Recently, the Bombay High Court dismissed an appeal arising out of a long-running contractual dispute between a cooperative credit society and a charitable trust concerning the forfeiture of earnest money in a failed land transaction at Dhule. The Court upheld the concurrent findings of the trial and appellate courts directing a refund of ₹2 lakh with interest, holding that the plaintiffs were consistently ready and willing to perform their contractual obligations. Significantly, the Court emphasised that forfeiture cannot be justified where the seller itself fails to establish a clear title to the property.
Brief Facts:
The case originated from a proposed sale of 71 R land, owned by a charitable trust. The plaintiff, a cooperative credit society registered under the Maharashtra Cooperative Societies Act, 1960, emerged as the highest bidder in a public auction and deposited ₹2 lakh as earnest money pursuant to negotiations and agreed terms. However, soon after, objections were raised by a third party claiming a lack of title in the trust, and disputes emerged regarding ownership and legal authority to sell the property. The trust subsequently refused to furnish title documents and later forfeited the earnest money, alleging breach by the purchaser for failure to complete payment obligations, prompting the plaintiff to seek a refund along with interest at 18% per annum.
Contentions of the Appellant:
The Appellants contended that the plaintiff had committed breach of contractual terms by failing to deposit the remaining consideration within the stipulated timeline under the agreement. The Counsel argued that despite repeated notices, the plaintiff avoided performance and failed to comply with contractual obligations, thereby justifying cancellation of the transaction and forfeiture of the earnest money. The Appellants further raised procedural objections, including a bar under Order II Rule 2 CPC, asserting that the subsequent suit for refund was not maintainable after earlier proceedings relating to the same transaction.
Contentions of the Respondent:
The Respondents argued that they had always remained ready and willing to perform their part of the contract, but were prevented from completing the transaction due to the trust’s failure to establish a clear title. The Counsel submitted that objections raised by third parties, including rival claims over the property, created legal uncertainty, and the trust itself failed to produce foundational ownership documents. The Respondents contended that forfeiture of earnest money was arbitrary and illegal, as contractual performance became impossible due to the seller’s default and not the purchaser’s conduct.
Observations of the Court:
The Court undertook a detailed examination of the concurrent findings and upheld the factual conclusion that the plaintiff had demonstrated continuous readiness and willingness to perform its contractual obligations. It noted that the issuance of notices, enhancement of bid amount, and participation in the transaction process collectively established bona fides on the part of the purchaser. Importantly, the Court emphasised that the breakdown of the contract was attributable to the trust’s inability to produce a clear title and the emergence of competing claims over the property, which fundamentally undermined the enforceability of the sale.
Reaffirming settled principles governing forfeiture, the Court observed that where a party is prevented from performance due to the other side’s default, forfeiture cannot be sustained. It held that “the Plaintiffs were always ready and willing to perform their obligations, but were prevented from doing so due to the Defendants,” thereby negating the basis for forfeiture of ₹2 lakh. The Court further found no merit in the plea of procedural bar or limitation, holding that the subsequent suit for refund was independently maintainable.
The decision of the Court:
Dismissing the appeal, the Court upheld the concurrent findings of the courts below and confirmed the decree directing refund of ₹2 lakh with 9% interest, holding that forfeiture of earnest money is impermissible where non-performance is caused by the seller’s inability to establish title or complete the transaction.
Case Title: Khandesh Gosevashrmantatgat Goshala, Vs. Late Sau and Ors
Case No.: Second Appeal No. 495 of 2022
Coram: Hon'ble Mr. Justice Mehroz K. Pathan
Advocate for the Appellants: Adv. D. S. Bagul
Advocate for the Respondent: None
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