Forfeiture Of Earnest Money Given For Sale Agreement Impermissible When Buyer & Seller Are At Fault : Supreme Court

The Supreme Court observed that when both the buyer and seller were at fault in performance of a contract, it would be impermissible to order forfeiture of the earnest money deposited by the buyer, as it would unjustly enrich the seller.

A Bench of Justices Vikram Nath and Sandeep Mehta heard the buyer's appeal against a Delhi High Court ruling which, while setting aside the trial court's decree of specific performance for lack of readiness and willingness, permitted forfeiture of the earnest money.

The dispute stemmed from a January 22, 2008 agreement to sell a 300 sq. yard property in Ashok Vihar, Delhi, for ₹6.11 crore. The buyer paid ₹60 lakh as earnest money and ₹30 lakh subsequently. Although the trial court in February 2021 decreed specific performance, the High Court in September 2025 reversed the decision, holding that the buyer failed to prove financial capacity to pay the balance ₹5.21 crore, allowing forfeiture of the earnest money but ordering refund of the additional ₹30 lakh with interest.

Partly allowing the appeal, the judgment authored by Justice Nath upheld the High Court's findings on the readiness and willingness but disagreed with the direction allowing forfeiture of the earnest money, holding that where both parties are at fault, equity must prevent unjust enrichment.

In this case, both the buyer and seller were at fault as the buyer had not proved his readiness and willingness, and the seller had failed to fulfil contractual obligations relating to mutation and conversion of the property from leasehold to freehold.

“It is a settled principle that equity must operate in a manner that prevents unjust enrichment and restores the parties to their original position, as far as possible particularly where both the parties are at fault. We, therefore, are of the view that directing forfeiture of the earnest money would result in an equitable windfall to the respondents.”, the court said.

“Therefore, to do complete justice and adjust the equities between the parties, we are of the considered view that appropriate course is to direct the respondents to pay a lumpsum amount of Rs. 3,00,00,000/- (Rupees Three Crores only) to the appellant, within four weeks from the date of this order. This would fully restitute the appellant while avoiding further complications relating to the contract and also bring quietus to a dispute that has been protracted for over a decade. The judgment of the High Court shall stand modified to the above extent”, the court held.

Cause Title: SUBHASH AGGARWAL VERSUS MAHENDER PAL CHHABRA & ANR.

Citation : 2025 LiveLaw (SC) 6

Click here to download judgment

Appearance:

For Petitioner(s) :Mr. Dhruv Mehta, Sr. Adv. Mr. Aneesh Mittal, AOR Ms. Deepriya Snehi, Adv. Ms. Yashika Kaushik, Adv. Ms. Nishi Sangtani, Adv. Ms. Komal Mittal, Adv.

For Respondent(s) : Mr. Siddharth Batra, Adv. Mr. Chinmay Dubey, Adv. Ms. Archna Yadav, Adv. Ms. Preetika Shukla, Adv.