	ousing Urban Deve	lopment Authority	and	another		v.

Kewal Kri	shan Goel and oth	ers (1996)	4 S	CC 2	49, t	he	question

that	came	up for consideration	before this Cour	t	was	, whe	re	a	land		is

Page 9 10

allotted,	the	a	llottee		deposited so	me installments b	ut thereafter

intimated	the		authority		about his i	ncapacity to pay up	the balance

installmen	ts	an	d	requested for refu	nd of the money p	aid, wa	s	the

allotting a

uthority

ntitled to forfeit

the earnest money

deposited

the

allotte

e o

r c

ould

only entitled

to forfeit 10% of the

total amount

deposited

llottee till the r

equest is made?

Following

the

judgment

Shree

Hanuman Cott

on Mills (supra), th

is Court

held

that

the a

llottee

having

accepted the

allotment and havin

g made

some

payment on installments basis, then

made a request to

surrender the

land, has committed default on his p

art and, therefore, t

he competent

authority

would

be f

ully

justified in f

orfeiting the earnest

money

which

had

been

deposited

and

not the 10%

of the amount depo

sited, as

held

he Hi

Court.

that case, t

his Court took the

view tha

the

earnest m	oney	represented the guar	antee that the cont	ract would		be

fulfilled.

16.		This	Court,		again, in Vide	ocon Properties	Ltd. v.		Dr.

Bhalchandra	Laboratories and o	thers (2004) 3 SC	C 711,	dealt

wit	h	a ca	se	of	sale	of	immovable p	roperty. It was a ca	se wher	e	the

plaintiff-appellants	had	entered	into an agreeme	nt with		the

respondents-defendants	on 13.5.1	994 to sell the lan	ded property

Page 10 11

owned by t	he respondents and	a sum of Rs.	38,00,000/-	was paid		by

the		appella	nts as deposit or e	arnest money	on the exe	cution	of	the

agreement.	In that case, t	his Court exa	mined the	nature		and


character o			f the earnest mone	y deposit and	took the v	iew that		the

words		used	in the agreement a	lone would not	be determinative		of	the

character o			f the “earnest mo	ney” but real	ly the inte	ntion o	f	the

parties and			surrounding circu	mstances. T	he Court h	eld that		the

earnest mo			ney serves two pu	rposes of bei	ng part-pay	ment o	f	the

purchase money and security				for the performance of th		e contract by
the party concerned. In that c				ase, on facts, after interpr		eting various
				Court held as follows:<br>facts of the case, it is seen from<br>3.5.1994 entered into between<br>se 1, which specifies more than<br>s of payment to be made by the<br>nd at stages indicated therein, as<br>GMENT<br>ltimate sale to be made and<br>ct that the sum of Rs. 38 lakhs<br>te of execution of the agreement<br>aining categories of sums being<br>different and subsequent stages<br>e sale deed by the Vendors taken<br>of the stipulation made in Clause<br>turn of it, if for any reason the<br>eir obligations under Clause 2,<br>strengthens the claim of the<br>ion of the parties in the case on<br>he sum of Rs. 38 lakhs to be part<br>money and not pure and simple<br>the restricted sense and tenor,
clauses of t			he agreement, the	Court held as fo
“15. Coming to the<br>the agreement dated 1<br>parties - particularly Clau<br>one enumerated categorie<br>purchaser in the manner a<br>JUD<br>consideration for the u<br>completed. The further fa<br>had to be paid on the da<br>itself, with the other rem<br>stipulated for payment at<br>as well as execution of th<br>together with the contents<br>2.3, providing for the re<br>Vendors fail to fulfill th<br>strongly supports and<br>appellants that the intent<br>hand is in effect to treat t<br>of the prepaid purchase-<br>earnest money deposit of
			15. Coming to the	facts of the ca	se, it is se	en from
	the ag		reement dated 1	3.5.1994 ente	red into b	etween
	parties		- particularly Clau	se 1, which s	pecifies mo	re than
	one en		umerated categorie	s of payment	to be made	by the
	purcha		ser in the manner a	nd at stages in	dicated the	rein, as
	JUD<br>consideration for the u			GMENT<br>ltimate sale	to be ma	de and
	comple		ted. The further fa	ct that the su	m of Rs. 3	8 lakhs
	had to		be paid on the da	te of execution	of the agr	eement
	itself,		with the other rem	aining categor	ies of sum	s being
	stipulat		ed for payment at	different and	subsequent	stages
	as well		as execution of th	e sale deed by	the Vendor	s taken
	togeth		er with the contents	of the stipulat	ion made in	Clause
	2.3, pr		oviding for the re	turn of it, if f	or any rea	son the
	Vendor		s fail to fulfill th	eir obligations	under Cl	ause 2,
	strongl		y supports and	strengthens t	he claim	of the
	appella		nts that the intent	ion of the par	ties in the	case on
	hand is		in effect to treat t	he sum of Rs.	38 lakhs to	be part
	of the		prepaid purchase-	money and no	t pure and	simple
	earnes		t money deposit of	the restricted	sense an	d tenor,

