By Legal Cell
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.
Supreme Court in its judgement on the 18th October, 2012 in the matter of Satish Batra vs Sudhir Rawal has held that “earnest” money paid by a purchaser of an immovable property can be forfeited by the seller if the former fails to pay the remaining sum.
A Division Bench of Justice Mr KS Radhakrishnan and Justice Mr Dipak Misra allowed the appeal and set aside the Order passed by the Delhi High Court directing the seller to forfeit only a nominal amount of Rs.50,000 out of Rs.7,00,000/- “earnest” money paid by a purchaser after he failed to pay the rest of Rs.63,00,000/- to get the property.
The Apex Court also put down those elements essential for monies paid in advance to be termed as “earnest” money-
- It must be given at the moment at which the contract is concluded.
- It represents a guarantee that the contract will be fulfilled or, in other words, “earnest” is given to bind the contract.
- It is part of the purchase price when the transaction is carried out.
- It is forfeited when the transaction falls through by reason of the default or failure of the purchaser.
- 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.
“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.”
“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.”
Download the judgement here: Satish_Batra_vs_Sudhir_Rawal_on_18_October_2012