SATISH BATRAversusSUDHIR RAWAL

                         [2012] 9 S.C.R. 662


A                           SATISH BATRA
                                   V.
                           SUDHIR RAWAL
                   (Civil Appeal No. 7588 of 2012)

                         OCTOBER 18, 2012
B
        [K.S. RADHAKRISHNAN AND DIPAK MISRA, JJ.]

         Contract - Agreement to sell - Payment of earnest
    money - Agreement stipulating forfeiture of earnest money
c   by the seller on failure on the part of purchaser to pay the sale
    amount before specified date - Failure on the part of purchaser
    in payment of sale amount as per the agreement - Forfeiture
    of earnest money by seller- Propriety of - Held: Part payment
    of purchase price cannot be forfeited unless it is guarantee
    for the due performance of contract - Forfeiture of entire
0
    amount of earnest money depends on the terms of the
    agreement - On facts, the earnest money was a security for
    the due performance of contract and hence the forfeiture
    thereof in its entirety was justified.
E      Appellant (seller) entered into an agreement for sale
  of an immovable property with the respondent
  (purchaser). The seller paid Rs. 7,00,0001- as earned
  money. As per the relevant clause of the agreement, the
  balance amount was required to be paid before -a
F particular date and on failure to do so on the part of the
  purchaser, the seller would forfeit the earnest money. The
  purchaser could not pay the balance amount before the
  specified date. Therefore, the sale deed was not executed
  and the seller forfeited the earnest money.
G       The purchaser filed suit for recovery of the earnest
    money. The suit was dismissed. In appeal, High Court
    took the view that the seller was entitled to forfeit only a
    nominal amount and not the entire amount. Hence the
    present appeal by the seller.
H                                 662
          SATISH BATRA v. SUDHIR RAWAL                  663

    Allowing the appeal, the Court                             A
     HELD: 1. The question whether the seller can retain
the entire amount of earnest money depends upon the
terms of the agreement. To justify the forfeiture of
advance money being part of 'earnest money', the terms
                                                               8
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          C
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                   D
consideration and not intended as earnest money, then
the forfeiture clause will not apply. [Paras 8 and 17] [666-
E-F; 673-H; 674-A-C]

      2. On examination of the clauses in the instant case,    E
it is amply clear that the clause stipulating forfeiture of
earnest money 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
                                                               F
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 that clause. Therefore, the seller was justified in    G
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
                                                               H
    664     SUPREME COURT REPORTS              [2012] 9 S.C.R.

A   error in reversing the judgment of the trial court. [Paras
    18 and 19] [67 4-C-F]

        (Kunwar) Chiranjit Singh v. Har Swarup AIR 1926 P.C.
  1 ; Fateh Chand v. Balkishan Dass AIR 1963 SC 1405: 1964
  SCR 515 ; Shree Hanuman Cotton Mills and Ors. v. Tata Air
B Craft Limited 1969 (3) SCC 522: 1970 (3) SCR 127; Delhi
  Development Authority v. Grihstrapana Cooperative Group
  Housing Society Ltd. 1995 Supp (1) SCC 751:1995
  (2) SCR 1'15; V. Lakshmanan v. B. R. Mangalgiri and Ors.
  (1995) Suppl. (2) sec 33: 1994 (6) Suppl. SCR 561 ;
C Housing Urban Development Authority ahd Anr. v. Kewal
  Krishan Goel and Ors. (1996) 4 SCC 249: 1996 (2) Suppl.
  SCR 587; Videocon Properties Ltd. v. Dr. Bhalchandra
  Laboratories and Ors. (2004) 3 SCC 711: 2003 (6) Suppl.
   SCR 1197 - relied on.
D
                       Case Law Reference:
      AIR 1926 P.C. 1              Relied on        Para 9

      1964 SCR 515                 Relied on        Para 9
E     1970 (3) SCR 127             Relied on        Para 12

      1995 (2) SCR 115             Relied on        Para 13

      1994 (6) Suppl. SCR 561      Relied on        Para 14

F     1996 (2) Suppl. SCR 587      Relied on        Para 15

      2003 (6) Suppl. SCR 1197     Relied on        Para 16

        CIVIL APPELLATE JURISDICTION : Civil Appeal No.
    7588 of 2012.
G
        From the Judgment & Order dated 4.11.2011 of the High
    Court of Delhi at New Delhi in RFA No. 137 of 2010.

