The Supreme Court has held that an agreement to sell cannot be treated as unenforceable merely because it contains a clause for refund of earnest money if the sale deed is not executed, unless the contract shows that such payment was intended to give the defaulting vendor an option to avoid performance.

The Court was hearing appeals against a judgment of the High Court of Punjab and Haryana, which had set aside a decree for specific performance and restored the Trial Court’s decree for refund of earnest money. The High Court had held that the agreement did not contain an express clause enabling specific performance through the court and that the purchaser was therefore not entitled to such relief.

A Bench of Justice K.V. Viswanathan and Justice Alok Aradhe disagreed, holding that Section 23 of the Specific Relief Act, 1963, permits specific enforcement of a contract even where a sum is named as payable on breach, unless the court finds that the sum was named to give the defaulting party an option of paying money in lieu of performance.

The Bench observed: “The High Court construed this clause as conferring upon the respondent an option to walk away from the bargain upon refund of the earnest money, holding that the absence of an express stipulation enabling the appellant to enforce the Agreement through court rendered the remedy of specific performance unavailable to him. In our opinion, such a construction cannot be sustained, either on the plain terms of the clause or on the settled position of law.”

Explaining Section 23, the Court held: “Section 23 of the Specific Relief Act, 1963, (the 1963 Act) which re-enacts in more explicit terms, the principle earlier contained in Section 20 of the Specific Relief Act, 1877, 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 court is satisfied, having regard to the terms of the contract and the attending circumstances, that the sum was named only to give the defaulting party an option of paying money instead of performance and not merely to secure performance.”

Advocate R.K. Kapoor appeared for the appellant, while Advocate Ravi Sharma appeared for the respondent.

Background

The appellant had agreed to purchase the respondent’s half share in immovable property. A substantial portion of the sale consideration was paid as earnest money, and the date for execution of the sale deed was extended twice by mutual consent. The appellant later appeared before the Sub-Registrar, but the respondent did not attend.

The appellant then filed a suit for specific performance, with an alternative prayer for refund and damages. The respondent denied the transaction and alleged that the documents had been executed as collateral security in connection with a different arrangement.

The Trial Court held that the agreement and extensions were proved, and that the appellant was ready and willing to perform his obligations, but declined specific performance on the ground that the agreement provided only for the refund of earnest money. The First Appellate Court reversed that view and decreed specific performance. The High Court, in a second appeal, restored the Trial Court’s decree for refund.

Court’s Observations

The Court began by noting that the High Court had not disturbed the concurrent findings on execution of the agreement, payment of earnest money, and readiness and willingness. It therefore framed the question as whether the appellant was entitled to specific performance on those established facts, and whether the High Court was justified in disturbing the First Appellate Court’s decree.

The Court observed: “It is trite law that First Appellate Court is the final court of fact and 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, or by ignoring material evidence, or are otherwise vitiated by perversity. This test finds its origin in a decision of this Court rendered in 1962 and was reaffirmed later. Subsequently, the aforesaid principles have been reiterated in recent years to state that a finding of fact will not be disturbed unless it is vitiated for want of perversity.”

The Court referred to Sir Chunilal v. Mehta & Sons Ltd. v. Century Spinning & Manufacturing Co. Ltd. (1962), Kondiba Dagadu Kadam v. Savitribai Sopan Gujar (1999), Jaichand v. Sahnulal (2024), and Russi Fisheries P. Ltd. v. Bhavna Seth (2026) on the limits of second appellate jurisdiction.

The Court also relied on M.L. Devender Singh v. Syed Khaja (1973), which approved the principle that the mere naming of a sum as damages or penalty is not sufficient to defeat a claim for specific performance unless it is clear that the sum was intended as a substitute for performance.

