Shree Hanuman Cotton Mills v. Tata Air-Craft Ltd.

A buyer paid Rs 2,50,000 as 25 per cent of the price of aero-scrap, then refused to pay the rest or take delivery. The seller cancelled the contract and kept the money. The Supreme Court held that the sum was earnest money and the seller could forfeit it.

Quick Revision

Parties

Shree Hanuman Cotton Mills & Ors. — appellants; the plaintiffs in the suit. They were the buyers of the aero-scrap and sued to recover their payment.

Tata Air-Craft Ltd. — respondent; the defendant in the suit. It was the seller and it forfeited the Rs 2,50,000.

Procedural History

1. The appellants filed Suit No. 2745 of 1947 on the Original Side of the Calcutta High Court. They sought Rs 2,50,000 with interest at 6 per cent from 18 November 1946.
2. The learned Single Judge dismissed the suit by judgment and decree dated 16 July 1959. He held the sum was paid as deposit or earnest money and the respondent could forfeit it.
3. The appellants appealed (Appeal from Original Order No. 28 of 1960). A Division Bench of the Calcutta High Court affirmed the judgment and decree on 29 January 1964.
4. The Calcutta High Court granted a certificate of appeal. The appellants then appealed to the Supreme Court (Civil Appeal No. 1122 of 1966).
5. 28 October 1969. The Supreme Court dismissed the appeal with costs.

Facts

1. The appellants dealt in new and second-hand machinery. They saw an advertisement in a daily newspaper offering aero-scrap for sale by the respondent.
2. 6 November 1946. The appellants wrote to the respondent that they wished to buy the advertised materials. They said a representative would contact the respondent shortly.
3. 18 November 1946. After a discussion that day, the respondent's General Manager wrote to the appellants. He confirmed the sale of the entire lot of aero-scrap lying at Panagarh, on the terms in the letter.
4. The scrap was in Dump No. 1 near the flight line at Panagarh. The approximate quantity was 4000 tons, more or less.
5. The appellants agreed to pay Rs 10 lakhs for the material in Dump No. 1. The respondent acknowledged a cheque for Rs 2,50,000 against it. The balance of Rs 7,50,000 was to be paid that day.
6. The price did not include sales-tax, which the appellants were to pay. The letter said the company's terms of business apply to this contract. A copy of the terms was enclosed.
7. The same day the appellants replied. They noted that the respondent wanted full payment at once. They confirmed the arrangement but asked to pay the balance in two instalments.
8. The instalments were Rs 2,50,000 on or before 22 November 1946 and Rs 5,00,000 on or before 14 December 1946. They said they would start taking delivery after full payment.
9. 20 November 1946. The respondent acknowledged the appellants' letter with its changes. It stressed that the other terms stayed as in its letter of 18 November 1946.
10. 22 November 1946. The appellants wrote again. They said the deal was closed without inspecting the material, on the respondent's assurance of about 4,100 tons.
11. They said they had since learned that the stated quantity was not on the spot, so they could not do the business. They asked the respondent to treat the letter of 18 November 1946 as cancelled and return the Rs 2,50,000.
12. The respondent wrote several letters asking for the balance and for delivery to be taken. The appellants refused to pay anything more.
13. The respondent forfeited the whole Rs 2,50,000 as earnest money and cancelled the contract.
14. Clause 9 of the respondent's terms of business required the buyer to deposit 25 per cent of the total value at the time of placing the order. The deposit stayed with the company as earnest money, to be adjusted in the final bills, with no interest.
15. Clause 10(a) required the buyer to pay the full value less the deposit before delivery or despatch. A Shipping Ticket would then be issued.
16. Clause 10(b) said that on default in payment the company could, without prejudice to its rights under clause 11 or other legal remedies, forfeit unconditionally the earnest money paid. It could cancel the contract by written notice and resell the stores, and recover any loss on resale.
17. Clause 10(b) also let the company recover storage, warehousing and removal costs and the expenses of resale or attempted resale. Any profit on resale belonged to the company.
18. The appellants did not dispute that they paid Rs 2,50,000 under clause 9. It was 25 per cent of the price of Rs 10,00,000.
19. In the suit, the appellants first pleaded that there was no concluded agreement and they had withdrawn during proposal and counter-proposal. They alleged false representations on the quantity of scrap. They said the respondents were never ready and willing to perform.
20. They pleaded that any repudiation by them was accepted by the respondent ending the contract, so it could not profit from its own wrong. In any event, they said the Rs 2,50,000 was money had and received for their use.
21. The respondent pleaded that a concluded contract arose from the letters of 18 and 20 November 1946. It said the appellants repudiated without justification and it was ready and willing throughout.
22. The respondent said it forfeited the Rs 2,50,000 as earnest money under its terms of business. It also claimed Rs 42,499 as loss and damage sustained.
23. Before the Single Judge and the Division Bench, the appellants conceded breach and conceded that the respondent was ready and willing. They gave up the plea of mistake and misrepresentation. They accepted that the contract was concluded by the letters of 18 and 20 November 1946.
24. The appellants led no evidence in the High Court. They pressed only the argument that the deposit was not earnest and so could not be forfeited.

