2025 (5) TMI 311 - SC - Indian Laws

Claim for specific performance of the agreement of sale - Validity of the Forfeiture of Advance Money - Law on the Alternative Relief of Refund of Earnest Money under Section 22 of the 1963 Act. Validity of the Forfeiture of Advance Money - Difference between Earnest Money and Advance Money - HELD THAT - In the case of Videocon Properties Ltd. v. Bhalchandra Laboratories 2003 (12) TMI 592 - SUPREME COURT while assessing the difference between advance and earnest this Court took the view that the words used in the agreement alone cannot be determinative of the true nature of the amount advanced. Instead the intention of the parties and the surrounding circumstances serve as more apt indicators. Further the Court observed that earnest money fulfils a dual purpose first it operates as part-payment of the purchase price and; secondly as security for the performance of the contractual obligations. Thus its true character and purpose can only be canvassed on a close reading of the agreement and the relevant contextual factors. In Satish Batra v. Sudhir Rawal 2012 (10) TMI 595 - SUPREME COURT this Court emphatically held that it is only the earnest money paid as a pledge for the due performance of the contract that can be forfeited by the seller on account of the buyer s default. In the same vein earnest money can also be doubled and paid back to the buyer if the contract falls through due to the seller s default. An amount which is in nature of an advance or serves as part-payment of the purchase price cannot be forfeited unless it is a guarantee for the due performance of the contract. The Court further held that despite the existence of an outright forfeiture clause it shall not apply if the amount stipulated in the contract is found to be only in the nature of part-payment of the purchase price. Consequently the forfeiture of advance money as part of earnest money can only be justified if the terms of the contract are clear and explicit to that effect. The amount of Rs.20, 00, 000/- termed as advance money in the ATS was essentially earnest money . In other words it was in the nature of a guarantee for the due performance of the contract. In a fashion akin to earnest money the said amount was paid at the very execution of the ATS. It was meant to be adjusted against the total sale consideration of Rs.55, 50, 000/- if the transaction was carried out which is evident from the ATS clause that states the balance sale consideration to be as Rs.35, 50, 000/-. Further it was liable to be forfeited in the event that the transaction fell through by reason of the default on part of the purchaser. Consequently when the appellantpurchaser failed to comply with the contractual stipulation of paying the balance sale consideration within a period of four months from the date of the agreement the respondent nos. 1-4 (vendors) were justified in forfeiting the advance money. It can be sufficiently inferred that the inclusion of the forfeiture clause in the ATS was intended to bind the contracting parties and ensure the due performance of the contract. This is particularly significant given the stipulated four-month period for completing the sale transaction and the primary object of executing the ATS being the urgency of the respondent nos. 1 4 regarding the OTS which was known to the appellant as recorded by the Trial Court. The findings of the Trial Court along with the impugned judgment affirming that time was of the essence further substantiate the said intent. Permissible Extent of Forfeiture - HELD THAT - A clause for the forfeiture of earnest money is not penal in the ordinary sense rendering Section 74 of the 1872 Act inapplicable. In the present case the stipulated amount under the ATS was in the nature of an earnest money deposit and thus Section 74 of the 1872 Act cannot apply to the same. Further the forfeiture clause was fair and equitable rather than one-sided and unconscionable as it imposed liabilities on both the appellantpurchaser and respondent-sellers wherein the seller was obligated to pay twice the advance amount paid by the buyer in case of his default - the forfeiture of the entire amount of advance money by the respondent nos. 1-4 would still be justified on the ground that there was breach of contract by the appellant which led to financial losses for the respondent nos. 1-4. Such losses as specifically pleaded and proved by the evidence led before the Trial Court far exceeded the amount forfeited under the ATS a position that was duly noted and accepted by the Trial Court. Law on the Alternative Relief of Refund of Earnest Money under Section 22 of the 1963 Act - HELD THAT - It is a settled position of law that the plaint may be amended at any stage of the proceedings to enable the plaintiff to seek an alternative relief including that of refund of earnest money and the courts have been vested with wide judicial discretion to permit such amendments. However under Section 22 of the 1963 Act the courts cannot grant such relief suo moto since the inclusion of the prayer clause remains a sine qua non for the grant of such a relief. In other words when an appropriate case exists for seeking the said relief under this provision it must be specifically sought either in the original plaint or by way of an amendment. The law contained under Section 22(2) of the 1963 Act is adequately broad and flexible to allow the appellant to seek an amendment of the plaint for the said relief even at the appellate stage. However no such application for an amendment of the plaint was moved either before the trial court or during the course of the first appeal before the High Court. That is to say the appellant never prayed for the refund of the advance money. Here it would be redundant to state that the law aids the vigilant not those who sleep over their rights. Conclusion - The forfeiture of advance money by the respondent nos. 1-4 was justified. The purchaser s claim that the vendor failed to produce probate certificate is held to be false and irrelevant as the ATS did not require such production. Appeal dismissed.

