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2025 Supreme(SC) 763

SUPREME COURT OF INDIA
J.B. PARDIWALA, R. MAHADEVAN, JJ.
K.R. Suresh – Appellant
Versus
R. Poornima & Ors. – Respondents
Civil Appellate Jurisdiction Civil Appeal No. 5822 of 2025 @Special Leave Petition (Civil) No. 5630 of 2023
Decided On : 02-05-2025

Advocates appeared:
For the Petitioner(s): Mr. Anand Sanjay M Nuli, Sr. Adv. Mr. Suraj Kaushik, Adv. Mr. Dharam Singh, Adv. Mr. Nanda Kumar K B, Adv. Ms. Akhila Wali, Adv. Mr. Akash Kukreja, Adv. Mr. Abhishek Kanyalur, Adv. Ms. Divya Sinha, Adv. For M/s.Nuli & Nuli, AOR
For the Respondent(s): Ms. Supreeta Sharanagouda, AOR Mr. Sharanagouda Patil, Adv. Mr. Jyotish Pandey, Adv. Mr. Yash, Adv. Mr. Saket Gogia, Adv. Ms. Gauri Pande, Adv. Ms. Sheetal Maggon, Adv. Mr. Mansingh, Adv. Mr. Dhawesh Pahuja, AOR

IMPORTANT POINTS
(1) Agreement to Sell – Suit for Specific Performance – Plaint may be amended at any stage of proceedings to enable plaintiff to seek alternative relief, including that of refund of earnest money and courts have been vested with wide judicial discretion to permit such amendments.
(2) Advance Money and Earnest Money – “Earnest” differs from “advance money”, though former can be treated as part-payment of sale consideration if contractual terms are duly honoured.
(3) Breach of contract – Compensation must be reasonable and it cannot, in any circumstance, exceed amount stipulated in contract.

Headnote:

(A) Specific Relief Act, 1963 – Sections 16(c) and 22 – Civil Procedure Code, 1908 – Order VI Rule 17 – Agreement to Sell – Suit for Specific Performance – Refund of earnest money as alternate relief – Defendant no. 1 acquired absolute title over suit property by way of unregistered Will executed by her late mother – Expression “at any stage of the proceeding” has been judicially interpreted to include appellate stage as well – Plaint may be amended at any stage of proceedings to enable plaintiff to seek alternative relief, including that of refund of earnest money and courts have been vested with wide judicial discretion to permit such amendments – However, under Section 22 of 1963 Act, courts cannot grant such relief suo moto, since inclusion of prayer clause remains a sine qua non for grant of such a relief – When “appropriate case” exists for seeking said relief under this provision, it must be specifically sought either in original plaint or by way of an amendment – Law contained under Section 22(2) of 1963 Act is adequately broad and flexible to allow appellant to seek amendment of plaint for said relief, even at appellate stage – However, appellant never prayed for refund of advance money – Forfeiture of advance money by respondents was justified. (Paras 56, 58, 63, 64 and 65)

(B) Words and Phrases – Advance Money and Earnest Money – Word “advance” means money in whole or in part, forming consideration of an agreement paid before same is completely payable – On other hand, word “earnest” stands for a sum of money given for the purpose of binding a contract, which is forfeited if contract does not go off and adjusted in price if contract goes through – “Earnest” differs from “advance money”, though former can be treated as part-payment of sale consideration if contractual terms are duly honoured – Earnest money is adjusted against total sale consideration if contract goes through. (Paras 31 and 36)

(C) Contract Act, 1872 – Section 74 – Breach of contract – Compensation must be reasonable and it cannot, in any circumstance, exceed amount stipulated in contract – Section 74 of 1872 Act will apply to every covenant involving a penalty, whether it is for a future payment on breach of contract or forfeiture of a sum already paid – Forfeiture of earnest money is not deemed as penal and Section 74 of 1872 Act will only apply where forfeiture is in nature of a penalty – Proof of actual damage or loss is a sine qua non for invoking Section 74 and thereby, only a reasonable amount will be permissible for forfeiture upon breach of contract. (Paras 43, 44, 46, 47 and 48)

Facts of the case:

Present appeal arises from judgment and order passed by High Court of Karnataka at Bengaluru dated 05.08.2021 in R.F.A. No. 386/2013 (SP) by which High Court dismissed appeal preferred by appellant (original plaintiff) and thereby affirmed the judgment and order dated 24.11.2012 passed by the Court of V Additional City Civil and Sessions Judge at Bengaluru City, dismissing O.S. No. 3559/2008 instituted by appellant herein for specific performance of contract.

Findings of Court:

Forfeiture of advance money by respondent nos. 1-4 was justified. In such circumstances, Court not inclined to grant relief of refund of advance money to the appellant.

Result : Appeal dismissed.

Legal Category Hierarchy

  • civil law
    • property law
      • transfer of property
        • agreement to sell (Para 4, 5, 29)
        • specific performance (Para 9, 13, 16, 54)
    • contract law
      • breach of contract
        • earnest money and forfeiture (Para 30, 31, 34, 37, 42)
        • liquidated damages and penalty (Para 43, 44, 47, 51)
      • interpretation of contracts
        • time as essence of contract (Para 14, 38, 39, 40)
    • practice and procedure
      • pleadings
        • amendment of plaint (Para 55, 56, 58)

Table of Contents

1. Suit for specific performance of agreement to sell immovable property — default in payment of balance consideration — forfeiture of advance money — subsequent sale to third parties. (Para 4 , 5 , 6 , 7 , 8 , 9 , 10 , 11 , 12 )

