A) ABSTRACT / HEADNOTE

This analysis examines the Supreme Court’s judgment in K.R. Suresh v. R. Poornima & Ors., Civil Appeal No. 5822 of 2025, which raises two tightly related legal questions: (i) whether an amount described in an Advance Sale Agreement (ATS) as “advance money” was properly treated as earnest money capable of lawful forfeiture on the purchaser’s default; and (ii) whether a plaintiff who seeks specific performance but fails to plead an alternative relief for refund under Section 22 of the Specific Relief Act, 1963 can obtain refund of that deposit.

The Court held that the sum of Rs. 20,00,000 paid on execution of the ATS bore the characteristics of earnest money  it was paid at contract formation, intended as security for performance, and was to be adjusted against the sale price if the transaction completed and therefore could be forfeited on the purchaser’s failure to pay the balance within the stipulated four months.

The Court further held that an alternative prayer for refund under Section 22(1)(b) is not a relief that a court may grant suo motu; it must be specifically claimed or properly amended into the plaint (though amendments may be allowed at any stage in an “appropriate case”).

The Court applied established principles distinguishing advance and earnest deposits, surveyed authorities on the permissible extent of forfeiture (and the interplay with Section 74, Indian Contract Act, 1872), and concluded that the forfeiture was lawful and not unconscionable on the facts. The appeal was dismissed.

Keywords: Advance money; Earnest money; Forfeiture clause; Specific Relief Act, 1963 s.22; Section 74, Indian Contract Act, 1872; Time is of the essence; Amendment of pleadings; Refund of earnest money.

B) CASE DETAILS

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The dispute springs from an Advance Sale Agreement dated 25 July 2007 for a plot in Kengeri Satellite Town, Bangalore, where the vendors (respondents) received Rs. 20,00,000 by two cheques as advance and agreed to receive the balance Rs. 35,50,000 within four months for registration of sale.

The ATS contained an express forfeiture clause: if the purchaser failed to pay the balance within the stipulated period the advance amount paid will be forfeited; if the vendor defaulted, double the advance would be payable to the purchaser. Time was put squarely within the contract because the vendors required funds to secure a time-bound One-Time Settlement (OTS) facility with a bank the surrounding circumstances the trial court and High Court accepted as rendering time of the essence.

The purchaser claimed readiness and willingness to perform, sought specific performance and injunctive relief to quash a subsequent sale executed by the vendors after expiry of the ATS period. The purchasers’ case on readiness relied upon bank loan interactions and an asserted attempt to secure probate or original title documents from the vendors; vendors denied obligation to furnish probate and relied on the ATS forfeiture covenant.

The trial court found that the purchaser had not proven readiness and willingness and that the forfeiture clause operated legitimately given the purchaser’s default; the High Court affirmed on similar grounds and noted that the purchaser had not specifically claimed the alternative relief of refund under Section 22 of the Specific Relief Act, 1963 in the plaint or by amendment.

The appeal to the Supreme Court was limited to the refund issue and validity of forfeiture; the Supreme Court analyzed the advance-vs-earnest distinction, the permissibility of forfeiture absent unconscionability, and the pleading/section 22 constraints on alternative relief — ultimately upholding forfeiture and dismissing the appeal. These factual and legal contours are drawn from the judgment and headnotes.

D) FACTS OF THE CASE

The following facts, established by the record and relied upon by the courts below, frame the legal contest. On 25 July 2007 respondents 1–4 executed an Advance Sale Agreement in favour of the appellant for Site No.307 at Kengeri for Rs. 55,50,000, the appellant issuing two cheques dated 16 July 2007 totaling Rs. 20,00,000 which the ATS acknowledged as advance and specified that the balance Rs. 35,50,000 was to be paid within four months for registration.

The ATS expressly stated forfeiture in case of buyer default and double payment if the seller defaulted. The appellant alleges he sought a bank loan on 20 September 2007 and was instructed by the bank to procure the original title documents and a probate certificate, prompting repeated requests to vendors to get the probate; the vendors allegedly promised but failed.