Summary

The core legal questions considered by the Court in this matter are as follows:

1. Whether the forfeiture of the advance money paid by the purchaser under the Agreement to Sell (ATS) was valid and justified.

2. The distinction between "earnest money" and "advance money" in the context of the ATS and the implications of such distinction on forfeiture.

3. Whether the purchaser proved readiness and willingness to perform his part of the contract within the stipulated time.

4. Whether time was the essence of the contract and the consequences of the purchaser's failure to pay the balance consideration within the specified period.

5. The legal effect of the subsequent sale deed executed in favour of bona fide purchasers without notice of the prior ATS.

6. Whether the purchaser was entitled to the alternative relief of refund of the advance money under Section 22 of the Specific Relief Act, 1963 ("the 1963 Act"), despite the absence of a specific prayer for such relief in the plaint.

7. The applicability of Section 74 of the Indian Contract Act, 1872 ("the 1872 Act") concerning compensation and penalty clauses to forfeiture of advance or earnest money.

Issue-wise Detailed Analysis

1. Validity of the Forfeiture of Advance Money

Relevant Legal Framework and Precedents: The Court examined the distinction between "advance money" and "earnest money" as discussed in authoritative precedents including Shree Hanuman Cotton Mills v. Tata Air Craft Ltd., Videocon Properties Ltd. v. Bhalchandra Laboratories, Satish Batra v. Sudhir Rawal, and Central Bank of India v. Shanmugavelu. The principles laid down establish that earnest money is a sum given at the time of contract formation as security for performance, forfeitable upon default, whereas advance money generally denotes part-payment of the purchase price and is not forfeitable unless explicitly guaranteed as earnest money.

Court's Interpretation and Reasoning: The Court noted that although the ATS referred to the amount as "advance money," its terms and context revealed that the sum of Rs.20,00,000/- functioned as earnest money. It was paid at the execution of the ATS, intended to be adjusted against the sale price, and subject to forfeiture upon purchaser default. The Court held that the forfeiture clause was clear and explicit, justifying forfeiture upon the purchaser's failure to pay the balance consideration within four months.

Key Evidence and Findings: The ATS expressly stipulated forfeiture of the advance money on purchaser default and doubling of the amount if the vendor defaulted. The purchaser failed to pay the balance within the stipulated time and did not prove readiness or willingness to perform. The Trial Court and High Court found time to be the essence of the contract, given the urgency of the vendor's financial needs and the purpose of the sale.

Application of Law to Facts: Given the contractual terms and circumstances, the forfeiture of the advance money was lawful and constituted a security for due performance. The purchaser's failure to pay the balance consideration within the contractual period activated the forfeiture clause.

Treatment of Competing Arguments: The purchaser's contention that the amount was merely an advance and not earnest money was rejected. The Court emphasized the intention of the parties and the explicit forfeiture clause over the mere terminology used. The purchaser's claim that the vendor failed to produce probate certificate was held to be false and irrelevant as the ATS did not require such production.

Conclusions: The forfeiture of the Rs.20,00,000/- advance money was valid and justified under the terms of the ATS and settled legal principles.

2. Distinction Between Earnest Money and Advance Money

Relevant Legal Framework and Precedents: The Court relied on established definitions and case law distinguishing earnest money as a pledge for due performance and advance money as part-payment. Satish Batra clarified that forfeiture applies only to earnest money when explicitly agreed.

Court's Interpretation and Reasoning: The Court found that the amount in question, though termed "advance money," was essentially earnest money because it was paid at contract inception, intended as a security, and subject to forfeiture upon breach. The contractual language and purpose were determinative, not the label.

Conclusions: The Rs.20,00,000/- was earnest money in nature, forfeitable under the ATS's clear terms.

3. Readiness and Willingness to Perform

Relevant Legal Framework: Section 16(c) of the 1963 Act requires a plaintiff seeking specific performance to prove readiness and willingness to perform his contractual obligations.

Key Evidence and Findings: The purchaser failed to produce documentary evidence (bank passbook, account statements, ITR) to prove possession of funds to pay the balance consideration within four months. The legal notice expressing readiness was issued only after the expiry of the stipulated period.

Court's Reasoning: The Court upheld the findings of the Trial Court and High Court that the purchaser was not ready and willing to perform within the contractual timeframe, thus disentitling him from specific performance.

Conclusions: The purchaser failed to prove readiness and willingness, a prerequisite for specific performance relief.

4. Time as Essence of the Contract

Relevant Legal Framework: The Court referred to principles from Chand Rani v. Kamal Rani and Welspun Specialty Solutions Ltd. v. ONGC which state that time is of the essence if the contract expressly so stipulates or can be inferred from the nature of the property, surrounding circumstances, and purpose of the contract.

