Now Reading: Supreme Court rulings on earnest money forfeiture under Section 74 analysed
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Supreme Court rulings on earnest money forfeiture under Section 74 analysed
Supreme Court rulings on earnest money forfeiture under Section 74 analysed
Earnest money, given at contract execution, serves as a guarantee and part-payment. The key legal question is whether Section 74 of the Indian Contract Act, 1872, applies to its forfeiture. English common…
Earnest money, given at contract execution, serves as a guarantee and part-payment. The key legal question is whether Section 74 of the Indian Contract Act, 1872, applies to its forfeiture. English common law allowed forfeiture of earnest money without requiring proof of loss, treating it as an exception to penalty rules.
Indian Supreme Court judgments have developed this area. Fateh Chand v. Balkishan Das (1963) and Maula Bux v. Union of India (1969) did not directly settle the issue. Shree Hanuman Cotton Mills v. Tata Aircraft (1969) allowed forfeiture but left open whether courts can examine reasonableness or if Section 74 applies.
In Kailash Nath Associates v. DDA (2015), Justice R.F. Nariman held earnest money falls within Section 74, relying on Fateh Chand. This reasoning is open to challenge as Fateh Chand's observation was conceded by the attorney general, not a binding ratio. Satish Batra (2012), which followed Hanuman Cotton Mills, was not considered.
Indian Opinion Analysis
The conflict matters because if Section 74 applies, courts can reduce forfeited earnest money to 'reasonable compensation', preventing windfalls. This affects real estate and infrastructure contracts where large deposits are common. The Supreme Court may need a larger bench to settle the split between Kailash Nath and earlier rulings. The next development to watch is whether a new case forces the court to overrule or clarify Kailash Nath.
Source: livelaw.in
This story was synthesised by AI from the source linked above.
