Supreme Court: Forfeiture of earnest money permissible if it is not excessive amounting to penalty under Section 74 of Contract Act

The Supreme Court in the case Godrej Projects Development Limited Versus Anil Karlekar And Ors observed and has clarified that forfeiting a reasonable earnest money deposit in a contract does not constitute a penalty under Section 74 of the Contract Act, 1872.

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The court in the case held that, 'It can be seen that this Court has held that if the forfeiture of earnest money under a contract is reasonable, then it does not fall within Section 74 of the Indian Contract Act, 1872, inasmuch as, such a forfeiture does not amount to imposing a penalty.' The bench comprising of Justice B.R. Gavai and Justice S.V.N. Bhatti was hearing the present matter.

In the present matter, the Respondents, as flat purchasers, challenged the Appellant builder's forfeiture of 20% of the basic sale price as earnest money following their cancellation of the flat booking.

The Appellants supported the forfeiture contending that the Apartment Buyer Agreement, ABA explicitly allowed forfeiture of 20% of BSP as earnest money in case of cancellation.