Indian Contract Act- Onus To Prove Pre-Estimated Amount Was Penal In Nature Squarely Lies On Party Seeking Refund: SC

The Supreme Court while allowing an appeal filed against the judgment passed by the Punjab High Court held that if the contractual terms clearly provide the factum of the pre-estimated amount being in nature of 'earnest money', the onus to prove that the same was penal in nature squarely lies upon the party seeking a refund.

The two-Judge Bench comprising Justice Surya Kant and Justice Bela M. Trivedi was dealing with a matter in which the appeal preferred by the appellants was dismissed and the decree entitled the respondent for the recovery of the earnest money which constituted of partly paid sale consideration in lieu of the concerned agreements to sale along with requisite interest. The Bench stated –

"… in a scenario 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 loss'. The Respondent in the instant case has neither pleaded for refund of the earnest money nor has he claimed any damages or penalty from the Appellants. From the perusal of the records, it is conspicuous that Respondent never raised any concern that the pre estimated amount was 'penal' in nature and instead his sole objective was to gain titular rights over the Concerned Property on the strength of Sale Agreements."

The Bench further stated that the decree granted by the Courts was hinged on a logical fallacy wherein the appellants were held to be unjustly enriched on the premise that the contract was rendered impossible to perform due to acquisition proceedings.

The Court said, "… the contract automatically stood terminated as per the stipulated contractual terms. The Sale Agreements should have been rightly held to be terminated instead of being declared impossible to perform."

Advocate Siddharth Mittal appeared on behalf of the appellants while Advocate Sonali Karwasra Joon appeared for the respondent.

Facts of the Case –

The subject matter of the original suit was a property that the appellants jointly owned to the extent of their respective shares. There were two separate sale agreements that were entered between the parties for that property. As per clause 4 of the Sale Agreements, the earnest money could be confiscated by the appellants if the sale deed was not executed on the prescribed date. Also, as per clause 8 of the same, the respondent was liable to secure all necessary No Objection Certificates (NOCs) and intimate regarding the grant of NOCs well before the date of execution failing which the agreement was deemed to be cancelled.

On the date of execution, the appellants appeared before the Sub-Registrar but the respondents failed to appear. The appellants forfeited the earnest money and treated the sale agreements as cancelled and all appearances of the appellants before the sub-registrar were marked by way of their respective affidavits. Thereafter, the respondent filed a suit seeking relief of the specific performance. The Trial Court decided that both parties were equally responsible for rendering the sale agreements as unenforceable. The Trial Court then went on to hold that the sale agreements were either way rendered impossible to perform in view of the land acquisition proceedings and proceeded to grant decree of recovery of earnest money on the principle of unjust enrichment. The First Appellate Court upheld the decree granted by the Trial Court on entirely identical reasons. The High Court also upheld the decree passed by the courts noting that in view of acquisition proceedings, the alternate relief of recovery of earnest money was legally correct. The matter was therefore before the Apex Court.

The Supreme Court after hearing both parties observed, "… we must highlight that throughout the entire dispute, Appellants have taken a consistent stand of time-bound performance being an essence of the contract. They have maintained that sale deed was needed to be executed necessarily on the Date of Execution as agreed between the parties. It is unfortunate that all the courts below have failed to render a finding on this aspect despite the fact that this was one of the key defenses taken by the Appellants in respect of the prayer seeking specific performance."

The Court further noted that no evidence or communication has been brought on record by the respondent to contradict the defense of time-bound performance taken by the appellants.

The Court while rejecting the respondent's contention stated, "… we expressly reject the Respondent's contention that this clause should be interpreted to construe that his obligation was limited to NOCs which he could obtain unilaterally. Additionally, since Respondent has led no evidence to indicate that he took any proactive steps to obtain the purported NOC necessary to execute the sale deed, we must hold that the plea of non-cooperation against the Appellants in respect of obtaining the NOC are not made out by the Respondent."

The Court noted that it finds merit in the appellants' contention that no such NOC was required in the first place as the property was agricultural land on the date of execution.

The Court afterward said, "The High Court, therefore, ought not to have made any fact based observations especially when the records of the courts below were not requisitioned to reach an independent conclusion to hold that the said finding of fact by the two courts was contrary to the record. The re¬appreciation of evidence is ordinarily impermissible and beyond the scope of a second appeal. Even otherwise, the presence of Appellants before the Sub¬Registrar on the Date of Execution is not disputed. In this backdrop where time was the essence of the contract, we conclude that the Respondent has failed to prove that the Appellants were willfully avoiding the performance of their contractual obligations."

The Court also noted that the respondent has neither prayed for the relief of refund of earnest money nor he sought any amendment at a subsequent stage and therefore, it is difficult to accept that the Court would suo-moto grant the refund of earnest money irrespective of the fact as to whether the SRA Act is construed to be directly or mandatory in nature.

Accordingly, the Apex Court set aside the judgments passed by the Courts, dismissed the suit, and allowed the appeal.

Cause Title – Desh Raj & Ors. v. Rohtash Singh

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