Date of the Judgment: May 02, 2025
Judges: J.B. Pardiwala, J., R. Mahadevan, J.
Can a seller forfeit advance money if a buyer fails to complete a property purchase? The Supreme Court of India addressed this question in K.R. Suresh vs. R. Poornima, a case concerning the specific performance of a contract. The core issue revolved around the validity of forfeiting Rs. 20,00,000, paid as “advance money,” when the buyer failed to pay the balance within the agreed timeframe. The judgment was delivered by a two-judge bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan.
Case Background
The case originates from a dispute over an agreement of sale (ATS) dated July 25, 2007, concerning property Site No. 307 in Kengeri Satellite Town Layout, Bangalore. R. Poornima (Defendant No. 1) claimed ownership of the property through an unregistered Will dated November 12, 2002, from her mother.
On July 25, 2007, R. Poornima and others (Defendant Nos. 1-4) entered into an ATS with K.R. Suresh (Plaintiff) for a total sale consideration of Rs. 55,50,000. The plaintiff issued two cheques, each for Rs. 10,00,000, dated July 16, 2007, as part payment, which was duly acknowledged. The agreement stipulated that the sale must be completed within four months from the ATS date upon payment of the remaining Rs. 35,50,000.
The ATS contained the following key terms:
“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 No.588, Postal Colony, Visveshwaranagara Layout, Mysore City – IN FAVOUR OF: Sri K.R. Suresh, aged about 42 years, son of Sri Rudrappa, residing at K. Gollahalli Village, K. Gollahalli Post, Kengeri Hobli, Bangalore South Taluk. Whereas, the property mentioned in the schedule hereunder i.e Site bearing No.307, situated at Kengeri Ssatellite Town Layout, Kengeri Hobli, Bangalore South Taluk, the said property originally belonged to Smt. Rathnamma, the mother of Smt. R. Poornima, wh ich is her self -acquired property… In such a way we are in possession and enjoyment of the schedule property and we are in need of funds to meet our urgent necessities, hence we have sold the schedule property to you for total sum of Rs.55,50,000/ (Rupees Fifty -five lakhs Fifty Thousand only), out of the sale consideration Rs.20,00,000/ – (Rupees Twenty Thousand only) I have received advance as hereunder… The remaining amount of Rs.35,50,000/ – (Rupees Thirty -Five Lakhs Fifty Thousand only) we have agreed to receive the same at the time of registration. Within 4(four) months by paying the balance amount to us you can get registered sale deed either to your name or to the name of person as suggested by you… 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 considera tion 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. Hence, we have executed this Advance Sale Agreement by affixing our signature.”
Timeline:
| Date | Event |
|---|---|
| November 12, 2002 | R. Poornima’s mother executes an unregistered Will in her favor. |
| July 16, 2007 | K.R. Suresh issues two cheques of Rs. 10,00,000 each to R. Poornima as part payment. |
| July 25, 2007 | Advance Sale Agreement (ATS) executed between K.R. Suresh and R. Poornima & Ors. |
| September 20, 2007 | K.R. Suresh approaches the bank for a loan and is advised to secure original title documents and a probate certificate. |
| September 20, 2007 – February 18, 2008 | K.R. Suresh claims to have repeatedly approached R. Poornima & Ors., expressing readiness to complete the sale. |
| February 15, 2008 | R. Poornima & Ors. execute a sale deed in favor of Defendant Nos. 5 and 6. |
| February 18, 2008 | K.R. Suresh issues a legal notice to R. Poornima & Ors., calling upon them to execute the sale deed. |
| March 15, 2008 | R. Poornima replies to the legal notice, stating the advance amount is forfeited and the ATS is cancelled. |
| May 05, 2008 | Defendant Nos. 5 and 6 issue a legal notice against Defendant Nos. 1-4 regarding the transfer of Khata. |
| May 23, 2008 | Defendant Nos. 5 and 6 are informed about the prior ATS and its lapse. |
| 2008 | K.R. Suresh institutes O.S. No. 3559/2008 before the Trial Court. |
| November 24, 2012 | Trial Court dismisses O.S. No. 3559/2008. |
| August 05, 2021 | High Court of Karnataka dismisses R.F.A. No. 386/2013 (SP), affirming the Trial Court’s judgment. |
| March 20, 2023 | Supreme Court limits consideration to the issue of refund of earnest money. |
| May 02, 2025 | Supreme Court dismisses the appeal, upholding the forfeiture of advance money. |
Course of Proceedings
The plaintiff, K.R. Suresh, filed O.S. No. 3559 of 2008 in the Trial Court, seeking specific performance of the ATS, possession of the property, and a declaration that the subsequent sale deed to Defendant Nos. 5 and 6 was not binding. The Defendant Nos. 1-4 contended that time was of the essence due to an urgent need for funds to avail a One-Time Settlement (OTS) from a bank. They denied agreeing to produce a probate certificate or original title deeds.
