The Supreme Court has ruled that a clause in an agreement to sell requiring the seller to refund the earnest money if the sale deed is not executed does not, by itself, deprive the purchaser of the right to seek specific performance.
Reaffirming settled principles under the Specific Relief Act, the bench of Justice K.V. Viswanathan and Justice Alok Aradhe has observed that such clauses ordinarily serve as a safeguard to secure contractual performance rather than as an option allowing a defaulting party to walk away from the transaction.
The bench set aside the Punjab and Haryana High Court’s judgment, which had denied specific performance and restored only the refund of earnest money to the purchaser.
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The dispute arose from an agreement to sell executed on 22 June 2003, under which the purchaser agreed to buy the respondent’s half share in a property measuring 12 marlas along with an existing factory situated in Jalandhar district, Punjab. The sale consideration was fixed at ₹12.50 lakh, out of which ₹9 lakh was paid as earnest money at the time of execution.
The parties subsequently executed two extension agreements, postponing the deadline for execution of the sale deed until 22 January 2005. The purchaser appeared before the Sub-Registrar’s office on the relevant dates to complete the transaction, but the seller failed to execute the sale deed. Consequently, the purchaser instituted a suit seeking specific performance of the agreement, along with an alternative claim for recovery of money and damages.
The seller denied having entered into a genuine sale transaction. Instead, he claimed that the documents had been signed merely as collateral security for an arrangement involving overseas travel through a travel agent allegedly associated with the purchaser. According to the defence, blank signed papers were subsequently converted into agreements to sell.
However, both the Trial Court and the First Appellate Court rejected this defence after examining the evidence of the scribe, attesting witnesses, stamp vendor and other witnesses. The courts found that the agreements had been validly executed and that the purchaser had always remained ready and willing to perform his contractual obligations.
Although the Trial Court accepted that the agreement was genuine and that the purchaser had proved readiness and willingness, it declined to grant specific performance. It reasoned that the agreement merely provided for refund of the earnest money if the sale deed was not executed and did not expressly contemplate enforcement through court proceedings.
Instead, the Trial Court awarded a refund of ₹9 lakh together with interest.
The First Appellate Court reversed this finding, holding that the absence of an express clause authorising court enforcement did not extinguish the purchaser’s statutory right to seek specific performance.
It concluded that the parties clearly intended to complete the sale, the extensions demonstrated a continuing contractual relationship, and time was not intended to be the essence of the contract. Accordingly, it decreed specific performance in favour of the purchaser. During execution proceedings, the sale deed was executed and possession of the property was also delivered.
In second appeal, the Punjab and Haryana High Court accepted that the agreement had been executed and that the purchaser was ready and willing to perform his obligations. Nevertheless, it denied specific performance on the ground that the purchaser had allegedly suppressed certain financial dealings between the parties and that the agreement lacked an express clause permitting specific performance.
The High Court also viewed the repeated extensions and certain surrounding circumstances as indicating that the transaction was not genuine, ultimately restoring the Trial Court’s decree granting only refund of earnest money.
The Supreme Court disagreed with the High Court’s interpretation, holding that Section 23 of the Specific Relief Act clearly permits specific performance even where a contract provides for payment of a specified amount upon breach.
The Court explained that a contractual provision requiring refund of earnest money does not automatically give the defaulting seller an option to avoid performance. Such a clause merely secures the purchaser’s minimum entitlement in the event of breach unless the agreement expressly provides that payment of money is intended as an alternative to completing the sale.
The Bench observed that there was no language in the agreement conferring any election upon the seller to simply refund the earnest money instead of performing the contract. Rather, the clause reinforced the seller’s obligation to execute the sale deed. Accepting the High Court’s interpretation, the Court said, would reward a defaulting seller who had already received a substantial portion of the sale consideration.
The Supreme Court also delivered an important ruling on the limited jurisdiction of High Courts under Section 100 of the Code of Civil Procedure.
It reiterated that the First Appellate Court is the final court on questions of fact. A High Court hearing a second appeal cannot reassess evidence merely because another view is possible. Interference is permissible only when findings are perverse, unsupported by evidence, or arrived at by ignoring material evidence.
In the present case, the High Court had accepted the concurrent findings that the agreement was genuine and that the purchaser was ready and willing to perform. Despite this, it relied upon fresh inferences regarding alleged suppression of financial transactions and surrounding circumstances without recording any finding that the concurrent factual findings were perverse.
The Supreme Court held that this amounted to an impermissible reappreciation of evidence beyond the scope of Section 100 CPC.
The Bench further rejected the High Court’s reasoning that the agreement appeared doubtful because the seller owned only an undivided half share in the property or because the parties had twice extended the deadline for execution of the sale deed.
The Court observed that transfer of an undivided share in immovable property is legally recognised and enforceable. Likewise, mutually agreed extensions of time are entirely consistent with genuine contractual performance and cannot, by themselves, justify suspicion regarding the transaction’s authenticity.
Allowing the appeals, the Supreme Court quashed the High Court’s judgment and restored the decree passed by the First Appellate Court granting specific performance.
The Court reaffirmed that a clause requiring refund of earnest money does not by itself bar a decree of specific performance. Courts must examine whether the payment was intended merely as security for performance or as a contractual alternative to performance. High Courts exercising jurisdiction under Section 100 CPC cannot overturn concurrent findings of fact without identifying perversity or other recognised legal grounds. Agreements to sell an undivided share in immovable property are legally enforceable, and consensual extensions of time do not undermine their genuineness.
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