Forfeiture Of Earnest Money Not Automatic Consequence Of Breach; Seller Must Prove Legal Injury U/S 74 Contract Act: Delhi High Court
The Bench dismissed buyer’s appeal for specific performance for want of proof of readiness and financial capacity, but upheld refund of Rs. 4.15 lakh as seller showed no loss.
Justice Neena Bansal Krishna, Delhi High Court
The Delhi High Court has held that forfeiture of earnest money under an agreement to sell is not an automatic consequence of the buyer’s breach. The seller must establish that legal injury resulted from the breach, and where the loss can be proved, it must be proved.
The Court dismissed the buyer’s appeal against the denial of specific performance, holding that he failed to prove readiness and financial capacity. It upheld the refund of Rs. 4,15,000 with 6% interest, since the seller led no evidence of loss and the agreement had never been terminated.
A Bench of Justice Neena Bansal Krishna observed, “The Legislature has chosen to use two phrases, namely ‘readiness’ and ‘willingness’. While the ‘willingness’ indicates his state of mind which is determined through the conduct of the plaintiff, the ‘readiness’ indicates the financial capacity of the plaintiff which is required to be proved through evidence that he had the financial capacity to perform the Agreement…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 financial capacity has to be however, proved strictly and self serving statements cannot discharge the burden of proving existence of financial capacity…”, it noted further.
Advocate T. S. Ahuja appeared for the appellant and Advocate Tanvi Madan appeared for the respondent.
On November 1, 2007, the appellant agreed to buy a 300 sq. yard property in Village Shalimar, Delhi, from the respondent for Rs. 30,00,000. He paid Rs. 2,00,000 as earnest money and Rs. 2,15,000 in part payments, the last on August 25, 2011. The sale stalled over probate litigation brought by a third party, which ended with the dismissal of an appeal on December 14, 2010. Letters of Administration were issued to the respondent on February 14, 2011.
The appellant sent a legal notice and sued for specific performance or, alternatively, double the amount paid. The respondent said the appellant had himself terminated the agreement in January 2012. The trial court held that readiness and willingness were not proved, dismissed the specific performance claim and ordered a refund of Rs. 4,15,000 with 6% interest from May 30, 2013. The appellant challenged only the denial of specific performance.
On readiness, the Court held that a plaintiff must plead and prove financial capacity strictly, and that self-serving statements do not suffice. The appellant produced only a bank statement for May to June 2013, after the suit was filed. His part payments in instalments after all impediments had been removed also showed he lacked the money. The Court held that possession was not a condition precedent to the sale deed.
On refund, the Court held that the agreement had no forfeiture clause and named no sum payable by the buyer on breach. Placing reliance on Fateh Chand and Kailash Nath Associates, it held that Section 74 requires legal injury and that the respondent showed none. The alleged oral termination was unproved, and the double-amount claim was rightly declined.
Cause Title: Shriram Pal Saini v. Shri Anil Kumar (Neutral Citation: 2026:DHC:9361)
Appearances:
Appellant: T. S. Ahuja, Varun Ahuja, Yukta Batra and Yashika Suneja, Advocates.
Respondent: Tanvi Madan, Advocate.