Issues Raised

1. Was the Rs 2,50,000 paid as part payment of the price or as an earnest deposit?
2. Was the respondent entitled to forfeit that sum after the appellants' breach?
3. Does the forfeiture clause name a sum payable on breach, or impose a penalty? If so, could the respondent get only reasonable compensation under Section 74 of the Contract Act?
4. Can earnest money be forfeited only if the amount is reasonable, and was 25 per cent of the price unreasonable?
5. Does Section 64 of the Contract Act apply, so that the respondent must restore the benefit it received?

Arguments Contended

For the appellants (B.P. Maheshwari and Sobhag Mal Jain):

• The Rs 2,50,000 was part of the purchase price, not a deposit or earnest money, so the respondent could not forfeit it.
• The respondent's letter of 18 November 1946 recorded a cheque of Rs 2,50,000 against the price of Rs 10 lakhs. Counsel said this showed part payment pure and simple, with no payment by way of earnest.
• The Rs 2,50,000 was a sum named in the contract as payable on breach. Alternatively, the forfeiture clause was a stipulation by way of penalty. Either way, the respondent could get only reasonable compensation under Section 74.
• Under Section 73 the respondent was entitled only to compensation for loss caused by the breach.
• Earnest money can be forfeited only if the amount is reasonable. A sum of 25 per cent of the price was not reasonable.
• Fateh Chand v. Balkishan Das held that a stipulation to forfeit a deposit is a penalty that attracts Section 74. The High Court missed this statutory duty of the courts.
• Counsel relied on Maula Bux v. Union of India for the reasonableness argument.
• Section 64 may apply. Relying on Murlidhar Chatterjee v. International Film Co., counsel said the respondent must restore the benefit it got under the contract.

For the respondent (Niren De, Attorney-General, with N.S. Bindra and S.P. Nayar):

• The correspondence read with the terms of business showed the Rs 2,50,000 was paid as earnest.
• Earnest money is part of the price when the transaction goes through. It is forfeited when the transaction falls through by the buyer's fault or failure. The Attorney-General cited decisions on the features of an earnest deposit and the right to forfeit it.
• The appellants never pleaded that the Rs 2,50,000 was a sum named as payable on breach, or that the clause was a penalty. They never raised the reasonableness of the deposit at any stage in the High Court. So Section 74 had no application.
• The appellants led no evidence and, after giving up their other pleas, pressed only that the deposit was not earnest.
• Without pleading and proof of unreasonableness or penalty, the respondent had no chance to meet the point. Reasonableness does not arise when earnest money is forfeited under the terms of the contract.
• The decisions cited in Maula Bux do not apply a test of reasonableness to earnest deposits. Maula Bux did not accept that the deposit there was earnest money.
• In various decisions, large earnest deposits in proportion to the price were forfeited and the courts did not interfere.

Court's Reasoning

The judgment has no numbered paragraphs and one opinion, delivered by Vaidialingam, J. for the Bench. The steps follow the order of the judgment. No paragraph numbers are cited.

