Liquidation of Damages not a Bar to Specific Perfor­mance – Section 23 | Specific Relief Act

Section 23 of the Specific Relief Act, 1963 Provides that:

1. Enforcement of:

The purchaser’s contract to pay off a mortgage debt could not be enforced by the mortgagee who was not a party to the contract. It must therefore be taken as well settled that except in the case of a beneficiary under a trust created by a contract or in the case of a family arrangement, no right may be enforced by a person who is not a party to the contract.

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2. Entitlement for:

Where the stipulation for damages was made only for the purpose of securing performance of the contract and not for the purpose of given an option to paying money in lieu of specific performance, the appellant was entitled in law to the enforcement of the agreement.

3. Grounds to compel:

The question always is: What is the contract? Is it that one certain act shall be done, with a sum annexed, whether by way of penalty or damages, to secure the performance of this very act? Or, is it that one of the two things shall be done at the election of the party who has to perform the contract, namely, the performance of the act or the payment of the sum of money? If the former, the fact of the penal or other like sum being annexed will not prevent the Court’s enforcing performance of the very act, and thus, carrying into execution the intention of the parties, if the latter, the contract is satisfied by the payment of a sum of money, and there is no ground for proceeding against the party having the election to compel the performance of the other alternative.

From what has been said it will be gathered that contract of the kind now under discussion are divisible into three classes:

(i) Where the sum mentioned is strictly a penalty – a sum named by way of securing the performance of the contract, as the penalty is a bond;

(ii) Where the sum named is to be paid as liquidated damages for a fresh of the contract;

(iii) Where the sum named is an amount the payment of which may be substituted for the performance of the act at the election of the person by whom the money is to be paid or the act done.

Where the stipulated payment comes under either of the two first-men­tioned heads, the Court will enforce the contract, if in other respects it can and ought to be enforced just in the same way as a contract not to do a particular act, with a penalty added to secure its performance or a sum named as liquidated damages, may be specifically enforced by means of an injunction against breaking it. On the other hand, where the contract comes under the third head, it is satisfied by he payment of the money, and there is no ground for the Court to compel the specific performance of the other alternative of the contract.

4. Importance of:

A distinction between liquidated damages and pen­alty may be important in common law but as regards equitable remedy the same does not play any significant role.

5. Maintainability of:

The clause as regard payment of damages as contained in Clause (7), of agreement of sale reads as under:

“7. That if the vendor fails to discharge the mortgage and also com­mits any breach of the terms in this agreement and fails to sell the property, then in that event he shall return the advance of Rs. 10,000 paid as aforesaid and shall also be liable to pay a further sum of Rs. 2.000/- as liquidated damages for the breach of the agreement.”

The mortgage was, thus, required to be redeemed. From Exhibit P 40 dated 15.6.1979 it appears that the Life Insurance Corporation of India admitted the execution of the discharge and the Mortgagor (defendant) was authorized to present the same for registration.

The mortgage deed was executed as far back on 3.6.1963. A further charge was created by a deed dated 10.7.1964. The entire mortgage money was paid only on or about 15.6.1979.Clause (7) of the Agreement of Sale would be attracted only in a case where the vendor is in breach of the term. It was for the plaintiff to file a suit for specific performance of contract despite having any option to invoke the said provision. It would not be correct to contend that only because such a clause exists, a suit for specific performance of contract would not be maintainable.

6. Permissibility of:

In substance statutory provisions under Sections 23, 13 and 27B lay down that, subject to certain exceptions which are not material in this case, a contract in the absence of a contrary intention ex­press or implied will be enforceable by and against the parties and their legal heirs and legal representatives including assignees and transferees.

In the present case, there is nothing in the language of the pre-emption clause or the other clauses of the award to suggest that the parties had any con­trary intention. On the other hand a reference to the other clauses of the award shows that the parties intended that the obligations and benefit of the contract should go to the assignee or successors-in-interest.

It is obvious that in these clauses the expression “parties” cannot be restricted to the original parties to the contract but must include the legal representatives and assignees of the original parties. There is hence no reason why the same expression should be given a restricted meaning in the pre-emption clause which is the subject-matter of interpretation in the present appeal.

The rule against perpetuities is not concerned with contracts as such or with contractual rights and obligations as such. Thus a contract to pay money to a person, his heirs or legal representatives upon a further contingency, which may happen beyond the period prescribed would be perfectly valid.

7. Question of:

A reference to Section 22 of the old Act, (the corre­sponding provision is Section 20 of the Act of 1963), would show that the jurisdiction of the Court to decree specific relief is discretionary and must be exercised on sound and reasonable grounds “guided by judicial prin­ciples and capable of correction by a Court of appeal”.

This jurisdiction cannot be curtailed or taken away by merely fixing a sum even as liquidated damages. This is made perfectly clear by the provisions of Section 20 of the old Act (corresponding to Section 23 of the Act of 1963) so that the Court has to determine, on the facts and circumstances of each case before it, whether specific performance of a contract to convey a property ought to be granted.

The fact that the parties themselves have provided a sum to be paid by the party breaking the contract does not, by itself, remove the strong pre­sumption contemplated by the use of the words “unless and until the con­trary is proved”. The sufficiency or insufficiency of any evidence to remove such a presumption is a matter of evidence.

