The Delhi High Court, presided over by Justice Neena Bansal Krishna, has held that a party cannot automatically forfeit earnest money or advance payments under an agreement to sell without proving actual loss or legal injury caused by a breach of contract. Affirming the dismissal of a suit for specific performance, the Court ruled that the plaintiff failed to establish continuous financial readiness to complete the purchase, while concurrently upholding the trial court’s decree ordering the seller to refund Rs. 4,15,000 with 6% interest per annum.
The appeal, filed under Section 96 of the Code of Civil Procedure, 1908, challenged a judgment and decree dated October 30, 2019, passed by the Additional District Judge, which rejected the buyer’s plea for specific performance but granted the alternative relief of refund.
Background of the Dispute
The appellant/plaintiff, Shri Ram Pal Saini, entered into an Agreement to Sell dated November 1, 2007, with the respondent/defendant, Shri Anil Kumar, to purchase an immovable property bearing No. 258, Village Shalimar, Delhi, measuring 300 square yards, for a total sale consideration of Rs. 30,00,000.
The plaintiff paid Rs. 2,00,000 as earnest money and subsequent sums across various dates: Rs. 1,00,000 each on November 3, 2007, and January 9, 2008; Rs. 50,000 on April 15, 2008; Rs. 65,000 on June 20, 2011; and Rs. 1,00,000 on August 25, 2011—totalling an aggregate payment of Rs. 4,15,000. Under the agreement, the balance consideration was to be paid within six months of the property being mutated by the defendant in his name following the conclusion of probate proceedings.
The suit property was entangled in litigation. One Smt. Beena Devi had filed objections in probate proceedings initiated by the defendant, resulting in an interim injunction. The probate was eventually decreed in favor of the defendant, and an appeal preferred by Smt. Beena Devi (FAO No. 130 of 2008) before the High Court was dismissed on December 14, 2010. Letters of Administration were subsequently issued on February 14, 2011. The defendant recovered possession of the property from the objector on May 30, 2013, through execution proceedings.
On May 24, 2013, the plaintiff issued a legal notice calling for the execution of the sale deed, followed by Suit CS No. 578170/2016 seeking specific performance, or alternatively, refund of double the paid amount (Rs. 8,30,000) with 15% interest.
Contentions of the Parties
The appellant contended before the High Court that there was no default or termination on his part, and that the balance payment was contingent upon mutation of the property, which the defendant never completed. The appellant further argued that possession was delivered to the defendant only at the end of May 2013, meaning the transaction could not have proceeded earlier. He relied on Satya Jain v. Anis Ahmed Rushdie, (2013) 8 SCC 131, K. Prakash v. B.R. Sampath, (2015) 1 SCC 597, and Zarine Siddiqui v. A. Ramalingam, (2015) 1 SCC, to submit that discretionary relief under Section 20 of the Specific Relief Act, 1963, must be guided by sound judicial principles.
Conversely, the respondent maintained that the plaintiff had orally terminated the agreement in January 2012 and sought return of the earnest money because he lacked the funds to pay the balance consideration in lump sum. The respondent argued that once the appeal was dismissed on December 14, 2010, all legal impediments vanished, yet the plaintiff remained inactive for over two and a half years, reviving interest only after local real estate prices escalated manifold.
High Court’s Analysis on Readiness and Willingness
Examining Section 16(c) of the Specific Relief Act, 1963, the High Court emphasized the statutory distinction between “readiness” and “willingness.” Drawing from H.P. Pyarejan v. Dasappa (Dead) By L.Rs. & Ors., (2006) 2 SCC 496, the Court reiterated that readiness and willingness must persist continuously from the date of the agreement through the date of the decree.
Citing Syed Dastagir v. T.R. Gopalakrishna Setty, (1999) 6 SCC 337, the bench observed:
“Readiness and willingness has to be in spirit and substance and not in letter and form. So to insist for mechanical production of the exact words of a statute is to insist for the form rather than essence. So absence of form cannot dissolve an essence if already pleaded.”
