Holding

The seller could not forfeit the advance amount; the contract was frustrated and the advance must be refunded.

Summary

The appellant entered into a sale agreement on 19 July 1981, paying Rs 50,000 as advance with the balance due by 25 February 1982, and a separate agreement stipulated forfeiture of the advance on default. Before the sale deed could be executed, a notification under Section 4(1) of the Land Acquisition Act, 1894 was issued, leading the seller to challenge the notification in court. The trial court ordered specific performance of the sale, but the High Court set aside the decree, holding that the seller was justified in forfeiting the advance. On appeal, the Supreme Court examined whether the contract was frustrated by the acquisition proceedings and whether the forfeiture clause could be enforced. It held that the contract was indeed frustrated and that the seller could not retain the advance, directing a refund with interest. The Court also affirmed that enforcing specific performance would be inequitable. Consequently, the appeal was allowed in part, ordering the refund of the advance.

Issues considered

Whether the issuance of a notification under the Land Acquisition Act, 1894 frustrates the contract of sale.
Whether a separate forfeiture clause can be enforced when the contract is frustrated.
Whether the seller is entitled to retain the advance payment under the forfeiture provision.
Whether specific performance of the sale deed is an equitable remedy in the circumstances.

Legislation cited

Subjects

contractfrustration of contractland acquisitionforfeiture clausespecific performanceadvance paymentrefundequity

Judgment

A THIRNEEDHI CHANNAIAH
v.
GUDIPUDI VENKA TA SUBBA RAO (D) BY LRS. & ORS.

FEBRUARY 20, 2007

B [S:B. SINHA AND MARKANDEY KA TJU, JJ.]

Contract Act, 1872-Frustration of Contract-Agreement to sell
property-Advance paid-Another agreement containing forfeiture clause-
C Land Acquisition proceeding by State in respect of suit property-Claim of
refund of advance by buyer refused by seller and advance forfeited-Challenge
against-Held, seller cannot exercise right offorfeiture of amount-Directed
to refund the advance amount.

Respondent had entered into an agreement to sell suit property to
D appellant Appellant made part payment of the consideration amount A regular
sale deed was to be executed after the entire amount is paid. On the same day,
they entered into another agreement whereupon it was agreed that on default
of appellant to pay the balance of sale consideration by or before 25.2.1982,
the advance amount paid by appellant would be forfeited. Before the deed of
· sale could be executed, a Notification under S.4 of Land Acquisition Act, 1894
E was issued. Respondent challenged the said Notification by filing writ petition
before High Court.

Appellant requested respondent to refund the advance amount as he was
not informed about the said land acquisition proceeding. Respondent replied
F that on account of failure to pay the balance amount, the money stood forfeited
in terms of the agreement. Appellant filed suit for specific performance of
contract of sale, which was decreed. On appeal, High Court set aside the
decree. Hence the present appeal.

Partly allowing the appeal, the Court
G HELD: 1.1. It is not the case of respondent that he had suffered any
damage. He did not deny or dispute that after the Agreement of Sale was
executed, a notification under Section 4(1) of the Land Acquisition Act had -
been issued. He himself raised a contention that the Agreement stood
frustrated. It may be true that he not only questioned the validity of the said
H 960
THIRIVEEOHI CHANNAIAH v. GUOIPUDI VENKATA SUBBA RAO (DJ BY LRS. [S.B. SINHA.!.] 96 J

notification, but had also filed a suit, but indisputably the parties were aware A
t that unless and until, the notification was set aside, the Agreement for Sale,
in the aforementioned situation, cannot be enforced by either of them.
(Para 12) [963-H; 964-A-B)

1.2. In the aforementioned facts and circumstances, the respondent could
not have forfeited the amount of advance. The High Court committed a manifest B
error in that behalf in arriving at the finding that the respondent was justified
in forfeiting the said amount. The High Court however rightly held that
enforcement of agreement for sale would be inequitable. The respondent is
--i directed to refund the amount of advance paid by the appellant to him.
[Para 13, 14) (964-C-D)
c
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 853 of 2007.

From the Judgment and final Order dated 22.7 .2005 of the High Court
of JUdicature, Andhra Pradesh at Hyderabad in FA No. 2692/1988.

Venkateswara Rao Anumolu for the Appellant.
D

·~ L.N. Rao, G. Ramakrishna Prasad and Suyodhan Byrapaneni for the.
, Respondents.

The Judgment of the Court was delivered by
E
S.B. SINHA, J. I. Leave granted.

2. This appeal is directed against the judgment and order dated 22.07 .2005
passed by a learned Single Judge of the High Court of Judicature at Andhra
Pradesh in First Appeal No. 2692 of 1988 whereby and whereunder the appeal
~ preferred by the respondents herein from a judgment and ·decree dated F
~
28.11.1998 passed by the Additional Subordinate Judge, Guntur in O.S. No.
258 of 1984 decreeing the suit f~r specific performance of an agreement of sale
dated 19.07.1981 was allowed.

3. The basic fact of the matter is not in dispute. An Agreement of Sale
G
was entered into by and between the parties on 19 .07 .1981, in terms whereof
the respondent offered to sell the suit property admeasuring 2.96 cents out
of 11.82 cents for Rs.44,000/- per acre in D. No. 140 situate at Agatavareppadu
Village in the District of Guntur. Appellant advanced a sum of Rs. 50,000/-
towards part payment of the said consideration. The balance amount of
consideration was to be paid on or before 25.02.1982 whereupon a regular sale H
y
\

962 SUPREME COURT REPORTS (2007] 2 S. C.R.

A deed was to be executed. On the said date, however, another agreement was
entered into by the parties in terms whereof it was agreed that on default of
the appellant to pay the balance of sale consideration on or before 25.02.1982,
the said amount of advnace shall be forfeited.

