Retention of earnest money without proof of actual loss is illegal despite "full and final settlement" under coercion.

In brief

The question

1. Whether the cancellation of the villa allotment vide letter dated 09.03.2009 was legal and justified

The court held

The High Court dismissed the appeal and upheld the Trial Court’s judgment

It also directed

It held that the cancellation was arbitrary and the settlement was vitiated by undue influence

The Court directed the Appellant to refund the balance of ₹18,00,000/- along with pendente lite and future interest @ 6% per annum

01Facts

The Respondents (Plaintiffs) entered into an Agreement to Sell (ATS) dated 27.02.2008 with the Appellant (Defendant) for a villa in Gurgaon for ₹2.5 Crores

p. 2

The Respondents paid a total of ₹62 Lakhs

p. 2

The Appellant cancelled the allotment on 09.03.2009, citing non-payment of instalments, and forfeited the earnest money

p. 3, 24

After failed negotiations for an alternative villa, the Appellant refunded ₹44 Lakhs on 27.06.2009, asserting a "Full and Final Settlement," while retaining ₹18 Lakhs

p. 5

The Respondents accepted the amount "under protest" via email on 30.06.2009, alleging the settlement was signed under coercion

pp. 5-6

The Trial Court decreed the suit in favor of the Respondents for ₹18 Lakhs with interest

p. 2

The Appellant challenged this decree in the High Court.

02Issues

i.1. Whether the cancellation of the villa allotment vide letter dated 09.03.2009 was legal and justified

p. 9 · ¶ 36(i)

ii.2. Whether the "Full and Final Settlement" and receipt of ₹44 Lakhs were executed voluntarily or under undue influence and coercion

p. 9 · ¶ 36(iii)-(iv)

iii.3. Whether the Appellant was entitled to forfeit ₹18 Lakhs as earnest money/liquidated damages

p. 9 · ¶ 36(ii)

03Law Applied

The Court applied Section 16 (Undue Influence) and Section 74 (Compensation for breach of contract) of the Indian Contract Act, 1872

p. 29 · ¶ 114

It relied on the principle of Necessitas non habet legem (necessity knows no law) as recognized in Ambika Construction v. Union of India and MD, NTPC Ltd. v. Reshmi Constructions, which holds that a settlement signed under economic duress or unequal bargaining power does not constitute valid "accord and satisfaction"

p. 17, 28

Furthermore, per Kailash Nath Associates v. DDA, the Court applied the rule that forfeiture of earnest money requires proof of actual loss or damage

p. 14, 29

Provisions in the judgment · 2 · Linked ones open on LawLens

Code of Civil Procedure, 1908 Section 96

Indian Contract Act, 1872 Section 74

04Reasoning

The Court observed that the payment schedule was construction-linked, not merely time-linked, as the ATS sequencing was "indicative" of construction progress

p. 21 · ¶ 78

The Appellant failed to prove that the construction milestones were met or that Demand Notices were served via Registered AD as mandated by Clause 45

pp. 22-23

Consequently, the Respondents were not in default, making the cancellation illegal

p. 24 · ¶ 96

Regarding the settlement, the Court found the Appellant held a dominant position by withholding ₹62 Lakhs, leaving the Respondents vulnerable

p. 28 · ¶ 110-111

The Respondents’ immediate protest via email after encashing the cheque evidenced a lack of free consent

p. 27 · ¶ 107

Finally, the Court held that the Appellant provided no evidence of financial loss to justify the forfeiture of ₹18 Lakhs under Section 74, rendering the retention of funds an illegal penalty rather than liquidated damages

p. 30 · ¶ 117-118