Essence of Contract, Forfeiture of Earnest Money, and Specific Pleadings in Enforcement of Sale Agreements: Supreme Court Ruling
- REEDLAW
- 1 day ago
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The Supreme Court, in a recent ruling, examined the essence of contract, the forfeiture of earnest money, and the necessity of specific pleadings in the enforcement of sale agreements.
The Supreme Court Bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan recently reviewed an appeal and held that in a suit for specific performance, the relief for refund of earnest money under Section 22(1)(b) of the Specific Relief Act, 1963 cannot be granted unless it is specifically pleaded in the plaint or by way of amendment; a general prayer for “any other relief” is insufficient. Furthermore, where time is expressly or impliedly of the essence of the contract, and the plaintiff fails to perform within the stipulated period, forfeiture of earnest money under a valid contractual clause is legally enforceable.
In a judgment authored by Justice J.B. Pardiwala, the Supreme Court dismissed an appeal against the Karnataka High Court’s decision upholding the Trial Court’s dismissal of a suit for specific performance. The dispute revolved around a sale agreement dated 25.07.2007 for a property in Bengaluru, wherein the appellant had paid an advance of ₹20,00,000. The plaintiff contended that he was ready and willing to perform the contract but was prevented by the defendants. The defendants, in contrast, asserted that time was of the essence due to a need to discharge a bank loan, and the plaintiff’s delay in paying the balance constituted a breach justifying forfeiture of the advance.
The Trial Court had ruled against the plaintiff on several grounds, including that time was indeed of the essence of the contract, that there was no requirement for the defendants to furnish probate or title documents, and that the plaintiff failed to prove financial capability. Additionally, the belated issuance of legal notice and the existence of bona fide subsequent purchasers who acquired the property without notice further undermined the plaintiff’s case. The High Court concurred, holding that the plaintiff had failed to establish readiness and willingness as mandated by Section 16(c) of the Specific Relief Act and had not sought an alternative prayer for refund under Section 22(2) of the Act.
The Supreme Court affirmed the High Court's reasoning, reiterating that in contracts for the sale of immovable property, time is not generally of the essence unless the nature of the transaction or the surrounding circumstances dictate otherwise. Drawing from Chand Rani v. Kamal Rani and Welspun Specialty Solutions Ltd. v. ONGC, the Court held that in the present case, the inclusion of a four-month deadline, the forfeiture clause, and the seller’s pressing financial circumstances cumulatively demonstrated that time was indeed of the essence. The appellant’s failure to seek an extension or perform within time, combined with a delayed legal notice, supported the finding of breach.
On the issue of forfeiture, the Court considered the scope of Section 74 of the Indian Contract Act and relevant precedents, including Fateh Chand, Maula Bux, and Kailash Nath Associates. It concluded that the forfeiture in this case pertained to earnest money and not a penalty, and even if Section 74 applied, the respondent’s financial loss justified the forfeiture. The clause was reciprocal and fair, given that the agreement imposed a double refund liability on the seller in case of their own default.
Addressing the alternative relief of refund under Section 22 of the Specific Relief Act, the Court emphasised that such relief must be specifically pleaded. Citing Desh Raj v. Rohtash Singh and Manickam v. Vasantha, it held that while Section 22(2) permits amendment at any stage, the plaintiff had neither initially pleaded for a refund nor sought an amendment. The general prayer for “any other relief” was held insufficient to sustain a refund claim, as such a claim does not inherently flow from a decree for specific performance.
In conclusion, the Supreme Court found no infirmity in the concurrent findings of the Trial and High Courts. It held that the appellant had failed to perform his obligations, the forfeiture clause was valid and enforceable, and the suit was rightly dismissed. Accordingly, the appeal was dismissed without costs.
Mr. Anand Sanjay M. Nuli, Senior Advocate, represented the Appellant.
Ms. Supreeta Sharanagouda and Mr. Dhawesh Pahuja, Advocates, appeared for the Respondents.
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