2. Appellant claims failure to provide probate and readiness to pay; Respondents argue time was essence, default occurred, and forfeiture was contractually valid. (Para 17 , 18 , 19 , 20 , 21 , 22 , 23 , 24 , 25 )

3. Advance money was essentially earnest money as a guarantee for performance; time was essence due to urgency; forfeiture was lawful and not penal. (Para 29 , 30 , 31 , 32 , 33 , 34 , 35 , 36 , 37 , 38 , 39 , 40 , 41 , 42 , 43 , 44 , 45 , 46 , 47 , 48 , 49 , 50 , 51 , 52 )

4. Earnest money is forfeitable upon buyer's default; refund under Section 22, Specific Relief Act, requires a specific prayer or amendment of the plaint. (Para 37 , 51 , 58 , 59 , 61 , 62 )

5. Appeal dismissed — forfeiture of advance money upheld — refund denied due to lack of specific prayer in the plaint. (Para 64 , 65 )

6. What is the legal distinction between advance money and earnest money regarding forfeiture?

Advance money is part-payment of the price, while earnest money is a guarantee for the performance of the contract. Only earnest money, intended as a pledge for due performance, can be forfeited upon the buyer's default if the contract explicitly provides for such forfeiture. (Para 30 , 31 , 33 , 34 , 36 , 37 )

7. Does Section 74 of the Indian Contract Act, 1872 apply to the forfeiture of earnest money?

Forfeiture of a reasonable amount of earnest money is generally not considered a penalty and thus Section 74 does not apply. However, if the forfeiture is penal in nature or unconscionable, the court may intervene to ensure reasonable compensation is awarded. (Para 43 , 44 , 45 , 46 , 47 , 51 )

8. Can a court grant a refund of earnest money under Section 22 of the Specific Relief Act, 1963, without a specific prayer in the plaint?

No. A specific prayer for the refund of earnest money is a sine qua non for granting such relief. While the plaintiff may amend the plaint at any stage to include this claim, the court cannot grant the refund suo motu. (Para 54 , 58 , 59 , 61 , 62 )

9. How is it determined whether time is the essence of a contract for the sale of immovable property?

There is no presumption that time is the essence. It is inferred from the express terms of the contract, the nature of the property, and surrounding circumstances, such as the object of making the contract. (Para 38 , 39 , 40 )

JUDGMENT :

J.B. PARDIWALA, J.

For the convenience of exposition, this judgment is divided into the following parts: -

INDEX

A.

FACTUAL MATRIX

i.

Judgment of the Trial Court

B.

IMPUGNED JUDGMENT

C.

SUBMISSIONS ON BEHALF OF THE APPELLANT

D.

SUBMISSIONS ON BEHALF OF THE RESPONDENT NOS. 1-4

E.

SUBMISSIONS ON BEHALF OF THE RESPONDENT NOS. 5-7

F.

ANALYSIS

i.

Validity of the Forfeiture of Advance Money

a.

Difference between Earnest Money and Advance Money

b.

Permissible Extent of Forfeiture

ii.

Law on the Alternative Relief of Refund of Earnest Money under Section 22 of the 1963 Act

G.

CONCLUSION

1. Leave granted.

2. This appeal arises from the judgment and order passed by the High Court of Karnataka at Bengaluru dated 05.08.2021 in R.F.A. No. 386/2013 (SP) (“impugned judgment”) by which the High Court dismissed the appeal preferred by the appellant (original plaintiff) and thereby affirmed the judgment and order dated 24.11.2012 passed by the Court of V Additional City Civil and Sessions Judge at Bengaluru City, dismissing O.S. No. 3559/2008 instituted by the appellant herein for the specific performance of contract.

A. FACTUAL MATRIX

3. The position of the parties before this Court, the High Court and before the Trial Court is tabulated as follows: -

BEFORE THIS COURT

BEFORE THE HIGH COURT

BEFORE THE TRIAL COURT

REMARKS

Appellant

Appellant

Plaintiff

Original Purchaser/Agreement of Sale Holder

Respondent No. 1

Respondent No. 1

Defendant No. 1

Original Owner (by way of an unregistered Will)

Respondent No. 4

Respondent No. 4

Defendant No. 4

Husband of respondent no. 1 and GPA Holder

Respondent Nos. 2-3

Respondent Nos. 2-3

Defendant Nos. 2-3

Minor children of respondent no. 1 and respondent no. 4

Respondent No. 5

Respondent No. 5

Defendant No. 5

Subsequent Purchaser (wife of defendant no. 6)

Srinivas S.

-

Defendant No. 6

Subsequent Purchaser (Deceased through his LRs)

Respondent Nos. 6 and 7

Respondent Nos. 6(a) and 6(b)

-

Legal heirs of defendant no. 6

For the sake of convenience, the parties shall be referred to in terms of their status before the Trial Court.

4. The dispute arises from a claim for specific performance of the agreement of sale (hereinafter referred to as “ATS”) dated 25.07.2007 in respect of the property bearing Site No.307, situated at Kengeri Satellite Town Layout, Kengeri Hobli, Bangalore South Taluk (hereinafter referred to as “suit property”). The defendant no. 1 acquired absolute title over the suit property by way of an unregistered Will dated 12.11.2002 executed by her late mother.

5. The defendant nos. 1-4 executed an ATS dated 25.07.2007 in favor of the plaintiff for the purchase of the Suit Property for total sale consideration of Rs.55,50,000/-. The plaintiff issued two cheques dated 16.07.2007 of the amount of Rs.10,00,000/- each towards part payment of the sale consideration, the receipt of which was duly acknowledged by the defendant no. 1. The said ATS stipulated that the sale transaction shall be completed by payment of the 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) -BY-

Smt. 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

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