Defendant Nos. 5 and 6 claimed to be bona fide purchasers for a consideration of Rs. 38,40,000 through a registered sale deed dated February 15, 2008, without knowledge of the prior ATS.
Legal Framework
Several legal provisions are central to this case:
- Section 16(c) of the Specific Relief Act, 1963: Requires the plaintiff to prove readiness and willingness to perform the contract.
- Section 19(b) of the Specific Relief Act, 1963: Protects the rights of bona fide purchasers without notice of the original contract.
- Section 22 of the Specific Relief Act, 1963: Deals with the power of the court to grant relief for possession, partition, refund of earnest money, etc. It states that “No relief under clause (a) or clause (b) of sub -section (1) shall be granted by the court unless it has been specifically claimed”.
- Section 74 of the Indian Contract Act, 1872: Concerns compensation for breach of contract where a penalty is stipulated. It states that “When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach…the party complaining of the breach is entitled to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named”.
Arguments
Appellant (Plaintiff) Arguments:
- Defendant No. 1 failed to obtain the promised probate certificate despite requests.
- Defendant No. 4 admitted that the plaintiff offered an additional Rs. 10,00,000, proving readiness and willingness.
- The sale to Defendant Nos. 5 and 6 shortly after the four-month period indicated mala fide intent.
- The cancellation of the ATS was not properly communicated.
- The plaintiff is entitled to a refund of the advance money.
Respondent Nos. 1-4 (Defendants) Arguments:
- The plaintiff admitted to lacking documents showing his ability to pay the balance.
- Time was of the essence due to the urgent business requirement of availing the OTS.
- There was consensus regarding the forfeiture of advance money in case of default.
Respondent Nos. 5-7 (Subsequent Purchasers) Arguments:
- They are bona fide purchasers without notice of the prior ATS.
- The prior ATS was suppressed and could not be discovered.
- It would be unfair to ask them to refund Rs. 20,00,000.
Issues Framed by the Supreme Court
- Whether the appellant (original plaintiff) is entitled to the refund of the amount of Rs. 20,00,000 purportedly paid as “advance money”?
Treatment of the Issue by the Court
| Issue | How the Court Dealt With It |
|---|---|
| Whether the appellant is entitled to a refund of Rs. 20,00,000 paid as “advance money.” | The Court held that the appellant was not entitled to a refund. It determined that the “advance money” was essentially “earnest money” and was rightfully forfeited due to the appellant’s failure to comply with the contractual stipulation of paying the balance sale consideration within the agreed timeframe. |
Authorities
The court considered the following cases and legal provisions:
- Shree Hanuman Cotton Mills v. Tata Air Craft Ltd., (1969) 3 SCC 522 (Supreme Court of India): Defined the principles governing “earnest money.”
- Videocon Properties Ltd. v. Bhalchandra Laboratories, (2004) 3 SCC 711 (Supreme Court of India): Differentiated between “advance” and “earnest” money, emphasizing the importance of the parties’ intention.
- Satish Batra v. Sudhir Rawal, (2013) 1 SCC 345 (Supreme Court of India): Held that only “earnest money” can be forfeited, not advance payments unless explicitly stated as a guarantee.
- Central Bank of India v. Shanmugavelu, (2024) 6 SCC 641 (Supreme Court of India): Reaffirmed the distinction between “earnest” and “advance” money.
- Chand Rani v. Kamal Rani, (1993) 1 SCC 519 (Supreme Court of India): Outlined the conditions that make time the essence of a contract.
- Welspun Specialty Solutions Ltd. v. ONGC, (2022) 2 SCC 382 (Supreme Court of India): Reaffirmed the principles for determining whether time is of the essence in a contract.