The Court stated: “The said principles have been referred to with approval by this Court wherein this Court held that 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. It was reiterated that the mere naming of an amount which may sound in damages is not, by itself, sufficient to defeat a claim for specific performance unless it is clear on the facts that the sum was named in lieu of performance, and that a party in breach cannot resist specific performance merely on the ground that the agreement contains no express stipulation for that relief.”

Applying the principle to the agreement, the Bench stated: “Tested on this touchstone, 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”.

To hold otherwise, the Bench added, “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 found that the Trial Court and First Appellate Court had rejected the respondent’s defence that the agreement was fabricated from blank signed papers. The respondent had admitted signatures on the documents and did not produce expert evidence to support the allegation of fabrication.

The Court observed: “Despite this, and despite not upsetting this finding in terms, the High Court permitted the very suspicion underlying the discarded defence to colour its assessment of the transaction – an aspect it ought not to have revisited.”

The Bench also held that omission to plead a collateral financial transaction could not substitute for proof of fraud.

The Court stated: “Suppression of a collateral financial dealing between parties who admittedly had continuing dealings with one another may reflect on the completeness of the plaint and go to the credibility of the appellant on that peripheral matter, but it does not, without more, establish that the Agreement to Sell, itself proved through the unimpeached testimony of the scribe and the attesting witnesses, was a fabrication superimposed on blank signatures. An omission bearing on a collateral transaction cannot be permitted to do the work of positive proof of fraud that the respondent himself failed to discharge, particularly where the cheque relied upon was not shown to correspond to the structured terms of the very arrangement he had pleaded, and the High Court erred in allowing this circumstance to colour its view of the genuineness of the Agreement.”

The High Court had also treated the fact that the agreement concerned an undivided half share in jointly owned property as a suspicious circumstance. The Supreme Court rejected this reasoning.

The Court held: “Nor could the mere fact that the subject matter of the Agreement was an undivided half share in a jointly owned property support an inference that the transaction was not genuine. A co-owner’s undivided share in immovable property is a valid and marketable subject matter of transfer, and an Agreement to Sell such a share cannot be viewed with suspicion merely because the vendor’s co-sharer brother was not made a signatory. It is well settled that a transfer of an undivided share is a legally recognised and enforceable transaction in its own right, the only consequence being that the transferee’s remedy for actual enjoyment of the property lies in a suit for partition, and a consequence bearing upon the mode of enjoyment following the decree; has no bearing whatsoever on the genuineness or enforceability of the underlying Agreement to Sell.”

The Court relied on Sidheshwar Mukherjee v. Bhubneshwar Prasad Narain Singh (1953), M.V.S. Manikayala Rao v. M. Narasimhaswami (1966), and Ramdas v. Sitabai (2009).

The Court further rejected the High Court’s inference that extensions of time for execution of the sale deed showed that the transaction was not genuine.

The Court observed: “Equally unsustainable is the interference that the time gap between the Agreement and the stipulated date for execution of Sale Deed, and the two extensions granted, indicated that the transaction was not genuine. In any event, the delay was not unreasonable: the date originally fixed as 22.06.2004 was extended, with the consent of parties, only to 22.01.2005 – a total period of barely seven months from the original date. There was, moreover, no material on record to substantiate the respondent’s plea that the parties had entered into a separate transaction relating to his travel to the USA. Extensions of time granted by consent, without more, are wholly consistent with the genuineness of the transaction cannot, by themselves, found an interference to the contrary.”

Conclusion

The Supreme Court allowed the appeals and held that the High Court had erred both in construing the earnest money clause as a bar to specific performance and in exceeding the limits of second appellate jurisdiction under Section 100 CPC. It restored the First Appellate Court’s decree for specific performance.

Cause Title: Jaspal Singh v. Ashwani Kumar (Neutral Citation: 2026 INSC 700)

Appearances

Appellant: R.K. Kapoor, Advocate, with Advocates Rajat Kapoor, Shweta Kapoor, Aakriti Kapila, and Kheyali Singh, AOR

Respondent: Ravi Sharma, AOR

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