Refund of Earnest Money Does Not Bar Specific Performance Unless It Creates a True Option to Pay Instead of Perform

1. Introduction

In JASPAL SINGH v. ASHWANI KUMAR, 2026 INSC 700, the Supreme Court of India considered whether an agreement to sell immovable property could be specifically enforced when the agreement contained a clause requiring refund of earnest money if the sale deed was not executed.

The appellant-plaintiff, Jaspal Singh, had entered into an agreement to purchase the respondent-defendant Ashwani Kumar’s half share in land measuring 12 marlas with a factory situated in District Jalandhar, Punjab. The agreed sale consideration was Rs.12,50,000/-, out of which Rs.9,00,000/- was paid as earnest money, later followed by a further payment of Rs.60,000/-. The time for execution of the sale deed was extended twice by written agreements.

When the respondent failed to appear before the Sub-Registrar for execution of the sale deed, the appellant filed a suit for specific performance, alternatively seeking refund and damages. The Trial Court granted only refund of earnest money. The First Appellate Court decreed specific performance. The High Court, in second appeal, reversed the decree for specific performance and restored the Trial Court’s decree. The Supreme Court set aside the High Court’s judgment and restored the decree of specific performance.

2. Summary of the Judgment

The Supreme Court allowed the appeals and restored the First Appellate Court’s decree granting specific performance. The Court held:

• The agreement to sell and its extensions were validly executed.
• The appellant had proved readiness and willingness to perform his obligations.
• The respondent’s plea that signatures were taken on blank papers as part of a travel/VISA arrangement was not proved.
• A clause providing refund of earnest money if the sale deed could not be executed does not, by itself, bar specific performance.
• Such a clause bars specific performance only where the contract clearly gives the defaulting party an option to pay money instead of performing the contract.
• The High Court exceeded its jurisdiction under Section 100 CPC by interfering with concurrent findings of fact without finding perversity.

Accordingly, the Supreme Court quashed the High Court’s judgment dated 08.02.2019 and review order dated 10.07.2019, and restored the First Appellate Court’s decree dated 01.05.2012.

3. Analysis

A. Precedents Cited and Their Role

The judgment also refers to Sir Edward Fry’s “Treatise on the Specific Performance of Contracts”, including references to Howard v. Hopkins, French v. Macale, Roper v. Bartholomew, and Legh v. Lillie. These authorities explain the distinction between:

• a penalty or damages clause intended to secure performance; and
• a true option clause allowing a party to pay money instead of performing.

The Supreme Court adopted this distinction while applying Section 23 of the Specific Relief Act, 1963.

Other cases cited by the parties included P. D'Souza v. Shondrilo Naidu (2004) 6 SCC 649, P.S. Ranakrishna Reddy v. M.K. Bhagyalakshmi and Anr. (2007) 10 SCC 231, Man Kaur (Dead) by LRs. v. Hartar Singh Sangha, (2010) 10 SCC 512, Inderchand Jain (Dead) through LRs. v. Motilal (Dead) through LRs, (2009) 14 SCC 663, Chander Bhan (D) through LRs. Sher Singh v. Mukhtiar Singh & Ors., (2024) 13 SCC 122, Pankajakshi (Dead) through LRs. & Ors. v. Chandrika & Ors., (2016) 6 SCC 157, Kirodi (Since Deceased) through LRs. v. Ram Parkash & Ors., (2019) 11 SCC 317, Satyender & Ors. v. Saroj & Ors., (2022) 17 SCC 154, Kannan (Dead) through LRs. & Ors. v. V.S. Pandurangam (Dead) through LRs. & Ors, (2007) 15 SCC 157, Pankaj Bhargava & Anr. v. Mohinder Nath & Anr., (1991) 1 SCC 556, Chandrabhan (Deceased) through LRs. & Ors. v. Saraswati & Ors., 2022 SCC OnLine SC 1273, Zarina Siddiqui v. A. Ramalingam, (2015) 1 SCC 705, and T. Ravi & Anr. v. B. Chinna Narasimha & Ors. and Jayakantham & Ors. v. Abaykumar, (2017) 5 SCC 178. These authorities framed arguments on readiness and willingness, discretionary relief, equity, review, and second appeal limitations. However, the Supreme Court’s operative reasoning principally rested on Section 23 of the Specific Relief Act and Section 100 CPC.