The Court explained that while “willingness” denotes the purchaser’s mental inclination discernible through conduct, “readiness” denotes verifiable financial capacity. Referring to Baldev v. Bhule, (2012) 132 DRJ 247, and Madhukar Nivrutti Jagtap v. Pramilabai Chandulal Parandekar, 2019 SCC OnLine SC 1026, the bench held that financial capacity cannot rest on self-serving oral assertions:
“The financial capacity has to be however, proved strictly and self-serving statements cannot discharge the burden of proving existence of financial capacity.”
The Court observed that although the plaintiff pleaded he was “losing interest on huge money,” he failed to establish his liquidity between 2010 and 2012. He produced bank statements only for a brief window in May–June 2013, well after the removal of judicial impediments in December 2010. Furthermore, the Court noted that piecemeal payments made in June and August 2011 demonstrated that he lacked the lump-sum balance consideration. Consequently, the High Court upheld the trial court’s refusal to grant specific performance.
The Court also rejected the argument regarding property mutation and physical possession, pointing out that under Clause 3 of the agreement, obtaining possession from Smt. Beena Devi was an obligation to be discharged at the risk of the seller and was not a condition precedent to executing the sale deed itself.
Law on Forfeiture of Earnest Money and Advance Payments
Addressing the issue of refund and forfeiture, the Court analyzed Sections 73 and 74 of the Indian Contract Act, 1872, alongside Section 22 of the Specific Relief Act, 1963. Examining precedents including Chiranjeet Singh v. Har Swarup, AIR 1926 PC 1, Shree Hanuman Cotton Mills v. Tata Air Craft Ltd., (1969) 3 SCC 522, Videocon Properties Ltd. v. Bhalchandra Laboratories, (2004) 3 SCC 711, and Central Bank of India v. Shanmugavelu, (2024) 6 SCC 641, the bench drew the demarcation between earnest money (intended to bind the contract) and advance part-payments.
Turning to the question of whether a party can retain such deposits upon breach, Justice Krishna referred to the Constitution Bench ruling in Fateh Chand v. Balkishan Das, (1964) 1 SCR 515, and the principles in Kailash Nath Associates v. Delhi Development Authority, (2015) 4 SCC 136, highlighting:
“Since Section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the Section.”
The Court held:
“Thus, the forfeiture of earnest money paid under an Agreement to Sell, is not an automatic consequence of breach. Even the right of the seller to forfeit the earnest money on the default of the purchaser, as recognised in Shree Hanuman Cotton Mills (supra), is subject to Section 74. The amount named in the contract operates only as the outer limit of compensation. The party seeking to retain it must establish that legal injury has resulted from the breach, and where the loss is capable of proof, it must be proved.”
The bench observed that the agreement between the parties contained no express forfeiture clause in the event of default by the buyer. Moreover, the defendant produced no evidence of any financial loss; to the contrary, he admitted that local real estate values had increased manifold and the property remained with him.
The Court further overturned the trial court’s finding regarding oral termination in January 2012, observing that the defendant never issued any notice or intimation of termination or forfeiture. Because no contractual forfeiture right existed and no legal injury was established, the seller was not permitted to retain the funds.
Similarly, the Court held that the plaintiff’s alternative claim for double the amount (Rs. 8,30,000) was rightly rejected by the trial court, as the plaintiff proved no loss beyond the deprivation of the paid money.
Decision
The High Court held that the trial judge rightly ordered the refund of Rs. 4,15,000 with interest at the rate of 6% per annum from the date of the legal notice (May 30, 2013) until realization. Finding no merit in the appeal, the Court dismissed the appeal and disposed of all pending applications.
Case Details:
Case Title: Shri Ram Pal Saini v. Shri Anil Kumar
Case No.: RFA 330/2021 & CM APPL. 32746-32747/2021
Bench: Justice Neena Bansal Krishna
Date: October 16, 2026