- Fateh Chand v. Balkishan Dass, 1963 SCC OnLine SC 49 (Supreme Court of India): Interpreted Section 74 of the Indian Contract Act, 1872, in relation to forfeiture clauses.
- Maula Bux v. Union of India, (1969) 2 SCC 554 (Supreme Court of India): Held that forfeiture of earnest money is not deemed penal under Section 74 of the Indian Contract Act, 1872.
- Kailash Nath Associates v. DDA, (2015) 4 SCC 136 (Supreme Court of India): Held that Section 74 of the Indian Contract Act, 1872, applies to the forfeiture of earnest money deposit.
- Lakshmanan v. B.R. Mangalagiri, 1995 Supp (2) SCC 33 (Supreme Court of India): Expounded on the question of loss when a contract falls through due to the purchaser’s default.
- Godrej Projects Development Ltd. v. Anil Karlekar, 2025 SCC OnLine SC 222 (Supreme Court of India): Examined one-sided and unconscionable forfeiture clauses.
- Manickam v. Vasantha, 2022 SCC OnLine SC 2096 (Supreme Court of India): Dealt with whether the executing court could deliver possession in execution of a decree where no specific prayer for possession had been made.
- Desh Raj v. Rohtash Singh, (2023) 3 SCC 714 (Supreme Court of India): Emphasized that a prayer clause is a sine qua non for the grant of a decree of refund of earnest money.
- Kamal Kumar v. Premlata Joshi, (2019) 3 SCC 704 (Supreme Court of India): Denied the relief of refund of earnest money.
- Section 22 of the Specific Relief Act, 1963
- Section 74 of the Indian Contract Act, 1872
| Authority | How Considered by the Court |
|---|---|
| Shree Hanuman Cotton Mills v. Tata Air Craft Ltd., (1969) 3 SCC 522 | Cited to define the principles governing “earnest money.” |
| Videocon Properties Ltd. v. Bhalchandra Laboratories, (2004) 3 SCC 711 | Cited to differentiate between “advance” and “earnest” money, emphasizing the importance of the parties’ intention. |
| Satish Batra v. Sudhir Rawal, (2013) 1 SCC 345 | Cited to support the holding that only “earnest money” can be forfeited, not advance payments unless explicitly stated as a guarantee. |
| Central Bank of India v. Shanmugavelu, (2024) 6 SCC 641 | Cited to reaffirm the distinction between “earnest” and “advance” money. |
| Chand Rani v. Kamal Rani, (1993) 1 SCC 519 | Cited to outline the conditions that make time the essence of a contract. |
| Welspun Specialty Solutions Ltd. v. ONGC, (2022) 2 SCC 382 | Cited to reaffirm the principles for determining whether time is of the essence in a contract. |
| Fateh Chand v. Balkishan Dass, 1963 SCC OnLine SC 49 | Cited to interpret Section 74 of the Indian Contract Act, 1872, in relation to forfeiture clauses. |
| Maula Bux v. Union of India, (1969) 2 SCC 554 | Cited to support the holding that forfeiture of earnest money is not deemed penal under Section 74 of the Indian Contract Act, 1872. |
| Kailash Nath Associates v. DDA, (2015) 4 SCC 136 | Cited to present a different view that Section 74 of the Indian Contract Act, 1872, applies to the forfeiture of earnest money deposit. However, the court ultimately distinguished this view. |
| Lakshmanan v. B.R. Mangalagiri, 1995 Supp (2) SCC 33 | Cited to expound on the question of loss when a contract falls through due to the purchaser’s default. |
| Godrej Projects Development Ltd. v. Anil Karlekar, 2025 SCC OnLine SC 222 | Cited to show how the court examines one-sided and unconscionable forfeiture clauses. |
| Manickam v. Vasantha, 2022 SCC OnLine SC 2096 | Cited to show how the relief of possession is inherent in a suit for specific performance |
| Desh Raj v. Rohtash Singh, (2023) 3 SCC 714 | Distinguished. The court notes that this case contradicts the appellant’s position, stating that in the absence of a prayer for the relief of refund of earnest money, such relief cannot be granted. |
| Kamal Kumar v. Premlata Joshi, (2019) 3 SCC 704 | Distinguished. The court notes that the ruling in this case also stands contrary to the arguments advanced by the appellant on account of the fact that the relief of refund of earnest money was denied therein. |
| Section 22 of the Specific Relief Act, 1963 | Considered for its provisions regarding the power to grant relief for possession, partition, refund of earnest money, etc. |
| Section 74 of the Indian Contract Act, 1872 | Considered for its provisions regarding compensation for breach of contract where a penalty is stipulated. |
Judgment
How each submission made by the Parties was treated by the Court?
