Supreme Court Upholds Forfeiture Of Advance Money | Time Held As Essence Of Contract | No Refund Without Alternative Relief Plea
Kiran Raj
The Supreme Court of India, in a judgment delivered by a Division Bench comprising Justice J.B. Pardiwala and Justice R Mahadevan, declined to grant specific performance in a property sale agreement dispute and upheld the forfeiture of advance money by the seller. The judgment arose from a civil appeal challenging concurrent findings of the Karnataka High Court and the Trial Court. The Court confined itself solely to the question of refund of advance money in light of its prior order dated 20.03.2023.
The appellant had sought specific performance of a sale agreement for a property in Kengeri Satellite Town Layout, Bangalore, or alternatively, a refund of advance money. The Bench stated that the advance money of Rs.20,00,000/- paid by the appellant was liable to forfeiture under the express terms of the contract due to the buyer’s failure to pay the remaining sale consideration within the agreed four-month period.
The dispute arose from an agreement of sale (referred to as ATS) dated 25.07.2007 between the appellant (original plaintiff) and defendant nos. 1-4 for the purchase of Site No. 307 at Kengeri Satellite Town Layout for a total consideration of Rs.55,50,000/-. The plaintiff paid an advance of Rs.20,00,000/- via two cheques, each of Rs.10,00,000/-. The balance amount of Rs.35,50,000/- was to be paid within four months.
The ATS included a forfeiture clause: "In the event failure on your part to pay the remaining amount within stipulated period, the advance amount paid by you will be forfeited. In the event failure on our part to execute the sale deed, even though you are ready to pay the balance sale consideration and get registration of sale deed, in such an event we agreed to pay the double amount of the advance which you have paid as compensation."
The plaintiff later sought a bank loan, and the bank requested the original title documents and probate of the Will under which defendant no. 1 claimed ownership. Alleging non-cooperation by the defendants in procuring the probate, the plaintiff issued a legal notice dated 18.02.2008 asserting readiness to pay the balance.
However, the defendants denied these allegations in a reply dated 15.03.2008, stating that the ATS was cancelled and the advance forfeited due to default. The plaintiff then filed a suit for specific performance and a declaration that a subsequent sale deed dated 15.02.2008 executed in favour of defendant nos. 5 and 6 (alleged bona fide purchasers) was not binding.
The Trial Court dismissed the suit on 24.11.2012, holding that:
- Time was the essence of the contract due to the seller’s urgent need for funds.
- The Will need not be probated under law.
- The plaintiff failed to prove readiness and willingness to pay within time.
- The advance amount was liable to forfeiture under contract.
The High Court upheld these findings in R.F.A. No. 386/2013, observing that the plaintiff did not seek refund under Section 22 of the Specific Relief Act and had no evidence of financial capacity to perform his obligations.
The Supreme Court recorded that the amount termed as "advance money" in the ATS functioned as "earnest money", payable at the time of execution and liable to forfeiture on breach. It noted:
"The amount of Rs.20,00,000/-, termed as 'advance money' in the ATS, was essentially 'earnest money'. It was meant to be adjusted against the total sale consideration... and was liable to be forfeited in the event that the transaction fell through by reason of the default on part of the purchaser."
Citing precedents including Satish Batra v. Sudhir Rawal, Shree Hanuman Cotton Mills v. Tata Air Craft Ltd., and Videocon Properties Ltd. v. Bhalchandra Laboratories, the Court drew a clear distinction between advance and earnest money:
"Earnest money is paid as a pledge for the due performance of the contract. An amount which is in the nature of an 'advance' or serves as part-payment... cannot be forfeited unless it is a guarantee for due performance of the contract."
On the applicability of Section 74 of the Indian Contract Act, the Court clarified:
"Section 74 will not apply to earnest money deposits unless the forfeiture is in the nature of a penalty. A forfeiture clause intended as a deterrent for non-performance of the agreement is not penal in the ordinary sense."
The Court recorded that the plaintiff failed to establish readiness and willingness and did not seek extension or make payments within time. Further, no prayer was made for refund of the forfeited sum as required under Section 22 of the Specific Relief Act: "In the absence of a specific claim for refund of advance money, the plaintiff was not entitled to such refund."
The Supreme Court concluded that the forfeiture of the advance amount by respondent nos. 1–4 was lawful and that the appellant had no right to claim a refund. It recorded:
"For all the foregoing reasons, we have reached the conclusion that the forfeiture of advance money by the respondent nos. 1-4 was justified. In such circumstances, we are not inclined to grant the relief of refund of advance money to the appellant."
"We are unable to find any kind of perversity or illegality in the impugned judgment passed by the High Court. As a result, the present appeal stands dismissed."
"Parties shall bear their own costs. Pending application(s), if any, stand disposed of."
Advocates Representing the Parties:
For the Petitioners: 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 Respondents: 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
Case Title: K.R. Suresh v. R. Poornima & Ors.
Neutral Citation: 2025 INSC 617
Case Number: Civil Appeal No. 5822 of 2025 @ SLP (Civil) No. 5630 of 2023
Bench: Justice J.B. Pardiwala and Justice R Mahadevan
[Read/Download order]
