IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 23RD DAY OF AUGUST 2019 BEFORE THE HON’BLE Dr. JUSTICE H.B. PRABHAKARA SASTRY R.F.A. No.1483 OF 2011 BETWEEN:
1. Mr. Prakash Kumar R. Aged about 49 years Son of late Mr. Rao R.V.K.
2. Mrs. Premalatha, Aged about 46 years Wife of Mr. Prakash Kumar R.
Both Appellants previously residing At No.1/2, 14th Main, 17th Cross, Malleswaram (West), Bangalore – 560 055 And presently residing at No.1200, 6th Main, ‘A’ Block, Rajajinagar 2nd Stage, Bangalore – 560 010.
(By Sri.P.B. Appaiah, Advocate) AND:
Mrs. R. Chitra, Aged about 46 years, Wife of Mr.D.B. Raghunandhan, Residing at No.8/110, …Appellants 2nd Main Road, Poornapragna Layout Banashankari 3rd Stage, Bangalore – 560 085.
(By Smt.K.M. Archana for Sri. G. Vikram, Advocate) …Respondent **** This Regular First Appeal is filed under Section 96 and Order XLI, Rule 1 of the Code of Civil Procedure, 1908, against the judgment and decree dated:20.04.2011 passed in O.S.No.2099/2009 on the file of XIX Additional City Civil and Sessions Judge at Bangalore City, (CCH-18), dismissing the suit for recovery of money.
This Regular First Appeal having been heard and reserved on 08-08-2019, coming on for pronouncement of judgment, this day, the Court delivered the following:
J U D G M E N T This is a plaintiffs’ appeal. The present appellants had instituted a suit against the present respondent arraigning her as a defendant in the Court of the XIX Additional City Civil and Sessions Judge at Bangalore City (CCH No.18) (hereinafter for brevity referred to as “Trial Court”) in O.S.No.2099/2009 for recovery of a sum of `6,53,205/- together with interest thereupon at `24% per annum from the date of the suit till realisation.
2. The summary of the case of the plaintiffs in the Trial Court was that, they had entered into an Agreement for purchase of the suit schedule immovable property from the defendant who was the owner of the said property thereof, on 25-11-2007 for a total consideration of a sum of `41,50,000/-. Under the said Agreement, an advance amount of a sum of `5,00,000/- was paid to the defendant through a cheque. Time stipulated under the Agreement for completion of the promise was three months, within which period, the defendant ought to have established her marketable and disposable title in respect of the suit schedule property and executed the Sale Deed in favour of the plaintiffs after obtaining the balance sale consideration. Ever since the date of the Agreement, the plaintiffs were ready and willing to have the Sale Deed executed in their favour. They approached their Bankers for financial assistance in the form of a Housing loan to purchase the suit schedule property. However, after scrutiny of the documents pertaining to the property, the Bankers expressed their inability to sanction the loan alleging defect in the title of the suit schedule property. The same was brought to the notice of the defendant by the plaintiffs and requested the defendant to cancel the said Agreement of Sale or to establish her absolute title over the suit schedule property to enable the plaintiffs to purchase the same. However, the defendant expressed her inability to prove her title. Therefore, the plaintiffs sought for refund of the entire advance amount of a sum of `5,00,000/- from the defendant. Even though the defendant had suppressed her defective title in respect of the suit schedule property, still, she did not refund the advance amount to the plaintiffs, despite issuance of legal notice to her by the plaintiffs, which constrained the plaintiffs to institute a suit against the defendant.
3. In response to the service of summons, the defendant appeared through her counsel and filed her Written Statement in the Trial Court, wherein she admitted of she having received a sum of `5,00,000/- from the plaintiffs under an Agreement for Sale dated 25-11-2007 entered into by her with the plaintiffs with respect to the sale of suit schedule property to the plaintiffs. However, she denied that there was any defect in the title of the property.
On the other hand, she contended that the plaintiffs did not have the financial capacity to pay the balance sale consideration and they were never ready and willing to pay the balance amount of consideration and get the schedule property registered in their names. She also contended that the Agreement provided for her to forfeit the entire advance amount in the event of the purchasers failing to pay the balance sale consideration within the time stipulated. Accordingly, she has forfeited the entire advance amount as the balance sale consideration was not tendered to her by the plaintiffs within the stipulated time.