        Keshav Kaushik, Vibhuti Sushant Gupta (For Dr. Kailash
    Chand) for the Appellant.
H
          SATISH BATRA v. SUDHIR RAWAL                       665

    Yunus Malik, Aman Malik, Sanjeev Agarwal for the                A
Respodent.

     The Judgment of the Court was delivered by

     K.S. RADHAKRISHNAN, J. 1. Leave granted.
                                                                    B
     2. 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.
                                                                    c
     3. An Agreement for Sale of property bearing No. 14/11,
2nd Floor, Punjabi Bagh, New Delhi was entered into between
the appellant (Seller) and the respondent (Purchaser) on
29.11.2005 for a total consideration of Rs. 70,00,000/- to be
paid on or before 5.3.2006 and, towards earnest money, an
amount of Rs.4,00,000/- was paid on 29.11.2005 and another D
Rs.3,00,000/- on 30.11.2005, that means, altogether
Rs.7,00,000/- was paid, being 10% of the total sale
consideration. The purchaser, however, could not .pay the
balance amount of Rs.63,00,000/- before 5.3.2006,
consequently, the sale deed could not be executed. Seller, E
therefore, did not return the earnest money to the purchaser.

     4. Consequently, the purchaser, as plaintiff; instituted a suit
No. 764/08/06 before the Additional District Judge, Delhi for
recovery of Rs.7,00,000/- from the seller-defendant of the F
earnest money paid by him. Defendant contested the suit
stating that, as per the agreement, he is entitled to forfeit the
amount of earnest money, if there was a failure on the part of
the purchaser-plaintiff in paying the balance amount of
Rs.63,00,000/-.                                                      G

    5. The trial Court dismissed the suit holding that the
defendant is entitled to retain the amount of earnest money
since the plaintiff had failed to pay the balance amount of
Rs.63,00,000/- before 5.3.2006.
                                                                    H
    666       SUPREME COURT REPORTS                   [2012] 9 S.C.R.


A         6. Aggrieved by the judgment of the Additional District
    Judge, Delhi, plaintiff took up the matter in appeal before the
    High Court of Delhi by filing R.F.A. No. 137 of 2010. The High
    Court, placing reliance on the judgment of this Court in Fateh
    Chand v. Balkishan Dass AIR 1963 SC 1405, took the view
B   that the seller is entitled to forfeit only a nominal amount and
    not the entire amount of Rs.7,00,000/-. The High Court further
    held that the seller can forfeit an amount of Rs.50,000/- out of
    the amount of Rs.7,00,000/- and he is bound to refund the
    balance amount of Rs.6,50,000/- to the purchaser. To this
c   extent, a decree was also passed in favour of purchaser
    against the seller. It was also held that the purchaser is also
    entitled to interest @ 12% per annum from 29.11.2005 till the
    amount is paid.

         7. Aggrieved by the said judgment of the High Court, the
D   seller has come up with this appeal.

         8. We have heard the learned counsel on either side at
    length. Facts are undisputed. The only question is whether the
    seller is entitled to retain the entire amount of Rs.7,00,000/-
E   received towards earnest money or not. The fact that the
    purchaser was at fault in not paying the balance ccnsideration
    of Rs.63,00,000/- is also not disputed. The question whether
    the seller can retain the entire amount of earnest money
    depends upon the terms of the agreement. Relevant clause of
F   the Agreement for Sale dated 29.11.2005 is extracted
    hereunder for easy reference:

           "(e)   If the prospective purchaser fail to fulfill the above
                  condition. The transaction shall stand cancelled and
                  earnest money will be forfeited. In case I fail to
G                 complete the transaction as stipulated above. The
                  purchaser will get the DOUBLE amount of the
                  earnest money. In the both condition, DEALER will
                  get 4% Commission from the faulty party."

H         The clause, therefore, stipulates that if the purchaser fails
           SATISH BATRA v. SUDHIR RAWAL                        667
              [K.S. RADHAKRISHNAN, J.]
to fulfill the conditions mentioned in the agreement, the               A
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. lndisputedly the purchaser failed to perform his
part of the contract, then the question is whether the seller can       B
forfeit the entire earnest money.

