Introduction
In a recent decision, the Supreme Court of India revisited the issue of when and to what extent can advance money be forfeited in a failed property sale transaction. The issue arose when a suit for specific performance was filed by K.R. Suresh ("Plaintiff"), who, unable to complete a property purchase within the agreed timeframe, sought either to compel performance or recover Rs. 20,00,000/- paid in advance for the purchase of the property. While his claim for specific performance was rejected by courts at all levels, his plea for a refund of the advance was ultimately denied by the Court, which held that the contract, as well as the applicable procedural framework, did not support the claim for recovery.
Background of the Dispute
The matter originated from an agreement of sale dated July 25, 2007 ("ATS"), for the sale of a residential plot in Kengeri Satellite Town, Bengaluru. The agreed total sale consideration was Rs. 55,50,000/-, out of which, the Plaintiff paid Rs. 20,00,000/- as advance. The ATS required the Plaintiff to pay the balance sale consideration of Rs. 35,50,000/- within 4 (four) months. It further stipulated that if the Plaintiff failed to pay the remaining amount within the stipulated timeframe, the advance would be forfeited. When the Plaintiff failed to pay the remaining amount, R. Poornima and others ("Defendants") sold the property to third-party purchasers.
The Plaintiff's case, filed in 2008, alleged that he was ready and willing to complete the purchase but was obstructed by the Defendants' failure to obtain probate for the unregistered will by which they claimed title. He also alleged collusion in the subsequent sale. However, both the trial court and the Karnataka High Court rejected the Plaintiff's arguments, holding that he had neither demonstrated readiness nor any legal basis for his insistence on probate.
Question Before the Supreme Court
By the time the case reached the Supreme Court, the central issue had been significantly narrowed. The main relief of specific performance was no longer under consideration. Instead, the Court limited itself to the question of whether the Plaintiff was entitled to a refund of the advance money, essentially, whether equity could rescue the Plaintiff, even though he was unable to perform his obligations under the contract.
Advance Money vs. Earnest Money
The Court first clarified the foundational distinction between advance money and earnest money. Although used interchangeably in many agreements, the two terms have distinct legal implications. Advance money is typically treated as part of the purchase price, while earnest money serves as a security deposit to bind the contract. The Court stated that contracts may stipulate the forfeiture of earnest money, provided the agreement includes a clear clause to that effect.
Citing precedents such as Shree Hanuman Cotton Mills v. Tata Air Craft Ltd.1 and Satish Batra v. Sudhir Rawal2, the Court held that the advance amount in this case constituted earnest money rather than a mere advance, as it was paid at the time of the ATS, intended as security, and subject to forfeiture upon default. Analysing the clause in the ATS, the Court observed that it was balanced and clearly stated that if the Defendants defaulted, they were required to refund double the amount. This symmetry, the Court noted, dispelled any claims of unfairness by the Plaintiff.
Is Forfeiture Penal? A Section 74 Analysis
The Court then addressed the issue of whether such a forfeiture could be viewed as penal under Section 74 of the Indian Contract Act, 1872 ("Contract Act"), which allows courts to strike down clauses that impose unreasonable penalties. The Court ultimately held against the Plaintiff. While acknowledging the debate over whether earnest money clauses fall within the ambit of Section 74 of the Contract Act, the Court emphasized that even if they did, the Defendants in this case had proven actual loss.
The Court observed that since the Plaintiff failed to pay on time, the Defendants were forced to conduct a distress sale at a lower price, losing both in value and time. This, the Court held, justified the forfeiture under any interpretation of Section 74 of the Contract Act. It also reaffirmed that a forfeiture clause tied to earnest money, if balanced and clearly stated, is not inherently penal.
Procedural Hurdle: Section 22 of the Specific Relief Act
The final and most decisive blow to the Plaintiff's claim came not from substantive law but from procedural rigor. Section 22(1)(b) of the Specific Relief Act, 1963 ("Specific Relief Act"), permits a plaintiff to seek alternative relief, including the refund of earnest money, only if such relief is specifically claimed in the plaint. This is more than a technicality as it ensures that all parties are properly notified and that the case can be adjudicated fairly.
In this case, the Plaintiff never claimed such a relief. He did not amend his plaint at the trial stage, nor during the first appeal. Although Section 22(2) of the Specific Relief Act includes a proviso that allows amendments at any stage of proceedings, the Plaintiff took no steps in that direction. Instead, he relied on a generic prayer for "such other reliefs as the court deems fit." The Court found this prayer insufficient. Citing Desh Raj v. Rohtash Singh3, the Bench emphasized that specific pleading is mandatory. Courts cannot grant such relief suo motu, especially when Section 22 of the Specific Relief Act makes explicit provision for when and how alternative reliefs may be granted.
Equity and Judicial Discretion: Limits and Purpose
The Court acknowledged that the law grants judges considerable discretion when dealing with equitable reliefs like specific performance. However, this discretion must operate within the statutory framework. If the law requires that alternative relief be pleaded, then no amount of judicial sympathy or equitable intent can override that condition. In other words, the Court is not a forum to salvage poorly pleaded cases, especially when procedural flexibility has already been built into the statutory design.
Moreover, the Court found that even on merits, there was no basis for refund. The Plaintiff had defaulted without justification, and the ATS's forfeiture clause was neither one-sided nor unconscionable. The Defendants had a legitimate commercial interest in binding the contract with earnest money, particularly since they were working under a time-sensitive settlement scheme with their bank.
Practical Lessons for Litigants and Practitioners
This ruling carries significant lessons for parties entering into real estate transactions, as well as for legal practitioners who represent them. First, the importance of contract clarity cannot be overstated as clauses relating to forfeiture must be drafted unambiguously. Second, plaintiffs in specific performance suits must be diligent in pleading every relief they wish to claim. Relying on generic prayers or raising new claims at the appellate stage is not a reliable litigation strategy.
This case serves as a caution to parties who enter into sale agreements without financial readiness or without properly understanding the conditions imposed by the opposing party. Courts have increasingly shown that they will not reward delay or default, particularly where the agreement is commercial in nature and the Plaintiff is not an unsophisticated party.
Ultimately, this judgment is not just a win for the Defendants but a reminder for all stakeholders in property transactions that the law respects diligence, clarity, and good faith, and does not support laxity, omission, or speculative litigation.
Footnotes
1 (1969) 3 SCC 522
2 (2013) 1 SCC 345
3 (2023) 3 SCC 714
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