The Delhi High Court dismissed an appeal challenging a trial court decree directing refund of Rs 4,00,000 earnest money paid under an Agreement to Sell, holding that forfeiture of earnest money is not automatic upon breach and the party seeking to retain it must establish legal injury under Section 74 of the Indian Contract Act, 1872. The Court affirmed that where loss is capable of proof, it must be proved, and mere stipulation in the contract does not render the named sum automatically recoverable.
Background & Facts
The Dispute
The original plaintiff, Smt. Arvinder Kaur (since deceased, represented by her legal heirs), entered into an Agreement to Sell dated 21.06.2008 with the original defendants, Sh. Somnath Kharbanda and Sh. Anoop Kharbanda (both since deceased, represented by their legal heirs), for the purchase of property bearing No. 6/2, Second Floor with roof right, Ramesh Nagar, New Delhi, for a sale consideration of Rs 40,00,000. A sum of Rs 4,00,000 was paid in cash as earnest money (bayana) under the Agreement, and a receipt was executed acknowledging the payment. The balance consideration of Rs 36,00,000 was stipulated to be paid on or before 05.09.2008. Clause 5 of the Agreement provided that if the seller failed to comply, he would pay double the earnest money to the purchaser, and if the purchaser failed to comply, the amount would be forfeited by the seller.
Key Facts
- 21.06.2008: Agreement to Sell executed between parties for Rs 40,00,000; earnest money of Rs 4,00,000 paid and receipt issued (Ex. PW-1/1 and Ex. PW-1/2).
- 05.09.2008: Stipulated date for payment of balance consideration of Rs 36,00,000, which remained unpaid.
- Pre-05.09.2008: Plaintiff requested defendants on several occasions to provide copies of title documents for verification; defendants allegedly failed to produce them.
- 15.04.2009: Property dealer conveyed to plaintiff that defendants were not willing to abide by the Agreement terms.
- Defendants' position: They claimed plaintiff failed to honour the Agreement by not paying the balance sum; they had entered into a forward Agreement to Sell and Purchase with one Mr. Paramjeet Singh for another property using anticipated sale proceeds, and paid bayana of Rs 4,60,000 to him, which was forfeited when their deal fell through due to plaintiff's default.
- Plaintiff's suit: Filed Suit Civ. DJ No. 9472/2016 for recovery of Rs 8,00,000 (double the earnest money) along with interest @ 12% p.a., alleging defendants' default in producing title documents.
- Issues framed on 16.03.2012: Seven issues including whether defendants failed to show title documents (Issue 1), whether plaintiff entitled to double earnest money (Issue 2), whether defendants informed plaintiff of forward purchase making time essence (Issue 3), whether defendants forfeited earnest money (Issue 4), limitation (Issue 5), interest entitlement (Issue 6), and relief (Issue 7).
- Evidence: Plaintiff examined herself (PW-1), attesting witness Mr. Rajender Bali (PW-2), and her husband Mr. Ranjeet Singh (PW-3). Defendant No. 1 (Somnath Kharbanda) filed affidavit but died during trial; his cross-examination incomplete. DW-1B (Kavita Kharbanda) and DW-1C (Gagan Kharbanda) corroborated defence. Registered GPA and Agreement to Sell with Paramjeet Singh marked as Mark A and Mark B but de-exhibited for non-production of originals.
Procedural History
- 16.03.2012: Issues framed in Suit Civ. DJ No. 9472/2016 before District Judge, Delhi.
- 20.03.2026: Trial Court pronounced Judgment and Decree, partly decreeing suit for refund of Rs 4,00,000 with pendente lite and future interest @ 6% p.a. Key findings: (a) Plaintiff's contention that defendants failed to produce title documents not accepted; (b) Plaintiff failed to establish financial capacity and readiness/willingness; (c) Defendants' claim of loss from forward transaction rejected as documents de-exhibited and no cogent evidence led; (d) Defendants not entitled to forfeit earnest money; (e) Plaintiff entitled to recover Rs 4,00,000 paid as bayana.
- 2026: Present Regular First Appeal (RFA 814/2026) filed by legal representatives of deceased defendants against the Judgment and Decree dated 20.03.2026.
- 10.08.2026: Appeal reserved for judgment.
- 27.10.2026: Judgment pronounced dismissing the appeal.
Relief Sought
The Appellants sought setting aside of the impugned Judgment and Decree dated 20.03.2026, contending the trial court travelled beyond pleadings, made findings on title not in issue, erroneously granted refund of earnest money despite plaintiff's default and lack of readiness/willingness, and misapplied precedent on specific performance suits.
