Summary
A purchaser whose suit for specific performance had been dismissed concurrently sought only the refund of Rs 20,00,000 paid as 'advance' under the agreement of sale. The Court held that, whatever its label, the sum was in substance earnest money given to bind the contract, adjustable against the price and liable to forfeiture on the purchaser's default; since time was of the essence and the balance was not paid within four months, the vendors were justified in forfeiting it. Forfeiture of earnest money is not a penalty attracting Section 74 of the Contract Act, and the clause was reciprocal rather than one-sided. Under Section 22 of the Specific Relief Act, refund of earnest money must be specifically claimed in the plaint or by amendment, which may be sought at any stage including appeal, but cannot be granted suo motu on a general prayer for other reliefs.
Issues
- Whether the sum of Rs 20,00,000 described in the agreement of sale as 'advance money' was in the nature of earnest money liable to forfeiture on the purchaser's default.
- Whether time was of the essence of the agreement of sale so that the purchaser's failure to pay the balance within four months justified forfeiture.
- Whether Section 74 of the Indian Contract Act, 1872 applies to the forfeiture of earnest money, and whether the vendors could retain the entire amount.
- Whether a court can grant refund of earnest money under Section 22 of the Specific Relief Act, 1963 when the plaintiff has neither claimed that relief in the plaint nor sought amendment, relying instead on a general prayer for such other reliefs as the court deems fit.
Provisions considered
- Section 74, Indian Contract Act, 1872Section 74 allows reasonable compensation not exceeding the sum named where a contract names a sum payable on breach or contains any other stipulation by way of penalty. Following Fateh Chand, Maula Bux, Satish Batra and Shanmugavelu, the Court held that a clause for forfeiture of earnest money is a security for performance rather than a penalty, so Section 74 does not apply to it; Kailash Nath Associates had taken a different view, but even on that view the forfeiture was justified because the vendors' pleaded and proved losses exceeded the amount forfeited. (¶¶ 43, 44, 45, 46, 47, 48, 49, 51, 52)
- Section 22, Specific Relief Act, 1963Section 22(1)(b) permits a plaintiff suing for specific performance to ask, in an appropriate case, for refund of earnest money or deposit if specific performance is refused; Section 22(2) bars such relief unless specifically claimed, with a proviso obliging the court to allow amendment of the plaint at any stage. The Court held that the amendment may be sought even in appeal and the court must allow it, but the relief cannot be granted suo motu, a general prayer for other reliefs does not suffice, and refund (unlike possession) does not automatically flow from a decree for specific performance. The appellant never sought amendment before the trial court or the High Court. (¶¶ 53, 54, 55, 56, 57, 58, 59, 60, 61, 62, 63)
Held
- The description used in an agreement is not determinative of whether a sum is earnest money or an advance; the intention of the parties and the surrounding circumstances govern. Earnest money is given at the conclusion of the contract to bind it, forms part of the price if the transaction goes through, and is forfeited if the transaction falls through by the purchaser's default; a mere advance or part-payment of price cannot be forfeited unless it is a guarantee for due performance and the contract clearly so provides. (¶¶ 30, 31, 32, 33, 34, 35, 36)
- The Rs 20,00,000 termed 'advance money' was in substance earnest money: it was paid at the execution of the agreement, was to be adjusted against the total consideration, and was liable to forfeiture on the purchaser's default with a reciprocal obligation on the vendors to pay double on their default. The purchaser having failed to pay the balance within four months, the vendors were justified in forfeiting it. (¶¶ 29, 37, 40)
- There is no presumption that time is of the essence in a contract for sale of immovable property; it is inferred from the express terms, the nature of the property and the surrounding circumstances, read with the contract as a whole, and an explicit clause is not by itself sufficient. Here the four-month stipulation, the vendors' urgent need to avail a time-bound one-time settlement known to the purchaser, the absence of any request for or grant of extension, and the distress sale within two months of expiry showed that time was of the essence. (¶¶ 38, 39, 40, 41)
- A clause providing for forfeiture of earnest money is not penal in the ordinary sense and Section 74 of the Contract Act does not apply to it; the clause here was fair and equitable, imposing reciprocal liabilities on both sides, and not one-sided or unconscionable. Even if Section 74 were applied, forfeiture of the whole amount was justified since the vendors' proved losses far exceeded it. (¶¶ 47, 50, 51, 52)
- Under Section 22 of the Specific Relief Act the plaint may be amended at any stage, including the appellate stage, to seek refund of earnest money, and the court must allow such amendment; but a specific prayer, in the plaint or by amendment, is a sine qua non and the court cannot grant the relief suo motu (Desh Raj). A general prayer for 'such other reliefs as the court deems fit' cannot be construed as a claim for refund, and refund of earnest money, unlike possession, does not automatically flow from a decree for specific performance. (¶¶ 56, 58, 59, 61, 62, 63)
- Since the appellant never applied to amend the plaint to seek refund of the advance money, either before the trial court or in the first appeal, the relief could not be granted; the law aids the vigilant, not those who sleep over their rights. (¶¶ 63, 64)
Result
Appeal dismissed; forfeiture of the advance money of Rs 20,00,000 by respondent nos. 1 to 4 held justified and refund declined; High Court judgment dated 05.08.2021 affirmed; parties to bear their own costs; pending applications disposed of.