S. 74 Contract Act | Forfeiture Of Earnest Money Permissible If It's Not Excessive Amounting To Penalty : Supreme Court

The Supreme Court today (Feb. 3) clarified that forfeiting a reasonable earnest money deposit in a contract does not constitute a penalty under Section 74 of the Contract Act, 1872. “It can be seen that this Court has held that if the forfeiture of earnest money under a contract is reasonable, then it does not fall within Section 74 of the Indian Contract Act, 1872, inasmuch as, such a forfeiture does not amount to imposing a penalty.”, the Court held. A bench of Justices B.R. Gavai and S.V.N. Bhatti heard the case in which the Respondents, as flat purchasers, challenged the Appellant builder's forfeiture of 20% of the basic sale price as earnest money following their cancellation of the flat booking. The Appellants supported the forfeiture contending that the Apartment Buyer Agreement (ABA) explicitly allowed forfeiture of 20% of BSP as earnest money in case of cancellation. However, the Respondents called the forfeiture of 20% as earnest money to be arbitrary and unfair demanding that the forfeiture should be limited to 10%. The National Consumer Disputes Redressal Commission (NCDRC) ruled in favor of the respondents-flat purchasers allowing the builder to forfeit only 10% of the Basic Sale Price (BSP) as earnest money instead of 20% and directed the refund of the remaining amount with 6% interest per annum. Assailing the NCDRC's decision, the builder appealed to the Supreme Court. Affirming the NCDRC's ruling, the judgment authored by Justice Gavai ruled that the forfeiture of the 20% of the BSP as earnest money by the Appellant was excessive and arbitrary qualifying as a penalty under Section 74 of the Contract Act against cancellation of the booking. The Court justified the NCDRC's ruling to allow the builder to forfeit only 10% of the BSP as earnest money terming such an amount to be just and fair not qualifying as a penalty under Section 74 of the Contract Act. Essentially, the Court emphasized that while earnest money can be forfeited as security for performance, it shouldn't be so excessive or punitive that it becomes a penalty. If a forfeiture is deemed excessive, the Court has the power to reduce the amount. Reference was drawn to the cases of Maula Bux v. Union of India (1969) 2 SCC 554 and Satish Batra v. Sudhir Rawal (2013) 1 SCC 345 to hold that forfeiture of reasonable earnest money could not be categorized as penalty. Although, the Court upheld 10% forfeiture but removed interest on refunds. “In the facts and circumstances, therefore, we find that the NCDRC was not justified in awarding interest on the amount to be refunded by the Appellant.”, the court noted. Accordingly, the appeal was partly allowed. Case Title: GODREJ PROJECTS DEVELOPMENT LIMITED VERSUS ANIL KARLEKAR & ORS.Citation : 2025 LiveLaw (SC) 150Click here to read/download the judgmentAppearances: For Appellant(s) : Mr. Dhruv Mehta, Sr. Adv. Mr. Kapil Madan, Adv. Mr. Saurabh Gauba, Adv. Mr. Akshit Narula, Adv. Mr. Shailendra Pratap Singh, Adv. Mr. Randhir Kumar Ojha, AOR Ms. Surabhi Kapur, Adv. For Respondent(s) : Mr. Ashwarya Sinha, AOR Mr. Aditya Malhotra, Adv.

S. 74 Contract Act | Forfeiture Of Earnest Money Permissible If It's Not Excessive Amounting To Penalty : Supreme Court

Yash Mittal

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