Refund Clause In Agreement To Sell Doesn't Bar Purchaser's Right To Seek Specific Performance : Supreme Court

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.

Headnote

Specific Relief Act, 1963 – Section 23 – Specific performance of contract – Bar founded on earnest money clause – Absence of express clause enabling enforcement through court does not bar specific performance - The High Court declined a decree for specific performance on the ground that the Agreement to Sell lacked an express clause enabling the purchaser to enforce it through court, stipulating instead that the vendor would refund the earnest money if the sale deed could not be executed - Held: Such a construction is unsustainable - Section 23 of the Specific Relief Act, 1963 provides that a contract otherwise proper to be specifically enforced may be so enforced notwithstanding that a sum is named in it as payable in the event of breach, unless the sum was named only to give the defaulting party an option of paying money in lieu of performance - A party in breach cannot resist specific performance merely because the agreement lacks an express stipulation for that relief - The stipulation for a refund operates as a deterrent reinforcing the obligation to perform, not as a substitute for it. [Relied On M.L. Devender Singh & Ors. v. Syed Khaja, (1973) 2 SCC 515; Paras 16 – 21]

Code of Civil Procedure, 1908 – Section 100 – Scope of interference in Second Appeal – Concurrent findings of fact - The High Court displaced the concurrent findings of the Trial Court and the First Appellate Court regarding the genuineness of the transaction and execution of the contract by drawing fresh inferences from surrounding circumstances, without recording any finding of perversity - Held: The High Court transgressed the limits of its jurisdiction under Section 100 of the CPC - The First Appellate Court is the final court of fact. The High Court in a Second Appeal cannot interfere with findings of fact merely because it would have arrived at a different conclusion on the appreciation of the same evidence - Interference is permissible only where the findings are recorded without evidence, ignore material evidence, or are otherwise vitiated by perversity - Findings on the execution of the agreement, readiness and willingness, and the falsity of a defence are pure findings of fact unassailable in a second appeal unless characterized as perverse. [Relied On: Sir Chunilal V. Mehta & Sons, Ltd. v. Century Spinning & Manufacturing Co. Ltd., AIR 1962 SC 1314; Paras 15 – 27]

Transfer of Property – Agreement to Sell – Undivided share of a co-owner – Validity of transaction - The High Court treated the fact that the subject matter of the Agreement was an undivided half share in a jointly owned property (where the vendor's brother was not a signatory) as a suspicious circumstance casting doubt on the genuineness of the transaction – Held that a co-owner's undivided share in immovable property is a valid and marketable subject matter of transfer - An Agreement to Sell such a share cannot be viewed with suspicion merely because the vendor's co-sharer brother was not a signatory - A transfer of an undivided share is a legally recognized and enforceable transaction in its own right; the only consequence is that the transferee's remedy for actual enjoyment lies in a suit for partition - This consequence bears upon the mode of enjoyment following the decree and has no bearing whatsoever on the genuineness or enforceability of the underlying Agreement to Sell. [Relied On Sidheshwar Mukherjee v. Bhubneshwar Prasad Narain Singh & Ors., AIR 1953 SC 487; M.V.S. Manikayala Rao v. M. Narasimhaswami & Ors., AIR 1966 SC 470; Ramdas v. Sitabai & Ors., (2009) 7 SCC 444; Para 25-29]

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

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