Vaidialingam, J. (judgment of the Court)

1. Noted: The appeal is by the plaintiffs, on a certificate from the Calcutta High Court. It challenges the Division Bench judgment of 29 January 1964, which affirmed the Single Judge's judgment of 16 July 1959 in Suit No. 2745 of 1947.
2. Noted: The Court set out the correspondence of 6, 18, 20 and 22 November 1946. It noted that the terms of business formed part of the contract and that the appellants accepted them in their reply of 18 November 1946.
3. Noted: The Court set out clauses 9 and 10 of the terms of business. It summed them up. The buyer deposits 25 per cent as earnest money, to be adjusted in the final bills. The buyer must pay the rest before delivery. On the buyer's default, the company may forfeit the earnest money unconditionally and cancel the contract.
4. Noted: The Court summarised the pleadings of both sides, including the respondent's counter-claim of Rs 42,499.
5. Noted: The appellants gave up several pleas: mistake, misrepresentation, and that the respondent was not ready and willing. They accepted that the contract was concluded by the letters. Only two questions survived: whether the Rs 2,50,000 was part payment or earnest deposit, and whether the respondent could forfeit it.
6. Noted: Both courts below held that the sum was paid as a deposit or earnest money. The deposit goes towards the price only when the buyer pays the entire price and performs the contract.
7. Noted: The courts below held earnest money to be primarily security for performance. Unless the contract says otherwise, the seller can forfeit it on the buyer's breach. The suit was therefore dismissed and the dismissal confirmed on appeal.
8. Noted: The Court recorded counsel's two contentions and the Attorney-General's replies (see Arguments Contended).
9. Noted: The Court said it must first find what in law makes a payment earnest money, and what rights and liabilities follow from it.
10. Noted: Burrows, Words and Phrases, Vol. 11, states the traits of "earnest". It must be a tangible thing, given at the moment the contract is concluded. It is given to bind the contract, as a token of good faith and a guarantee of performance. If the giver defaults, it is forfeited. If the contract is fulfilled, it may also operate as part payment.
11. Noted: Benjamin on Sale (8th edition, p. 219) discusses clause 17 of the Statute of Frauds and Section 4(1) of the Sale of Goods Act, 1893. These speak of giving something in earnest to bind the contract, or in part payment.
12. Noted: Benjamin says the two phrases are often treated as meaning the same thing. But earnest binds the bargain, and there can be no part payment until the bargain is closed.
13. Noted: Benjamin gives two alternatives. A buyer may give money or a present as a token of the bargain, apart from the price, which is earnest. Or the buyer may give part of the agreed price to be set off against the final payment, which is part payment.
14. Noted: Benjamin says that if the buyer fails to carry out a rescinded contract, the buyer cannot recover earnest but may recover part payment. The seller's right to damages is not affected, unless the sum is by way of deposit or guarantee, in which case it is forfeited. Earnest does not lose its character because it may also serve as part payment.
15. Noted: Benjamin (p. 946) says a deposit is a guarantee of the buyer's performance. If the buyer defaults and the contract separates the deposit from the instalments of price, the deposit is forfeited.
16. Noted: Halsbury's Laws of England (3rd edition, Vol. 34, p. 118, item 189) distinguishes part payment from a deposit or earnest. A deposit is paid primarily as security that the buyer will accept and pay for the goods, and otherwise forms part of the price. If the buyer will not accept and pay, the seller may repudiate the contract and keep the deposit.
17. Noted: Jowitt's Dictionary of English Law describes giving earnest as a way of showing assent to a sale. The buyer gives the vendor a nominal sum as a token that the parties are in earnest.
18. Noted: In Howe v. Smith, Fry, L.J. discussed the history of earnest, which is identical with a deposit. The buyer there paid 500 pounds as deposit and part payment of the purchase money on signing the agreement. He sued for specific performance, which was refused for his delay. He then asked for return of the deposit.
19. Noted: In Howe v. Smith, Cotton, L.J. said a deposit is a guarantee that the contract will be performed. If the sale goes on, it goes in part payment. If the purchaser repudiates and the contract goes off, he has no right to recover it.
20. Noted: Bowen, L.J. said that business people understand a deposit as security for completing the purchase. The purchaser cannot abandon his contract and still recover the deposit, as that would let him take advantage of his own wrong.