     9. The question raised is no more res integra. In (Kunwar)
Chiranjit Singh v. Har Swarup AIR 1926 P.C. 1, it has been
held that the earnest money is part of the purchase price when          C
the transaction goes forward and it is forfeited when the
transaction falls through, by reason of the fault or failure of the
purchaser. In Fateh Chand (supra), this Court was interpreting
the conditions of an agreement dated 21.3.1949. By that
agreement, the plaintiff contracted to sell his rights in the land
and the building to Seth Fateh Chand (defendant). It was                D
recited in the agreement that the plaintiff agreed to sell the
building together with 'pattadari' rights appertaining to the land
admeasuring 2433 sq. yards for Rs.1, 12,500/- and that
Rs.1,000/- was paid to him as earnest money at the time of
the execution of the agreement. The conditions of the agreement         E
were as follows:

     "(1) I, the executant, shall deliver the actual possession, i.e.
     complete vacant possession of kothi (bungalow) to the
     vendee on the 30th March, 1949, and the vendee shall               F
     have to give another cheque for Rs. 24,000/- to me, out of
     the sale price.

     (2) Then the vendee shall have to get the sale (deed)
     registered by the 1st of June, 1949. If, on account of any
     reason, the vendee fails to get the said sale-deed                 G
     registered by June, 1949, then this sum of Rs. 25,000/-
     (twenty-five thousand) mentioned above shall be deemed
     to be forfeited and the agreement cancelled. Moreover, the
     vendee shall have to deliver back the complete vacant
     possession of the kothi (bungalow) to me, the executant.           H
    668       SUPREME COURT REPORTS                   [2012] 9 S.C.R.


A         If due to certain reason, any delay takes place on my part
          in the registration of the sale-deed, by the 1st June 1949,
          then I, the executant, shall be liable to pay a further sum of
          Rs. 25,000/- as damages, apart from the aforesaid sum
          of Rs. 25,000/- to the vendee, and the bargain shall be
B         deemed to be cancelled."

          Plaintiff, on 25,3.1949, received Rs.24,000/- and delivered
          possession of the building and the land in his occupation
          to the defendant.

C       10. Alleging that the agreement was rescinded because
  the defendant committed default in performing the agreement
  and the sum of Rs.25,000/- paid by the defendant stood
  forfeited. Plaintiff instituted a suit. The defendant resisted the
  claim contending inter alia that the plaintiff having committed
D breach of the contract could not forfeit the amount of Rs.25,000/
  - received by him. The matter ultimately came to .this Court. This
  Court considered as to whether the plaintiff could forfeit the
  amount. Noticing that the defendant had conceded that the
  plaintiff was entitled to forfeit the amount which was paid as
E earnest money, the Court held as follows:

          "(16) .......... The contract provided for forfeiture of Rs.
          25,000/- consisting of Rs. 1000/-paid as earnest money
          and Rs. 24,000/- paid as part of the purchase price. The
          defendant has conceded that the plaintiff was entitled to
F         forfeit the amount of Rs. 1,000/- which was paid as earnest
          money. We cannot however agree with the High Court that
          10 per cent of the price may be regarded as reasonable
          compensation in relation to the value of the contract as a
          whole, as that in our opinion is assessed on arbitrary
G         assumption. The plaintiff failed to prove the loss suffered
          by him in consequence of the breach of the contract
          committed by the defendant, and we are unable to find any
          principle on which compensation equal to ten percent of
          the agreed price could be awarded to the plaintiff. The
H         plaintiff has been allowed Rs. 1,000/-which was the earnest
          SATISH BATRA v. SUDHIR RAWAL                    669
             [K.S. RADHAKRISHNAN, J.]

    money as part of the damages. Besides he had use of the       A
    remaining sum of Rs. 24,000/-, and we can rightly presume
    that he must have been deriving advantage from that
    amount throughout this period. In the absence therefore of
    any proof of damage arising from the breach of the
    contract we are of opinion that the amount of Rs. 1,000/-     B
    (earnest money) which has been forfeited, and the
    advantage that the plaintiff must have derived from the
    possession of the remaining sum of Rs. 24,000/-during all
    this period would be sufficient compensation to him. It may
    be added that the plaintiff has separately claimed mesne      c
    profits for being kept out of possession for which he has
    got a decree and therefore the fact that the plaintiff was
    out of possession cannot be taken into account in
    determining damages for this purpose.' The decree
    p~ssed by the High Court awarding Rs. 11,250/- as
                                                                  0
    damages to the plaintiff must therefore be set aside."

