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TMI Blog2025 (5) TMI 311X X X X Extracts X X X X X X X X Extracts X X X X ..... ........................................... 11 C. SUBMISSIONS ON BEHALF OF THE APPELLANT .............................. 15 D. SUBMISSIONS ON BEHALF OF THE RESPONDENT NOS. 1-4 ............................................................................................................ 16 E. SUBMISSIONS ON BEHALF OF THE RESPONDENT NOS. 5-7 ............................................................................................................ 17 F. ANALYSIS ....................................................................................................... 18 i. Validity of the Forfeiture of Advance Money .......................................... 19 a. Difference between Earnest Money and Advance Money ................. 19 b. Permissible Extent of Forfeiture .......................................................... 27 ii. Law on the Alternative Relief of Refund of Earnest Money under Section 22 of the 1963 Act ........................................................................................ 35 G. CONCLUSION ................................................................................................ 42 1. Leave granted. 2. This appeal arises fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he balance sale consideration of Rs. 35,50,000/- within four months from the date of the ATS, pursuant to which the sale deed was to be executed. The contents of the said ATS are extracted hereinbelow: - "ADVANCE SALE AGREEMENT This Advance Sale Agreement is executed on this Twenty fifth day of July, Two Thousand Seven (25-07-2007) -BYSmt. R. Poornima, daughter of Late Rathnamma also wife of Sri M.L. Harsha, aged about 32 years, and Sri Lakshmisha, husband of Smt. R. Poornima, aged about 39 years, and the children of Smt. Poornima and Sri M.L. Harsha, 1) Kum. H.R. Anusha, aged about 7 years, 2) Chi. H. Amogham aged about 3 years, both are minors represented by their mother and natural guardian Smt. R. Poornima, all are residing at House No.588, Postal Colony, Visveshwaranagara Layout, Mysore City- IN FAVOUR OF: Sri K.R. Suresh, aged about 42 years, son of Sri Rudrappa, residing at K. Gollahalli Village, K. Gollahalli Post, Kengeri Hobli, Bangalore South Taluk. Whereas, the property mentioned in the schedule hereunder i.e Site bearing No.307, situated at Kengeri Ssatellite Town Layout, Kengeri Hobli, Bangalore South Taluk, the said property originally belonged to Smt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of said property except ourselves there are no any other title holders or successors, if any such dispute arisen in future the same will be solved by us out of our own expenses and for which we have agreed. In the event failure on your part to pay the remaining amount within stipulated period, the advance amount paid by you will be forfeited. In the event failure on our part to execute the sale deed, even though you are ready to pay the balance sale consideration and get registration of sale deed, in such an event we agreed to pay the double amount of the advance which you have paid as compensation. Hence, we have executed this Advance Sale Agreement by affixing our signature. SCHEDULE:- All that part and parcel of the site bearing No.307, 5th Main Road, Kengeri Satellite Town Layout, Kengeri Hobli, Bangalore South Taluk, now comes under Kengeri Town Municipal limits, old Khatha No.129, present khatha No.130, present property No.307, which comes within the limits of Bruhat Bangalore Mahanagara Paluk, bounded on the; East by: Road West by: Site No.317 & 318 North by: Site No.308 South by: Site No.306 As bounded above measuring East-West 60-0 (sixty) feet, No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsequent sale deed dated 15.02.2008 in favour of the defendant nos. 5 and 6 respectively is not binding on the plaintiff. 10. It is the case of the defendant nos. 1-4 that they were in urgent need of the sale consideration money to avail of the One-Time Settlement (for short, "OTS") benefit from the Indian Overseas Bank K.R. Mohalla, Mysore Branch which was time-bound for 3 months, thereby making time the essence of the contract. The defendant nos. 1-4 denied having ever agreed to produce the probate or the original title deeds as contended by the plaintiff. Furthermore, they have contended that owing to the plaintiff's non-performance of the contract, they suffered substantial losses. 