Court's Reasoning: The ATS stipulated a four-month period for payment and registration, with forfeiture clauses for breach. The urgency of the vendor's financial needs (OTS settlement) was known to the purchaser. The contract's terms and circumstances established time as the essence.

Conclusions: Time was the essence of the contract, and failure to perform within the stipulated period constituted breach.

5. Status of Subsequent Purchasers

Relevant Legal Framework: Section 19(b) of the 1963 Act protects bona fide purchasers for value without notice of prior agreements. The purchaser's failure to challenge the subsequent sale deed was relevant.

Key Findings: The subsequent purchasers acquired the property through a registered deed after the ATS period expired, without knowledge of the prior ATS. The purchaser did not challenge this deed.

Court's Reasoning: The subsequent purchasers were bona fide purchasers for value without notice, and the suit was not maintainable against them.

Conclusions: The subsequent purchasers' title was protected, and they were not liable to refund the advance money.

6. Alternative Relief of Refund of Advance Money under Section 22 of the 1963 Act

Relevant Legal Framework: Section 22(1)(b) allows a plaintiff suing for specific performance to claim alternative relief including refund of earnest money, but Section 22(2) mandates that such relief must be specifically claimed in the plaint or by amendment at any stage of the proceedings.

Court's Interpretation and Reasoning: The purchaser did not seek refund of advance money as an alternative relief in the plaint nor moved for amendment to include such a claim at any stage. The Court emphasized that courts cannot grant such relief suo moto. The purchaser's reliance on a general prayer for "such other relief(s) as deemed fit" was rejected as insufficient to substitute for a specific prayer.

Key Precedents: The Court relied on Desh Raj v. Rohtash Singh, Kamal Kumar v. Premlata Joshi, and Manickam v. Vasantha which underscore the necessity of a specific claim for refund under Section 22. The Court noted that the provision is directory, allowing amendment at any stage, but the onus is on the plaintiff to seek such amendment.

Conclusions: The purchaser was not entitled to refund of advance money as he failed to specifically claim such relief or seek amendment to plead the same.

7. Applicability of Section 74 of the 1872 Act to Forfeiture Clauses

Relevant Legal Framework: Section 74 governs compensation for breach where a penalty or liquidated damages are stipulated, requiring compensation to be reasonable and not exceeding the stipulated amount.

Court's Reasoning: The Court distinguished forfeiture of earnest money from penalty clauses, holding that forfeiture of earnest money is not penal in nature and thus Section 74 does not ordinarily apply. The forfeiture clause in the ATS was reciprocal and equitable, providing for doubling of earnest money if the vendor defaulted, and hence not unconscionable or one-sided.

Key Precedents: The Court referred to Fateh Chand v. Balkishan Dass, Maula Bux v. Union of India, Satish Batra, Shanmugavelu, and Kailash Nath Associates v. DDA. The latter held Section 74 applicable to earnest money forfeiture but required proof of loss for reasonable compensation. Here, the vendor proved loss exceeding the forfeited amount.

Conclusions: The forfeiture of the entire advance money was justified and not subject to Section 74 limitations; even if applied, the forfeiture was reasonable given the vendor's proven losses.

Significant Holdings

"The amount of Rs.20,00,000/- termed as 'advance money' in the ATS, was essentially 'earnest money'. In other words, it was in the nature of a guarantee for the due performance of the contract. ... Consequently, when the appellant-purchaser failed to comply with the contractual stipulation of paying the balance sale consideration within a period of four months from the date of the agreement, the respondent nos. 1-4 (vendors) were justified in forfeiting the advance money."

"Time was the essence of the contract, and failure to perform within the stipulated period constituted breach."

"The purchaser failed to prove readiness and willingness to perform his part of the contract under Section 16(c) of the Specific Relief Act, 1963, and was therefore not entitled to specific performance."

"The subsequent purchasers were bona fide purchasers for value without notice of the prior ATS, and the suit was not maintainable against them."

"Section 22(2) of the Specific Relief Act mandates that alternative relief such as refund of earnest money must be specifically claimed in the plaint or by amendment, failing which such relief cannot be granted."

"Forfeiture of earnest money is not penal in nature and Section 74 of the Indian Contract Act, 1872 does not ordinarily apply; the forfeiture clause was reciprocal and equitable, and the vendor proved losses exceeding the forfeited amount."

"In the absence of any application for amendment to include alternative relief for refund of advance money, the Court cannot grant such relief suo motu."

The Court dismissed the appeal, upholding the forfeiture of advance money, the bona fide status of subsequent purchasers, and the absence of entitlement to refund without a specific claim, thereby affirming the judgments of the Trial Court and High Court in all material respects.