“Earnest” vs “Advance”: Supreme Court Clarifies Valid Forfeiture & Mandatory Pleading for Refund
Commentary on K.R. Suresh v. R. Poornima & Ors., (2025) INSC 617

1. Introduction

The Supreme Court of India’s decision in K.R. Suresh v. R. Poornima has delivered two path-breaking clarifications in contract and specific-performance jurisprudence:

1. It reiterates and sharpens the conceptual divide between “earnest money” and “advance money”, sanctioning total forfeiture of an amount described as advance once the agreement reveals it was in fact earnest.
2. It re-emphasises that refund of earnest/advance money is an independent, alternative relief which must be specifically pleaded under Section 22(1)(b) read with Section 22(2) of the Specific Relief Act, 1963; courts cannot grant it suo motu.

Background Snapshot

2. Summary of the Judgment

The Bench (Pardiwala J. & Mahadevan J.) framed the sole question: Is the appellant entitled to refund of ₹20 lakh labelled ‘advance money’?

Answering in the negative, the Court:

• Held the amount was in substance earnest money (security for performance, part-payment, forfeitable on default).
• Found the forfeiture clause fair, bilateral and therefore not penal; Section 74 Contract Act (liquidated damages) was held inapplicable, though even if applied, respondent’s losses exceeded ₹20 lakh.
• Invoked Section 22(2) SRA: refund cannot be granted because no specific plea or amendment was sought by the purchaser at any stage.
• Dismissed the appeal; no perversity in High Court ruling; parties to bear own costs.

3. Analysis

A. Precedents Cited & Their Influence

1. Shree Hanuman Cotton Mills v. Tata Aircraft (1969): Laid foundational tests for “earnest money”. Court relied to classify the ₹20 lakh.
2. Videocon Properties v. Bhalchandra Laboratories (2004): Intention & circumstances determine whether amount is earnest or advance.
3. Satish Batra v. Sudhir Rawal (2013): Allowed forfeiture of earnest money under a bilateral clause identical to present ATS – principal authority applied.
4. Central Bank v. Shanmugavelu (2024, 3-Judge): Reiterated earnest vs advance distinction; cited to buttress classification.
5. Fateh Chand (1963) & Maula Bux (1969): Forfeiture is penal only when not earnest; referred to while holding Section 74 inapplicable.
6. Kailash Nath Associates v. DDA (2015): Noted contrary observations on Section 74 but Court distinguished, saying even under its approach losses exceeded forfeited sum.
7. DESH RAJ v. ROHTASH SINGH (2023) & Manickam v. Vasantha (2022): Clarified that refund under S.22 SRA demands explicit prayer/amendment – decisive for denial of refund.

B. The Court’s Legal Reasoning

1. Characterisation Test: Despite the ATS using the words “advance money”, its timing (at execution), adjustability, and security function typified earnest money.
2. Time as Essence: Four-month limit and vendors’ OTS urgency satisfied Chand Rani & Welspun v. ONGC tests. No extensions sought/granted.
3. Fair & Bilateral Forfeiture Clause: Because seller also risked double liability on own default, clause not “one-sided/unconscionable” (Godrej Projects v. Anil Karlekar, 2025).
4. Section 74 Trilogy: Court found Section 74 typically inapplicable to earnest-money forfeiture. Even arguendo—loss > ₹20 lakh—so forfeiture stands.
5. Section 22 SRA Rigour: Refund not automatic; plaint carried only generic “such other relief” prayer, insufficient post-Desh Raj. Appellant never sought amendment despite statutory latitude.

C. Impact Assessment

• Contract Drafting: Parties will exercise heightened care in labelling consideration; mere nomenclature no longer shields a defaulting buyer.
• Litigation Strategy: Plaintiffs in specific-performance suits must now invariably include alternative refund pleas, or be ready to amend swiftly.
• Banking & Real-Estate Transactions: Doubles weight of earnest money as serious performance security; may deter speculative agreements.
• Section 74 Jurisprudence: Judgment leans towards pre-existing line (Fateh Chand, Maula Bux) that earnest-money forfeiture is per se outside Section 74 – indicating a narrowing of the wider interpretation in Kailash Nath.

4. Complex Concepts Simplified

5. Conclusion

K.R. Suresh v. R. Poornima cements two pivotal propositions:

1. Substance over label: Courts will look beyond headings (“advance”) to decide if an upfront sum is earnest money. Once so classified, total forfeiture is permissible under a fair bilateral clause on buyer’s default.
2. No implied refunds: Refund of forfeited amounts is not an automatic corollary of failure of specific performance. The plaintiff must plead it upfront or amend the plaint; otherwise, courts are powerless to grant it.

The judgment brings clarity, deters speculative buyers, and underscores disciplined pleading. Going forward, litigants and drafters alike must treat earnest-money clauses, timelines, and alternative reliefs with meticulous seriousness.