The Supreme Court of India, in a significant judgment, has ruled that a suit for specific performance of an agreement to sell (ATS) is maintainable even without a specific prayer to declare the unilateral termination of the agreement as invalid, particularly when the contract is not “in its nature determinable”.
Delivering the judgment in K.S. Manjunath and Others v. Moorasavirappa Muttanna Chennappa Batil (D) by LRs and Others, a bench of Justice J.B. Pardiwala and Justice R. Mahadevan dismissed the appeals filed by subsequent purchasers of a property. The court upheld the High Court’s decree for specific performance in favour of the original vendees, holding that the subsequent purchasers, who had notice of the prior agreement, could not be classified as “bona fide purchasers” under Section 19(b) of the Specific Relief Act, 1963.
Background of the Case
The dispute originated from an unregistered Agreement to Sell (ATS) dated 28.04.2000, through which the “Original Vendors” (Respondent Nos. 6-13) agreed to sell 354 acres of agricultural land to the “Original Vendees” (Respondent Nos. 1-5 and 15-22) for a total consideration of Rs. 26,95,501/-. The vendees paid an initial earnest money of Rs. 2,00,000/-, and a total of Rs. 8,12,500/-.
The execution of the final sale deed was contingent on the vendors completing certain tasks, including changing the land’s tenure, conducting a survey, and relocating 19 tenants.
On 11.04.2001, a status quo order was passed on the subject land in a separate partition suit (O.S. No. 30 of 2001) filed by a third party. While this suit was pending, the original vendors issued a “Notice of Termination” to the original vendees on 10.03.2003. The notice cited the pending litigation, the status quo order, and the death of one vendor as reasons for their inability to proceed. It called upon the vendees to take back their earnest money within one month, failing which the ATS would be “deemed to be cancelled”.
The original vendees replied on 21.03.2003, refuting the termination. They asserted they were ready and willing to perform, that the status quo order only suspended the contract, and that the death of a vendor did not frustrate the ATS. The vendors did not respond to this reply.
On 14.02.2007, the partition suit (O.S. No. 30 of 2001) was withdrawn, and the status quo order was vacated. Within days, on 20.02.2007 and 02.03.2007, the original vendors sold the property to the “Subsequent Purchasers” (the appellants herein) for Rs. 71,00,000/-.
The original vendees then filed O.S. No. 36 of 2007 seeking specific performance of the 2000 ATS. The Trial Court denied specific performance, holding that the subsequent purchasers were bona fide, but ordered a refund of the earnest money. The High Court of Karnataka reversed this, granting specific performance and holding that the subsequent purchasers were not bona fide as they had notice of the prior ATS. The subsequent purchasers appealed to the Supreme Court.
Arguments Before the Supreme Court
The appellants (Subsequent Purchasers) primarily argued that the suit was not maintainable, as the original vendees had not sought a declaration that the termination notice dated 10.03.2003 was illegal, relying on the precedent in I.S. Sikandar (Dead) by LRs v K. Subramani. They also contended that they were bona fide purchasers for value without notice and that the suit was barred by limitation.
The respondents (Original Vendees) countered that the High Court was correct in holding the subsequent purchasers were not bona fide, as they admitted to having been shown the termination notice, which itself gave them notice of the prior ATS. They argued that the termination was a unilateral act that was immediately contested.
Supreme Court’s Analysis and Findings
The Supreme Court’s judgment, authored by Justice J.B. Pardiwala, addressed three key legal issues.
1. Maintainability of Suit without Challenging Termination
The court held that the central question was whether the ATS was “in its nature determinable”. After reviewing several High Court and Supreme Court judgments, including Annamalai v. Vasanthi, the bench clarified the legal position:
- If a contract provides a right to terminate (is determinable) and a party exercises that right, a “doubt/cloud on subsistence of the contract is created”. In such cases, a plaintiff must seek a declaration that the termination is invalid.
- However, if the contract “gives no right to unilaterally terminate” and is not, by its nature, determinable (like a license or partnership at will), then a unilateral termination is “a breach of contract by repudiation”.
The court held that the aggrieved party “can, by treating the contract as subsisting, sue for specific performance without seeking a declaratory relief”.
Applying this to the facts, the court found the ATS was not determinable. “The ATS was devoid of any clause enabling termination for convenience or otherwise empowering either party to terminate unilaterally.” The reasons cited by the vendors (pending suit, death of a party) were deemed “tenuous,” “wholly extraneous,” and a “cloak” for convenience. The court also noted the vendors’ lack of bona fides in failing to actually refund the Rs. 8,12,500/-.
The court distinguished the I.S. Sikandar case, noting that in that case, the termination was valid as the purchaser was in default despite multiple opportunities. In contrast, the termination here was “a unilateral act of convenience” not based on any default by the vendees.
2. Bona Fides of the Subsequent Purchasers
The court found that the subsequent purchasers were not bona fide purchasers under Section 19(b) of the Specific Relief Act. Their admission that they were shown the notice of termination was “of decisive importance”.
The court observed that this notice gave them actual notice of the prior contract, the parties, the earnest money paid, and the facts surrounding the dispute. “Good faith,” the court noted, requires “due care and attention.” A prudent purchaser would have inquired further.
The court stated, “The said notice of termination itself provided the names and addresses of all the original vendees… They could, with little effort, have contacted the original vendees… Their deliberate abstention from this inquiry… constitute[s]… ‘wilful abstention from inquiry or search which he ought to have made, or gross negligence’.” The court concluded they were not entitled to protection as bona fide purchasers.
3. Readiness and Willingness of Original Vendees
The court affirmed the Trial Court’s finding of fact that the original vendees were always ready and willing to perform their part of the contract. Their payment of Rs. 8,12,500/-, their reply to the termination notice, and their subsequent suit demonstrated this.
Final Decision and Directions
The Supreme Court dismissed the appeals. However, “with a view to do substantial justice,” considering nearly 18 years had passed since the subsequent sale, the court issued the following directions:
- The original vendees (Respondent Nos. 1-5 and 15-22) must pay the subsequent purchasers (Appellants) the balance sale consideration of Rs. 18,83,001/- with 16% per annum interest from 28.04.2000 (the date of the ATS).
- The original vendees must also pay the subsequent purchasers an additional amount of Rs. 5,00,00,000/- (Rupees Five Crores).
- Both payments must be made within six months.
- Only after these payments are made shall the appellants (subsequent purchasers) execute the sale deed and hand over vacant and peaceful possession of the subject land to the original vendees.