Page 11 12

wholly unrelated to the purc		hase price as such in any
manner. The mention made in		the agreement or description
of t	he same otherwise as "dep	osit or earnest money" and
not	merely as earnest mone	y, 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
par	t payment of purchase pric	e, 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 th	e respondents - irrespective
of b	onafides or otherwise involv	ed in such delay and lapses,
the	amount of rupees 33 lakhs	becomes refundable by the
Vendors to the purchasers as o		f the prepaid purchase price
deposited with the Vendors.		Consequently, the sum	of
rupees 38 lakhs to be refunded<br>or part of Section 55(6)(b) of		would attract the first limb<br>the Transfer of Property Act
itse	lf and therefore necessaril	y, as held by the learned
Single Judge, the defendants p		rima facie became liable	to
refund the same with interes		t due thereon, in terms	of
Clause 2.3 of the agreemen		t Therefore, the statutory
charge envisaged therein wo		uld get attracted to and
encompass the whole of the su		m of rupees 38 lakhs and the
interest due thereon…….”

In		the	above mentioned case, the Co

“	. …………Further, it is not th	e description by words used
in t	he agreement only that wo	uld 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 ultimat	ely turn out to be really	an
advance or part of purchase		price. Earnest money	or
deposit also, thus, serves tw		o purposes of being part
payment of the purchase m		oney and security for the
performances of the contract b		y the party concerned, who
pai	d it.”

Page 12 13

17.		Law	is,	therefore,	clear	that to j	ustify the forfeiture	of	advance

money	b	eing	part o	f ‘ea	rnest	money’ t	he terms of	the	contra	ct should

be	clear				and	explici		t. Ea	rnest		money i	s paid or given a		t the ti		me w	hen

the		contract				is	entered		into	a	nd, as a	pledge for its d		ue	performance

by	the			d	eposito		r t	o be	forfeited in ca			se of non-performance				, by	the

depositor					. T	he	re c	an b	e converse situ			ation also that		if the s		eller	fails

to	perform					the	contrac		t the		purchas	er can also	get	the	do	uble	the

amount,					if it	is	so	stipulated.			It is als	o the law that		part	pa	ymen	t of
purchase price cannot be forfeited unless it is a guarantee for the due

performance						of	the	contract.			In other	words, if the p		ayment		is m	ade

only			toward			s p	art	payment			of cons	ideration and n		ot	intended		as

earnest					money		then	the	forfeiture clau			se will not apply

18.		When	we	examine	the	clauses i	n the instant c	ase,	it	is amply

clear		tha	t t	he	clause	extracted her	einabove was	include	d in	the

contract	at	the	momen	t at	w	hich the	contract was e	ntered	into.	It

represen	ts t	he	guarante	e that	the cont	ract would be f	ulfilled.	In ot	her

words,	‘e	arnest	’ is	give	n to	b	ind the	contract, which	is a	pa	rt of	the

purchase	price	when t	he	transaction	is carried	out	and i	t will	be

forfeited	when t	he	transaction	falls thr	ough by reason	of the d	efaul	t or

Page 13 14

failure		of	the	purchaser.		There is n	o other	clause	militates	a	gainst	the

clauses		extracted	in	the	agreement	dated	29.11.2011.

19.		We		are	,	therefore				,		the vi	ew tha	t th			e	seller			was				justified						in

forfeiting				th	e	amount				of	Rs.7,00,000/-			as		per			the		relevant							clause,

since			the	e	arnest				money			was	primaril	y		a		security					for			the				due

performance					of		the		agreement and				, consequently,						the		seller				is		entitled

to	forfeit			the	entire				deposit.			The Hi	gh Cou	rt	has			, t	herefore,						committed
an error in reversing the judgment of the trial court.
20.		Consequently,							the	appeal is a			llowed	and			the		impugned						judgment

of	the		High		Court			is	set	aside. Ho			wever,	there				will		b	e	no		o	rder				as		to
costs.

an	error	i	n r	eversing	the	judgment	of the t	rial		court.

JUDGMENT ……………………………………….…J (K. S. RADHAKRISHNAN) ………………………………………..J. (DIPAK MISRA) New Delhi, October 18, 2012 Page 14