4. However, before the Deed of Sale could be executed, a notification
B under Section 4 (I) of the Land Acquisition Act, 1894 (for short, 'the Act')
was issued. Legality of the said notification was questioned by the respondent
by filing a Writ Petition before the High Court of Andhra Pradesh which was
marked as Writ Petition No. 434/1982. A suit was also filed by him for a decree
for permanent injunction restraining the State of Andhra Pradesh from
C interfering with his possession.

5. In view of the aforementioned developments, the appellant herein by
a notice requested the respondent to refund the said sum of Rs. 50,0001- with
interest at the rate of 18 per cent per annum as he was not informed about
the said land acquisition proceeding. However, in reply thereto, the respondent
D contended that as he has failed and/or neglected to pay the balance amount,
the money stand forfeited in terms of the said agreement dated 19.07.1981.
The suit filed by the appellant herein, was allowed by a judgment and order
dated 28.11.1998, holding :
<
"In the result, the suit is decreed with costs for specific performance
E of contract of sale dated 19.07.1981 directing the defendant to execute
the registered sale deed in favour of the plaintiff in respect of the
plaint schedule property after receiving the balance of sale
consideration. It was also directed that the balance of sale consideration
shall be deposited on or before 31.1.1989 and that the defendant shall
execute the sale deed on or before 28.2.1989. Failure to execute the
F sale deed by the defendant on or before 28.2.1989 the plaintiff is at
liberty to obtain the sale deed from the Court."

6. The said decree was passed having regard to the fact that in the
meanwhile, the High Court had quashed the aforementioned notification issued
G by the State under Section 4(1) of the Act by a judgment and order dated
18.02.1986. By reason of the said judgment the contention of the respondent
herein that in view of the issuance of the said notification, the contract
between the parties stood frustrated, was rejected.

7. The High Court, however, reversed the said judgment and decree
H passed by reason of the impugned judgment opining :
THIRIVEEOHI CHANNAIAH •·. GUDIPUDI VEN KAT A SUBBA RAO (0) BY LRS. [S.B. SINHA. J.] 963

(i) The appellant was not ready and willing to perform his part of A
t contract;

(ii) He was aware of the proceedings under the Act;

(iii) Issuance of mere notification would not lead to the conclusion
that the contract had become frustrated; and
B
(iv) In the aforementioned situation, forfeiture of the advance money
was justified.

8. This Court issued a limited notice to the respondent as to why the
amount of earnest money/advance should not be directed to be refunded to
the appellant. C
9. Execution of the Agreement of Sale on 19.7.1981 is not in dispute.
However, the same did not contain any stipulation in regard to the right of
the respondent to forfeit the amount of advance. Such stipulation was made
in a separate document which reads as under:-
D
"You executed an agreement of sale on 19.7.1981 in my favour to sell
land admeasuring 2.9 acres for a consideration of Rs. 44,000/- per acre

- and today I paid Rs. 50,000/- as advance. If I failed to pay the balance
of consideration before 25.02.1982 there is no need to refund my
advance amount. Before the above said date, if I pay the balance of
consideration, I will get the sale deed on my own expenses. On my E
consent if I sold partly, I would get the registration accordingly."

IO. Notification under Section 4(1) of the Act was issued on 02.01.1982.
Appellant evidently was of the view that the respondent was aware of the
intention of the State to acquire the said property, but despite his knowledge,
he executed the said Agreement for Sale.
F

II. The notice dated 4.3.1983 was issued on behalfofthe appellant on
the said premise that the respondent did not have any transferable title. It was
on that basis refund of Rs. 50,000/-, which was paid by way of advance, was
sought for from the respondent. It is only at that stage, the respondent G
invoked the forfeiture clause.

12. The only question which arises for our consideration is as to
whether in a situation of this nature, the respondent could exercise his right
of forfeiture of the entire amount. It is not his case that he had suffered any
damage. He did not deny or dispute that after the Agreement of Sale was H
f'-•
964 SUPREME COURT REPORTS [2007] 2 S.C.R.

A executed, a notification under Section 4( 1) of the Act had been issued. He
himself raised a contention that the Agreement stood frustrated. It may be 1
true that he not only questioned the validity of the said notification, but had
also filed a suit, but indisputably the parties were aware that unless and until,
the notification was set aside, the Agreement for Sale, in the aforementioned
situation, cannot be enforced by either of them.
B
13. Jn the aforementioned facts and circumstances of this case, we are
of the opinion that the respondent could not have forfeited the amount of
advance. The High Court, in our opinion, committed a manifest error in that
t- -·
behalf in arriving at the finding that the respondent was justified in forfeiting
c the said amount. We, however, agree with the High Court that enforcement ""
of agreement for sale would be inequitable.

14. We, therefore, direct that respondents to refund the amount of
advance paid by the appellant to him. Such payment should be made within
a period of 4 weeks from date; failing which the same would carry interest at
D the rate of 12 per cent per annum from the said date till the date of actual
payment.
;..
15. The appeal is allowed to the aforementioned extent. However, in the
facts and circumstances of this case, there shall be no order as to costs.

D.G. Appeal allowed.