21. Noted: Fry, L.J. said that, where no terms are expressed, the implied terms are these. If the contract is performed, the deposit is brought into account. If the payer does not perform, it remains the payee's property. It is then an earnest to bind the bargain and, by the fear of forfeiture, gives the payer a motive to perform. The Court of Appeal rejected the refund claim.
22. Noted: In Soper v. Arnold, the buyer paid a deposit under an agreement that said it would be forfeited if he failed to comply. He could not pay the balance. He later learned that the vendor's title was defective and sued for the deposit on grounds of mistake and failure of consideration. The suit failed and the Court of Appeal and the House of Lords rejected his claim.
23. Noted: Lord Macnaghten in Soper v. Arnold said a deposit serves two purposes. If the purchase is carried out, it goes against the purchase-money. Its primary purpose is as a guarantee that the purchaser means business.
24. Noted: In Farr, Smith & Co. v. Messrs. Ltd., Wright, J. asked whether a payment was earnest to bind the contract or part payment of the price. He repeated the traits of earnest in the Burrows passage.
25. Noted: Wright, J. quoted Hamilton, J. in Sumner and Leivesley v. John Brown & Co. Earnest means something given to bind a contract and to pressure the defaulter. If the contract goes through, it is returned or deducted from the price. If the contract goes off through the giver's fault, the earnest is forfeited.
26. Noted: In Chiranjit Singh v. Har Swarup, the buyer agreed to pay twenty thousand as earnest and the balance in two parts. He paid Rs 1,65,000 by two cheques, and the receipt called it payment towards the price of Rs 4,76,000.
27. Noted: The buyer in Chiranjit Singh told the seller he could not complete the purchase and invited a sale to others. He sued for the whole Rs 1,65,000. The High Court let him lose the Rs 20,000 earnest but ordered refund of Rs 1,45,000.
28. Noted: The Judicial Committee agreed that Rs 20,000 was earnest and that nothing showed the seller had given up the stipulated earnest. It said earnest money is part of the purchase price when the transaction goes forward and is forfeited when it falls through by the buyer's fault or failure. It dismissed the appeal for refund.
29. Held: From these decisions, five principles emerge about "earnest". (1) It must be given at the moment the contract is concluded. (2) It represents a guarantee that the contract will be fulfilled, or is given to bind the contract. (3) It is part of the purchase price when the transaction is carried out.
30. Held: (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 by the buyer, the seller is entitled to forfeit the earnest.
31. Noted: Applying these principles, the Court turned to the contract between the parties. It asked whether the Rs 2,50,000 was earnest money and whether the respondent was justified in forfeiting it.
32. Held: The respondent's letter of 18 November 1946 said that the company's terms of business applied to the contract. The appellants accepted this in their reply of the same day. The terms of business were therefore part of the contract.
33. Held: Clause 9 required a 25 per cent deposit to remain with the company as earnest money, adjusted in the final bills and carrying no interest. It is undisputed that the appellants deposited Rs 2,50,000 under clause 9. It was 25 per cent of Rs 10,00,000. So it was a deposit as earnest money.
34. Held: Counsel's argument that the letter of 18 November 1946 showed part payment pure and simple was rejected. It ignored the last recital, which made the terms of business part of the contract. The appellants accepted that recital.
35. Held: Clause 10(b) gave the respondent the right, on the buyer's default in payment, to forfeit the earnest money unconditionally, without prejudice to its other legal rights.
36. Noted: The appellants had pleaded that they were not in breach and that the respondent was. They did not pursue these pleas before the High Court. They conceded breach.
37. Held: The High Court rightly held that, under clause 10(b), the respondent was entitled to forfeit the earnest money of Rs 2,50,000.
38. Noted: In Chiranjit Singh, the contract stipulated Rs 20,000 as earnest, but the buyer paid the sum as part of the price. Even so, the High Court and the Judicial Committee treated Rs 20,000 of it as earnest and refused to refund it.
39. Held: In this case, the contract read with the terms of business clearly speaks of earnest money and says Rs 2,50,000 was paid as earnest. There is no ambiguity about the nature of the payment. The right to forfeit it on the appellants' admitted breach cannot be challenged. The first contention fails.
