Forfeiture of Advance Money Upheld; No Refund Ordered Where Buyer Did Not Plead Alternative Relief Under S.22

A bench of Justices J.B. Pardiwala and R. Mahadevan heard the appeal against the Karnataka High Court’s dismissal of a suit for specific performance and the claim for refund of Rs.20 lakh paid as advance under an Advance Sale Agreement dated 25.07.2007. The appellant challenged the High Court’s affirmation of the trial court’s decree which held that time was of the essence, the purchaser had not proved readiness and willingness, and the vendors were justified in forfeiting the advance.

The Court summarized the main holding that the sum described as “advance money” was in substance “earnest money” and that its forfeiture was lawful where the purchaser failed to pay the balance consideration within the contractual period. The Court, in its reasoning, observed: “From the above exposition of law, it becomes amply clear that the amount of Rs.20,00,000/- termed as ‘advance money’ in the ATS, was essentially ‘earnest money’. In other words, it was in the nature of a guarantee for the due performance of the contract. ... Consequently, when the appellant-purchaser failed to comply with the contractual stipulation of paying the balance sale consideration within a period of four months from the date of the agreement, the respondent nos. 1-4 (vendors) were justified in forfeiting the advance money.” The Court further held that Section 22(2) of the Specific Relief Act, 1963 required a specific claim for refund of earnest money and that the appellant had not sought amendment to plead such relief at trial or on appeal; consequently no refund was granted and the appeal was dismissed.

Background The dispute arose from an Advance Sale Agreement for a site in Kengeri Satellite Town for Rs.55,50,000, under which the purchaser paid Rs.20,00,000 by two cheques as advance and agreed to pay the balance of Rs.35,50,000 within four months. The vendors later sold the property to third parties after the four-month period elapsed. The purchaser sued for specific performance and to set aside the subsequent sale, while the vendors pleaded forfeiture under the express clause in the ATS. The trial court found that time was of the essence, observed that the purchaser had not proved readiness and willingness or produced documentary evidence of funds, and held that the vendors validly forfeited the advance. The High Court affirmed, noting that “The sale transaction was required to be completed within four months from the date of execution of sale agreement. The plaintiff failed to perform his part of the contract by coming forward to pay the balance sale consideration within four months as specified in the sale agreement.” The parties had contested whether the sum was mere part-payment or earnest money; the Supreme Court reviewed authorities distinguishing “advance” and “earnest” (including Videocon, Satish Batra, Fateh Chand and related precedent), held the advance was in the nature of earnest money and that the forfeiture clause was not unconscionable. The Court recorded that its consideration was limited to the issue of refund of earnest money and that Section 22 of the Specific Relief Act required a specific pleading for alternative relief of refund; no amendment was made by the plaintiff to include such a claim. The appeal was dismissed and parties were directed to bear their own costs. No interim directions were recorded in the final order.

Case Details: Case No.: 2025 INSC 617; Civil Appeal No. 5822 of 2025 @ SLP (C) No. 5630 of 2023 Case Title: K.R. Suresh v. R. Poornima & Ors. Appearances: For the Petitioner(s): Mr. Anand Sanjay M. Nuli, Senior Counsel (for appellant) For the Respondent(s): Ms. Supreeta Sharanagouda (for Respondents 1–4); Mr. Dhawesh Pahuja (for Respondents 5–7)