The vendors say they had already got khata changed to their name and that the buyer knew the title was by unregistered Will and no obligation existed in the ATS to furnish probate; they stressed urgent need of funds for an OTS with the bank making time-essential. After the buyer did not tender the balance within the four-month period (no documentary proof of funds was produced; the buyer’s legal notice was issued only after the four months had expired), the vendors purportedly cancelled the ATS, forfeited the Rs. 20,00,000 and sold the plot to third parties (defendants 5–6) who were held to be bona fide purchasers for value without notice.

The trial court found lack of readiness/willingness, accepted the vendors’ urgency and confirmed forfeiture; the High Court affirmed and added that the buyer had not pleaded an alternative claim for refund under Section 22(1)(b) so refund could not be granted.

The Supreme Court examined whether the advance was essentially earnest money and whether Section 22 permitted a court to grant refund absent a specific plea, concluding the advance was earnest in nature, forfeiture lawful on these facts, and refund unavailable where not claimed. These pivotal facts are set out in the judgment record.

E) LEGAL ISSUES RAISED

i. Whether an amount described as advance money in an ATS is to be characterized as earnest money such that it can be lawfully forfeited upon the purchaser’s default?

ii. If forfeiture is sought under an ATS, what is the permissible extent of forfeiture and does Section 74, Indian Contract Act, 1872 apply to limit such forfeiture?

iii. Whether Section 22(1)(b) of the Specific Relief Act, 1963 allows a court to grant refund of earnest money suo motu when a plaintiff seeking specific performance has not specifically pleaded the alternative relief?

iv. Whether a plaint may be amended at any stage to include a prayer for refund under Section 22(2), and if so what are the attendant judicial limitations?

v. Whether, on the facts, the forfeiture clause was unconscionable, one-sided or otherwise unenforceable under principles of fairness and doctrine derived from Article 14 jurisprudence?

F) PETITIONER / APPELLANT’S ARGUMENTS

The appellant argued that despite labels used in the ATS, the facts showed he was ready and willing to perform and the vendors had frustrated completion by failing to obtain probate; the appellant relied on his communications with the bank and an alleged offer to increase consideration (an asserted offer of an additional Rs. 10,00,000 between 18–20 February 2008) as proof of readiness to pay.

Counsel contended that the sellers acted mala fide by hastily selling to third parties soon after expiry of the four months and that they never produced the cancellation letter of the ATS before trial  thereby attacking the procedural sufficiency of the vendors’ case.

On the pleading point, the appellant relied on Prayer (c) in the plaint (a residuary prayer that the court may pass “such other relief(s) as it deems fit”) and invoked precedent (notably Desh Raj v. Rohtash Singh and Kamal Kumar v. Premlata Joshi) to submit that the Court could, in the exercise of equitable jurisdiction, grant refund of the advance even if the plaint did not set out a specific section 22 prayer; alternatively, counsel argued that such relief could be deemed included or could be permitted by an amendment even on appeal, thereby entitling refund against the subsequent purchasers who benefited from the property.

The appellant framed the plea as one of compensatory equity — that the plaintiff should not be left without remedy where the vendor benefited and the purchaser lost his deposit.

G) RESPONDENT’S ARGUMENTS

The vendors contended that time was of the essence  they had an urgent need to realize the sale proceeds to secure an OTS facility with their bank  and the buyer had failed to show documentary proof of funds or bank sanctions; his legal notice was only issued after the four-month term had expired.

The vendors stressed the explicit contract clause: on buyer default advance amount will be forfeited and on vendor default double the amount was payable a bilateral bargain. They argued the advance was truly earnest in nature and thus forfeitable and that courts have long recognized such forfeiture absent unreasonableness.

On Section 22, respondents pointed out that the plaintiff never sought a refund in the plaint and neither sought amendment below; Section 22(2) mandates the court to allow amendment where necessary, but the plaintiff did not avail himself of that remedy. The subsequent purchasers argued they were bona fide purchasers for value without notice and could not be asked to refund; any liability lay on the vendor who sold the property.

Respondents relied upon authorities distinguishing advance from earnest and stressing the need for pleading particular reliefs under s.22. The cumulative submission was that forfeiture was lawful, proportionate, and that the plaintiff’s failure to plead the alternative remedy precluded relief.

