The Supreme Court has drawn a clear line on property deals gone wrong: when neither side has clean hands, earnest money cannot be confiscated to reward one party at the expense of the other.
The ruling came in an appeal arising from a long-running dispute over a high-value property sale in Delhi. The Court held that forfeiting earnest money in situations where both buyer and seller failed to meet their contractual obligations would amount to unjust enrichment, something equity does not permit.
The case revolved around a 2008 agreement for the sale of a 300-square-yard property in Ashok Vihar, priced at ₹6.11 crore. The buyer paid ₹60 lakh as earnest money and later added another ₹30 lakh. Years of litigation followed. While a trial court initially ordered specific performance in favour of the buyer, the Delhi High Court overturned that decision, finding that the buyer had not demonstrated the financial capacity to pay the remaining ₹5.21 crore. On that basis, the High Court allowed the seller to retain the earnest money, while directing refund of the additional ₹30 lakh with interest.
When the matter reached the Supreme Court, the Bench agreed that the buyer had failed to establish readiness and willingness to complete the transaction. However, it parted ways with the High Court on one crucial point: the forfeiture of earnest money.
The Court noted that fault was not one-sided. While the buyer could not prove his ability to pay the balance amount, the seller too had fallen short by failing to complete essential steps such as mutation and conversion of the property from leasehold to freehold. In such circumstances, the law could not allow one party to profit from a contract that collapsed due to shared lapses.
Emphasising equitable principles, the Court observed that remedies must aim to restore parties, as far as possible, to their original position rather than create an undeserved gain for one side. Allowing forfeiture in this scenario, it said, would hand the seller an unfair advantage.
To finally close a dispute that had dragged on for more than a decade, the Court modified the High Court’s order. Instead of forfeiture, it directed the seller to pay a consolidated sum of ₹3 crore to the buyer within four weeks, bringing the matter to a definitive end and avoiding further complications tied to the abandoned agreement.
With this ruling, the Supreme Court reinforced that earnest money is not a penalty to be imposed mechanically, but a concept rooted in fairness—especially when responsibility for failure lies on both sides of the contract.