She also contended that the plaintiffs had expressed their inability to pay the balance sale consideration and their unwillingness to purchase the schedule property. The defendant had to sell the suit schedule property by a lesser price thereafter to a subsequent purchaser which was for a sum of `23,53,000/-. Thus, she has incurred a huge financial loss, for which the plaintiffs are directly responsible. It is in that circumstance, the defendant had forfeited the advance amount.
She also contended that, the Agreement for Sale was entered into between them only after the plaintiffs were satisfied about her title over the suit schedule property.
4. Based on the pleadings of the parties, the Trial Court framed the following issues for its consideration:
“1] Whether the plaintiffs prove that defendant is liable to pay a sum of `6,53,205/-?
2] Whether plaintiffs further prove that defendant is liable to pay interest at the rate of `24% on `5 lakhs?
3] Whether plaintiffs prove cause of action?
4] Whether defendant proves that suit is not maintainable as pleaded in para 3 of the written statement?
5] Whether the plaintiffs are entitled for the decree sought?
6] What order or decree?”
In order to prove their case, the plaintiff No.1 got himself examined as PW-1 and got produced and marked documents from Exhibits P-1 to P-5. On behalf of the defendant, she herself got examined as DW-1 and got produced and marked two documents at Exhibits D-1 and D-2.
5. After hearing both side, the Trial Court by its impugned judgment and decree dated 20-04-2011 answered issues No.1 to 5 in the ‘negative’ and dismissed the suit of the plaintiffs. It is against the said judgment and decree, the plaintiffs have preferred the present appeal.
6. Lower Court records were called for and the same are placed before this Court.
7. Heard the arguments of the learned counsels from both side and perused the material placed before this Court including the memorandum of appeal and the impugned judgment.
8. For the sake of convenience, the parties would be henceforth referred to with the ranks they were holding before the Trial Court respectively.
9. In the light of the materials placed and the arguments addressed by the parties, the points that arise for my consideration are:
1] Whether the plaintiffs have proved that the defendant is liable to pay them a sum of `6,53,205/- with future interest there upon?
2] Whether the judgment and decree under appeal warrants any interference at the hands of this Court?
PW-1 in his Examination-in-chief in the form of Affidavit evidence has reiterated the contentions taken up by the plaintiffs in their plaint. He has stated that under the Agreement for Sale with respect to suit schedule property, they have paid a sum of `5,00,000/- to the defendant as an advance amount and three months’ time was fixed for completion of the sale transaction. He has also stated that when he applied for a Housing loan with his Banker, the said Banker opined that the defendant does not have a valid title to sell the schedule property. As such, the only option left to them was to think of not going in for the purchase of the said flat. The defendant had suppressed the defective title with respect to the suit schedule flat. As such, she has committed breach of the very essential term of the contract thereby rendering herself liable for an action by him for return of the advance amount to the plaintiffs. He has got marked the Agreement of Sale dated 25-11- 2007 at Ex.P-1, copy of the legal notice dated 25-07- 2008 said to have been sent on their behalf to the defendant at Ex.P-2 and reply to the said legal notice by the defendant dated 30-09-2008 at Ex.P-3. He was subjected to a detailed cross-examination from the defendant’s side.
10. The defendant as DW-1 in her Examination-in- chief in the form of Affidavit evidence also has reiterated the contentions taken up by her in her Written Statement. She has admitted of she entering into an Agreement for Sale of the suit property with the plaintiffs on 25-11-2007 and receiving a partial amount of a sum of `5,00,000/- as advance amount under the said Agreement. However, she contended that the plaintiffs had never expressed their readiness and willingness to pay the balance sale consideration and get the schedule property registered in their names. Since the plaintiffs did not perform their promise, she had forfeited the entire advance amount as the balance amount was not tendered within the stipulated time.
She also contended that subsequent to the plaintiffs not honouring their commitments under the Sale Agreement, she was constrained to sell the suit schedule property to another purchaser, i.e. M/s.
