Court allows forfeiture of earnest money

Is a seller of an immovable property entitled to retain an earnest money deposit on the transaction if the buyer of the property fails to complete the transaction?

Ruling in Satish Batra v Sudhir Rawal, the Supreme Court recently held that a seller is justified in retaining any advance paid as earnest money if the terms of the contract are “clear and explicit”. Clarifying that a payment cannot be forfeited if it is made as part payment of the purchase price and not intended as earnest money, the court stated that earnest money is paid as a guarantee for performance of the contract.

In November 2005, Batra agreed to sell a property to Rawal for a total consideration of ₹7 million (US$130,000) and Rawal paid 10% of it as earnest money. Rawal was to pay the remaining 90% of the consideration by March 2006 but failed to do so and as a result the sale deed was not executed. This prompted Batra to retain the earnest money. Rawal filed for its recovery in the district court, but was unsuccessful. On appeal Delhi High Court held that that Batra was entitled to retain only a nominal amount of ₹50,000. An appeal to the Supreme Court followed.

The update of court judgments is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@bhasinco.in or lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.