Earnest money refund clause does not bar specific performance, holds Supreme Court

A bench of Justices K.V. Viswanathan and Alok Aradhe held a clause for refund of earnest money is no bar to specific performance, restoring a buyer’s decree.

The Supreme Court has held that a clause requiring a seller to refund earnest money if a sale deed cannot be executed does not, by itself, take away a buyer’s right to specific performance. Deciding Jaspal Singh v. Ashwani Kumar on 14 July 2026, a bench of Justices K.V. Viswanathan and Alok Aradhe set aside a High Court of Punjab & Haryana judgment that had denied the buyer a decree on the strength of such a clause. The Court found the clause recorded only a consequence of non-execution and worked as a deterrent reinforcing the obligation to perform. It also held the High Court had overstepped the limits of Section 100 of the Code of Civil Procedure by reopening concurrent findings of fact without any finding of perversity. The First Appellate Court’s decree of specific performance stands restored.

How the sale dispute reached the Court

The appellant, Jaspal Singh, entered into an Agreement to Sell dated 22 June 2003 with the respondent, Ashwani Kumar, for a half share in land measuring 12 marlas at village Gowar/Gohwar, Tehsil Phillaur, District Jalandhar. The respondent, a co-owner with his brother, agreed to sell his share for Rs.12,50,000. Earnest money of Rs.9,00,000 was paid at execution.

The date for the sale deed, first fixed at 22 June 2004, was extended by an Agreement dated 21 June 2004 to 22 July 2004. A third Agreement dated 21 July 2004 recorded a further Rs.60,000 and pushed the date to 22 January 2005. The appellant appeared before the Sub-Registrar on 20 and 24 January 2005, but the respondent did not attend.

In 2006 the appellant sued for specific performance, with an alternative prayer for recovery of Rs.19.20 lakh. The respondent denied execution and pleaded that the documents were signed on blank papers as security for a separate arrangement to facilitate his travel abroad through a travel agent, and were later converted into an Agreement to Sell.

The three earlier rounds

The Trial Court, by judgment dated 30 April 2010, held the appellant had proved execution and readiness and willingness, but declined specific performance. It read the Agreement as providing only for refund of earnest money on default, and decreed recovery of Rs.9 lakh with interest.

The First Appellate Court, on 1 May 2012, held that the absence of an express clause enabling court enforcement did not bar the relief. It found the respondent’s visa arrangement version implausible in the absence of supporting evidence and given his admitted signatures, and decreed specific performance. During the pendency of the Second Appeal, the sale deed was executed on 29 April 2013 and possession delivered.

The High Court, on 8 February 2019, affirmed the concurrent findings on execution, earnest money and readiness. It nonetheless set aside the decree, pointing to the appellant’s suppression of a separate transaction, an admitted encashment of a Rs.2,00,000 cheque on 11 March 2004, and the repeated extensions coupled with the absence of a specific performance clause. The review petition was dismissed on 10 July 2019.

Why the refund clause did not defeat the decree

The disputed clause bound both parties to get the sale deed executed and provided that if it could not be executed “due to certain reason” the seller would refund the earnest money. The High Court read this as an option for the seller to walk away on refund.

The Court rejected that construction. It relied on Section 23 of the Specific Relief Act, 1963, which re-enacts the principle earlier in Section 20 of the 1877 Act. Under that provision, a contract may be specifically enforced despite a sum named for breach, unless the court is satisfied the sum was named to give the defaulter an option to pay in lieu of performance and not merely to secure performance.

Drawing on Sir Edward Fry’s treatise and this Court’s decision in M.L. Devender Singh v. Syed Khaja, the bench held that mere naming of a sum does not defeat specific performance unless it is clear the sum was named in lieu of performance. On the facts, the clause carried “neither any language of election” nor any right for the seller to discharge the bargain by payment. The refund stipulation operated as a deterrent reinforcing performance and protected the buyer’s minimum entitlement without curtailing his right to insist on the sale.

A contrary reading, the Court said, would reward a seller who took substantial consideration and twice extended the date, and would defeat the object of Section 23.

The limits of a second appeal

The Court held the High Court had transgressed Section 100 of the Code of Civil Procedure. The First Appellate Court is the final court of fact, and a High Court in second appeal cannot substitute its own view unless findings are without evidence, ignore material evidence, or are vitiated by perversity. The bench traced this test to Sir Chunilal V. Mehta & Sons v. Century Spinning & Manufacturing Co. and later decisions.

Even the High Court had not disturbed the concurrent findings on execution, earnest money and readiness. Yet it rested its conclusion on a fresh appraisal of surrounding circumstances that ran counter to those findings.

On the fraud defence, the Court noted the respondent, who signed in English, led no handwriting or document expert and did not explain his signatures on three documents over three years. His admission of the signatures amounted in law to admission of the contents. The suppression of a collateral cheque dealing, explained in cross-examination as an unrebutted loan, could touch credibility on a peripheral matter but could not do the work of positive proof of fraud.

The bench also rejected suspicion based on the subject matter being an undivided share, holding a co-owner’s undivided share is a valid and marketable subject of transfer, the transferee’s remedy for enjoyment lying in partition. The extended timeline of barely seven months from the original date was not unreasonable and did not indicate a sham. Above all, the High Court reopened pure findings of fact without recording any finding of perversity.

Order

The Court held the High Court erred both in its construction of the earnest money clause and in exceeding its jurisdiction under Section 100. The findings that the Agreement and extensions were validly executed, that the appellant was ready and willing, and that the fraud defence was not established stand restored.

The judgment dated 8 February 2019 in RSA No. 3619 of 2012 and the order dated 10 July 2019 in RA-RS No. 87 of 2019 were quashed and set aside. The First Appellate Court’s judgment and decree dated 1 May 2012 was restored. The appeals were allowed with no order as to costs.