11. Pursuant to this, the defendant nos. 1-4 terminated the ATS and forfeited the advance paid by the plaintiff, going by the express covenant of the ATS. According to the defendants, at no point of time during the validity of the ATS did the plaintiff convey or express his readiness and willingness to complete the transaction. The defendants have also asserted that the plaintiff instituted the suit long after termination of the ATS. 12. The defendant nos. 5 and 6 respectively in their written sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... underscored the settled law that a Will need not be registered and lack of such registration does not impute its authenticity, thus making the procurement of probate unnecessary. Additionally, there was nothing on record to indicate that the advocate for the bank insisted for a probate certificate. The plaintiff claimed to have forgotten the name of the said advocate and had no opinion in writing to rely upon. Further, neither the legal advisor nor DW2 (defendant no. 4) was examined on the issue of probate, leading to an adverse inference against the plaintiff. The Court held that in the absence of any recitals in the ATS requiring the defendants to furnish original title deeds to the bank within four months, the plea taken by the plaintiff was false, frivolous, and concocted. (iii) Thirdly, on the issue of readiness and willingness to perform, the Trial Court recorded that the plaintiff did not produce any bank passbook, account extracts, ITR or other documents, to establish that he had sufficient finances to pay the balance sale consideration within the stipulated four-month period. The plaintiff, in his oral evidence, admitted that he had no funds in his bank account and lack ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied in the ATS. Further, the Court took note of the fact that it was only after a lapse of three months from the expiry of the stipulated four-month period that the plaintiff issued legal notice dated 18.02.2008 to the defendant no.1 calling upon her to execute the ATS. The relevant observations read as under: "14. [...] There is no recital in the agreement of sale that the defendant No.1 was required to furnish the probate certificate from the competent Court before executing the sale deed in favour of the plaintiff upon receipt of the balance sale consideration. [...] In the absence of requirement for furnishing probate certificate, the contention of the plaintiff that the defendant No.1 failed to perform her part of the contract is not acceptable having regard to the fact that it was well within his knowledge that the defendant No.1 acquired the suit property by virtue of the will executed in her favour by her mother, and the same was acted upon and her name was entered in the concerned revenue records. 15. The sale transaction was required to be completed within four months from the date of execution of sale agreement. The plaintiff failed to perform his part of the contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espectively were deemed bona fide purchasers for value, in view of the fact that the sale deed dated 15.02.2008 was executed in their favour only after the expiry of the four-month period in the ATS. Additionally, it is an admitted position of the plaintiff that he had obtained the certified copy of the sale deed executed in favor of the defendants nos. 5 and 6 respectively at the time of filing of the suit. On account of the plaintiff's omission to challenge the said sale deed, the Court held that the suit was not maintainable against the defendant nos. 5 and 6 respectively. The relevant observations read as under: "19. The defendant No.1 in her reply notice dated 15.3.2008 -Ex.P.13 has stated that the sale agreement was terminated on the ground that the plaintiff has failed to perform his part of the contract by paying the balance sale consideration within the specified time vide letter. However, the defendant No.1 has not placed any documentary evidence to substantiate the said claim. Hence, it is held that the defendant No.1 has failed to prove that the sale agreement was terminated. 20. [...] The sale deed executed in favour of defendants No.5 and 6 after expiry of four m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing for the appellant/plaintiff, submitted that the defendant no. 1 failed to obtain the promised probate certificate with respect to the suit property despite multiple requests from the plaintiff. It was further submitted that the defendant no. 4 has specifically admitted that between 18.02.2008 and 20.02.2008, the plaintiff voluntarily offered to pay an additional Rs.10,00,000/- beyond the agreed sale consideration of Rs.55,50,000/-. The learned Senior Counsel contended that the aforesaid admission proved the readiness and willingness of the plaintiff to fulfill his part of the contract. 18. Mr. Nuli submitted that the defendant nos. 1-4, exhibiting mala fide intent, sold the suit property to the defendant nos. 5 and 6 respectively for Rs.38,40,000/- within just two months after the expiry of the stipulated four-month period. It was argued that the purported cancellation of the ATS was allegedly effected via a letter from the defendant nos. 1-4, though the said letter was never produced before the Trial Court. Further, he asserted that no prior notice had been served on the plaintiff before forfeiting the advance sale consideration or executing the sale deed in favour of the def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithout notice of the prior ATS in favour of the plaintiff. It was argued that the factum of the prior ATS was suppressed and could not be discovered even on thorough due diligence, considering that the ATS was unregistered. An encumbrance certificate was placed on record to substantiate the same, which did not reveal any prior agreement in relation to the Suit Property. 