| Submission by the Parties | How it was treated by the Court |
|---|---|
| Appellant (Plaintiff): Entitled to a refund of the advance money. | Rejected. The Court concluded that the forfeiture of advance money by the respondent nos. 1 -4 was justified. |
| Respondent Nos. 1-4 (Defendants): Forfeiture of advance money was justified due to the plaintiff’s failure to pay the balance consideration on time. | Accepted. The Court agreed that the “advance money” was essentially “earnest money” and was rightfully forfeited due to the appellant’s failure to comply with the contractual stipulation of paying the balance sale consideration within the agreed timeframe. |
| Respondent Nos. 5-7 (Subsequent Purchasers): It would be unfair to ask them to refund Rs. 20,00,000. | Not Directly Addressed. While the Court acknowledged their status as bona fide purchasers, the judgment primarily focused on the validity of the forfeiture between the original parties (Appellant and Respondent Nos. 1-4). |
How each authority was viewed by the Court?
- Shree Hanuman Cotton Mills v. Tata Air Craft Ltd., (1969) 3 SCC 522:* The Court used this case to define the principles governing “earnest money,” which helped in distinguishing it from “advance money” in the context of the current case.
- Videocon Properties Ltd. v. Bhalchandra Laboratories, (2004) 3 SCC 711:* This authority was used to emphasize the importance of considering the parties’ intention and surrounding circumstances when determining whether an amount is “advance” or “earnest” money.
- Satish Batra v. Sudhir Rawal, (2013) 1 SCC 345:* The Court relied on this case to support the holding that only “earnest money” can be forfeited, not advance payments, unless explicitly stated as a guarantee. This was crucial in determining whether the forfeiture in the present case was justified.
- Central Bank of India v. Shanmugavelu, (2024) 6 SCC 641:* This recent judgment was cited to reaffirm the distinction between “earnest” and “advance” money, reinforcing the legal principles applied in the case.
- Chand Rani v. Kamal Rani, (1993) 1 SCC 519:* The Court used this case to outline the conditions that make time the essence of a contract, which was relevant in determining whether the forfeiture was justified due to the appellant’s delay.
- Welspun Specialty Solutions Ltd. v. ONGC, (2022) 2 SCC 382:* This authority was cited to reaffirm the principles for determining whether time is of the essence in a contract, further supporting the analysis of the appellant’s delay.
- Fateh Chand v. Balkishan Dass, 1963 SCC OnLine SC 49:* The Court referred to this case to interpret Section 74 of the Indian Contract Act, 1872, in relation to forfeiture clauses. However, the Court also distinguished this case, noting that Section 74 does not apply to earnest money.
- Maula Bux v. Union of India, (1969) 2 SCC 554:* This authority was used to support the holding that forfeiture of earnest money is not deemed penal under Section 74 of the Indian Contract Act, 1872.
- Kailash Nath Associates v. DDA, (2015) 4 SCC 136:* The Court presented this case to show a different view that Section 74 of the Indian Contract Act, 1872, applies to the forfeiture of earnest money deposit. However, the court ultimately distinguished this view.
- Lakshmanan v. B.R. Mangalagiri, 1995 Supp (2) SCC 33:* This case was cited to expound on the question of loss when a contract falls through due to the purchaser’s default, which was relevant in justifying the forfeiture.
- Godrej Projects Development Ltd. v. Anil Karlekar, 2025 SCC OnLine SC 222:* This recent judgment was cited to show how the court examines one-sided and unconscionable forfeiture clauses.
- Manickam v. Vasantha, 2022 SCC OnLine SC 2096:* This case was cited to show how the relief of possession is inherent in a suit for specific performance
- Desh Raj v. Rohtash Singh, (2023) 3 SCC 714:* The Court distinguished this case, noting that it contradicts the appellant’s position, stating that in the absence of a prayer for the relief of refund of earnest money, such relief cannot be granted.
- Kamal Kumar v. Premlata Joshi, (2019) 3 SCC 704:* The Court distinguished this case, noting that the ruling in this case also stands contrary to the arguments advanced by the appellant on account of the fact that the relief of refund of earnest money was denied therein.
