Introduction:
The Supreme Court of India, in Subhash Aggarwal v. Mahender Pal Chhabra & Anr. (2025 LiveLaw (SC) 6), delivered a nuanced and equity-driven ruling clarifying the law on forfeiture of earnest money in contracts for sale of immovable property. The judgment arose from a long-standing dispute relating to an agreement to sell dated 22 January 2008 concerning a 300 square yard residential property situated in Ashok Vihar, Delhi, agreed to be sold for a total consideration of ₹6.11 crore. Under the agreement, the buyer paid ₹60 lakh as earnest money and an additional ₹30 lakh thereafter. While the trial court, by judgment dated February 2021, decreed specific performance in favour of the buyer, the Delhi High Court in September 2025 reversed the decree on the ground that the buyer had failed to establish readiness and willingness to pay the balance consideration of ₹5.21 crore. However, the High Court permitted forfeiture of the earnest money of ₹60 lakh while directing refund of the additional ₹30 lakh with interest. Aggrieved by the forfeiture, the buyer approached the Supreme Court. The case presented a crucial question: whether forfeiture of earnest money is permissible when both the buyer and the seller are found to be at fault in performance of contractual obligations, and whether equity allows such forfeiture to operate as unjust enrichment in favour of one party.
Arguments on Behalf of the Appellant (Buyer):
On behalf of the buyer, it was contended that the High Court, having rightly held that specific performance could not be granted due to lack of proof of readiness and willingness, erred gravely in permitting forfeiture of the earnest money. The appellant argued that forfeiture is not an automatic consequence of failure of a contract and must be tested on principles of equity, fairness, and restitution. It was emphasised that the High Court itself recorded findings that the seller had failed to discharge essential contractual obligations, particularly with respect to mutation of the property and conversion of the property from leasehold to freehold, which were prerequisites for completion of the sale. The appellant submitted that when both parties contribute to the failure of the contract, the seller cannot be permitted to retain the earnest money, as doing so would amount to unjust enrichment.
The buyer further argued that earnest money is intended to secure performance and demonstrate bona fides, not to operate as a penalty or a source of profit. Once the court concludes that neither party is entitled to enforce the contract strictly, the appropriate remedy must be restitutionary in nature, aimed at restoring parties, as far as possible, to their original positions. Relying on settled principles of equity, the appellant submitted that forfeiture in such circumstances violates the fundamental maxim that no party should be allowed to profit from its own wrong. It was also contended that the dispute had already remained pending for over a decade, causing severe financial and mental hardship to the buyer, and that continued enforcement of forfeiture would perpetuate injustice rather than cure it.
Arguments on Behalf of the Respondents (Sellers):
The sellers supported the High Court’s judgment insofar as it allowed forfeiture of the earnest money, contending that the buyer had failed to establish readiness and willingness, a mandatory requirement under Section 16(c) of the Specific Relief Act, 1963. It was argued that the buyer did not demonstrate the financial capacity to pay the substantial balance consideration of ₹5.21 crore at the relevant time, and therefore could not seek either specific performance or equitable relief. According to the respondents, earnest money by its very nature is liable to forfeiture when the buyer commits breach or fails to perform contractual obligations, and the High Court had correctly exercised its discretion in allowing such forfeiture while still directing refund of the additional ₹30 lakh.
The sellers attempted to downplay their own lapses by arguing that issues relating to mutation and conversion were procedural in nature and did not absolve the buyer of his primary obligation to demonstrate readiness with funds. They contended that permitting forfeiture served as a reasonable consequence of the buyer’s failure and acted as a deterrent against speculative or non-serious purchasers. The respondents further argued that the Supreme Court, in exercise of its appellate jurisdiction, ought not to interfere with a discretionary and equitable relief granted by the High Court unless the same was manifestly arbitrary or perverse.
Court’s Judgment:
The Supreme Court, in a carefully reasoned judgment authored by Justice Vikram Nath and concurred in by Justice Sandeep Mehta, partly allowed the appeal and significantly modified the High Court’s decision. At the outset, the Court affirmed the High Court’s finding that the buyer had failed to prove readiness and willingness to perform his part of the contract, and therefore was not entitled to the decree of specific performance. However, the Court took serious exception to the direction permitting forfeiture of the earnest money despite clear findings that the seller was also in breach of contractual obligations.
The Court categorically held that forfeiture of earnest money is impermissible where both parties are at fault. Emphasising foundational principles of equity, the Bench observed that equity must operate in a manner that prevents unjust enrichment and seeks to restore parties, as far as possible, to their original positions. The Court noted that in the present case, the buyer was at fault for not establishing financial readiness, while the seller was equally at fault for failing to fulfil obligations relating to mutation and conversion of the property, which were essential for lawful completion of the transaction. In such circumstances, allowing the seller to forfeit the earnest money would result in an inequitable windfall and permit the seller to profit from a transaction that never fructified due to shared blame.
The Court underscored that earnest money cannot be treated as a punitive instrument and that forfeiture is not a matter of course. It reiterated that contractual remedies must be tempered with equitable considerations, particularly where rigid enforcement would lead to disproportionate or unjust outcomes. Invoking the doctrine of restitution, the Court held that the correct approach in cases of mutual fault is not forfeiture, but adjustment of equities to ensure fairness. Taking note of the prolonged nature of the dispute, which had spanned over a decade, the Court also expressed its intent to bring finality and quietus to the litigation.
To do complete justice between the parties, the Supreme Court exercised its powers to mould relief and directed the respondents to pay a lump sum amount of ₹3,00,00,000 (Rupees Three Crores only) to the appellant within four weeks from the date of the order. The Court held that this amount would fully restitute the appellant, avoid further complications arising from the failed contract, and conclusively settle the dispute. Accordingly, the judgment of the High Court was modified to the extent that forfeiture of earnest money was set aside and replaced by the direction to pay the lump sum compensation.