The Legal Issue
The central questions were: (1) Whether forfeiture of earnest money under an Agreement to Sell is automatic upon breach, or whether the party seeking to retain it must establish legal injury and actual loss under Section 74 of the Indian Contract Act, 1872; (2) Whether the trial court travelled beyond the pleadings and issues framed by making observations on the defendants' title to the suit property; (3) Whether the principle in K.R. Suresh v. R. Poornima & Ors. (2025 INSC 617) requiring a specific prayer for refund of earnest money in a suit for specific performance applies to a simpliciter suit for recovery of bayana amount.
Arguments Presented
For the Appellants
The Appellants contended that the trial court travelled beyond the pleadings and issues framed, as no specific issue was framed regarding ownership or validity of title documents. They argued the suit was merely for recovery of double earnest money, not for declaration of title, and no relief can be granted on an unpleaded case. They asserted the plaintiff never challenged the legality of title documents in the plaint or evidence, and the trial court's reliance on Shakeel Ahmed v. Syed Akhlaq Hussain (2023 SCC Online SC 1526) was misconceived. They further contended that the plaintiff failed to establish readiness and willingness to perform, the balance consideration remained unpaid, and the defendants had rightly forfeited the earnest money per Clause 5. They relied on K.R. Suresh v. R. Poornima to argue that refund of earnest money cannot be granted unless specifically claimed in a suit for specific performance, and cited Bachhaj Nahar v. Nilima Mandal (2008 INSC 1072), Rohit Singh v. Parimal Bhattacharjee (2024 DHC 8175), Trojan & Co. v. Nagappa Chettiar (1953) 1 SCC 456, Krishna Priya Ganguly v. University of Lucknow (1984) 1 SCC 307, Om Prakash v. Ram Kumar (AIR 1991 SC 409), Bharat Amratlal Kothari v. Dosukhan Samadkhan Sindhi (2010) 1 SCC 234, and Fertilizer Corp. of India Ltd. v. Sarat Chandra Rath (AIR 1996 SC 2744) on principles of forfeiture and contractual obligations.
For the Respondents
The Respondents (through counsel Ms. Tejasvi Mohan) supported the trial court's findings, emphasizing that the defendants failed to produce original documents for Mark A and Mark B (forward transaction documents), which were de-exhibited, and led no cogent evidence to prove the alleged loss of Rs 4,60,000. They argued that Section 74 requires proof of legal injury and reasonable compensation, not automatic forfeiture, and the trial court correctly applied Fateh Chand v. Balkishan Das and Kailash Nath Associates v. DDA. They maintained the suit was a simpliciter recovery suit, not a specific performance suit, making K.R. Suresh inapplicable, and the trial court's observations on title were incidental to adjudicating whether plaintiff was justified in not proceeding, not a finding on title merits.
The Court's Analysis
The High Court began by noting the admitted facts: execution of Agreement to Sell dated 21.06.2008, payment of Rs 4,00,000 as bayana, and non-payment of balance Rs 36,00,000 by 05.09.2008. The core inquiry was which party committed default.
On the plaintiff's contention about non-production of title documents, the Court agreed with the trial court that "it was not believable that a person entering into an Agreement and paying Rs 4,00,000/-, would not first see the documents of title." The Court found the trial court's observation on the plaintiff's financial capacity (noting a Section 149 CPC application for enlargement of time to pay court fees) was relevant to assessing readiness and willingness, though the more pertinent question was the defendants' right to forfeit.
The Court then undertook a detailed analysis of Section 74 of the Indian Contract Act, 1872, quoting the provision in full. It held that a plain reading makes evident that "the sum stipulated in the contract does not become automatically recoverable, merely upon proof of breach. The aggrieved party is entitled only to 'reasonable compensation' not exceeding the sum named or the penalty stipulated." The Constitution Bench in Fateh Chand v. Balkishan Das (1964) 1 SCR 515 was cited for the principle that the words "whether or not actual damage or loss is proved" merely dispense with proof of precise quantum, not with the existence of legal injury - Section 74 "does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted."
The Court extensively relied on Kailash Nath Associates v. Delhi Development Authority (2015) 4 SCC 136, quoting paragraph 43.3: "Since Section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the Section," and paragraph 43.6-43.7 on the limited circumstances where the liquidated amount can be awarded without proof of actual loss, and the application of Section 74 to forfeiture of earnest money under a contract.
Applying these principles, the Court held: "Thus, the forfeiture of earnest money paid under an Agreement to Sell, is not an automatic consequence of breach. The amount named in the contract, only defines the outer limit of compensation. The party seeking to retain it, must establish that legal injury has resulted from the breach, and where the loss is capable of proof, it must be proved."