24. The learned Counsel argued that the defendant nos. 5 and 6 respectively issued a legal notice dated 05.05.2008 against defendant nos. 1-4 soon after receiving objections regarding transfer of Khata from Bruhat Bengaluru Mahanagara Palike (for short, "BBMP"). It was asserted that only in the reply dated 23.05.2008 to the said legal notice that the defendant nos. 5 and 6 respectively were informed about the prior ATS dated 25.07.2007 and the eventual lapse of the said ATS on 25.11.2007 due to the default on part of the plaintiff. 25. In the last, it was argued that it would be too much to ask the bona fide purchasers to refund Rs.20,00,000/- to the appellant/plaintiff. Such a liability ought to be fastened upon the party guilty of suppression, i.e. the respondent/defendant nos. 1-4. F. ANALYSIS 26. In view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "21. 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 that 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.'" (Emphasis supplied) 33. In the case of Videocon Properties Ltd. v. Bhalchandra Laboratories reported in (2004) 3 SCC 711, while assessing the difference between "advance" and "earnest", this Court took the view that the words used in the agreement alone cannot be determinative of the true nature of the amount advanced. Instead, the intention of the parties and the surrounding circumstances serve as more apt indicators. Further, the Court observed that earnest money fulfils a dual purpose: first, it operates as part-payment of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Privy Council in Har Swarup [(1926) 23 LW 172 : AIR 1926 PC 1] and Shree Hanuman Cotton Mills [(1969) 3 SCC 522], held that the forfeiture of the earnest money was legal. In V. Lakshmanan v. B.R. Mangalagiri [1995 Supp (2) SCC 33] this Court held as follows : (SCC p. 36, para 5) "5. 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 the respondents are 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." xx xx xx 15. The 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 double the amount, if it is so stipulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art, reiterated the distinction between "earnest" and "advance" in Central Bank of India v. Shanmugavelu, reported in (2024) 6 SCC 641, thus stating that "earnest" differs from "advance money", though the former can be treated as part-payment of the sale consideration if the contractual terms are duly honoured. In other words, earnest money is adjusted against the total sale consideration if the contract goes through. The relevant observations are reproduced hereinbelow: "84. The difference between an earnest or deposit and an advance part-payment of price is now well established in law. Earnest is something given by the promisee to the promisor to mark the conclusiveness of the contract. This is quite apart from the price. It may also avail as a part-payment if the contract goes through. But even so it would not lose its character as earnest, if in fact and in truth it was intended as mere evidence of the bargain. An advance is a part to be adjusted at the time of the final payment. If the promisee defaults to carry out the contract, he loses the earnest but may recover the part-payment leaving untouched the promisor's right to recover damages. [...]" (Emphasis supplied) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduced hereinbelow: "34. In order to consider the relevancy of time conditioned obligations, we may observe some basic principles: (a) Subject to the nature of contract, general rule is that promisor is bound to complete the obligation by the date for completion stated in the contract. [Refer to Percy Bilton Ltd. v. Greater London Council [Percy Bilton Ltd. v. Greater London Council, (1982) 1 WLR 794 (HL)] ] (b) That is subject to the exception that the promisee is not entitled to liquidated damages, if by his act or omissions he has prevented the promisor from completing the work by the completion date. [Refer Holme v. Guppy [Holme v. Guppy, (1838) 3 M & W 387 : 150 ER 1195] ] (c) These general principles may be amended by the express terms of the contract as stipulated in this case. 35. It is now settled that "whether time is of the essence in a contract", has to be culled out from the reading of the entire contract as well as the surrounding circumstances. Merely having an explicit clause may not be sufficient to make time the essence of the contract. As the contract was spread over a long tenure, the intention of the parties to provide for extensions surely re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for. [...]" 