Hon’ble Supreme Court in the case of Shree Hanuman Cotton Mills and Others v. Tata Air Craft Limited 1969 (3) SCC 522, elaborately discussed the principles which emerged from the expression “earnest money”. The Court, considering the scope of the term “earnest”, laid down certain principles, and held that:
“From a review of the decisions cited
above, the following principles emerge regarding “earnest””
(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.” [Para 21]