2012 (10) TMI 595 - SC - Indian Laws

Seller entitled to forfeit entire earnest money deposit when purchaser breaches contract conditions

The SC held that a seller was entitled to forfeit the entire earnest money deposit when the purchaser failed to fulfill contract conditions. The court ... Forfeiture of earnest money deposit - sale of immovable property fails due to the purchaser's fault or failure - Whether the seller is entitled to retain the entire amount received towards earnest money or not. HELD THAT:- 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. Considering the clauses of contract in the instant case, it is amply clear that the clause extracted 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. It was included in the contract at the moment at which the contract was entered into, thus 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. 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 - in favour of purchaser. The core legal question considered by the Court is whether a seller is entitled to forfeit the entire earnest money deposit when the sale of immovable property fails due to the purchaser's default or fault.Another related issue examined is the interpretation of the contractual clause governing forfeiture of earnest money and the extent to which precedent authorities guide the forfeiture of earnest money versus refund or partial refund to the purchaser.Further, the Court considered the nature and character of earnest money deposits in contracts for sale of immovable property, including whether earnest money is part payment of the purchase price or merely a security deposit, and the conditions under which forfeiture is justified.Regarding the first issue, the Court relied on the express terms of the agreement dated 29.11.2005, which stipulated that if the purchaser failed to fulfill the conditions, the transaction would stand cancelled and the earnest money forfeited. The clause also provided that if the seller failed to complete the transaction, the purchaser would receive double the earnest money. The Court emphasized that the purchaser's failure to pay the balance amount before the stipulated date constituted default under the agreement.In analyzing relevant precedent, the Court extensively reviewed the judgment in Fateh Chand v. Balkishan Dass, where the Supreme Court held that the seller was entitled to forfeit only the earnest money (a nominal amount) and not the entire amount paid by the purchaser as part of the purchase price. However, the Court clarified that the High Court had misapplied this precedent by arbitrarily limiting forfeiture to Rs. 50,000 out of Rs. 7,00,000, without considering the specific terms of the contract in the instant case.The Court further examined the principles laid down in Shree Hanuman Cotton Mills v. Tata Air Craft Ltd., which elucidated the nature of earnest money as a guarantee for contract fulfillment, part of the purchase price, and subject to forfeiture upon purchaser default unless otherwise agreed. The Court reiterated that unless the contract states otherwise, the seller is entitled to forfeit the earnest money upon purchaser default.Subsequent decisions such as Delhi Development Authority v. Grihstrapana Cooperative Group Housing Society Ltd., V. Lakshmanan v. B.R. Mangalgiri, and Housing Urban Development Authority v. Kewal Krishan Goel were cited to reinforce the principle that forfeiture of earnest money is lawful where the purchaser defaults and the contract expressly permits forfeiture.The Court also considered Videocon Properties Ltd. v. Dr. Bhalchandra Laboratories, which highlighted that the characterization of earnest money depends on the intention of the parties and surrounding circumstances, and that earnest money may serve as part payment of purchase price and security for contract performance. Importantly, forfeiture is justified only if the payment was intended as earnest money securing performance, not merely as part payment of consideration.Applying these legal principles to the facts, the Court noted that the agreement clearly provided for forfeiture of earnest money upon purchaser default and that the earnest money was paid at the time of contract formation as security for performance. The purchaser's failure to pay the balance amount before the deadline constituted default. There was no clause limiting the forfeiture to a nominal amount or requiring refund of any part of the earnest money in such circumstances.The Court rejected the High Court's approach of awarding refund of the majority of the earnest money, holding that the High Court misunderstood the binding precedents and the contractual terms. The Court emphasized that the earnest money deposit was a guarantee for due performance and was rightly forfeited in full upon purchaser default.Regarding competing arguments, the Court acknowledged the purchaser's contention for refund and interest but found that the contractual clause was explicit and the purchaser was at fault. The Court also noted that precedents allowing only nominal forfeiture were distinguishable on facts and contractual terms.In conclusion, the Court held that the seller was entitled to forfeit the entire earnest money deposit of Rs. 7,00,000/- as per the contract terms, given the purchaser's failure to perform. The High Court's judgment ordering partial refund and interest was set aside, and the trial court's decision allowing forfeiture was restored.Significant holdings include the following verbatim legal reasoning:'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.''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.''From a review of the decisions cited above, the following principles emerge regarding 'earnest money':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.''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.''To justify the forfeiture of advance money being part of 'earnest money' the terms of the contract should be clear and explicit.''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.'Core principles established are:- Earnest money is a security deposit given at contract formation to guarantee performance and is part of the purchase price.- Forfeiture of earnest money is justified where the purchaser defaults, provided the contract explicitly permits forfeiture.- The amount forfeited depends on the contract terms and the intention of the parties, not on arbitrary or fixed percentages.- Refund or partial refund of earnest money is not warranted if the purchaser is at fault and the contract provides for forfeiture.- Precedents permitting only nominal forfeiture apply only where contracts or facts differ materially.The final determination was that the seller is entitled to forfeit the entire earnest money deposit of Rs. 7,00,000/- due to purchaser default, and the High Court's judgment ordering partial refund and interest was set aside.