H) RELATED LEGAL PROVISIONS 

i. Specific Relief Act, 1963 — Section 16(c) (readiness and willingness); Section 21 (compensation) and Section 22(1)(a)-(b), (2) (power to grant possession or other relief including refund of earnest, and mandate to permit amendment).

ii. Indian Contract Act, 1872 — Section 74 (liquidated damages/penalty — reasonable compensation not exceeding stipulated sum).

iii. Code of Civil Procedure, 1908 — Order VI Rule 17 (amendment of pleadings) (overridden in part by s.22 proviso).

iv. Constitution of India — Article 14 principles informing unconscionability and fairness applied in contract enforcement jurisprudence.

I) JUDGEMENT

The Supreme Court confined the appeal to the question of refund and validity of forfeiture and conducted a two-part analysis: (1) characterisation of the advance and validity of forfeiture; and (2) scope of Section 22 in allowing refund when the plaint does not specifically claim it.

On the first limb the Court reiterated established tests: the wording of the agreement is important but not conclusive; the intention of the parties and surrounding circumstances determine whether a sum is earnest or merely advance or part-payment.

Applying the precedent from Shree Hanuman Cotton Mills v. Tata Air Craft Ltd., Videocon Properties Ltd. v. Bhalchandra Laboratories, Satish Batra v. Sudhir Rawal, and Central Bank of India v. Shanmugavelu, the Court found the Rs.20,00,000 to have all classic hallmarks of earnest money: it was paid at the time of contract, expressed to be adjustable against price, and tied to performance with an explicit forfeiture clause.

The sale’s urgent commercial purpose (the vendor’s OTS) and a strict four-month completion window reinforced that time was of the essence a fact acknowledged by the trial court and affirmed by the High Court thus the forfeiture covenant was not a surprise term.

The Court rejected the appellant’s readiness-and-willingness narrative because the record lacked contemporaneous documentary proof (bank passbooks, sanction letters) and his legal notice was belated. The Court held the vendors were entitled to forfeit the deposit under the ATS because the purchaser defaulted.

a. RATIO DECIDENDI

The controlling ratio is twofold.

First, where a sum paid at contract formation is contractually earmarked as security for performance, and the aggregate contract and facts show it was intended as earnest money, it may be forfeited upon purchaser default; mere labeling as “advance” does not preclude this characterisation. The Court drew on Videocon, Satish Batra and Shanmugavelu to hold that intention and purpose determine the sum’s nature.

Second, Section 22(2) of the Specific Relief Act requires that refund relief be specifically claimed; courts may permit amendment at any stage but they cannot grant refund suo motu in the absence of such a claim.

Hence, a purchaser who neither pleads refund nor moves to amend cannot compel repayment. Applied to facts: the payment was earnest in character; the purchaser failed to show readiness/willingness; time was of the essence; forfeiture therefore valid; and refund unavailable because the plaint lacked the specific s.22 relief and no amendment was sought.

These principles set the binding precedent on the interplay between contractual forfeiture clauses and statutory pleading requirements.

b. OBITER DICTA

The Court made several obiter observations of doctrinal interest. It rehearsed the nuanced relationship between forfeiture clauses and Section 74 of the Indian Contract Act: ordinarily forfeiture of bona fide earnest money is not regarded as a penalty; however, if forfeiture operates as a punitive or unconscionable term disproportionate to loss, Section 74 principles may limit enforcement (citing Fateh Chand v. Balkishan Dass, Maula Bux, Kailash Nath and later authority).

The Court also emphasised that Section 22(2) is broadly permissive and enables amendment at the appellate stage in an “appropriate case”, but the availability is context-sensitive; the provision is directory in character when relief is ancillary to, or necessarily flows from, a decree (e.g., possession ancillary to specific performance), but not where the relief is independent and must be pleaded. The judges observed that courts must be vigilant against unfair contractual terms under Article 14 when bargaining power is asymmetrical (citing Central Inland Water Transport Corporation v. Brojo Nath Ganguly in dictum), but stressed parity of commercial parties and the bilateral nature of the ATS’s forfeiture/double-payment bargain weighed against interference.

These observations guide lower courts on balancing contractual freedom, equitable restraint, and statutory pleading mandates.

c. GUIDELINES

1. Characterisation Test: Determine whether an upfront payment is earnest or mere advance by reading the agreement, examining whether it was paid at contract formation, whether it was to be adjusted on completion, and the surrounding commercial context. Use Videocon and Shree Hanuman as guides.