     11. We are of the view that the High Court has completely
misunderstood the dictum laid down in the above mentioned
judgment and came to a wrong conclusion of law for more than
one reason, which will be more evident when we scan through       E
the subsequent judgments of this Court.

       12. In Shree Hanuman Cotton Mills and Others v. Tata
lf.ir Craft Limited 1969 (3) SCC 522, this Court elaborately
discussed the principles which emerged from the expression F
"earnest money". That was a case where the appellant therein
entered into a contract with the respondent for purchase of aero
scrap. According to the contract, the buyer had to deposit with
the company 25% of the total amount and that deposit was to
remain with the company as the earnest money to be adjusted G
in the final bills. Buyer was bound to pay the full value less the
deposit before taking delivery of the stores. In case of default
by the buyer, the company was entitled to forfeit unconditionally
the earnest money paid by the buyer and cancel the contract.
The appellant advanced a sum of Rs.25,000/- (being 25% of H
    670          SUPREME COURT REPORTS                   [2012] 9 S.C.R.


A   the total amount) agreeing to pay the balance in two
    installments. On appellant's failure to pay any further amount,
    respondent forfeited the sum of Rs.25,000/-, which according
    to it, was earnest money and cancelled the contract. Appellant
    filed a suit for recovery of the said amount. The trial Court held
B   that the sum was paid by way of deposit or earnest money
    which was primarily a security for the performance of the
    contract and that the respondent was entitled to forfeit the
    deposit amount when the appellant committed a breach of the
    contract and dismissed the suit. The High Court confirmed the
C   decision taken by the trial Court. This Court, considering the
    scope of the term "earnest", laid down certain principles, which
    are as follows:

          "21. From a review of the decisions cited above, the
          following principles emerge regarding "earnest""
D
           (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
E
                  the contract.

           (3)    It is part of the purchase price when the transaction
                  is carried out.

F          (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."
G
                                                  '
          13. In Delhi Development Authority v. Grihstrapana
    Cooperative Group Housing Society Ltd. 1~95 Supp (1) SCC
    751, this Court following the judgment of the Privy Council in
    Har Swaroop and Shree Hanuman Cotton Mills (supra), held
H   that the forfeiture of the earnest money was legal.
           SATISH BATRA v. SUDHIR RAWAL                         671
              [K.S. RADHAKRISHNAN, J.]
    14. In V. Lakshmanan v. B.R. Mangalgiri and others                  A
(1995) Suppl. (2) SCC 33, this Court held as follows:

           "The question then is whether the respondents are
    entitled to forfeit the entire amount. It is seen that a specific
    covenant under the contract was that respondents are                8
    entitled to forfeit the money paid under the contract. So
    when the contract fell through by the default committed by
    the appellant, as part of the contract, they are entitled to
    forfeit the entire amount."

      15. In Housing Urban Development Authority and another            C
v. Kewal Krishan Goel and others (1996) 4 SCC 249, the
question that came up for consideration before this Court was,
where a land is allotted, the allottee deposited some
installments but thereafter intimated the authority about his
incapacity to pay up the balance installments and requested for         D
refund of the money paid, was the allotting authority entitled to
forfeit the earnest money deposited by the allottee or could be
only entitled to forfeit 10% of the total amount deposited by the
allottee till the request is made? Following the judgment in
Shree Hanuman Cotton Mills (supra), this Court held that the            E
allottee having accepted the allotment and having made some
payment on installments basis, then made a request to
surrender the land, has committed default on his part and,
therefore, the competent authority would be fully justified in
forfeiting the earnest money which had been deposited and not           F
the 10% of the amount deposited, as held by the High Court.
In that case, this Court took the view that the earnest money
represented the guarantee that the contract would be fulfilled.