44. A conjoint reading of Section 74 of the 1872 Act and the principles underlying forfeiture clauses was undertaken in the case of Fateh Chand v. Balkishan Dass, reported in 1963 SCC OnLine SC 49. This Court held that Section 74 of the 1872 Act will apply to every covenant involving a penalty, whether it is for a future payment on breach of the contract or the forfeiture of a sum already paid. Ergo, a forfeiture clause in a contract would ordinarily fall within the ambit of the words "any other stipulation by way of penalty". Further, it was held that supplying evidence of a loss incurred by the vendor on account of the breach of contract by the buyer would be mandatory to justify forfeiture, and only a reasonable amount, commensurate with such loss, can be forfeited. The relevant observations are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forfeiture of earnest money is concerned, Section 74 of the 1872 Act will not apply. The relevant observations are reproduced hereinbelow: "7. The Attorney General appearing on behalf of the defendant has not challenged the plaintiff's right to forfeit Rs 1000 which were expressly named and paid as earnest money. He has, however, contended that the covenant which gave to the plaintiff the right to forfeit Rs 24,000 out of the amount paid by the defendant was a stipulation in the nature of penalty, and the plaintiff can retain that amount or part thereof only if he establishes that in consequence of the breach by the defendant, he suffered loss, and in the view of the Court the amount or part thereof is reasonable compensation for that loss. We agree with the Attorney General that the amount of Rs 24,000 was not of the nature of earnest money. The agreement expressly provided for payment of Rs 1000 as earnest money, and that amount was paid by the defendant. The amount of Rs 24,000 was to be paid when vacant possession of the land and building was delivered, and it was expressly referred to as "out of the sale price." If this amount was also to be regarded as earnest money, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Batra v. Sudhir Rawal, (2013) 1 SCC 345 : (2013) 1 SCC (Civ) 483] is that there lies a difference between forfeiture of any amount and forfeiture of earnest money with the former being a penal clause and the latter a general forfeiture clause. A clause providing for forfeiture of an amount could fundamentally be in the nature of a penalty clause or a forfeiture clause in the strict sense or even both, and the same has to be determined in the facts of every case keeping in mind the nature of contract and the nature of consequence envisaged by it. 82. Ordinarily, a forfeiture clause in the strict sense will not be a penal clause, if its consequence is intended not as a sanction for breach of obligation but rather as security for performance of the obligation. This is why Fateh Chand [Fateh Chand v. Balkishan Dass, 1963 SCC OnLine SC 49 : AIR 1963 SC 1405] Maula Bux [Maula Bux v. Union of India, (1969) 2 SCC 554] and Satish Batra [Satish Batra v. Sudhir Rawal, (2013) 1 SCC 345 : (2013) 1 SCC (Civ) 483] held that forfeiture of earnest money deposit is not a penal clause, as the deposit of earnest money is intended to signify assent of the purchaser to the contract, and its forfeitur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e respondents had suffered damages, firstly for one year they were prevented from enjoying the property and the appellant had cut off 150 fruit-bearing coconut trees and sugarcane crop was destroyed for levelling the land apart from cutting down other trees. Pending the appeal, the respondents sought for and were granted permission by the court for sale of the property. Pursuant thereto, they sold the land for which they could not secure even the amount under contract and the loss they suffered would be around Rs 70,000. Under those circumstances, their forfeiting the sum of Rs 50,000 cannot be said to be unjustified. The appeal is accordingly dismissed with costs." (Emphasis supplied) 50. We may as well refer to a recent judgment of this Court in Godrej Projects Development Ltd. v. Anil Karlekar, reported in 2025 SCC OnLine SC 222, wherein this Court examined one-sided and unconscionable forfeiture clauses. It was held that a forfeiture clause, if found to be unfair and unreasonable, cannot be enforced by this Court. Further, while citing the clause providing for "forfeiture of earnest money deposit" in Satish Batra (supra), it held that the said clause could not be said to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of his default. 52. Even, for argument's sake, if we have to apply the principle under Section 74 of the 1872 Act to the present case in line with Kailash Nath (supra), the forfeiture of the entire amount of advance money by the respondent nos. 1-4 would still be justified on the ground that there was breach of contract by the appellant, which led to financial losses for the respondent nos. 1-4. Such losses, as specifically pleaded and proved by the evidence led before the Trial Court, far exceeded the amount forfeited under the ATS, a position that was duly noted and accepted by the Trial Court. ii. Law on the Alternative Relief of Refund of Earnest Money under Section 22 of the 1963 Act 53. The High Court denied the relief of refund of advance money to the appellant herein, having regard of the fact that the appellant had not sought for an alternative prayer for refund of the advance sale consideration in the suit as mandated by Section 22(2) of the 1963 Act. 54. Before we proceed to answer the question formulated by us in para 27, we deem it necessary