(2) When enforcing specific performance under this section, the court shall not also decree payment of the sum so named in the contract.”

Pertinently, the corresponding section in the earlier Specific Relief Act, 1877 read as under:

“20. Liquidation of damages not a bar to specific performance. – A contract, otherwise proper to be specifically enforced, may be thus enforced, though a sum be named in it as the amount to be paid in case of its breach, and the party in default is willing to pay the same.”

The significant difference between the two provisions was explained by the Supreme Court in Kamal Kant Jain vs. Surinder Singh (Dead) through legal representatives^[2]. A two-judge bench noted therein that the new section 23 “explicitly provided that the mere naming of a certain amount which may sound in damages is not good enough by itself to non-suit a person seeking specific performance unless it is clear on the facts that the said sum was named in lieu of specific performance”.

A good starting point for this analysis is a 1973 judgment of the Supreme Court in M.L. Devender Singh vs. Syed Khaja^[3]. Here, an agreement for sale of a residential house provided that if the seller failed to comply with the terms thereof, he would be liable to refund the advance money plus a similar amount as damages to the purchaser. The Court noted that there was no stipulation in the agreement that the party in breach will have the option to either fulfil the contract to buy or sell or to pay the specified liquidated damages as an alternative to the performance of the contract.

The Court also examined the language of the new Section 23 and held that it contained a comprehensive statement of the principles on which, even before the Act of 1963, the presence of a term in a contract specifying a sum of money to be paid for a breach of the contract has to be construed. The Court further held that where payment is an alternative to carrying out the other terms of the contract, it would exclude, by the terms of the contract itself, specific performance of the contract to convey a property.

The Court relied on the following exposition of law in Sir Edward Fry’s “Treatise on the Specific Performance of Contracts” (Sixth Edn. at p. 65):

“From what has been said it will be gathered that contracts of the kind now under discussion are divisible into three classes –

• where the sum mentioned is strictly a penalty – a sum named by way of securing the performance of the contract, as the penalty is a bond;
• where the sum named is to be paid as liquidated damages for a breach of the contract;
• where the sum named is an amount the payment of which may be substituted for the performance of the act at the election of the person by whom the money is to be paid or the act done.

Where the stipulated payment comes under either of the two first-mentioned heads, the court will enforce the contracts, if in other respects it can and ought to be enforced, just in the same way as a contract not to do a particular act, with a penalty added to secure its performance or a sum named as liquidated damages, may be specifically enforced by means of an injunction against breaking it. On the other hand, where the contract comes under the third head, it is satisfied by the payment of the money, and there is no ground for the court to compel the specific performance of the other alternative of the contract.”

Observing that the equitable principles evolved by the Courts in England have been accorded statutory form in India, the Court held that the jurisdiction of the court to decree specific performance could not be curtailed or taken away by merely fixing a sum as liquidated damages. It was further held that a contractual stipulation of payment of money in case of a breach is nothing more than a piece of evidence (which is neither conclusive nor decisive) to be considered while considering grant of specific performance.

Around two and a half decades later, the Apex Court, in a discordant note, held in Dadarao vs. Ramrao^[4] that since the agreement sought to be enforced therein itself provided the consequences if either the seller refused to sell or the buyer refused to buy, a sale deed could only be executed if both parties agreed to do so. In that case, the agreement provided that in addition to the earnest money of Rs 1000, a sum of Rs. 500 was to be given back to the buyer and that “no sale deed will be executed”.

This judgment was subsequently distinguished by the Supreme Court in P. D’Souza vs. Shondrilo Naidu^[5] and P.S. Ranakrishna Reddy vs. M.K. Bhagyalakshmi^[6]. In P. D’Souza (supra), the Court held:

“34. In Dadarao whereupon Mr. Bhat placed strong reliance, the binding decision of M.L. Devender Singh was not noticed. This Court furthermore failed to notice and consider the provisions of Section 23 of the Specific Relief Act, 1963. The said decision, thus, was rendered per incuriam.”

In 2010, a two-judge bench of the Supreme Court, in Man Kaur (Dead) by LRs vs. Hartar Singh Sangha^[7], dealt with an agreement between the parties which provided that if the seller committed a default, he had to pay double the amount of the earnest money to the purchaser. The Court held that under Section 23, even where the agreement of sale contained only a provision for payment of damages or liquidated damages in case of breach and did not contain any provision for specific performance, the party in breach could not argue that the court cannot grant specific performance. However, where the provision naming an amount to be paid in case of breach is intended to give to the party in default an option to pay money in lieu of specific performance, then specific performance may not be permissible.

The Apex Court then outlined three illustrations (not exhaustive):

• where a purchaser would be entitled to an amount equivalent to the earnest money as damages in case of breach by the seller – the Court opined that in such a case, the amount named was only for the purpose of securing performance of the contract; however the court can direct specific performance of the contract if breach is established and alternatively grant damages if it is found not to be a fit case for specific performance.
• where in case of breach, the purchaser will not be entitled to specific performance but only to return of the earnest amount and/or liquidated damages – here, the court may not grant specific performance in view of the contractual intent but can award refund of earnest money and liquidated damages.
• where in case of breach, the purchaser will be entitled to specific performance but the party in breach may, at his option, either perform the contract or to pay a named amount as liquidated damages – here, the purchaser will not be entitled to specific performance should the seller opt to pay damages for the breach.

On facts, the Court ultimately found that since the agreement neither provided for or barred specific performance expressly, the purchaser will be entitled to seek specific performance subject to proof of breach by the defendant and his own readiness and willingness to perform the contract.

In Kamal Kant Jain (supra), the agreement to sell stated that if the seller backed out from the deal, he would refund the earnest money with an equal amount as penalty for non-fulfilment of the contract. The Court found that such a statement will not debar specific performance.

Unfortunately, the Court, while deciding T.D. Vivek Kumar (supra), neither deigned to examine the legal position in detail nor considered that the agreement, in that case, nowhere stated either that the purchaser will not be entitled to claim specific performance or that the monetary amount named therein was in lieu of specific performance. Hence, this view not only ignores the authoritative body of law rendered by coordinate benches in the past, but also begs the question whether the judgment is susceptible to being declared per incuriam in future, although that will offer little solace to the losing party therein.

It is desirable, nay imperative, that an authoritative bench of the Supreme Court puts this issue to rest.

Footnote

[1] 2023 SCC Online SC 526.

[2] (2019) 11 SCC 432.

[3] (1973) 2 SCC 515.

[4] (1999) 8 SCC 416.

[5] (2004) 6 SCC 649.

[6] (2007) 10 SCC 231.

[7] (2010) 10 SCC 512.

This article was originally published in Mondaq on 12 May 2023 Written by: Ajit Warrier, Partner. Click here for original article

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