Court’s decision
The Delhi High Court partly allowed a first appeal arising from a summary suit under Order XXXVII of the Code of Civil Procedure, holding that while a seller is legally entitled to forfeit earnest money upon purchaser’s default, any additional amount paid beyond earnest money cannot be forfeited. Upholding the direction to refund ₹75 lakhs with interest, the Court set aside the condition requiring the seller to furnish security for the remaining ₹1.25 crore, ruling that such a direction was unjustified once the trial court itself had found the purchaser to be in default .
Court’s decision
The Division Bench reaffirmed settled law distinguishing earnest money from other payments made under an agreement to sell. While affirming the Single Judge’s direction to refund ₹75 lakhs paid additionally by the purchaser, the Court held that the seller was entitled to unconditional leave to defend the suit and could not be compelled to furnish security for the earnest money amount of ₹1.25 crore. The appeal was thus partly allowed, balancing contractual principles with procedural fairness in summary suits .
Facts
The dispute arose out of an Agreement to Sell executed in April 2013 for agricultural land situated in Najafgarh, Delhi. Under the agreement, the purchaser paid ₹1.25 crore as earnest money against a total sale consideration exceeding ₹10 crore, with the balance payable within 80 days. Subsequently, at the seller’s request, the purchaser paid an additional ₹75 lakhs in instalments. When the purchaser failed to pay the remaining consideration within the stipulated time, the seller issued a notice forfeiting the entire ₹2 crore and treating the agreement as discharged.
Aggrieved, the purchaser instituted a summary suit under Order XXXVII CPC seeking recovery of ₹2 crore with interest. The seller sought leave to defend, contending that time was the essence of the contract and that the entire amount stood validly forfeited. The Single Judge decreed refund of ₹75 lakhs and granted conditional leave to defend for the balance ₹1.25 crore, leading to the present appeal .
Issues
The principal issues before the Court were whether, upon purchaser’s default, the seller could forfeit amounts paid over and above earnest money, whether a summary decree for refund of such additional payment was legally sustainable, and whether the trial court was justified in directing the seller to furnish security as a condition for leave to defend despite prima facie finding default on the purchaser’s part.
Petitioner’s arguments
The seller contended that once the trial court concluded that the purchaser had defaulted, no decree for refund—summary or otherwise—could have been passed. It was argued that the additional ₹75 lakhs was also in the nature of security for performance and therefore liable to forfeiture. The seller further submitted that directing furnishing of security for ₹1.25 crore was manifestly erroneous when the court itself had found the purchaser in breach of contractual obligations.
Respondent’s arguments
The purchaser argued that forfeiture in law is confined strictly to earnest money and that additional payments cannot be appropriated unless expressly agreed. Relying on Supreme Court precedents, it was contended that even earnest money cannot be forfeited mechanically and must satisfy the test of reasonableness. It was submitted that the seller had unjustly retained ₹2 crore without concluding the sale and that refund ought to have been ordered for the entire amount.
Analysis of the law
The Court examined the jurisprudential distinction between earnest money and part payment. Earnest money is a security deposit to assure performance and is liable to forfeiture upon default. However, amounts paid in excess of earnest money do not automatically acquire that character unless the contract explicitly so provides. The Court reiterated that forfeiture clauses must be strictly construed and cannot be expanded beyond their contractual and legal contours.
Precedent analysis
The Division Bench relied on authoritative Supreme Court decisions including Satish Batra v. Sudhir Rawal, Videocon Properties Ltd. v. Dr. Bhalchandra Laboratories, and Desh Raj v. Rohtash Singh, which consistently hold that forfeiture is confined to earnest money. The Court distinguished Kailash Nath Associates v. DDA, noting that it arose from a public auction where time was not treated as the essence and defaults were attributable to the authority, making it inapplicable to a private bilateral agreement of sale .
Court’s reasoning
Applying these principles, the Court held that ₹1.25 crore was clearly identified as earnest money in the agreement, while ₹75 lakhs was a subsequent additional payment without any stipulation converting it into earnest money. Consequently, forfeiture of ₹75 lakhs was impermissible, justifying the decree for its refund with interest. However, the Court found no legal basis for compelling the seller to furnish security for the earnest money amount once purchaser’s default was prima facie established, particularly when statutory protection under the Transfer of Property Act was available to the purchaser .
Conclusion
The appeal was partly allowed. The direction requiring the seller to furnish security of ₹1.25 crore as a condition for leave to defend was set aside, and unconditional leave to defend was granted. The decree directing refund of ₹75 lakhs with interest was affirmed. The judgment thus harmonises contractual law principles with procedural safeguards under summary suits.
Implications
This ruling reinforces clarity in property transaction disputes by reaffirming that forfeiture is strictly limited to earnest money. It cautions trial courts against imposing onerous conditions while granting leave to defend when default is prima facie established. For real estate transactions, the judgment underscores the importance of precise drafting of payment clauses and reinforces judicial reluctance to allow unjust enrichment through expansive forfeiture claims.
Case law references
- Satish Batra v. Sudhir Rawal – Clarified the legal nature of earnest money and conditions for forfeiture.
- Videocon Properties Ltd. v. Dr. Bhalchandra Laboratories – Distinguished earnest money from part payment under agreements to sell.
- Desh Raj v. Rohtash Singh – Reiterated that purchaser’s default results in forfeiture of earnest money alone.
- Kailash Nath Associates v. Delhi Development Authority – Distinguished as a public auction case where forfeiture was held unjustified.
FAQs
1. Can a seller forfeit all amounts paid if a buyer defaults under an agreement to sell?
No. Only earnest money can be forfeited. Additional payments must be refunded unless the contract clearly provides otherwise.
2. What is the difference between earnest money and part payment?
Earnest money is a security deposit ensuring performance, while part payment is merely an advance towards consideration and is generally refundable.
3. Can courts impose security conditions while granting leave to defend in summary suits?
Yes, but such conditions must be reasonable. They are unjustified where the court itself finds prima facie default on the plaintiff’s part.