to examine Section 22 of the 1963 Act. It reads thus: "22. Power to grant relief for possession, partition, refund of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after the sale agreement, the Court, while refusing a decree for specific performance, ordered a refund of the earnest amount on the ground that the plaintiff did not suffer any loss, but had gained due to the default of the plaintiff. xx xx xx [s 22.7] Pleadings and Amendment to Pleadings Section 22 enacts a rule of pleading. It enables the plaintiff to ask for possession in the suit for specific performance and empowers the Court to provide, in the decree itself, that upon payment by the plaintiff of the consideration money within the given time, the defendant should execute the deed and put the plaintiff in possession. If the said relief is not claimed in the plaint, the Court shall permit the plaintiff at any stage of the proceedings, including execution proceedings, to amend the plaint on such terms as it deems proper. The purpose is to avoid multiplicity of suits. This provision overrides the provisions of Order VI, rule 17 of CPC, 1908. Omission to seek alternative relief is not a ground to reject the plaint. A plaintiff may amend the plaint to include a claim for refund to advance money paid to the defendant. The amendment may be made at any stage of the proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution proceedings. The relevant observations are reproduced hereinbelow : "22. The Bombay High Court in a judgment reported as Lotu Bandu Sonavane v. Pundalik Nimba Koli held that relief of possession is to be claimed "in an appropriate case". It means a case in which the relief does not necessarily flow from the decree for specific performance of the agreement of sale. If such a relief is ancillary to and necessarily flows from a decree for specific performance, then it is not necessary to specifically seek such a relief and the bar of S. 22(2) would not be attracted. If the defendant is in possession of the property agreed to be sold and the decree directs a specific performance of the agreement of sale, the defendant is bound to execute the sale deed as per the decree and to put the plaintiff in possession of the property as contemplated by S. 55(1)(f) of the Transfer of Property Act. In such a case it is not necessary to specifically claim the relief of possession in the suit. xx xx xx 9. The term "proceeding" is a very wide and comprehensive term and it includes execution proceeding also. The expression "at any stage of the proceeding" gives widest permission to the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty. In the suit for specific performance, the possession is inherent in such suit, therefore, we find that the decree-holders are in fact entitled to possession in pursuance of the sale deed executed in their favor." (Emphasis supplied) 58. It is thus a settled position of law that the plaint may be amended at any stage of the proceedings to enable the plaintiff to seek an alternative relief, including that of refund of earnest money, and the courts have been vested with wide judicial discretion to permit such amendments. However, under Section 22 of the 1963 Act, the courts cannot grant such relief suo moto, since the inclusion of the prayer clause remains a sine qua non for the grant of such a relief. In other words, when an "appropriate case" exists for seeking the said relief under this provision, it must be specifically sought either in the original plaint or by way of an amendment. This has been emphatically held by this Court in Desh Raj v. Rohtash Singh, reported in (2023) 3 SCC 714. The relevant observations are reproduced hereunder: "35. On a plain reading of the above-reproduced provision, we have no reason to doubt that the plaintiff in his suit for specific perf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to perform his part of the contract and, therefore, he was not entitled to claim the relief of specific performance of the contract against the defendants in relation to the suit land. It was also held that the plaintiff was not entitled to claim any relief of refund of earnest money because it was liable to be adjusted as agreed between them." (Emphasis supplied) 61. Applying these principles to the facts of the case at hand, we find ourselves unable to accept the submissions of the appellant that, in the absence of a specific prayer for the refund of advance money paid by them, Prayer (c) of the plaint which specifies the grant of "such other relief(s) as the Hon'ble Court deems fit in the facts and circumstances of the case in the interest of justice", can be construed to include a prayer for such an alternative relief. 62. The reasoning set forth in the case of Manickam (supra) as regards the relief of possession under Section 22(1)(a) of the 1963 Act, can be appropriately imported in the present case to say that the relief of refund of earnest money under Section 2 2(1)(b) is not a relief that automatically flows from a decree for specific performance of a sale agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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