Refund Of Sum Named In Contract Does Not Prevent Specific Performance: Supreme Court Considers Section 23

In its judgment in Jaspal Singh v. Ashwani Kumar, dated 15 July 2026, the Supreme Court considered the effect of a clause commonly found in agreements to sell immovable property, providing for refund of the earnest money paid where the sale deed is not executed. A Bench comprising Justice K.V. Viswanathan and Justice Alok Aradhe held that the presence of such a clause does not, by itself, deprive a purchaser of the right to seek specific performance.

Background of the Dispute

The appellant had agreed to purchase the respondent’s half share in an immovable property. A substantial portion of the sale consideration was paid as earnest money, and the date for execution of the sale deed was subsequently extended twice by mutual consent.

The appellant later appeared before the Sub-Registrar, but the respondent did not attend.

Suit for Specific Performance

The appellant thereafter filed a suit seeking specific performance, with an alternative prayer for refund of the amount paid and damages. The respondent denied the transaction and alleged that the documents had instead been executed as collateral security in connection with a different arrangement.

Decisions of the Lower Courts

The Trial Court found that the agreement and the subsequent extensions had been proved and that the appellant was ready and willing to perform his obligations. However, it declined to grant specific performance on the ground that the agreement contemplated refund of the earnest money in the event of non-execution of the sale deed.

The First Appellate Court reversed this finding and decreed specific performance. The High Court, in second appeal, restored the Trial Court’s decree directing refund.

Section 23 of the Specific Relief Act: Key Consideration

Section 23 of the Specific Relief Act, 1963 addresses contracts containing a sum named as payable in the event of breach. The provision makes clear that the mere naming of such a sum does not automatically prevent a court from granting specific performance.

The relevant question is whether the contract shows that the sum was intended to give the defaulting party an option of paying money instead of performing the contract, or whether it merely provides for the consequences of breach.

Application to the Present Case

In the present case, the Supreme Court found nothing in the relevant clause indicating that either party had been given an option to treat payment or refund of the specified amount as a substitute for performance.

The clause merely recorded the consequence of non-execution of the sale deed and did not confer a contractual right on either party to walk away from the transaction by paying or accepting the specified sum.

Reliance on M.L. Devender Singh v. Syed Khaja

Relying on M.L. Devender Singh v. Syed Khaja, the Bench reiterated that the naming of a sum as compensation for breach does not, by itself, defeat a claim for specific performance. What is material is whether the contract demonstrates that the payment was intended to operate as a substitute for performance, rather than merely as a consequence or deterrent in the event of breach.

Findings on Genuineness and Scope of Second Appeal

The Court also rejected the High Court’s reliance on the following grounds for doubting the genuineness of the transaction:

• The transaction concerned an undivided share in the property.
• The time for execution of the sale deed had been extended twice.

The Court observed that a co-owner’s undivided share constitutes a legally transferable interest in the property. Similarly, extensions of time mutually agreed between the parties are not, by themselves, indicative of an absence of a genuine transaction and may instead demonstrate that the parties continued to treat the agreement as subsisting.

Reaffirming the limited scope of interference under Section 100 of the Code of Civil Procedure, 1908, the Bench held that a High Court exercising second appellate jurisdiction cannot ordinarily disturb concurrent findings of fact merely because it may have arrived at a different view on the same evidence. The Supreme Court accordingly found that the High Court had exceeded the permissible scope of interference in second appeal.

Key Takeaways for Practitioners

For practitioners, the ruling reiterates that refund-of-earnest-money clauses commonly incorporated in agreements to sell do not, without more, convert a purchaser’s remedy into a purely monetary one. The mere stipulation that earnest money may be refunded upon non-execution of the sale deed will not necessarily bar a claim for specific performance.

• Where parties intend a contractual sum to operate as an alternative to performance, the agreement must make that intention sufficiently clear.
• A clause merely prescribing the consequence of non-performance, without conferring an option to substitute payment for performance, may not be sufficient to prevent the court from granting specific performance.

Last Updated on 13 August, 2026