B. Legal Reasoning

i. Earnest money clause was not an option to breach

The relevant contractual clause stated that both parties would remain bound to execute the sale deed, and if the sale deed could not be executed for any reason, the respondent would refund the earnest money.

The High Court read this as meaning that the respondent could avoid the sale by refunding the earnest money. The Supreme Court rejected that interpretation. It held that the clause contained no language giving the respondent an election or option to pay money instead of completing the sale.

Under Section 23 of the Specific Relief Act, 1963, a contract may be specifically enforced even if it names a sum payable on breach, unless that sum was intended as a substitute for performance. Here, refund of earnest money was only a consequence of non-execution; it was not an alternative contractual performance.

ii. Absence of express enforcement clause is irrelevant

The Supreme Court clarified that an agreement to sell need not expressly say that the purchaser may sue for specific performance. If the contract is otherwise enforceable, the statutory remedy is available. The absence of a “specific performance clause” cannot defeat the purchaser’s right.

iii. High Court exceeded second appellate jurisdiction

The Trial Court and First Appellate Court had concurrently found that:

• the agreement and extensions were executed;
• earnest money was paid;
• the appellant was ready and willing; and
• the respondent’s fraud defence was not proved.

The High Court did not record that these findings were perverse. Yet it reappraised surrounding circumstances, including an alleged collateral financial transaction and the fact that the property was jointly owned. The Supreme Court held that this was impermissible under Section 100 CPC.

iv. Fraud must be proved, not inferred from suspicion

The respondent alleged that he signed blank papers for a VISA/travel arrangement and that those papers were converted into an agreement to sell. But he admitted signatures on three documents and failed to produce expert or documentary evidence supporting the blank-paper allegation. The Court held that suspicion could not replace proof.

v. Sale of undivided share is valid

The Supreme Court rejected the idea that the agreement was doubtful merely because the respondent owned only an undivided half share with his brother. A co-owner’s undivided share is transferable. The purchaser may need to seek partition for separate possession, but the agreement itself is not invalid or unenforceable.

4. Impact of the Judgment

This decision is significant for both contract law and civil procedure.

• For specific performance suits: Vendors cannot avoid performance merely because the contract provides for refund of earnest money or damages on breach.
• For drafting agreements: If parties intend payment to be an alternative to performance, the agreement must clearly say so.
• For second appeals: High Courts must not reopen factual findings unless perversity, absence of evidence, or legal error is clearly shown.
• For property transactions: Agreements concerning undivided shares remain enforceable; the transferee’s remedy for separate enjoyment may lie in partition.
• For fraud defences: Allegations of blank papers and fabrication require strong proof, especially where signatures are admitted.

5. Complex Concepts Simplified

• Specific performance: A court order requiring a party to do exactly what was promised in the contract, such as executing a sale deed.
• Earnest money: An advance payment showing commitment to the transaction. It may also secure performance.
• Section 23 of the Specific Relief Act: A damages/refund clause does not automatically prevent specific performance. The key question is whether money was meant to replace performance.
• Option clause: A clause giving a party a genuine choice between performing the contract and paying money. Only such a clause may bar specific performance.
• Readiness and willingness: The purchaser must show continuous intention and ability to perform his obligations.
• Section 100 CPC: A second appeal to the High Court lies only on a substantial question of law, not for re-evaluating facts.
• Perversity: A finding is perverse when it is unsupported by evidence, ignores material evidence, or is irrational.
• Undivided share: A co-owner’s share in joint property before physical division. It can be sold, though actual possession may require partition.

6. Conclusion

The Supreme Court’s ruling establishes a clear and important principle: a clause requiring refund of earnest money does not bar specific performance unless the contract clearly gives the defaulting party an option to pay money instead of performing.

The judgment also reinforces the discipline of second appellate jurisdiction. A High Court cannot disturb concurrent factual findings by drawing fresh suspicions from the evidence unless it identifies perversity or a substantial question of law.

The decision therefore strengthens contractual certainty in immovable property transactions and prevents defaulting vendors from using refund clauses as an escape route from agreed sales.