Sapthagiri Trading Corporation on 05-09-2008 for a total sale consideration of a sum of `23,53,000/-. Thus, she incurred a huge financial loss of a sum of `17,97,000/- which can be directly attributed to the plaintiffs. After denying that there was any defect in her title with respect to the suit property, she stated that at the time of she purchasing the suit schedule property, she had obtained a Housing Loan from M/s. State Bank of Mysore and had also mortgaged the schedule property in favour of the said Bank. This fact was well within the knowledge of the plaintiffs. Therefore, it is incorrect to state that the plaintiffs’ Banker had refused to sanction the loan to the plaintiffs on the ground that the title deeds of the suit schedule property were defective.
In her support, she got marked one Certificate issued by the State Bank of Mysore and a certified copy of the Sale Deed dated 12-09-2008 at Exs.D-1 and D-2 respectively. In her cross-examination from the plaintiffs’ side, she adhered to her original version.
11. From the pleadings and evidence of the parties, the undisputed fact remains that both the parties had entered into an Agreement for the sale of suit schedule property from the defendant to the plaintiffs on 25-11-2007 for consideration of a sum of `41,50,000/- in which a sum of `5,00,000/- was paid by the plaintiffs to the defendant as an advance amount. The time stipulated for the performance of the contract was three months from the date of Agreement. The parties have also submitted that the terms of Agreement of Sale was reduced into writing which is produced and marked by the plaintiffs at Ex.P-1.
12. Clauses 2, 3.1, 5, and 7 of the Agreement of Sale at Ex.P-1 are the more relevant covenants of the Agreement for the case on hand. They are reproduced as follows:-
“2. TIME FOR COMPLETION:
The time fixed for completion of the Sale transaction is three months from 25.11.2007 and by which time the Vendor shall obtain Clearance Certificate U/s 230 A of the Income-Tax Act, 1961, and such other clearance and permission required for registration of Sale Deed.
3. TITLE:
3.1 The Sale of the Schedule Property shall be free from all kinds of encumbrances, attachments, court or acquisition proceeding or charges of any kind and minor rights or claims.
5. BREACH :
In the event of the VENDOR failing to perform her obligations under this agreement and receive the balance sale considerations as aforesaid execute the deed of sale and appear for registration of the sale deed in favour of the purchaser, the purchaser shall, at his option, entitled to specifically enforce the contract or rescind this agreement. In the event of the purchaser rescinding this agreement the VENDOR shall forthwith refund the amount paid by the purchaser as advance without any interest on the said advance. In the event of the purchaser failing to pay the balance of the sale consideration in the manner and within the time stipulated after the VENDOR fulfilling all the terms and conditions under this agreement and obtain registration of the final Deed of Sale, the VENDOR shall be entitled, at her option, to enforce specific performance of this agreement or rescind the same. In the event of the VENDOR rescinding the agreement, as hereinbefore stated, the VENDOR shall forfeit the entire advance amount paid by the purchaser under this agreement.
7. DOCUMENT OF TITLE :
The original document of title to schedule property i.e., settlement deed dated 26.6.1976 executed by Sri. Srinivasan. L. Sastri, is with Miss. Bramara. L who is one of the settlees under the above settlement deed dated:26.6.1976 and the purchaser can have access to it whenever required for legitimate reference."
It is in the above background, the first point of argument of the learned counsel for the plaintiffs/ appellants is that, the breach has been committed by the defendant/vendor who has not furnished documents like building plan and completion certificate, as such, there was defect in the title which prevented the plaintiffs from proceeding further in the contract. As such, the act of the defendant in forfeiting the advance amount is uncalled for.
13. Per contra, learned counsel for the defendant/respondent in her argument submitted that the alleged defect in the title has not been established by the plaintiffs nor even they have shown as to what the alleged defects were. The plaintiffs also failed to prove that the Banker has stated that there was defect in the title of the defendant/vendor since no opinion of the Bank in that regard has been produced by the plaintiffs.
14. A perusal of Ex.P-1, more particularly, the Clauses which are extracted above nowhere goes to show that, the defendant/vendor had agreed to furnish the building plan and completion certificate. No doubt in Clause 3.1 of the document at Ex.P-1, the defendant/vendor has agreed that the suit schedule property shall be free from all kinds of encumbrances, attachments, Court or acquisition proceedings or charges of any kind and minor rights or claims, but it would not imply that the building plan and completion certificate are also essentially to be furnished by the vendor to the purchasers. Even in Clause 7 which deals about the ‘Document of title’ also, there is no mention about the details of the documents that are required to be furnished by the vendor to the purchasers. It is not in dispute that the suit schedule property is a flat in the second floor of the Apartment building. As such, it is also not the case of the plaintiffs that, the defendant/vendor had the alleged documents i.e. building plan and completion certificate and despite their request, the defendant did not furnish them the copies of the same.