     16. This Court, again, in Videocon Properties Ltd. v. Dr.
Bhalchandra Laboratories and others (2004) 3 SCC 711, dealt             G
with a case of sale of immovable property. It was a case where
the plaintiff-appellants had entered into an agreement with the
respondents-defendants on 13.5.1994 to sell the landed
property owned by the respondents and a sum of Rs.38,00,000/
- was paid by the appellants as deposit or earnest money on             H
      -
    672      SUPREME COURT REPORTS                  [2012] 9 S.C.R.


A the execution of the agreement. ·In that case, this Court
  examined the nature and character of the earnest money
  deposit and took the view that the words used in the agreement
  alone would not be determinative of the character of the
  "earnest money" but really the intention of the parties and
B surrounding circumstances. The Court held that the earnest
  money serves two purposes of being part-payment of the
  purchase money and security for the performance of the
  contract by the party concerned. In that case, on facts, after
  interpreting varioul> clauses of the agreement, the Court held
c as follows:
          "15. Coming to the facts of the case, it is seen from the
    agreement dated 13.5.1994 entered into between parties -
     particularly Clause 1, which specifies more than one
    enumerated categories of payment to be made by the
D   purchaser in the manner and at stages indicated therein, as
    consideration for the ultimate sale to be made and completed.
    The further fact that the sum of Rs. 38 lakhs had to be paid on
    the date of execution of the agreement itself, with the other
    remaining categories of sums being stipulated for payment at
E   different and subsequent stages as well as execution of the sale
    deed by the Vendors taken together with the contents of the
    stipulation made in Clause 2.3, providing for the return of it, if
    for any reason the Vendors fail to fulfill their obligations under
    Claus~.2-.- strongly supports and strengthens the claim of the
F   appellants that the intention of the parties in the case on hand
    is in effect to treat the sum of Rs. 38 lakhs to be part of the
    prepaid purchase-money and not pure and simple earnest
    money deposit of the restricted sense and tenor, wholly
    unrelated to the purchase price as such in any manner. The
G   mention made in the agreement or description of the same
    otherwise as "deposit or earnest money" and not merely as
    earnest money, inevitably leads to the inescapable conclusion
    that the same has to and was really meant to serve both
    purposes as envisaged in the decision noticed supra. In
H   substance, it is, therefore, really a deposit or payment of
           SATISH BATRA v. SUDHIR RAWAL                         673
              [K.S. RADHAKRISHNAN, J.]
advance as well and for that matter actually part payment of            A
purchase price, only. In the teeth of the further fact situation that
the sale could not be completed by execution of the sale deed
in this case only due to lapses and inabilities on the part of the
respondents - irrespective of bonafides or otherwise involved
in such delay and lapses, the amount of rupees 33 lakhs                 B
becomes refundable by the Vendors to the purchasers as of
the prepaid purchase price deposited with the Vendors.
Consequently, the sum of rupees 38 lakhs to be refunded would
attract the first limb or part of Section 55(6)(b) of the Transfer
of Property Act itself and therefore necessarily, as held by the        c
learned Single Judge, the defendants prima facie became
liable to refund the same with interest due thereon, in terms of
Clause 2.3 of the agreement Therefore, the statutory charge
envisaged therein would get attracted to and encompass the
whole of the sum of rupees 38 lakhs and the interest due
                                                                        0
thereon ....... "

      In the above mentioned case, the Court also held as
follows:

     "14 ............. Further, it is not the description by words      E
     used in the agreement only that would be determinative of
     the character of the sum but really the intention of parties
     and surrounding circumstances as well, that have to be
     baked into and what may be called an advance may really
     be a deposit or earnest money and what is termed as 'a             F
     deposit or earnest money' may ultimately turn out to be
     really an advance or part of purchase price. 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           G
     paid it."

     17. 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        H
    674      SUPREME COURT REPORTS                    [2012] 9 S.C.R.


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
B 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.
c      18. 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. !n other words, 'earnest' is given to bind the contract,
D 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.
E
        19. 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,
F 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.

      20. Consequently, the appeal is allowed and the impugned
  judgment of the High Court is set aside. However, there will be
G no order as to costs.

    K.K.T.                                           Appeal allowed.