Refund Clause Doesn't Bar Specific Performance

Source: Supreme Court 

Why in News? 

A bench of Justice KV Viswanathan and Justice Alok Aradhe, in Jaspal Singh v. Ashwani Kumar (2026), held that a contractual clause providing for refund of earnest money in the event of default does not, by itself, prevent a court from granting specific performance of an agreement to sell. 

What was the Background of Jaspal Singh v. Ashwani Kumar (2026) Case? 

• An Agreement to Sell dated June 22, 2003 was executed under which the plaintiff agreed to purchase the defendant's half share in 12 marlas of land for ₹12.50 lakh. 
• The appellant (plaintiff) paid ₹9 lakh as earnest money, and the parties subsequently extended the deadline for execution of the sale deed twice, with the respondent receiving an additional ₹60,000. 
• Alleging that the respondent failed to execute the sale deed despite his readiness and willingness to complete the transaction, the appellant filed a suit for specific performance in 2006. 
• The respondent denied the agreement, claiming that the documents had been signed as security for a separate financial arrangement connected with his proposed travel abroad. 
• The Trial Court granted only a refund of the earnest money. The First Appellate Court decreed specific performance. The High Court, in second appeal, restored the Trial Court's decree, prompting the plaintiff to approach the Supreme Court. 

What were the Court's Observations? 

• On the effect of a refund clause on the obligation to perform: The Court held that a clause merely providing for refund of earnest money in case the sale deed could not be executed does not amount to an election or a stipulation entitling the seller to discharge the bargain, at his option, by paying that sum in lieu of executing the sale deed. Such a clause records no more than the bare consequence flowing from non-execution, operating as a deterrent reinforcing the obligation to perform rather than as a substitute for it, and protects the purchaser's minimum entitlement without curtailing his right to insist on performance. 
• On the High Court's error in restoring the Trial Court's decree: The Court held that the High Court committed an error in interfering with the First Appellate Court's decision, having wrongly construed the refund clause as discharging the seller from the obligation of specific performance. 
• On the object of Section 23 of the Specific Relief Act, 1963: The Court held that accepting the High Court's interpretation would reward a defaulting vendor who had already received a substantial part of the sale consideration and had twice sought extensions for execution of the sale deed, and that such a construction would defeat rather than serve the object of Section 23. The Court further observed that the mere naming of a sum as damages or penalty in a contract does not by itself entitle the defaulting party to escape specific performance by paying that sum, and that a contrary reading would render Section 23 meaningless. 
• On the scope of second appellate jurisdiction under Section 100 CPC: The Court held that the High Court exceeded the limited scope of its jurisdiction under Section 100 CPC, reiterating that a High Court hearing a second appeal cannot reappreciate evidence or interfere with concurrent findings of fact unless such findings are perverse or unsupported by evidence. 
• On the respondent's defence of fabrication: The Court held that the respondent failed to establish his defence that the agreement was fabricated from signed blank papers, noting that he admitted his signatures on all three agreements and led no expert evidence to support the allegation of fraud. 
• On sale of an undivided share and consensual extensions: The Court held that sale of an undivided share in jointly owned property is legally permissible and cannot itself create suspicion about the genuineness of a transaction, and that the consensual extensions of time for execution of the sale deed did not indicate that the agreement was a sham. 
• On relief granted: The appeal was allowed, and the First Appellate Court's order decreeing specific performance was restored. 

What is the Legal Position on Refund Clauses and Specific Performance? 

Refund Clauses in Agreements to Sell: 

• A clause providing for refund of earnest money on non-execution of a sale deed does not, by itself, discharge the seller's obligation to perform the contract. 
• Such a clause must contain clear language of election or a stipulation permitting the seller to opt out of performance by payment, before it can be read as a substitute for specific performance. 
• Absent such language, the clause functions only as a deterrent and as a floor protecting the purchaser's minimum entitlement. 

Section 23, Specific Relief Act, 1963: 

• The provision governs the construction of clauses naming a sum as damages or penalty for breach of contract. 
• A contract remains specifically enforceable notwithstanding such a clause, unless the clause clearly shows an intention to allow performance to be substituted by payment. 
• Reading such clauses as automatic escape routes from performance would render Section 23 otiose. 

Section 100, Code of Civil Procedure, 1908 (Second Appeal): 

• A second appeal lies only on a substantial question of law. 
• The High Court cannot reappreciate evidence or disturb concurrent findings of fact reached by the courts below. 
• Interference is permissible only where such findings are shown to be perverse or wholly unsupported by evidence.