Desh Raj vs. Rohtash Singh: Supreme Court Upholds Forfeiture of Earnest Money in Property Sale Dispute

The Supreme Court of India, in its judgment dated December 14, 2022, in the case of Desh Raj & Others vs. Rohtash Singh, upheld the forfeiture of earnest money in a dispute involving agreements to sell agricultural land. The Court overturned the Punjab and Haryana High Court’s decision, which had granted the respondent the right to recover earnest money, and ruled that time was the essence of the contract. The Court also clarified the applicability of Section 74 of the Indian Contract Act regarding penalty and reasonable compensation.

Background of the Case

The dispute revolved around two agreements to sell, executed on February 17, 2004, for a property measuring 23 Kanals and 4 Marlas in Gurugram, Haryana. The appellants, joint owners of the property, agreed to sell it to the respondent at a rate of Rs. 79,00,000 per acre. The respondent paid Rs. 22,90,000 as earnest money.

The agreements stipulated that the sale deed was to be executed on or before August 16, 2004. The contracts also contained provisions allowing the forfeiture of earnest money if the respondent failed to execute the sale deed within the stipulated time. Additionally, the respondent was responsible for securing necessary No Objection Certificates (NOCs) before the execution date.

The appellants claimed they had obtained the required permissions and had appeared before the Sub-Registrar on the execution date, but the respondent failed to perform his obligations. The appellants issued a legal notice granting an additional opportunity until September 1, 2004, but the respondent again failed to appear. Consequently, the appellants treated the agreements as canceled and forfeited the earnest money.

In 2006, the respondent filed a suit for specific performance, claiming he was always ready and willing to execute the sale agreements. He argued that the appellants failed to provide the necessary documents for obtaining NOCs. He sought either specific performance of the contract or, alternatively, a decree for Rs. 2,29,10,000, along with interest and costs.

Arguments Presented

Petitioners’ (Desh Raj & Others) Arguments

The appellants, represented by counsel, argued:

The respondent failed to fulfill his contractual obligations within the agreed time frame.
The contracts explicitly stated that time was the essence of the agreement, and failure to execute the sale deed would result in forfeiture of the earnest money.
The respondent was responsible for obtaining the necessary NOCs but failed to do so.
The property was acquired by the state government in 2008, rendering the agreements impossible to perform.

Respondent’s (Rohtash Singh) Arguments

The respondent, represented by counsel, countered:

The appellants were unwilling to perform their contractual obligations, particularly in securing the necessary NOCs.
The forfeiture clause was penal in nature and, as per the ruling in Fateh Chand vs. Balkishan Dass, the appellants were not entitled to forfeit the entire earnest money.
The sale agreements became impossible to perform due to the government’s land acquisition, and the respondent was entitled to a refund of the earnest money.

Supreme Court’s Observations

The Supreme Court examined the facts and evidence and held:

“A party cannot claim specific performance if it fails to comply with the agreed time frame when time is the essence of the contract.”
“The agreements clearly stipulated that the respondent had to obtain the NOCs, and the failure to do so resulted in a lawful termination of the contract.”
“Forfeiture of earnest money is valid when it is a genuine pre-estimate of loss and not a penalty. The respondent failed to prove that the forfeiture was penal in nature.”
“Repeated legal notices and extensions were given to the respondent, but he failed to appear for the execution of the sale deed.”

Judgment and Ruling

The Supreme Court ruled in favor of the appellants with the following key directions:

The Punjab and Haryana High Court’s judgment was quashed and set aside.
The forfeiture of earnest money was upheld as a valid and reasonable consequence of the respondent’s breach.
The suit for specific performance and refund of earnest money was dismissed.

Implications of the Judgment

This ruling has significant implications for property transactions and contract law in India:

Enforcement of Contractual Deadlines: The ruling emphasizes that when time is the essence of the contract, failure to meet deadlines can result in contract termination.
Forfeiture of Earnest Money: The judgment clarifies that earnest money can be forfeited if it serves as a genuine pre-estimate of damages and not as a penalty.
Obligations of the Buyer: The buyer must fulfill contractual responsibilities, such as obtaining necessary approvals, within the agreed period.

Conclusion

The Supreme Court’s ruling in Desh Raj & Others vs. Rohtash Singh reinforces the principle that contractual deadlines must be honored. By upholding the forfeiture of earnest money and dismissing the claim for specific performance, the Court has set a precedent ensuring that parties cannot indefinitely delay contractual obligations and later seek refunds. This judgment serves as a crucial reference point for future contract disputes involving property sales.

Petitioner Name: Desh Raj & Others.
Respondent Name: Rohtash Singh.
Judgment By: Justice Surya Kant, Justice Bela M. Trivedi.
Place Of Incident: Gurugram, Haryana.
Judgment Date: 14-12-2022.

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