Add Your HeadingDecided on 14/12/2022 Supreme Court of India Text Here
The Appellants and the Respondents entered into two separate agreements to sell wherein the Appellants agreed to sell the Schedule Property to the Respondent. The sale consideration was agreed at Rs. 79,00,000/- per acre and the Respondent paid a sum of Rs. 22,90,000/- in total as part payment of the sale consideration which was in nature of earnest money. Per the agreement to sell, it was specifically stipulated that that earnest money paid could be confiscated by the Appellant if the sale dee was not executed by 16/08/2004 and that the Respondent was solely liable to obtain all necessary NOC’s and that he had to intimate the Appellant regarding grant of NOCs well before 16/08/2004. The Sale Deeds were not entered into by the parties and the Appellant issued legal notices dated 18/08/2004 to the Respondents to appear before the Sub Registrar office to execute the Sale Deeds failing which the earnest money paid would be forfeited. Disputes arose between the parties and as such the Respondent, in 2006, filed a suit seeking relief of specific performance of agreement of sale. During the pendency of the aforementioned suits, the schedule property was acquired under the Land Acquisition Act, 1894 vide award dated 23/11/2011.
The Trial Court and the First Appellant Court held that the Respondent was entitled to recovery of earnest money which constituted of partly paid sale consideration in lieu of the concerned agreement to sale along with requisite interest. An appeal from the Judgement passed by the Punjab and Haryana High Court, whereby a second appeal preferred by the Appellants was dismissed and the Judgement of the Trial Court and the First Appellant Court were affirmed.
Question under consideration:
I. Whether time was the Essence of the Contract?
The Supreme Court took note of Section 55 of the Contract Act and held that the agreement to sell clearly indicated the intention of the parties to treat time bound performance as an essential condition. It relied on Citadel fine Pharmaceuticals v. Ramaniyam Real Estates Private Limited (2011) 9 SCC 147 and Saradamani Kandappan v S Rajalakshmi, (2011) 12 SCC 18 wherein it was held that the defense under Section 55 is valid against anyone seeking relief under specific performance and held that there was an undue delay on behalf of the Respondent to institute the suit, thus, the relief of specific performance cannot be granted.
II. Whether it was proved that the Appellants were willfully avoiding performance of their contractual obligations?
The Supreme Court observed that the agreement to sell clearly spells out the intention of the parties in respect of the Respondent’s liability for obtaining the required NOC. The Respondent produced no evidence to indicate that he took steps to obtain NOC necessary to execute the sale deed and as such held that the plea of non-cooperation against the Appellant does not stand. Thus, the Supreme Court held that the High Court erred in going beyond the contractual terms in their literal sense.
III. Whether respondent was entitled to recovery of the Earnest Money?
The Supreme Court, with regards to the recovery of earnest money observed that where the contractual terms clearly provide the factum of the pre estimate amount being in the nature of ‘earnest money’, the onus to prove that the same was ‘penal’ in nature squarely lies on the party seeking refund of the same. Failure to discharge such burden would treat any pre-estimated amount stipulated in the contract as a ‘genuine’ pre-estimate of the losses. In the instant case, the Respondent neither sought for refund of the earnest money nor sought any amendment at a subsequent stage to include the said relief. In absence of such prayer, the court cannot suo moto grant refund of earnest money irrespective of the fact that Section 22 of the Specific Relief Act.
The Supreme Court has held that the forfeiture of earnest money is justified and within the confines of reasonable compensation according to Section 74 of Indian Contract Act, owing to the fact that the nature of forfeiture was not contested by the respondent.
It specifically held that in cases where refund of the earnest money is not specifically sought for, either initially or by amendment thereafter, the court cannot suo moto grant refund of earnest money.