40. Noted: The second contention rests on Sections 73 and 74 of the Indian Contract Act. Counsel said Section 73 allows only compensation for loss caused by breach. He said the Rs 2,50,000 was a sum named for breach, or a stipulation by way of penalty, so only reasonable compensation could be had. He added that earnest money cannot be forfeited unless reasonable.
41. Noted: The Attorney-General replied that these pleas were never raised in the pleadings or before the High Court. The appellants led no evidence. Without pleading and proof of unreasonableness or penalty, the respondent could not meet the point.
42. Held: The Attorney-General's contention is well founded. The appellants raised none of the points covered by the second contention. It is therefore unnecessary to decide whether the amount deposited as earnest and forfeited can be considered reasonable.
43. Held (reserved): "We express no opinion on the question as to whether the element of unreasonableness can ever be considered" in the forfeiture of earnest money. The Court also left open what factors would matter. The Court said a party who contests on such grounds must lay a foundation by proper pleas and evidence, so the other side can meet the claim.
44. Noted: In this view it is unnecessary to consider Maula Bux v. Union of India, on which the appellants relied. The Court noted its observation that forfeiture of a reasonable amount of earnest money under a contract for sale of property does not fall within Section 74. But forfeiture of the nature of a penalty does.
45. Noted: The Attorney-General argued that the cases cited in Maula Bux do not lay down a test of reasonableness for earnest deposits. He also said this Court in Maula Bux did not agree with the High Court that the deposit there was earnest money.
46. Noted: The Attorney-General cited decisions in which fairly large earnest deposits were forfeited without interference. The Court said it would not go into those aspects.
47. Held: The appellants never raised that the forfeiture was a penalty, that the amount forfeited was so large that forfeiture was bad, or that the deposit was unreasonable. Maula Bux had no occasion to consider the reasonableness of an earnest deposit. This Court there did not agree that the deposits were earnest money. It was in those circumstances that Section 74 was applied.
48. Noted: Counsel relied on Fateh Chand v. Balkishan Das. He said that case held a forfeiture stipulation to be a penalty attracting Section 74, and that courts have a statutory duty to award only reasonable compensation. He said the High Court missed this.
49. Noted: In Fateh Chand this Court considered two questions. The first was whether the plaintiff could forfeit Rs 1,000 paid as earnest money. The second was whether he could also forfeit the whole Rs 24,000 paid by the buyer under the contract.
50. Noted: Fateh Chand held that the plaintiff could forfeit Rs 1,000 as earnest money. The Rs 24,000 could not be treated as earnest, so the parties' rights were judged under Section 74. The Court there fixed the compensation to which the plaintiff was entitled.
51. Noted: Fateh Chand said Section 74 deals with the measure of damages in two classes of cases. In the first, the contract names a sum payable on breach. In the second, it has any other stipulation by way of penalty.
52. Noted: Fateh Chand said the words any other stipulation by way of penalty apply to every covenant involving a penalty. It said the court's duty under Section 74 is not to enforce the penalty clause but to award reasonable compensation not exceeding the amount liable to forfeiture. It also said Section 74 applies whether the party in default is plaintiff or defendant.
53. Held: The contention that the forfeiture recital in this contract is a stipulation by way of penalty cannot be accepted. Fateh Chand recognised that earnest money can be forfeited. It applied Section 74 only to the rest of the amount, which was admittedly not earnest. Here the entire amount is earnest money, so Fateh Chand does not apply.
54. Noted: Counsel finally argued that Section 64 of the Contract Act applies, citing Murlidhar Chatterjee v. International Film Co. He said the respondent must restore the benefit it obtained under the contract.
55. Held: There is no scope for applying Section 64, so the decision of the Judicial Committee on Section 64 has no relevance.
56. Noted: The appellants had pleaded that a misrepresentation about the quantity induced them. If they had pursued that plea, the contract would have been voidable at their instance under Section 19. They abandoned it and admitted their own breach. Hence Section 64 cannot be invoked by them. The second contention also fails.
57. Held: The appeal fails and is dismissed with costs.

