Acceptance of Refunded Earnest Money Negates Buyer's Suit for Specific Performance: Supreme Court

Supreme Court: Buyer's Encashment of Refunded Earnest Money Fatal to Specific Performance Suit

New Delhi, India – In a significant judgment, the Supreme Court of India has overturned decisions favouring a buyer seeking specific performance of an Agreement to Sell, ruling that the buyer's act of encashing a refund of the majority of the earnest money deposit indicated a lack of willingness to proceed with the purchase. The bench comprising Justices Dipankar Datta and Manmohan delivered the verdict in the case of Sangita Sinha vs Bhawana Bhardwaj & Ors. , setting aside concurrent judgments from lower courts.

Case Background: Agreement to Sell and Subsequent Dispute

The case originates from a 2008 Agreement to Sell between Bhawana Bhardwaj (Respondent No. 1 - buyer) and Kushum Kumari (original defendant - seller) for a property in Patna. Bhardwaj paid a portion of the sale consideration as earnest money. However, the seller, Kushum Kumari , claimed fraud and attempted to cancel the agreement shortly after, refunding a significant portion of the earnest money via demand drafts and returning post-dated cheques.

Bhardwaj subsequently filed a suit for specific performance in the Trial Court, seeking to enforce the Agreement to Sell. The Trial Court and the Patna High Court both ruled in favour of Bhardwaj . The appeal before the Supreme Court was filed by Sangita Sinha (Appellant), the beneficiary of a Will from the original seller, Kushum Kumari .

Arguments Presented: Seller's Heir Contests Buyer's Readiness and Agreement Validity

Senior Counsel Shri S.B. Upadhyay, representing the appellant Sangita Sinha , argued that the original seller's signatures on the agreement were fraudulently obtained. He emphasized that the seller had promptly cancelled the agreement upon discovering it and refunded a substantial portion of the earnest money. Crucially, Upadhyay highlighted that the buyer, Bhawana Bhardwaj , encashed the refund demand drafts after filing the suit for specific performance, demonstrating a lack of continuous "readiness and willingness" to complete the purchase. He cited precedent, including R. Kandasamy vs. T.R.K. Sarawathy , to argue that a non-existent or revoked agreement cannot be enforced.

Conversely, Mr. Mungeshwar Sahoo, representing the buyer Bhawana Bhardwaj , contended that not the entire earnest money was refunded, and unilateral cancellation of a bilateral agreement is invalid. He argued that readiness and willingness were demonstrated by filing the suit and depositing the balance consideration in court later.

Supreme Court's Reasoning: Encashment Signifies Lack of Willingness

The Supreme Court meticulously examined the evidence and conduct of the buyer. The court underscored the settled legal principle that for specific performance, a buyer must prove continuous "readiness and willingness" from the date of the agreement until the decree.

Justice Manmohan , writing the judgment, stated: "The conduct of the Respondent No.1-buyer in encashing the demand drafts establishes beyond doubt that the Respondent No.1-buyer was not willing to perform her part of the Agreement to Sell... for the Respondent No.1-buyer would not have encashed the demand drafts if she was indeed willing to perform the contract and have a sale deed executed."

The Court reiterated that "readiness" refers to financial capacity, and "willingness" pertains to the intention to perform the contract, evidenced by conduct. Referencing judgments like Gomathinayagam Pillai vs. Palaniswami Nadar and C.S. Venkatesh vs. A.S.C. Murthy , the Court emphasized that readiness and willingness must be continuous throughout the suit's pendency.

Furthermore, the Court held that the seller's cancellation letter and refund, coupled with the buyer's encashment of the refund, effectively cancelled the Agreement to Sell. "…the encashment of the demand drafts was acceptance of such repudiation by the Respondent No.1-buyer, leading to cancellation of the Agreement to Sell dated 25th January 2008."

Absence of Declaratory Relief and Suppression of Facts

The Supreme Court further noted that the buyer did not seek a declaratory relief challenging the validity of the cancellation. Citing R. Kandasamy and I.S. Sikandar vs. K. Subramani , the judgment underscored that a suit for specific performance is not maintainable without first challenging the cancellation of the agreement.

Moreover, the court criticized the buyer for suppressing the fact of receiving the cancellation letter and refund in her plaint, deeming it a suppression of material facts that disentitles her from the equitable relief of specific performance, referencing Citadel Fine Pharmaceuticals v. Ramaniyam Real Estates Private Limited .

Final Verdict and Implications

Allowing the appeal, the Supreme Court set aside the judgments of the Trial Court and the High Court, declaring the sale deed executed in favour of Bhardwaj as null and void. The appellant was directed to refund the balance sale consideration deposited by the buyer.

This judgment reinforces the importance of continuous readiness and willingness in specific performance suits and highlights that a buyer's conduct, especially concerning refunds of earnest money, can significantly impact the outcome of such cases. It also reiterates the necessity of disclosing material facts and, where applicable, seeking declaratory relief against contract cancellations before pursuing specific performance.