Case Note & Summary
The appeals arose from a common judgment of the Punjab and Haryana High Court in three matters involving forfeiture of earnest money by the Haryana Urban Development Authority (HUDA). HUDA had issued an advertisement inviting applications for allotment of residential plots at Karnal, requiring a deposit of 10% of the tentative price along with the application as earnest money. The letter of allotment issued to each allottee contained clauses 4, 5, and 6, stipulating that if an allottee refused to accept the allotment, refusal had to be communicated within 30 days failing which the allotment would stand cancelled and the earnest money forfeited. Upon acceptance, an additional amount was to be paid so that the total deposit constituted 25% of the tentative price, and the balance was payable either in lump sum within 60 days or in six annual instalments with interest. The respondents, allottees, accepted the allotment, made initial deposits, paid some instalments, and then intimated the authority that they would not be in a position to take the land and requested refund of the money deposited. In some cases the authority refused cancellation, and in other cases the allottees approached the High Court before the authority considered their requests. The High Court directed the authority to refund the balance after deducting 10% of the amount deposited by each allottee. HUDA and the State of Haryana appealed to the Supreme Court. The appellant argued that the 10% deposit was earnest money given to bind the contract, and since the allottees defaulted after accepting the allotment, the authority was entitled to forfeit the entire earnest money. The respondent argued that forfeiture under clause 4 applied only if refusal was not communicated within 30 days, and once allotment was accepted and instalments paid, no provision allowed forfeiture of earnest money; the High Court's equitable deduction was proper. The Court examined the nature of earnest money, relying on Shri Hanuman Cotton Mills and Delhi Development Authority cases, and held that earnest money is part of the purchase price when the transaction is carried out and is forfeited when the transaction falls through due to default of the purchaser. The Court found that the allottees had accepted the allotment, made part payment, and then requested surrender, which constituted default. The Court also held that the High Court erred in relying on delay in possession because no period for possession was stipulated in the allotment letter and reasonable time had not lapsed. The Court set aside the High Court's direction and held that the authority was entitled to forfeit the earnest money deposited along with the application form; after deducting the earnest money, the balance amount was to be refunded to the allottee-respondents who had applied for refund. The appeals were allowed accordingly.
Headnote
A) Contract Law - Earnest Money - Nature and Forfeiture - Not mentioned - Earnest money represents a guarantee that the contract will be fulfilled and is part of the purchase price when the transaction is carried out. It is forfeited when the transaction falls through by reason of the default or failure of the purchaser. The Court relied on Shri Hanuman Cotton Mills and Delhi Development Authority cases. Held that an allottee who accepted allotment and made part payment but later defaulted by requesting surrender committed default, entitling the authority to forfeit the entire earnest money deposited with the application. (Paras 1-5) B) Allotment Terms - Forfeiture Clause Interpretation - Clause 4 of Allotment Letter - Not mentioned - Clause 4 provided forfeiture of earnest money if refusal was not communicated within 30 days, but a combined reading of clauses 4, 5, and 6 along with the advertisement showed that the 10% deposit made with the application was earnest money to bind the contract and was forfeitable on default even after acceptance. The High Court erred in limiting forfeiture to 10% of the total amount deposited instead of the full earnest money. Held that the authority was justified in forfeiting the entire earnest money. (Paras 1-5) C) Possession Delay - Reasonable Period - No Stipulated Period - Not mentioned - The High Court directed refund on the ground that the authority was not in a position to deliver possession, but the letter of allotment did not stipulate any period for possession; the land required development and the allottees had not paid the full instalments. Reasonable period had not lapsed. Held that the High Court's direction was erroneous. (Paras 1-5)
Issue of Consideration
Whether, when a land is allotted and the allottee deposits some instalments but thereafter intimates the authority about his incapacity to pay up the balance instalments and requests for refund of the money paid, is the allotting authority entitled to forfeit the earnest money deposited by the allottee or only entitled to forfeit 10% of the total amount deposited by the allottee till the request is made as directed by the High Court?
Final Decision
The appeals were allowed. The impugned judgment and directions of the High Court in each appeal were set aside. The Court held that the appellant authority was entitled to forfeit the earnest money deposited along with the application form, and after deducting the said earnest money, the balance amount was to be refunded to the allottee-respondents who had applied for refund.
Law Points
- earnest money represents guarantee for contract fulfilment
- earnest money is part of purchase price
- forfeiture on default of purchaser
- allotment letter clause 4 conditions
- authority entitled to forfeit entire earnest money deposited with application
- High Court direction to deduct 10% erroneous
- possession period reasonable no stipulated time