Authorities

• Burrows, Words and Phrases, Vol. 11: traits of earnest. Must be tangible, given when the contract is concluded, as a guarantee, forfeited on default, may operate as part payment.
• Benjamin on Sale (8th edition), pp. 219 and 946: earnest differs from part payment; a deposit is a guarantee and is forfeited on the buyer's default.
• Halsbury's Laws of England (3rd edition), Vol. 34, p. 118, item 189: a deposit is paid as security and otherwise forms part of the price; the seller may keep it if the buyer fails to accept and pay.
• Earl Jowitt, Dictionary of English Law: earnest is a mode of signifying assent to a sale by giving a nominal sum as a token.
• Howe v. Smith, L.R. [1884] Ch. D. 89 (Court of Appeal; Fry, Cotton and Bowen, L.JJ.): applied. A deposit is a guarantee of performance and cannot be recovered by the buyer who repudiates.
• Soper v. Arnold, L.R. [1889] 14 A.C. 429 (House of Lords): applied. A deposit is a guarantee that the purchaser means business and is rightly forfeited in a proper case.
• Farr, Smith & Co. v. Messrs. Ltd., L.R. [1928] 1 K.B.D. 397: applied. It sets out the traits of earnest and the difference from part payment.
• Sumner and Leivesley v. John Brown & Co., 25 T.L.R. 745: applied through Farr Smith. Earnest is forfeited if the contract goes off through the giver's fault.
• Chiranjit Singh v. Har Swarup, A.I.R. 1926 P.C. 1 (Judicial Committee): applied. Earnest money is part of the price when the transaction goes forward, and is forfeited when it falls through by the buyer's fault or failure. Applied. The courts there still treated Rs 20,000 as earnest although the buyer paid it as part of the price.
• Maula Bux v. Union of India, [1970] 1 S.C.R. 928: relied on by the appellants. Explained. The Court found it unnecessary to consider it because reasonableness and penalty were never raised. Maula Bux did not treat the deposits there as earnest money.
• Cases listed within the Maula Bux passage: Kunwar Chiranjit Singh v. Har Swarup (A.I.R. 1926 P.C. 1), Roshan Lal v. The Delhi Cloth and General Mills Co. Ltd. (I.L.R. 33 All. 166), Muhammad Habibullah v. Muhammad Shafi (I.L.R. 41 All. 324) and Bishan Chand v. Radha Kishan Das (I.L.R. 19 All. 489). The Attorney-General said they do not apply a reasonableness test to earnest deposits.
• Fateh Chand v. Balkishan Das, [1964] 1 S.C.R. 515: relied on by the appellants. Distinguished. It allowed forfeiture of earnest money of Rs 1,000 and applied Section 74 only to the rest of the amount, which was not earnest.
• Murlidhar Chatterjee v. International Film Co., L.R. 70 I.A. 35 (Judicial Committee): relied on by the appellants for Section 64. Held to have no relevance.
• Also cited in footnotes: the footnotes only give the citations of Howe v. Smith, Soper v. Arnold, Farr Smith, Sumner and Leivesley, Chiranjit Singh, Maula Bux, Fateh Chand and Murlidhar Chatterjee. No other case is named in them.

Provisions mentioned

• Section 74, Indian Contract Act, 1872: reasonable compensation, not exceeding the sum named or the penalty stipulated, where a contract has been broken. Fateh Chand read it to cover forfeiture of amounts already paid.
• Section 73, Indian Contract Act: compensation for loss or damage caused by breach. Counsel said this was all the respondent could get.
• Section 64, Indian Contract Act: counsel said it makes a party restore the benefit received under a contract. The Court held it did not apply.
• Section 19, Indian Contract Act: a contract induced by misrepresentation is voidable at the option of the party misled. The appellants dropped this plea.
• Clause 17 of the Statute of Frauds; Section 4(1) of the Sale of Goods Act, 1893. Both speak of something given in earnest to bind the contract, or in part payment (as quoted from Benjamin).
• Clauses 9, 10(a) and 10(b) of the respondent's terms of business: deposit, time and method of payment, and forfeiture on default.

Judgement

1. The Rs 2,50,000 paid by the appellants was earnest money under clause 9 of the respondent's terms of business.
2. The respondent was entitled to forfeit it under clause 10(b), because the appellants admittedly committed breach of contract.
3. Section 74 and Section 64 of the Contract Act do not help the appellants. The Court expressed no opinion on whether unreasonableness can ever be considered for forfeiture of earnest money.
4. The appeal fails and is dismissed with costs.