- Section 22 of the Specific Relief Act, 1963:* The Court considered this section for its provisions regarding the power to grant relief for possession, partition, refund of earnest money, etc.
- Section 74 of the Indian Contract Act, 1872:* The Court considered this section for its provisions regarding compensation for breach of contract where a penalty is stipulated.
The Supreme Court dismissed the appeal, upholding the High Court’s judgment. The court reasoned that:
- The amount of Rs. 20,00,000, termed as “advance money,” was essentially “earnest money.”
- The inclusion of the forfeiture clause in the ATS indicated an intention to bind the parties and ensure due performance.
- Time was of the essence, given the stipulated four-month period and the urgency of the respondent nos. 1 –4 regarding the OTS.
- The appellant failed to seek an alternative prayer for refund of the advance money as mandated by Section 22(2) of the Specific Relief Act, 1963.
“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.”
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the contractual agreement between the parties and the appellant’s failure to adhere to the agreed-upon terms. The Court emphasized the importance of fulfilling contractual obligations and the validity of forfeiture clauses when a party defaults. The sentiment analysis reveals a strong emphasis on the legal principles governing contracts and the conduct of the parties involved.
| Reason | Percentage |
|---|---|
| Contractual Agreement and Terms | 40% |
| Appellant’s Failure to Adhere to Terms | 30% |
| Legal Principles Governing Contracts | 20% |
| Conduct of the Parties Involved | 10% |
| Category | Percentage |
|---|---|
| Fact (Consideration of Factual Aspects) | 35% |
| Law (Legal Considerations) | 65% |
Logical Reasoning
Issue: Whether the appellant is entitled to a refund of Rs. 20,00,000 paid as “advance money.”
Dissenting Opinions/Alternative Viewpoints
While the judgment was unanimous, alternative viewpoints could consider the following:
- Equitable Considerations: Whether the forfeiture was unduly harsh, considering the amount involved and the specific circumstances of the case. A more lenient approach might consider the equities of the situation, especially if the delay was marginal or caused by unforeseen circumstances.
- Interpretation of “Advance Money”: A different interpretation of the term “advance money” could argue that it should be treated differently from “earnest money,” requiring a clearer indication of intent to forfeit.
- Impact on Bona Fide Purchasers: While the court acknowledged the rights of Defendant Nos. 5-7 as bona fide purchasers, the judgment indirectly benefits them by upholding the sale deed, which could be seen as unfair to the original purchaser.
Implications
This judgment has several important implications:
- Clarity on Forfeiture: It reinforces the validity of forfeiture clauses in property sale agreements when the buyer defaults, provided the terms are clear and unambiguous.
- Distinction between Advance and Earnest Money: It highlights the crucial distinction between “advance” and “earnest” money and the importance of clearly defining the terms in the agreement.
- Importance of Seeking Alternative Relief: It emphasizes the need for plaintiffs to seek alternative relief, such as a refund of advance money, in their pleadings, as required by Section 22 of the Specific Relief Act, 1963.
- Time is of the Essence: It reaffirms the significance of adhering to timelines stipulated in the agreement, particularly when time is explicitly stated as being of the essence.
Critical Analysis
Strengths:
- Clear and Concise Reasoning: The judgment provides a clear and concise analysis of the facts, legal issues, and relevant precedents.
- Adherence to Legal Principles: It adheres to established legal principles governing contracts and specific relief.
- Practical Implications: It offers practical guidance for drafting and interpreting property sale agreements.
Weaknesses:
- Limited Consideration of Equitable Factors: The judgment could have given more weight to equitable considerations, such as the potential hardship to the appellant and the overall fairness of the forfeiture.
- Indirect Impact on Bona Fide Purchasers: The judgment’s outcome indirectly benefits the subsequent purchasers without directly addressing the equities involved in their purchase.
Conclusion
The Supreme Court’s decision in K.R. Suresh vs. R. Poornima (2025) serves as a crucial reminder of the importance of clearly defined contractual terms, adherence to timelines, and the need to seek appropriate relief in legal proceedings. The judgment reinforces the validity of forfeiture clauses in property sale agreements and provides valuable guidance for parties entering into such agreements. While the judgment is legally sound, a greater emphasis on equitable considerations could have further enhanced its fairness.