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Earnest Money

Hanuman Cotton Mills v. Tata Air Craft Ltd., 1969) 3 SCC 522 in which there is a detailed discussion of what is meant by earnest money and what are the consequences of deposit of such money and when can the same be forfeited. The Bench after reviewing various decisions noted in the judgment which includes that of the Privy Council rendered in Chiranjit Singh v. Har Swarup, AIR 1926 PC 1, culled out the following principles regarding the ‘earnest’ at page 139: (SCC p. 531, para 21)

“(1) It must be given at the moment at which the contract is concluded.
(2) It represents a guarantee that the contract will be fulfilled or,in other words, ‘earnest’ is given to bind the contract.
(3) It is part of the purchase price when the transaction is carried out.
(4) It is forfeited when the transaction falls through by reason of the default or failure of the purchaser.
(5) Unless there is anything to the contrary in the terms of the contract, on default committed by the buyer, the seller is entitled to forfeit the earnest.”