2. Time-Essence Inquiry: Ascertain whether time is of the essence from express terms, nature of property/transaction, and surrounding circumstances (e.g., urgency for bank OTS). Mere clause alone is not conclusive; factual matrix matters. See Chand Rani and Welspun Specialty Solutions v. ONGC.

3. Forfeiture vs. Penalty: If deposit functions as earnest money, forfeiture is ordinarily permissible and not penal; if forfeiture operates as an arbitrary penalty disproportionate to loss, Section 74 principles may apply to limit recovery; the vendor should tender evidence of loss when disputing unconscionability. See Fateh Chand, Kailash Nath, Lakshmanan.

4. Pleading Under s.22: Refund of earnest money under Section 22(1)(b) is not automatic; it must be specifically claimed in the plaint or by amendment. Courts should allow amendment at any stage in an appropriate case but not grant refund suo motu. Parties must be vigilant to plead alternative reliefs timely.

5. Bona Fide Purchaser Protection: Courts should protect bona fide purchasers for value without notice; liability for refund ordinarily lies on the original vendor unless the purchaser had notice or mala fide involvement.

J) CONCLUSION & COMMENTS

On a balanced view, the Supreme Court’s disposition adheres to established contract and remedial principles while underscoring procedural discipline in civil pleading. The Court’s holding that an advance can be treated as earnest upon a close reading of contractual text and background aligns with authorities emphasising substance over nominal labels; it avoids formalism that would enable parties to circumvent forfeiture covenants by mere choice of words.

Equally important is the Court’s insistence that Section 22(1)(b) reliefs be specifically pleaded or properly amended into the record: this protects defendants (and innocent subsequent purchasers) from surprise monetary liability and preserves orderly adjudication, while still keeping the door open for litigants to seek amendment in appropriate circumstances.

Practically, litigants seeking specific performance should now be doubly careful:

(i) to plead alternative reliefs such as refund under s.22(1)(b) at the earliest opportunity; 

(ii) to adduce contemporaneous documentary proof of readiness and willingness (bank statements, loan sanction letters, correspondence) because mere post-fact assertions and belated notices will likely fail. For vendors, the judgment is a caution that forfeiture will be upheld where the forfeiture term is reciprocal or reasonable, and loss evidence further fortifies the position.

Finally, the Court’s obiter on unconscionability and Article 14 signals that egregious one-sided clauses remain subject to constitutional and equitable control; thus pure contractual freedom does not immunize manifestly unfair forfeiture. Overall, the judgment strikes a reasoned balance between contractual sanctity and procedural fairness.

K) REFERENCES

a. Important Cases Referred 

1. K.R. Suresh v. R. Poornima & Ors., Civil Appeal No. 5822 of 2025, [2025] 6 S.C.R. 22 (Supreme Court of India).

2. Desh Raj v. Rohtash Singh, (2023) 3 SCC 714.

3. Kamal Kumar v. Premlata Joshi, (2019) 3 SCC 704.

4. Pydi Ramana v. Davarasety Manmadha Rao, (2024) 7 SCC 515.

5. Shree Hanuman Cotton Mills v. Tata Air Craft Ltd., (1969) 3 SCC 522.

6. Videocon Properties Ltd. v. Bhalchandra Laboratories, (2004) 3 SCC 711.

7. Satish Batra v. Sudhir Rawal, (2013) 1 SCC 345.

8. Central Bank of India v. Shanmugavelu, (2024) 6 SCC 641.

9. Fateh Chand v. Balkishan Dass, 1963 SCC OnLine SC 49.

10. Maula Bux v. Union of India, (1969) 2 SCC 554.

11. Kailash Nath Associates v. DDA, (2015) 4 SCC 136.

12. Lakshmanan v. B.R. Mangalagiri, (1995) Supp 2 SCC 33.

13. Godrej Projects Development Ltd. v. Anil Karlekar, 2025 SCC OnLine SC 222.

14. Chand Rani v. Kamal Rani, (1993) 1 SCC 519.

15. Welspun Specialty Solutions Ltd. v. ONGC, (2022) 2 SCC 382.

b. Important Statutes Referred

1. Specific Relief Act, 1963 (India), ss.16(c), 21, 22.

2. Indian Contract Act, 1872 (India), s.74.

3. Code of Civil Procedure, 1908 (India) — Order VI r.17 (pleadings).