15. The plaintiffs, for the first time, have put it in writing about the alleged defect in the title in their legal notice sent to the defendant, a copy of which is marked at Ex.P-2. In the said document, though the plaintiffs have stated that their Banker told them that there was a defect in the title of the property, but, nowhere they have stated as to what the alleged defect was. However, they gave the reason of their Banker refusing to sanction the loan and sought for refund of the advance amount by stating that the Agreement of Sale has thus become unenforceable.
16. Ex.P-3 is the reply to the legal notice at Ex.P-2 by the defendant, where it is specifically stated that the defendant was not aware as to why the plaintiffs’ Banker refused to sanction the loan. The defendant has not admitted that there was any defect in the tile. On the contrary, the defendant contended that, had there been any defect in the title, the plaintiffs ought not to have entered into an Agreement to Sell. Thus, at the very first opportunity, the defendant has denied that there was any defect in the title.
17. PW-1 in his evidence also has not stated as to what was the alleged defect in the title of the defendant/vendor and how the same can be construed as a breach of the Agreement committed by the defendant. On the other hand, the said witness in his cross-examination, has stated that, before entering into the Agreement, they have not shown the documents pertaining to the property to any Advocate. Thus, the plaintiffs themselves have made it clear that before entering into the Agreement of Sale at Ex.P-1, they have not got the documents verified from a professional or an expert.
PW-1 in his cross-examination has further stated that, after the execution of Agreement, he did not consult the lawyer by showing the title deeds of the property to ascertain whether the title deeds were correct or not. By stating so, the witness has further confirmed that even after the Agreement of Sale at Ex.P-1 also, the plaintiffs were not bothered to get the legal opinion from a professional/lawyer.
PW-1 has stated that he approached only the State Bank of India, Shivajinagar Branch, seeking a Housing loan.
In the same breath, PW-1 has stated that he has not given any application to the Shivajinagar Branch of the State Bank of India. Thus, it creates a doubt as to how can a Banker would give an opinion as to the title of a property, when in fact, no application was made to it requesting for any Housing loan in respect of the said property. This doubt is pertinent, because, admittedly, the plaintiffs have not produced the alleged Banker’s opinion regarding the title of the suit schedule property.
PW-1 in his cross-examination has stated that the alleged absence of the original sanctioned plan and completion certificate made him to conclude that the title of the defendant/vendor with respect to the suit property was defective. However, the same witness in the very next sentence has also stated that the suit schedule property is a flat and that he does not know that the original documents would be with the Association and not with the individual person.
Further, when it was specifically asked to PW-1 in his cross-examination as to whether he had called upon the defendant/vendor to provide the original sanction plan and occupancy certificate, the witness answered stating that, he had not issued the legal notice in writing.
However, he admitted that they had not pleaded in their plaint about the original sanction plan and occupancy certificate. Therefore, it is clear that at no point of time, the plaintiffs demanded for furnishing the original sanction plan and occupancy certificate from the defendant nor they have mentioned in their pleading as to what the alleged defect in title of the defendant was, with respect to the suit schedule property. Admittedly, there is no pleading about the plaintiffs claiming original sanction plan and occupancy certificate from the defendant. As such, the contention of the plaintiffs that the title of the defendant with respect to the suit schedule property was defective, is not proved to be a fact.
