Refund Clause In Agreement To Sell Doesn't Bar Purchaser's Right To Seek Specific Performance : Supreme Court
The clause providing for refund of earnest money does not discharge the seller of the obligation to execute the sale deed.
The Supreme Court has observed that a contractual clause providing for refund of earnest money in the event of default does not, by itself, prevent a court from granting specific performance of an agreement to sell.
A bench of Justice KV Viswanathan and Justice Alok Aradhe held that a mere inclusion of a clause in an agreement to sell to return the earnest money in case of non-execution of an agreement to sell, would not by itself discharge the seller from its obligation to perform the contract.
“…the clause in question does no more than provide that, in case the Sale Deed could not be executed for any reason, the respondent would be bound to refund the earnest money. There is neither any language of election, nor any stipulation entitling the respondent to discharge the bargain, at his option, by payment of any sum in lieu of executing the Sale Deed. The clause records no more than bare consequence flowing from non-execution of the Sale Deed; the stipulation for refund operates as a deterrent reinforcing the obligation to perform, and not as a substitute for it. It protects the purchaser's minimum entitlement in the event of default, without in any manner curtailing his right to insist upon performance.”, the Court Observed.
The dispute arose from an Agreement to Sell dated June 22, 2003, under which the plaintiff agreed to purchase the defendant's half share in 12 marlas of land for ₹12.50 lakh. The appellant paid ₹9 lakh as earnest money, and the parties subsequently extended the deadline for execution of the sale deed twice, with the respondent receiving an additional ₹60,000.
Alleging that the respondent failed to execute the sale deed despite his readiness and willingness to complete the transaction, the appellant filed a suit for specific performance in 2006. The respondent denied the agreement, claiming that the documents had been signed as security for a separate financial arrangement connected with his proposed travel abroad.
While the Trial Court granted only a refund of the earnest money, the First Appellate Court decreed specific performance. The High Court, in second appeal, restored the Trial Court's decree, prompting the plaintiff to approach the Supreme Court.
Setting aside the impugned judgment, the judgment authored by Justice Aradhe held that the High Court committed an error in interfering with the First Appellate Court's decision. The court said that the High Court had wrongly construed the clause on return of the earnest money as discharge from the obligation of specific performance.
The Bench observed that accepting the High Court's interpretation would effectively reward a defaulting vendor who had already received a substantial portion of the sale consideration and twice sought extensions for execution of the sale deed.
“To hold otherwise would place a premium on the conduct of a respondent who received a substantial part of the consideration for immovable property and twice extended the time for execution of the Sale Deed – a construction that would defeat, rather than serve, the object of Section 23 of the 1963 Act. This, in our view, is the central infirmity in the impugned judgment on the question of specific performance.”, the Court observed.
The Court said that the High Court's interpretation of the clause goes against the spirit of Section 23 of the Special Performance Act, 1963, as just because a contract mentions a specific amount to be paid in case of a breach, it does not mean the defaulting party can simply pay that amount to escape their obligations. If the contract is otherwise eligible to be specifically enforced, the court can still order the party to perform his part of the obligation.
“Section 23 of the 1963 Act contains a comprehensive statement of the principles governing construction of such clauses and if mere naming of a sum of damages or penalty were by itself sufficient to defeat the claim for specific performance of a contract for transfer of immovable property, the provision would be rendered wholly meaningless.”, the Court observed.
The bench also faulted the High Court for exceeding the limited scope of its jurisdiction under Section 100 of the Code of Civil Procedure. It reiterated that a High Court hearing a second appeal cannot reappreciate evidence or interfere with concurrent findings of fact unless they are perverse or unsupported by evidence.
In the present case, the High Court had accepted the concurrent findings that the agreement was validly executed, the purchaser had paid the earnest money and had remained ready and willing to perform the contract. Yet it proceeded to cast doubt on the genuineness of the transaction by relying on surrounding circumstances, including an unpleaded financial transaction between the parties, the fact that the property was jointly owned, and the extensions granted for execution of the sale deed.
The Supreme Court held that none of these factors justified interference.
It observed that the respondent had failed to establish his defence that the agreement was fabricated from signed blank papers, noting that he admitted his signatures on all three agreements and led no expert evidence to support his allegation of fraud. The Court also held that the sale of an undivided share in jointly owned property is legally permissible and cannot itself create suspicion about the genuineness of the transaction. Likewise, the consensual extensions of time for execution of the sale deed did not indicate that the agreement was a sham.
In terms of the aforesaid, the appeal was allowed, thereby restoring the First Appellate Court's order, which decreed the suit.
Appearances: Adv R.K. Kapoor for appellant; Adv Nina R. Nariman for the respondent.
Cause Title: JASPAL SINGH VERSUS ASHWANI KUMAR
Citation : 2026 LiveLaw (SC) 682