Can a Seller Forfeit Your Entire Earnest Money?

Kailash Nath Associates was the highest bidder for Plot No. 2-A at Bhikaji Cama Place, District Centre, New Delhi. It bid Rs. 3.12 crore and deposited Rs. 78,00,000 as earnest money on February 18, 1982. The Delhi Development Authority accepted the bid and directed the company to deposit the remaining 75% by May 17, 1982.

A recession in the industry hit. The company asked for more time, and DDA set up a High Powered Committee. That committee recommended an extension, and DDA’s letter dated August 11, 1982 extended time up to October 28, 1982, with varying rates of interest starting from 18% and going up to 36%. A second High Powered Committee specifically named Kailash Nath as a person who should be given more time; DDA accepted that recommendation on May 14, 1984.

Nothing moved. The company wrote letters through 1984 to 1987 and got no reply. On December 1, 1987, DDA wrote a “without prejudice” letter asking for consent to pay the balance 75% premium within a period to be fixed, along with 18% interest per annum. Kailash Nath consented the same day.

On March 1, 1990, the Central Government told DDA the land was not Nazul land. On October 6, 1993, DDA cancelled the allotment and forfeited the entire Rs. 78,00,000, citing failure to deposit the balance 75% and dismissal of the company’s writ petition. Kailash Nath sued on February 17, 1994, asking the court to compel the sale and, in the alternative, to award damages and return the earnest money. DDA re-auctioned the plot on February 23, 1994, for Rs. 11.78 crore.

The single judge dismissed the suit for specific performance and damages but ordered refund of the earnest money forfeited together with 9% per annum interest. The division bench reversed that and upheld the forfeiture. DDA’s real-world excuses were that time was of the essence and could not be waived unilaterally, that the December 1, 1987 letter was “without prejudice” and based on a mistake of fact, and that its later profit from the re-auction was irrelevant.

The auction conditions said in sub-clause (iv) that the deposit could be forfeited only in case of default, breach, non-compliance or misrepresentation by the bidder. The original terms required the buyer to pay the balance 75% within three months of acceptance. DDA’s position was that time was of the essence and could not be waived unilaterally, and that its December 1, 1987 letter was “without prejudice” and based on a mistake of fact, so void under Section 20.

The High Court division bench relied on Tilley v. Thomas and Anandram Mangturam v. Bholaram Tanumal to say extensions required consensus ad idem. The Supreme Court found Webb v. Hughes more directly applicable: where time is made of the essence, it may be waived by conduct, but the purchaser is not bound to wait indefinitely and must give reasonable notice fixing a date.

The statutory question was Section 74. Although its words say compensation is available “whether or not actual damage or loss is proved”, the Court read that phrase narrowly: where actual loss can be proved, proof is not dispensed with; only where loss is difficult or impossible to prove can a genuine pre-estimate be awarded. Thus damage or loss caused is essential for Section 74 to apply. Section 63 also mattered because DDA, as promisee, could extend time for performance when the time was for the appellant’s benefit.

The Supreme Court allowed the appeal. It held that DDA had waived the three-month deadline by extending time at least twice and then asking for consent to pay the balance with interest. The December 1, 1987 letter was not a unilateral trap; it was a genuine attempt to regularise the payment. The October 6, 1993 cancellation letter gave no fresh notice fixing a deadline.

Once the transaction is carried out, the deposit counts toward the purchase price. But forfeiture is different. The Court held that Section 74 covers forfeiture of earnest money after an agreement has been reached.

• The Court closed the loophole that a public authority could treat the original three-month date as still strict after twice extending it. DDA had to put Kailash Nath on notice with a fresh, definite deadline before cancelling.
• The Court rejected the division bench’s view that DDA’s later profit was irrelevant. Because DDA suffered no loss and actually received Rs. 11.78 crore on re-auction, keeping Rs. 78 lakh would be a windfall and arbitrary under Article 14.

Gather the auction or sale terms, the original bid record, the earnest money receipt or bank draft, and every letter about extensions, consent and cancellation. In Kailash Nath, the December 1, 1987 consent and the October 6, 1993 cancellation letter were decisive.

If you are challenging a forfeiture, file a civil suit asking the court to compel the sale or refund the earnest money. Kailash Nath Associates’ original suit was CS (OS) 396 of 1994, and DDA’s later appeal to the division bench was RFA (OS) No. 10 of 2008. If the other party is a public authority, examine whether its conduct was arbitrary under Article 14.

If the other side resells the property, collect proof of the resale price and date. In this case, the Rs. 11.78 crore re-auction mattered because it showed DDA had suffered no loss.

Put every extension and consent in writing, and demand a clear notice fixing a deadline before any cancellation. The costliest mistake is letting a cancellation happen without that fresh notice.