On the other hand, the plaintiffs themselves got produced and marked a document as Ex.P-5 which is a letter by the State Bank of Mysore, P and S Banking Division, Bangalore Branch dated 14-12-2007 and addressed to the defendant, wherein referring to the Housing loan account of the defendant, the Banker has confirmed that they were holding seven documents pertaining to the building/property which also included a Xerox copy of the building plan. The said letter also refers to a legal opinion which is annexed to the said letter. The legal opinion shows that the vendor of the property from whom the defendant had purchased the suit schedule property had a clear, valid and a marketable title over the schedule property. Thus, the pleading as well the evidence of the defendant that, she had acquired the said property through a Bank loan which had granted a loan to her after satisfying the marketable title in the property, stands proved. Thus, the plaintiffs have failed to prove that there was any defect in the title of the suit schedule property which prevented them from proceeding further with the Agreement of Sale at Ex.P-1. On the other hand, their own notice at Ex.P-2, as observed above, shows that the plaintiffs have shown their non-inclination to proceed further with Ex.P-1 calling the said Agreement as an unenforceable one. Therefore, the alleged breach of the Agreement is proved to have been committed not by the defendant/vendor but by the plaintiffs/purchasers. As such, the first argument of the learned counsel for the plaintiffs/appellants on the point is not acceptable.
18. The other argument which the learned counsel for the plaintiffs/appellants emphasised in this appeal is that, Ex.P-1 calls the amount of `5,00,000/- paid by the plaintiffs to the defendant/vendor as ‘advance amount’ but not as ‘earnest money’, as such, the same would not bind the buyer. Therefore, even if there is any breach by the buyer, still, they are entitled for refund of the advance amount.
In his support, he relied upon two judgments of the Hon’ble Apex Court, wherein, the first judgment is in the case of Shri.Hanuman Cotton Mills and others Vs. Tata Air Craft Limited, reported in 1969 (3) Supreme Court Cases 522.
In the said case, the appellants had entered into a contract with the respondent for purchase of aero-scrap. According to the contract, the buyer had to deposit with the Company, 25% of the total amount and that deposit was to remain with the Company as ‘earnest money’ to be adjusted in the final bills. The buyer was bound to pay the full value less the deposit before taking delivery of the stores. In case of default by the buyer, the Company was entitled to forfeit unconditionally the ‘earnest money’ paid by the buyer and cancel the contract. The appellants advanced a sum of `2,50,000/- (being 25% of the total amount) agreeing to pay the balance in two instalments on certain dates. On the appellants failing to pay any further amount, the respondent forfeited the sum of `2,50,000/-, which according to it was ‘earnest money’ and cancelled the contract. The appellants filed a suit for the recovery of the aforesaid amount. The Trial Court held that the sum was paid by way of deposit or ‘earnest money’ which was primarily a security for the performance of the contract and that the respondent was entitled to forfeit the deposit amount when the appellants committed a breach of the contract and dismissed the suit. The High Court confirmed the decision of the Trial Court. On appeal to the Hon’ble Supreme Court, the appellants contended that the sum being part of the purchase, the respondent was not entitled to furnish the same and that the respondent was entitled only to a reasonable compensation under Section 74 of the Indian Contract Act, 1872.
The Hon’ble Apex Court considered as to what constitutes ‘earnest’ and held that the following principles emerge regarding ‘earnest’.
“(1) It must be given at the moment at which the contract is concluded.
(2) It represents a guarantee that the contract will be fulfilled or, in other words, ‘earnest’ is given to bind the contract.
(3) It is part of the purchase price when the transaction is carried out.
(4) It is forfeited when the transaction falls through by reason of the default or failure of the purchaser.
(5) Unless there is anything to the contrary in the terms of the contract, on default committed by the buyer, the seller is entitled to forfeit the earnest.”
The second case relied upon by the learned counsel for the appellants is, in the case of Satish Batra Vs. Sudhir Rawal reported in (2013) 1 Supreme Court Cases 345 wherein also, the question of ‘earnest money’, ‘forfeiture of earnest money’ and Section 74 of the Indian Contract Act, 1872 was under consideration.
The Hon’ble Apex Court in paragraphs 14, 15 and 16 was pleased to observe as below:-
“14. In the above mentioned case, the Court also held as follows: (Bhalchandra Laboratories case, SCC p.721, para 14) “14…. Further, it is not the description by words used in the agreement only that would be determinative of the character of the sum but really the intention of parties and surrounding circumstances as well, that have to be looked into and what may be called an advance may really be a deposit or earnest money and what is termed as ‘a deposit or earnest money’ may ultimately turn out to be really an advance or part of purchase price. Earnest money or deposit also, thus, serves two purposes of being part-payment of the purchase money and security for the performance of the contract by the party concerned, who paid it.”