Legal Principle / Ratio

A deposit is earnest money if it is given when the contract is concluded as a guarantee of performance. It is part of the price if the contract is carried out. Unless the contract says otherwise, the seller can forfeit it on the buyer's default.

Key holding: "It is forfeited when the transaction falls through by reason of the default or failure of the purchaser."

Related points:

• Where the contract calls the deposit "earnest money" and the buyer admits breach, forfeiture under the contract stands.
• Obiter (a reserved question): the Court expressed no opinion on whether unreasonableness can ever be considered for forfeiture of earnest money. A party who raises it must plead it and lead evidence.

Subsequent Treatment

The notes below come only from the later judgments supplied with this page.

Kailash Nath Associates v. DDA — 2015 (4) SCC 136; Supreme Court of India; R.F. Nariman and Ranjan Gogoi, JJ.; decided 9 January 2015.

• The DDA's counsel argued that the case was covered by Shree Hanuman Cotton Mills (para 14).
• The Division Bench had relied on it for the rule that earnest money, unlike security, can be forfeited under the contract. The Supreme Court quoted that part of the Division Bench judgment (para 30).
• The Court quoted the five principles of earnest from Shree Hanuman and the passage on the questions not raised (para 36).
• The Court said Shree Hanuman was a case where the appellants conceded breach. It also said only two questions were argued and both were answered against the appellants (para 39).
• The Court read Shree Hanuman as holding that Maula Bux did not concern earnest money on its facts. So the Maula Bux observation on earnest money did not arise for decision there (para 40).
• The Court held that earnest money is an amount to be paid on breach and named in the contract, so Section 74 covers it. Where forfeiture follows the terms of a public auction before any agreement, Section 74 does not apply (paras 40-41, 43).

K.R. Suresh v. R. Poornima — 2025 INSC 617; Civil Appeal No. 5822 of 2025; Supreme Court of India; J.B. Pardiwala and R. Mahadevan, JJ.; decided 2 May 2025.

• The Court said the principles on the scope of earnest money were succinctly explained in Shree Hanuman Cotton Mills, and reproduced its five principles (para 32).
• It first separated "advance money" from earnest money. Earnest is a sum given to bind a contract (paras 30-31).
• It quoted Satish Batra v. Sudhir Rawal, which in turn cited Shree Hanuman for the nature of earnest and the right to forfeit it. Only earnest paid as a pledge for due performance can be forfeited (para 34).

Critical Analysis

Analysis based on the judgment text.

• The Court did not decide whether a large earnest deposit can be cut down as unreasonable. It said the point was never pleaded or proved.
• The decision leaves unclear how the five principles fit with Section 74, because the Court did not decide the reasonableness question.
• The Court treated the terms of business as part of the contract because the covering letter said so and the appellants accepted it.
• The Court found the sum was earnest from the label in clause 9. It did not say whether a similar sum with another label would be earnest.

Significance

• It sets out five tests for earnest money from English and Privy Council authority.
• It separates earnest money from part payment and shows how a contract's own wording decides the question.
• It confirms that earnest money is forfeitable on the buyer's default unless the contract says otherwise.
• It explains Maula Bux as a case where the deposits were not earnest, and Fateh Chand as applying Section 74 only to the part that was not earnest.

Exam-Important Points

• Rule: earnest is given at the time the contract is concluded, as a guarantee of performance. Trap: it is not the same as part payment, which can be recovered.
• Rule: earnest is part of the price if the contract is carried out and forfeited if the buyer defaults. Trap: the contract can provide otherwise.
• Rule: the label in the contract matters. Clause 9 called the 25 per cent deposit "earnest money". Trap: in Chiranjit Singh, a payment described as part of the price was still partly treated as earnest.
• Trap: the Court did not decide whether reasonableness applies to forfeiture of earnest money. It declined because no such plea was raised.
• Section 74 and Fateh Chand did not help the buyers, because the whole sum was earnest. Section 64 did not apply because the buyers admitted breach.
• Facts to remember: price Rs 10,00,000; paid Rs 2,50,000; balance Rs 7,50,000; claim of Rs 42,499 by the seller. Appeal dismissed with costs.

Prepared from the full text of the judgment. The judgment has no numbered paragraphs, so none are cited. The citation is as printed in the judgment's header.