Source: Supreme Court  

Why in News? 

A bench of Justice JB Pardiwala and Justice R Mahadevan held that the forfeiture of earnest money was justified and hence the Court was not inclined to grant the relief of refund of advance money to the appellant. 

• The Supreme Court held this in the case of KR Suresh v. R. Poornima & Ors. (2025). 

What was the Background of KR Suresh v. R. Poornima & Ors. (2025) Case?   

• The dispute concerns a claim for specific performance of an Agreement to Sell (ATS) dated 25th July 2007 related to property No.307 in Kengeri Satellite Town Layout, Bangalore. 
• The defendant no. 1 acquired the property through an unregistered Will dated 12th November 2002 executed by her late mother. 
• The plaintiff (appellant) entered into an ATS with defendants 1-4 for a total sale consideration of Rs.55,50,000. 
• The plaintiff paid Rs.20,00,000 as advance payment through two cheques of Rs.10,00,000 each. 
• The ATS stipulated that the remaining Rs.35,50,000 would be paid within four months, after which a sale deed would be executed. 
• The plaintiff claims that upon approaching a bank for a loan on 20th September 2007, the bank's advocate instructed him to obtain original title documents and a probate certificate from defendant no. 1. 
• The plaintiff alleges that despite promising to furnish the required documents, defendant no. 1 failed to do so. 
• After the four-month period lapsed, the plaintiff issued a legal notice dated 18th February 2008 expressing his readiness to complete the transaction. 
• The plaintiff discovered that defendant no. 1 had sold the property to defendants 5 and 6 via a sale deed dated 15th February 2008. 
• Defendant no. 1 responded on 15th March 2008, stating that the advance amount stood forfeited due to the plaintiff's default in making the balance payment within the specified period. 
• The judgment of the Trial Court: 
  • The Trial Court dismissed the suit on the ground that the plaintiff had not approached the Court with clean hands. 
  • The Court found that time was the essence of the contract as defendants 1-4 urgently needed the money for a One-Time Settlement (OTS) with Indian Overseas Bank. 
  • The Court upheld the forfeiture of advance money as the ATS contained explicit recitals regarding forfeiture in case of default. 
• The judgment of the High Court: 
  • The High Court dismissed the appeal and affirmed the Trial Court's judgment. 
  • The Court held that there was no obligation in the ATS for defendant no. 1 to furnish a probate certificate before executing the sale deed. 
  • The High Court noted that the plaintiff failed to pay the balance consideration within the stipulated four-month period and only issued a legal notice three months after the period expired. 
  • The Court denied the refund of advance money as the plaintiff had not sought this as an alternative prayer in the suit as required under Section 22 of the Specific Relief Act, 1963 (SRA). 

What were the Court’s Observations? 

• The Court divided the present case into two issues: 
  • Validity of the forfeiture of Advance money 
  • Law on the Alternate relief of refund of earnest money under Section 22 of the SRA. 
• With Regard to Issue (i): 
  • The Court held that in the facts of the present case it can be concluded that the amount described as “advance money” in the ATS is essentially “earnest money”. 
  • The Court held that it can be said on the basis of authorities expounded that a clause for forfeiture of earnest money is not penal in ordinary sense and hence Section 74 of the Indian Contract Act, 1872 (ICA) is inapplicable.  
  • Further, the Court observed that the forfeiture clause in the facts of the present case was equitable and fair as it imposed liability on both the appellant purchaser and respondent seller. 
  • The Court further observed that if the principle under Section 74 of ICA is applied in line with the reasoning laid down in the case of Kailash Nath Associates v DDA (2015) forfeiture would still be justified as there were losses suffered which were explicitly pleaded and proved by evidence. 
• With Respect to Issue (ii): 
  • The High Court in the facts of the present case had denied the relief of refund of advance money having regard to the fact that the appellant failed to sought an alternate prayer for refund of advance sale consideration. 
  • The Court further observed that the Section itself permits the amendment of plaint at any stage to enable the plaintiff to seek an alternative relief of refund of earnest money. 
  • However, it was observed by the Court that under Section 22 of SRA the courts cannot grant relief suo moto since the inclusion of prayer clause remains a sine qua non for the grant of such relief. 
• The Court denied the appellant's request for refund of advance money because it wasn't specifically included in their prayer for relief, and despite the option to amend their plaint even at the appellate stage under Section 22(2) of the SRA Act they failed to do so, justifying the forfeiture of the advance money by the respondents. 

What is Section 22 of SRA? 

• A person suing for specific performance of a contract for immovable property transfer may also ask for possession or partition of the property. 
• The plaintiff may request other appropriate relief, including refund of earnest money or deposits, if the specific performance claim is refused. 
• The court cannot grant relief for possession or refund of earnest money unless these remedies are specifically claimed in the lawsuit. 
• If the plaintiff hasn't claimed such relief in the original plaint, the court has discretion to allow amendment of the plaint at any stage to include these claims. 
• The court's power to grant refund of earnest money does not limit its authority to award compensation under section 21. 
• In the case of Desh Raj v. Rohtash Singh (2023), the Court held that : 
  • The court has broad discretion to allow the plaintiff to amend their plaint even at later stages to seek refund of earnest money. 
  • The essential requirement is that a plaintiff must specifically request refund of earnest money, either in the original filing or through amendment. 
  • The prayer clause requesting refund of earnest money is an absolute requirement (sine qua non) for the court to grant such relief. 
  • In this case, the respondent neither included a request for refund of earnest money in their original plaint nor sought amendment at any stage. 
  • Courts cannot grant refund of earnest money on their own initiative (suo motu), regardless of whether Section 22(2) of the SRA Act is interpreted as directory or mandatory.