15. The law is, therefore, clear that to justify the forfeiture of advance money being part of “earnest money” the terms of the contract should be clear and explicit. Earnest money is paid or given at the time when the contract is entered into and, as a pledge for its due performance by the depositor to be forfeited in case of non-performance by the depositor. There can be converse situation also that if the seller fails to perform the contract the purchaser can also get double the amount, if it is so stipulated. It is also the law that part-payment of purchase price cannot be forfeited unless it is a guarantee for the due performance of the contract. In other words, if the payment is made only towards part-payment of consideration and not intended as earnest money then the forfeiture clause will not apply.
16. When we examine the clauses in the instant case, it is amply clear that the clause extracted hereinabove was included in the contract at the moment at which the contract was entered into. It represents the guarantee that the contract would be fulfilled. In other words, “earnest” is given to bind the contract, which is a part of the purchase price when the transaction is carried out and it will be forfeited when the transaction falls through by reason of the default or failure of the purchaser. There is no other clause that militates against the clauses extracted in the agreement dated 29-11-2011.”
A reading of the judgment of the Hon’ble Apex Court in Sathish Batra’s case (supra) at paragraph 14 clearly goes to show that, it is not the nomenclature that the parties have used in their Agreement that matters, but what really matters is the intention of the parties and the surrounding circumstances as well. It is further said in para.14 that, “what may be called as an ‘advance’ may really be a ‘deposit’ or ‘earnest money’ and what is termed as a ‘deposit’ or ‘earnest money’ may ultimately turn out to be really an ‘advance’ or part of purchase price.…”
In the instant case, a reading of Clause 5 of Ex.P-1, which is reproduced above clearly goes to show that though the parties have called the payment of a sum of `5,00,000/- by the purchasers/plaintiffs to the vendor/defendant as an ‘advance amount’, but they were entitled to treat it as an ‘earnest money’, because, it gives a right to the vendor to forfeit the said amount in the event the purchasers commit any breach of the Agreement. Therefore, the argument of the learned counsel for the appellants that, since Ex.P-1 calls the amount of `5,00,000/- paid by the plaintiffs to the defendant as an ‘advance amount’, the same cannot be forfeited, is not acceptable.
19. Further to the above, in a decision relied upon by the learned counsel for the respondent in the case of Narendrakumar Nakhat Vs. Nandi Hasbi Textile Mills Ltd. and Ors. reported in MANU/KA/0031/1997, a Division Bench of this Court after analysing Section 74 of the Indian Contract Act and the forfeiture Clause in an Agreement of auction sale was pleased to observe that, where under the terms of the contract, the party in breach has undertaken to pay a sum of money or to forfeit a sum of money which has already been paid to the party complaining of breach of contract, the undertaking is of the nature of penalty. The Court was further pleased to observe that the ‘earnest money deposit’ in the said case must be treated as liquidated damages and as per Clause 6 of the Agreement, that amount would be liable for forfeiture on account of any default by him.
20. In the instant case also, though the amount of a sum of `5,00,000/- given by the plaintiffs/purchasers to the defendant/vendor is called as an ‘advance amount’ in the Agreement of Sale at Ex.P-1, still, the recital of the Agreement goes to show that the parties intended to treat it as an ‘earnest money’ and the forfeiture Clause was in the form of liquidated damages entitling the vendor to forfeit the same, in case of default of the contract committed by the purchasers. Since, as observed above, the plaintiffs have failed to prove that, breach of the contract was from the vendor/ defendant, on the contrary, the evidence has proved otherwise. Further, the defendant could able to show that because of the breach of the contract from the plaintiffs, she had to sell the very same property for a lesser value to another purchaser by which the defendant claims to have incurred a huge loss. As such, the defendant has forfeited the so-called ‘advance amount’ given by the plaintiffs.
21. The Trial Court since has arrived at the same conclusion though with a different reasoning, I do not find any reason to interfere in it.
Accordingly, I proceed to pass the following:
O R D E R [i] The appeal is dismissed;
[ii] The judgment and decree dated 20-04-2011 passed by the learned XIX Additional City Civil and Sessions Judge at Bangalore City, (CCH-18) in O.S.No.2099/ 2009, is hereby confirmed;
Registry to transmit a copy of this judgment along with the Lower Court records to the concerned Trial Court, without delay.
Sd/- JUDGE BMV*