Patna HC Cuts Refund to Defaulting Buyer, Upholds 10% Deduction Clause in Failed Property Agreement

Where a buyer fails to pay instalments as agreed, the seller may deduct 10 per cent of advance money before refunding the balance, the Patna High Court held, partly allowing the seller's appeal against a trial court decree that had ordered a full refund with interest and additional compensation.

The Patna High Court has partly allowed a seller's appeal against a trial court decree that directed him to refund the entire advance of Rs 43,30,000 with interest at 9 per cent per annum and pay additional compensation of Rs 5 lakh to a buyer who had failed to honour instalment obligations under an agreement for sale. Justice Jitendra Kumar, sitting singly, held that because the buyer had defaulted on a contractually stipulated payment of Rs 25 lakh within four months of the agreement, the seller was entitled to deduct 10 per cent of the advance before returning the balance. The court set aside the trial court's decree and directed the seller to pay Rs 38,97,000 with interest at 6 per cent per annum from 23 December 2010, with a penal rate of 12 per cent if payment is not made within two months.

The Agreement and the Dispute

The agreement for sale was executed on 23 August 2010 between Prusottam Swaroop, the seller, and Umesh Kumar Sahu, the buyer, for a house property built over land measuring 3 katha and 10 dhurs, at a total consideration of Rs 1 crore 55 lakh.

Under the agreed terms, Rs 35 lakh had already been paid at the time of execution. The buyer was then required to pay a further Rs 25 lakh within four months — that is, by 23 December 2010 — and another Rs 25 lakh within eight months. The seller's obligation to redeem the property from a mortgage with State Bank of India (CC Loan Account No. 30208722531, Bhikhna Pahadi, Patna) was conditional on receipt of the next instalment. The balance consideration was payable at the time of execution of the sale deed, once holding tax, electric bills, and land revenue had been cleared. Rent received from tenants was to be adjusted against the balance.

The agreement also contained a default clause: if the buyer failed to pay as stipulated, the seller was entitled to deduct 10 per cent of the advance money and return the rest. Conversely, if the seller refused to execute the sale deed, the buyer could seek legal remedy for specific performance.

After the initial Rs 35 lakh, the buyer paid Rs 6 lakh on 6 December 2010 and Rs 2,30,000 on 31 December 2010. No further payment was made. The seller cancelled the agreement and offered to return the advance after deducting 10 per cent. The buyer instead filed Title Suit No. 564 of 2011 before the Sub-Judge-Ist, Patna, seeking specific performance or, alternatively, return of Rs 43,30,000 with interest at 18 per cent per annum.

What the Trial Court Decided

The Sub-Judge-Ist, Patna, by judgment and decree dated 7 February 2017, partly decreed the suit. The court found that the agreement for sale was not in dispute, but that the buyer had failed to perform his part of the contract and had not demonstrated readiness and willingness to do so. Specific performance was therefore denied.

However, the trial court also found vagueness in the terms and conditions relating to encumbrances on the property. On that basis, it granted the alternative relief: the seller was directed to refund the full Rs 43,30,000 with interest at 9 per cent per annum from 31 December 2010, and to pay additional compensation of Rs 5 lakh, all within three months.

The buyer had also filed a cross-appeal seeking specific performance by way of execution of the sale deed. During the hearing before the High Court, the seller informed the court that the subject property had been sold to a third party. Impleadment of that purchaser would have been necessary for an effective decision on the cross-appeal, but would have caused inordinate delay. Counsel for the buyer accordingly stated that the cross-appeal would not be pressed, and it was not pursued.

The Seller's Challenge Before the High Court

The seller's counsel, Mr Dhiraj Sagar, argued that the trial court's decree was internally contradictory. Having found that the buyer failed to perform his part of the contract and lacked readiness and willingness, the trial court could not then penalise the seller by directing a full refund with interest and additional compensation. The seller's position was that the contract itself provided the answer: in the event of the buyer's default, the seller was entitled to deduct 10 per cent and return the balance. The trial court should have directed no more than that.

The buyer's counsel, Senior Advocate Mr P N Shahi, defended the decree. He submitted that time was not of the essence of the contract, that the buyer had performed his part and remained ready and willing to perform the rest, and that it was the seller who was at fault. On that basis, the seller was duty-bound to return the full advance with interest and compensation.

The High Court's Reasoning

Justice Jitendra Kumar identified the sole point for determination as whether the seller was liable to return the full Rs 43,30,000 with 9 per cent interest and Rs 5 lakh compensation, or only the paid amount after deducting 10 per cent.

The court examined the terms of the agreement (Ext. 1) and found that the buyer was required, in unambiguous terms, to pay Rs 25 lakh to the seller within four months of 23 August 2010. There was no pleading or evidence that this payment was made or that the buyer was ready and willing to make it. After the initial advance, the buyer paid Rs 6 lakh on 6 December 2010 and Rs 2,30,000 on 31 December 2010, and made no further payment despite demand.

The court referred to Section 16 of the Specific Relief Act, 1963, which sets out personal bars to relief. Section 16(c) provides that specific performance cannot be enforced in favour of a person who fails to aver and prove that he has performed, or has always been ready and willing to perform, the essential terms of the contract which are to be performed by him. The court held that the buyer's failure to pay the stipulated instalment disentitled him to equitable relief.

On the question of refund, the court held that the contractual default clause was operative. The buyer's failure to pay as stipulated triggered the seller's right to deduct 10 per cent before returning the balance. The court calculated 10 per cent of Rs 43,30,000 as Rs 4,33,000, leaving a payable amount of Rs 38,97,000.

The court also found that the seller had not paid back even this reduced amount, nor had he offered to do so. To avoid unjust enrichment, the court held that reasonable interest was payable on the amount due. Since the buyer's obligation to pay Rs 25 lakh fell due on 23 December 2010, the court fixed that date as the starting point for interest.

On the additional compensation of Rs 5 lakh awarded by the trial court, the High Court held that in view of the buyer's default, the seller could not be penalised by any compensation. That direction was set aside.

Outcome

The High Court set aside the impugned judgment and decree of the Sub-Judge-Ist, Patna dated 7 February 2017. First Appeal No. 67 of 2017 was partly allowed. The seller, Prusottam Swaroop, is directed to pay Rs 38,97,000 to the buyer, Umesh Kumar Sahu, with interest at 6 per cent per annum from 23 December 2010, within two months of the judgment. If payment is not made within that period, penal interest at 12 per cent per annum will apply thereafter. The direction to pay additional compensation of Rs 5 lakh was set aside.