Mere Labeling As 'Bayana' Not Enough For Forfeiture Of Advance Money Without Proof Of Loss: Delhi HC

The Delhi High Court has established that a seller cannot forfeit advance payments in a property transaction by simply labeling them as 'earnest money' unless they prove actual legal injury or a significant decline in property value caused by the buyer's breach. This ruling reinforces the principle that forfeiture under the Indian Contract Act, 1872 is compensatory, not punitive, requiring tangible evidence of loss rather than speculative claims based on general market trends.

A bench of Justice Neena Bansal Krishna heard the regular first appeal challenging a trial court's decree that ordered the refund of Rs. 1.5 crore to a buyer while dismissing the seller's counter-claim for damages. The dispute arose from an agreement to sell a Delhi property for Rs. 12.80 crore, where the buyer eventually backed out and purchased a different property, prompting the seller to forfeit the substantial advance payment.

Key Takeaways

Burden of Proof for Loss

Sellers must provide positive evidence of property depreciation or missed financial opportunities to justify forfeiting advance payments beyond a nominal amount.

Earnest Money vs. Part Payment

Calling an amount 'Bayana' does not automatically make it forfeitable; the court will look at the intention, the proportion of the amount to the total price, and whether it was meant as security or part-payment.

General Market Reports Inadequate

Newspaper articles and general economic surveys regarding real estate trends are insufficient to prove specific legal injury to a particular property.

Section 74 Interpretation

Proof of the 'existence' of legal injury is a sine qua non for claiming compensation, even if the contract stipulates a penalty for breach.

Distinction Between Earnest Money and Advance Payment

The Court analyzed the nature of the Rs. 1.5 crore payment, concluding it was part-payment rather than true earnest money. Referencing Shree Hanuman Cotton Mills vs. Tata Air Craft Ltd. ( "(1969) 3 SCC 522": 1969 CaseBase(SC) 328), the Court noted that while 'earnest' binds the bargain, part payment is simply a set-off against the final price. The bench observed that when a payment is intended to be adjusted against the purchase price at completion, it loses the strict character of forfeitable earnest money.

In its reasoning, the Court observed: "The amount of Rs. 1,50,00,000/- cannot be treated as earnest money liable to forfeiture, merely based on its description as 'bayana' in the Agreement to Sell... a conjoint reading of these terms indicates that the amount of Rs. 1,50,00,000/- constituted part payment of the sale consideration, intended to be adjusted against the purchase price, at the time of completion of the transaction."

Failure to Establish Legal Injury

The Court emphasized that under Section 73 and Section 74 of the Indian Contract Act, 1872, compensation is only due for actual loss. The seller relied on newspaper reports from 'Hindustan Times' and 'Times of India' to suggest a 10-15% dip in property prices, but the Court rejected this as speculative.

Regarding the seller's claim, the Court in its reasoning, observed: "The issue herein was not that the Plaintiff was able to purchase a similarly situated property at more than half less value, but the burden was on the Defendant that value of his property depreciated or that he was compelled to sell his property at a lesser price... No positive evidence has been led to establish any fall in real estate price of his property, to the extent claimed by the Defendant."

The Court has the following directions:

"Thus, the learned District Judge has rightly decreed the Suit of the Plaintiff for recovery of Rs.1,50,00,000/- along with interest @ 4% per annum, and has rightly dismissed the Counter-Claim of the Appellant. There is no merit in the Appeal, which is accordingly dismissed."

Ratio

Forfeiture of money paid as an advance under a contract is permissible only if it is established that the party claiming forfeiture has suffered a legal injury. Under Section 74 of the Indian Contract Act, 1872, while proof of precise quantum may be dispensed with if the sum is a genuine pre-estimate, the existence of a loss is a mandatory prerequisite for awarding compensation. General economic reports cannot substitute for specific evidence of a property's value depreciation.

Background

The litigation began when the Respondent (Plaintiff) entered into an agreement with the Appellant (Defendant) in February 2016 to purchase a property in Yojna Vihar. The Respondent paid Rs. 1.5 crore as advance but later alleged the Defendant failed to provide original documents necessary for a home loan. During the agreement period, the Respondent purchased another property in Shrestha Vihar for Rs. 4.25 crore. The Defendant claimed this was a breach and forfeited the Rs. 1.5 crore, additionally filing a counter-claim for Rs. 1 crore in damages.

The Trial Court found that while the Respondent failed to prove she specifically asked for original documents, the Defendant also failed to prove any actual loss suffered due to the non-completion of the sale. The High Court upheld this view, dismissing an application for additional evidence under Order XLI Rule 27 of the Code of Civil Procedure, noting that the documents sought to be introduced were available during the trial. The appeal was dismissed, confirming the refund of the advance to the buyer.

Case Details:
Case No.: RFA 268/2021, CM APPL. 21677-21678/2021
Case Title: Sh. K.G. Krishnamurthy V. Ms. Vijyeta Gupta
Appearances:
For the Petitioner(s): Mr. Sunil Kumar, Advocate.
For the Respondent(s): Mr. Arjun Sanjay, Advocate.

Source: 2026 CaseBase(DEL) 7521