Source: Supreme Court 

Why in News? 

A bench of Justice BR Gavai and Justice SVN Bhatti held that if the forfeiture of earnest money under a contract is reasonable, then it does not fall within Section 74 of the Indian Contract Act, 1872, inasmuch as, such a forfeiture does not amount to imposing a penalty.         

• The Supreme Court held this in the case of Godrej Projects Development Limited v. Anil Karlekar (2025). 

What was the Background of Godrej Projects Development Limited v. Anil Karlekar Case?  

• Booking of Apartment: 
  • On 10^th January 2014, the Complainants booked an apartment in the "Godrej Summit" project at Sector 104, Gurgaon, Haryana, submitting ₹10,00,000 as application money. 
• Allotment of Apartment: 
  • On 20^th June 2014, the Appellant allotted Apartment No. C-1501 (14th floor, Tower ‘C’) to the Complainants. 
  • An Apartment Buyer Agreement was executed between the parties. 
• Completion & Occupation Certificate: 
  • On 20^th June 2017, the Appellant obtained the Occupation Certificate from the Director, Town & Country Planning Department, Haryana. 
• Offer of Possession: 
  • On 28^th June 2017, the Appellant offered possession of the apartment. 
  • The Complainants declined possession, sought cancellation of the allotment, and demanded a full refund of the amount paid. 
• Legal Notice for Refund: 
  • On 29^th September 2017, the Complainants issued a legal notice to the Appellant seeking a refund of ₹51,12,310. 
• Consumer Complaint: 
  • On 14^th November 2017, the Complainants filed Consumer Complaint No. 262 of 2018 before the NCDRC, seeking:  
    • Refund of ₹51,12,310 with 18% interest per annum from the date of each payment till realization. 
• NCDRC Order: 
  • On 25th October 2022, the NCDRC directed the Appellant to:  
    • Deduct 10% of BSP (₹17,08,140) as cancellation charges. 
    • Refund the balance amount of ₹34,04,170 with 6% simple interest per annum from the date of each payment until refund, within three months. 
• Review Application Dismissed: 
  • On 5^th December 2022, the NCDRC dismissed the Review Application filed by the Appellant. 
• Appeal Filed: 
  • On 10^th January 2023, the Appellant filed the present appeal challenging the NCDRC’s order dated 25th October 2022. 
• Stay Order by the Supreme Court: 
  • On 24^th April 2023, the Court granted a stay on the impugned order, subject to the Appellant:  
    • Refunding the amount after deducting 20% as earnest money deposit. 
    • Paying 6% interest per annum from the date of contract cancellation. 
• The matter is now before the Supreme Court for the final decision.

What were the Court’s Observations?

• The Court first of all observed the terms of the contract in dispute.  
  • As per the agreement the complainant was required to pay earnest money deposit of 20% of the BSP. 
  • On the termination on account of buyer’s default the developer was entitled to forfeit the entire earnest money deposit and other dues including interest on delayed payments as specified in the Agreement. 
• It is to be noted that the respondent (complainant i.e. buyer) cancelled the deal since there was recession in the market. 
• The Court cited earlier cases where it was held that to justify the forfeiture of advance money being part of “earnest money” the terms of contract should be clear and explicit. However, it was clarified that if the payment is made only towards part payment of consideration and not intended as earnest money then forfeiture clause will not apply. 
• Further, the Court held that if the forfeiture of earnest money under the contract is not reasonable it does not fall within Section 74 of the Indian Contract Act, 1872 (ICA), as such an amount would not fall under the ambit of “penalty”. 
• However, if the forfeiture of earnest money is in the form of penalty, then Section 74 would be applicable. 
• In this line the NCDRC has in a series cases earlier held that 10% of BSP is a reasonable amount which is liable to be forfeited as earnest money. 
• Thus, the Court did not interfere with the direction of NCDRC for refund of amount in excess of 10% of the BSP. However, the Court held that the NCDRC was not justified in awarding interest on the amount to be refunded. 
• The Court further observed that the respondents sought cancellation of the allotment on the account of sharp decline in the prices of flats. Hence, it is possible that the respondent would have utilized the money for purchasing another property at a lower rate. 
• Thus, the Court partly allowed the appeal.

What is Earnest Money?

• In simple words earnest money is the amount payable as a specific form of security deposit made in some major transactions like real estate dealings. 
• In the case of Satish Batra v. Sudhir Rawal (2013) the Court held that earnest money is paid as a pledge for due performance of the contract, and it shall be forfeited in case of non performance of the contract by the depositor. 
• It is also the law that part-payment of purchase price cannot be forfeited unless it is a guarantee for the due performance of the contract. 
• The Court has further clarified that to justify the forfeiture of advance money being part of “earnest money” the terms of the contract should be clear and explicit. 
• However, if the payment is made only towards part payment of the consideration and not intended as earnest money then the forfeiture clause will not apply.

What is the Law on Forfeiture of Earnest Money and Section 74 of ICA ?

• In the case of Kailash Nath Associates v. Delhi Development Authority (2015) the Court held that Section 74 of ICA will apply to cases of forfeiture of earnest money under a contract.  
• However, if the forfeiture takes place under the terms and conditions of a public auction before agreement is reached, Section 74 would have no application. 
• Further, Delhi High Court in the case of Adani Enterprises v. Shri Somnath Fabrics Private Limited (2024) held that in the light of Section 73 and Section 74 of ICA the forfeiture of earnest money requires proof of actual loss.