Whilst delving into the validity of forfeiture of "advance money" advanced by the purchaser as part-payment towards sale of property, the Supreme Court in K.R. Suresh v. R. Poornima, Civil Appeal No. 5822 of 2025, observed that the forfeiture of advance money as part of earnest money is justified only if terms of the contract are clear and explicit in that regard. The Supreme Court also examined the distinction between "earnest money" and "advance money".
Brief Facts
One R. Poornima (Respondent No. 1 therein) acquired absolute title over a property situated at Hubli, Bangalore ("Suit Property") by way of an unregistered Last Will & Testament dated November 12, 2002 executed by her late mother.
One Mr. K.R. Suresh (the Appellant therein) was keen on purchasing the Suit Property, a sale agreement dated July 25, 2007 ("Sale Agreement"), was executed by and between the Appellant and Respondent Nos. 1 – 4 for selling the Suit Property for a total sale consideration of Rs. 55,50,000/- (Rupees Fifty-Five Lakhs and Fifty Thousand). The Appellant made payment of Rs. 20,00,000 (Rupees Twenty Lakhs) ("Advance Amount") as part payment of the total consideration amount, the receipt of which was duly acknowledged by Respondent No. 1. The Sale Agreement stipulated that the sale transaction shall be completed by payment of the balance sale consideration of Rs. 35,50,000/- (Rupees Thirty-Five Lakhs Fifty Thousand) within 4 (four) months from the date of the Sale Agreement, pursuant to which the sale deed was to be executed.
Upon Appellant's failure to remit the remaining amount [viz Rs. 35,50,000 (Rupees Thirty-Five Lakhs Fifty Thousand)] to the Respondents within the stipulated period as set out in the Sale Agreement, the Respondents terminated the agreement and forfeited the Advance Amount. It was contended by the Respondent Nos. 1 – 4 that time was of essence as the Respondents were in urgent need of funds in order to execute a one-time settlement with a certain lender. It was also contended by the Respondents that the Appellant was conscious of this position.
Aggrieved by the foregoing, the Appellant filed a suit before the Additional City Civil and Sessions Judge at Bengaluru City ("Trial Court") inter alia seeking specific performance of the Sale Agreement.
The Trial Court dismissed the Appellant's suit, inter alia holding that the Advance Amount being security for performance was rightfully forfeited by the Respondents due to the Appellant's failure to perform his contractual obligations and the resulting losses to the Respondents. The Appellant preferred an appeal before the Karnataka High Court, which was subsequently dismissed thereby affirming the Trial Court's findings. Aggrieved, the Appellant challenged the judgement of the Karnataka High Court before the Supreme Court.
Issues
1. Whether "advance money" as part of "earnest money" was lawfully / rightfully forfeited?
2. Whether Appellant was entitled to relief under Section 22 of the Specific Relief Act ("SRA") without an express prayer to that effect?
Findings of the Apex Court
Dismissing the appeal, the Supreme Court, inter-alia, went on to make the following observations:
1. The forfeiture of "advance money" as part of "earnest money" was justified if the terms / intention of the contract was clear/ explicit to that effect
a. The Supreme Court observed that an amount which is in nature of an 'advance' serves as part-payment of the purchase price and cannot be forfeited, unless the terms of the contract explicitly stipulates that the amount is a guarantee for due performance of the contract intending to bind the contract and/ or express the willingness of the buyer.
b. The Supreme Court further remarked that a forfeiture of 'advance money' as part of earnest money can only be justified if the terms of the contract are clear and explicit to that effect. In other words, if the contract explicitly set out the intention of the parties to treat the advance amount as a guarantee for due performance of the contract, the amount shall in essence be treated as 'earnest money' and the forfeiture clause shall apply.
c. Relying on settled jurisprudence, the Supreme Court emphatically distinguished between 'earnest money' and 'advance money'. The Supreme Court held that, 'earnest money' is paid as a pledge for due performance of the contract and may be forfeited by the seller on account of the buyer's default/ failure to perform the contract.
d. Examining the facts of the present case, the Supreme Court observed that the Advance Amount was essentially 'earnest money' intended for guaranteeing due performance of the contract. This is because the Advance Amount was paid at the very execution of the Sale Agreement. The Advance Amount was meant to be adjusted against the total sale consideration of Rs. 55,50,000 (Rupees Fifty-Five Lakhs and Fifty Thousand) if the transaction went through, which is evident from the clause that states the balance sale consideration to be as Rs. 35,50,000 (Rupees Thirty-Five Lakhs Fifty Thousand). Further, it was liable to be forfeited in the event that the transaction fell through by reason of the default on part of the purchaser. Consequently, when the appellant-purchaser failed to comply with the contractual stipulation of paying the balance sale consideration within a period of four months from the date of the agreement, Respondent Nos. 1 -4 were justified in forfeiting the advance money.
e. Considering the intention of the parties and the terms of the Sale Agreement, the Apex Court inferred that the inclusion of the forfeiture clause in the Sale Agreement was intended to bind the contracting parties and ensure the due performance of the contract. This is particularly significant given the stipulated four-month period for completing the sale transaction and the primary object of executing the Sale Agreement viz. being the urgency of Respondent Nos. 1 -4 regarding the OTS with the lender, which was known to the Appellant, as recorded by the Trial Court. The findings of the Trial Court and the High Court affirming that time was of the essence, further substantiate the said intent.
2. The Appellant was not entitled to refund of the Advance Amount as 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 SRA
a. The Supreme Court observed that as per Section 22 of SRA, a 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, the Courts cannot grant such relief suo motu, since the inclusion of the prayer clause remains a sine qua non for the grant of such 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.
b. The Supreme Court went on to hold that the law contained under Section 22(2) of SRA is adequately broad and flexible to allow the Appellant to seek an amendment of the plaint for the said relief, even at the appellate stage. However, no such application for an amendment of the plaint was moved either before the trial court or during the course of the first appeal before the High Court. The Court observed that as the Appellant never prayed for the refund of the Advance Amount as warranted under Section 22, the Appellant was not entitled to the refund on this ground as well.
Please find a copy of the judgement, here.
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