Forfeiture of earnest money not automatic on breach of agreement to sell; seller must prove actual loss

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Published 31 October 2026

Case: Not stated in source
Court: High Court of Delhi
Bench: Justice C. Hari Shankar
Citation: Not stated in source
Statutes: Indian Contract Act, 1872 — s.74
Source: LiveLaw

Bottom Line Up Front (BLUF)

The Delhi High Court, in a decision by Justice C. Hari Shankar, held that forfeiture of earnest money is not automatic upon breach of an agreement to sell. The seller must prove actual loss suffered due to the breach to justify forfeiture, as per Section 74 of the Indian Contract Act, 1872. This applies even if the agreement specifies forfeiture.

Ratio Decidendi · Legal Principle Established

Forfeiture of earnest money under an agreement to sell is not automatic upon breach. The party seeking to forfeit must prove actual loss suffered due to the breach, in accordance with Section 74 of the Indian Contract Act, 1872, even if the contract contains a forfeiture clause.

Practice & Procedural Impact for Advocates

Advocates representing sellers must advise clients to maintain meticulous records of actual losses incurred due to a buyer's breach of an agreement to sell. Litigants seeking to forfeit earnest money must specifically plead and prove the actual loss suffered, rather than relying solely on the contract's forfeiture clause. Buyers challenging forfeiture can argue the absence of proven actual loss by the seller.

Key Legal Takeaways

1Forfeiture of earnest money is not an automatic consequence of breach of contract.
2The party seeking forfeiture must demonstrate actual loss suffered.
3Section 74 of the Indian Contract Act, 1872, governs the forfeiture of earnest money.
4A contractual clause allowing forfeiture does not negate the requirement to prove loss.

The Legal Issue The Delhi High Court addressed whether the forfeiture of earnest money is an automatic consequence upon the breach of an agreement to sell, or if the seller must prove actual loss suffered due to the breach. The case involved an agreement to sell where the buyer failed to complete the transaction, leading the seller to seek forfeiture of the earnest money as stipulated in the agreement.

Court's Reasoning Justice C. Hari Shankar, citing Section 74 of the Indian Contract Act, 1872, held that the forfeiture of earnest money is not automatic. The Court clarified that even if an agreement to sell contains a clause allowing for the forfeiture of earnest money upon breach, the party seeking to forfeit must still prove the actual loss suffered. The Court emphasized that Section 74 requires the party claiming damages or forfeiture to establish the actual loss, and only a reasonable amount, not exceeding the stipulated sum, can be forfeited. The Court distinguished between a genuine pre-estimate of damages and a penalty, stating that earnest money, while serving as security, is ultimately subject to the principles of compensation for actual loss.

What Follows The Delhi High Court's ruling means that sellers cannot automatically forfeit earnest money upon a buyer's breach of an agreement to sell. They must demonstrate the actual loss incurred due to the breach to justify the forfeiture. This places the onus on the seller to provide evidence of such loss. The decision reinforces the principle that compensation for breach of contract is primarily aimed at indemnifying the injured party for actual loss, rather than imposing a penalty.