‘Earnest money’ given in guarantee of performance is liable to be forfeited- SC

In case the case of ‘Satish Batra vs. Sudhir Rawal’ Civil Appeal No. 7588 of 2012 [Arising out of SLP (Civil) No. 4605 of 2012], the question that came up for consideration before the Supreme Court was 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.

The Court held that:

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. [Para 17]

The Court further observed:

When we examine the clauses in the instant case, it is amply clear that the clause extracted hereinabove was included in the contract at the moment at which the contract was entered into.  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.