S Murlidharan

‘Earnest money can be forfeited on non-performance if it was given by way of performance guarantee’

S. Murlidharan | Updated on October 26, 2012

Whether the amount deposited with the seller of a property is earnest money capable of being forfeited in the case of non-performance by the buyer, would depend upon the language of the contract. If the contract says explicitly that the deposit made is contemplated to be a performance guarantee and no less, it can be forfeited by the seller in the event of non-performance by the buyer.

The Supreme Court in Satish Batra v. Sudhir Rawal laid down the following ingredients which must be present in the contract so as to enable the seller to forfeit the deposit.

(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 the 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.

In the case on hand, the petitioner seller had entered into a sale agreement with the respondent to sell a property for Rs 70 lakh with the buyer making a deposit of Rs 7 lakh liable to be forfeited if he does not keep his part of the promise. On the flip side, it was also agreed that the seller would pay double this amount i.e. Rs 14 lakh to the buyer in case he defaults. On the facts of the case the Supreme Court had no hesitation in overturning the Delhi High Court verdict and instead upholding the claim of the petitioner to forfeit Rs 7 lakh deposited with him as earnest money.

(The author is a New Delhi-based chartered accountant)

Published on October 26, 2012

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