Introduction
In commercial transactions, earnest money holds a crucial position between contractual assurance and equitable restraint. It is a sum of money paid by the purchaser at the time of entering into a contract for sale to demonstrate their bona fide intention to perform the agreement. It acts as a security for the sellers to ensure the due performance of the contract, enabling them to forfeit the amount if the purchaser fails to complete the agreement.¹ However, this forfeiture remains in conflict with the principle of equity, and courts have repeatedly cautioned that forfeiture of earnest money cannot operate as a mechanism for unjust enrichment. This principle was reaffirmed in Subhash Aggarwal v. Mahender Pal Chhabra & Anr. [“the case”].²

Brief Facts
The dispute in the case arose from an agreement to sell dated 22nd January 2008, wherein Subhash Aggarwal [“the buyer”] agreed to purchase a residential property of 300 square yard in Delhi’s Ashok Vihar area for a total consideration of INR 6.11 Crore. At the time of the agreement, the appellant paid INR 60 lakhs as earnest money to Mahender Pal Chhabra [“the seller”] and later paid INR 30 Lakhs as part payment. When the transaction failed to materialise, the buyer, before the trial court, filed a suit for specific performance against the seller, and the court ruled in his favour. However, this decree was set aside by the High Court, which held that the buyer had failed to prove his readiness and willingness, resulting in the forfeiture of the earnest money and an order for a refund of the additional amount, along with interest. The matter ultimately reached the Supreme Court [“the court”], which re-examined the equities between the parties that included specific performance, equity and unjust enrichment.

Findings of the Court
The court upheld the High Court’s conclusion that the buyer was not entitled to specific performance, agreeing that he failed to establish continuous readiness and willingness to perform the contract. He was unable to demonstrate that he had the necessary financial capacity to pay the balance consideration on the stipulated due date, and his failure to be present at the office of the Sub-registrar on the date so fixed for execution of the sale deed weighed against his claim. However, the buyer was not solely responsible for the breach, noting that the seller also failed in obtaining the mutation and converting the property from leasehold to freehold, rendering both the buyer as well as the seller liable for the breach.

Moving on to the question of forfeiture of the earnest money, the court set aside the High Court’s order of forfeiture and found it to be inequitable. The court reiterated that earnest money, though liable to be forfeited in cases of breach, cannot be retained automatically or punitively, specifically in cases where both parties are contributories to the failure of the contract. The court emphasised that the principle of equity must prevail in such transactions to prevent the unjust enrichment and to restore parties to their original position so far as possible. Therefore, in the present case, since the seller had himself failed to perform the essential contractual obligations and the transaction remained unresolved for over seventeen years, the forfeiture of earnest money would result in an unfair windfall. Resulting in the court prohibiting the forfeiture and directing the payment of a lump-sum amount to achieve restitution and balance of equity between the parties.

Analysis
The judgment in Subhash Agarwal v. Mahender Pal Chhabra & Anr.³ reinforces the principle that forfeiture of earnest money in property transactions is neither automatic nor mechanical nor punitive. Rather, it is an outcome of the equitable scrutiny of the facts of the case. The reasoning closely aligns with earlier rulings such as Fateh Chand v. Balkishan Dass,⁴ where the court held that forfeiture leading to unjust enrichment is impermissible, and Kailash Nath Associates v. DDA,⁵ which clarified that forfeiture cannot be sustained in the absence of clear loss or when the defaulting party is not solely at fault. In this case, although the purchaser failed to establish the readiness and willingness to perform, the court acknowledged that the sellers had also breached their contractual obligations. By refusing to allow forfeiture of the earnest money, the court focused on restitution over punishment when both parties were at fault. This approach reflects upon the grant of specific relief and forfeiture as discretionary remedies, rather than as rigid consequences of contractual breaches.

Additionally, the judgment also carries significant implications for day-to-day transactions. For buyers, it highlights the importance of maintaining documentary proof of financial capacity and for sellers, it acts as a warning that forfeiture clauses cannot be used as a tool for unjust gains, especially where the failure of the contract can be attributed to the seller’s own action. The ruling strikes a balance between protecting genuine contractual expectations while ensuring that earnest money remains a safeguard for performance and not a means of unjust enrichment.

By - Manasi Chaudhari and Srishti Sati