On the defendants' claim of loss from the forward transaction with Paramjeet Singh, the Court noted the Receipt and Agreement to Sell were de-exhibited for non-production of originals, and no other cogent evidence was led. The loss was "neither difficult nor impossible to prove; it was capable of being established by documentary evidence and by examining Mr. Paramjeet Singh." The defendants therefore failed to establish any loss under Section 73 of the Indian Contract Act.
Regarding the appellants' contention that the trial court made findings on title beyond the pleadings, the Court clarified: "The learned Trial Court did make observations regarding the legal effect of the documents relied upon by the Defendants, but it was not any findings on the title of the Defendant; the observations were confined to adjudicate whether the plaintiff was justified in rescinding the Agreement to Sell and not a finding on the title of the defendant over his property. Such observations were only incidental and not on the merits."
On readiness and willingness, the Court held the reference was made "while examining her conduct and the parties' respective obligations under the Agreement to Sell, and not to adjudicate a claim for Specific Performance, which was not the relief sought in the Suit."
Finally, on K.R. Suresh v. R. Poornima (2025 INSC 617), the Court distinguished it squarely: "The principle laid down in K.R. Suresh v. R. Poornima & Ors., 2025 INSC 617, regarding the requirement of a specific prayer for refund under Section 22(2) of the Specific Relief Act, 1963, is applicable only in Suit for Specific Performance. The present Suit was not one for Specific Performance. The Trial Court awarded Rs 4,00,000/- against the monetary claim of Rs 8,00,000/- made in the Suit, and did not grant an unclaimed alternative relief in a Suit for Specific Performance."
The Verdict
The appeal was dismissed. The High Court upheld the trial court's Judgment and Decree dated 20.03.2026, confirming the decree for refund of Rs 4,00,000 (earnest money) to the plaintiff/respondents with pendente lite and future interest at 6% per annum. The pending applications (CM APPL. 52540-52541/2026) were also disposed of. The defendants/appellants failed to prove any legal injury or loss from the plaintiff's breach, and the forfeiture of earnest money was held unjustified under Section 74 of the Indian Contract Act.
What This Means For Similar Cases
Forfeiture of Earnest Money Is Not Automatic
Practitioners must advise clients that a forfeiture clause in an Agreement to Sell does not operate as a self-executing penalty. The party seeking to retain earnest money bears the burden of proving legal injury and actual loss resulting from the breach. Where the loss is capable of proof - as in a claimed forward transaction - documentary evidence and witness testimony are essential. Mere assertions on oath, without original documents or independent corroboration, will not suffice. The named sum in the contract is only an outer limit of reasonable compensation under Section 74.
Section 74 Requires Proof of Loss Where Proof Is Possible
The Kailash Nath Associates principles are now firmly entrenched: if actual damage or loss is capable of proof, the party claiming compensation must prove it. The liquidated damages clause does not relieve this burden. In earnest money disputes, this means the seller must demonstrate concrete financial prejudice - such as a proven lost opportunity, price depreciation, or incurred costs - not merely point to the buyer's default. The Fateh Chand principle that Section 74 does not justify compensation where no legal injury resulted remains the governing test.
Simpliciter Recovery Suits Are Distinct from Specific Performance Suits
The distinction drawn between a suit for recovery of bayana and a suit for specific performance is critical. In a pure recovery suit, the plaintiff need not pray for refund of earnest money as an alternative relief under Section 22(2) of the Specific Relief Act; the claim for return of the amount paid is the primary relief. K.R. Suresh applies only where specific performance is sought and refund is claimed as a consequential or alternative remedy. Lawyers drafting plaints for earnest money recovery should frame them as independent money suits, not as specific performance suits with alternative prayers, to avoid the K.R. Suresh threshold.
Incidental Observations on Title Do Not Constitute Findings on Title
Courts may examine title documents incidentally to determine whether a party's conduct (e.g., refusing to proceed for want of title verification) was justified, without adjudicating title validity. Such observations are not findings on the merits of title and do not travel beyond the pleadings if they serve the limited purpose of assessing breach and justification. Practitioners should not conflate incidental judicial reasoning with substantive determinations on ownership.
Documentary Evidence Must Be Produced in Original or Properly Proved
The de-exhibition of Mark A (GPA) and Mark B (forward Agreement to Sell) for non-production of originals was fatal to the defendants' loss claim. Parties relying on secondary evidence must comply with the Indian Evidence Act requirements (Sections 63, 65). Failure to produce originals or lay proper foundation for secondary evidence renders documents inadmissible, and oral assertions cannot fill the evidentiary gap. This underscores the importance of document management and timely production in contract disputes.