The fact that the parties them­selves specified a sum of money to be paid in the event of its breach is, no doubt, a piece of evidence to be considered in deciding whether the pre­sumption has been repelled or not. But, it is nothing more than a piece of evidence. It is not conclusive or decisive.

The second assumption underlying the contentions on behalf of the defendants-appellants is that, once the presumption, contained in explana­tion to Section 12 of the old Act, is removed, the bar contained in Section 21 of the old Act, against the specific enforcement of a contract for which compensation in money is an adequate relief, automatically operates, over­looks that the condition for the imposition of the bar is actual proof that compensation in money is adequate on the facts and circumstances of a particular case before the Court.

The effect of the presumption is that the party coming to Court for the specific performance of a contract for sale of immovable property need not prove anything until the other side has re­moved the presumption. After evidence is led to remove the presumption, the plaintiff may still be in a position to prove, by other evidence in the case, that payment of money does not compensate him adequately.

In the instant case, both sides have led evidence. But, there is no evidence as to the extent of loss of prospective gains to the plaintiff- re­spondent, who carries on a Bakery business, from the deprivation of a site so valuable as one in front of the Secunderabad Junction Railway Station.

In fact, there is no standard for judging the loss from such a deprivation either to the plaintiff-respondent or to the partners of the Alpha Hotel who are the real corpora-ting parties. No attempt was even made to gauge the value of future prospects of such a site to businessmen in the position of plaintiff-respondent and those defendants-appellants who are partners of the Alpha Hotel.

It is clear that the property has got no such value for the first defendant, who is a business man fully occupied with a number of business at Delhi where he had residing for 19 years in 1963. It is evident that he could not conveniently look after the property situated in Secunderabad.

The defendants-appellants had miserably failed to prove their cases. The attempt to prove either fraud or misrepresentation or “an unfair advan­tage” over the first defendant, so as to bring his case within Section 22 (1) of the old Act, was totally unsuccessful. The Courts commented adversely on incorrect assertions made by the first defendant who could not show anything beyond the penalty or damages clause in the contract for sale dated 9.10.1962. It is strange that the first defendant, while willing to pay Rs. 20,000/- as damages to the plaintiff-respondent will only get Rs. 10,000/ – more in price over Rs. 60,000/- if his contract of sale to the partners of the Alpha Hotel was to stand.

It is therefore clear that the first defendant must have some ulterior motive in being prepared to suffer on ostensible loss of Rs. 10.000/- even if his sale of 16.10.1962 for Rs. 70,000/ – to the partners of the Alpha Motel could be upheld. The plaintiff himself had stated that financial consideration do not really determine his stand. It is not possible to accept this profession of unconcern for financial gain on the part of an astute businessman like the first defendant. It is more likely that there is some undisclosed understanding between him and the partners of Alpha Motel who are also co-appellants with him before the Court.

The result is that the presumption contained in the explanation to Sec­tion 12 of the old Act was not rebutted here. In such cases, equity helps honest plaintiffs against defendants who break solemnly given undertak­ings. The High Court had rightly decreed the suit for specific performance of the contract.

8. Scope and applicability:

Section 23 of the Act of 1963 contains a comprehensive statement of the principles on which, ever before the Act of 1963, the presence of a term in a contract specifying a sum of money to be paid for a breach of the contract has to be construed. Where payment is an alternative to carrying out the other terms of the contract, it would exclude, by the terms of the contract itself, specific performance of the contract to convey a property.

The position stated above is in conformity with the principles found stated in Sir Edward Fry’s “Treatise on the Specific Performance of Con­tracts (6th Edn. at p. 65). It was said there:

“The question always is: What is the contract? Is it that one certain act shall be done, with a sum annexed, whether by way of penalty or damages, to secure the performance of this very act? Or, is it that one of the two things shall be done at the election of the party who has to perform the contract namely, the performance of the act or the payment of the sum of money? If the former, the fact of the penal or other like sum being annexed will not prevent the Court’s enforcing performance of the very act and thus carrying into execu­tion the intention of the parties; if the latter, the contract is satisfied by the payment of a sum of money, and there is no ground for proceeding against the party having the election to compel the per­formance of the other alternative.

From what has been said, it will be gathered that contracts of the kind now under discussion are divisible into three classes:

(i) Where the sum mentioned is strictly a penalty—a sum named by way of securing the performance of the contract, as the penalty is a bond;

(ii) Where the sum named is to be paid as liquidated damages for a breach of the contract;

(iii) Where the sum named is an amount the payment of which may be substituted for the performance of the act at the election of the person by whom the money is to be paid or the act done.

Where the stipulated payment comes under either of the two first- mentioned heads, the Court will enforce the contract, if in other respects it can and ought to be enforced, just in the same way as a contract not to do a particular act, with a penalty added to secure its performance or a sum named as liquidated damages, may be spe­cifically enforced by means of an injunction against breaking it. On the other hand, where the contract comes under the third head, it is satisfied by the payment of the money, and there is no ground for the Court to compel the specific performance of the other alterna­tive of the contract.”

Sir Edward Fry pointed out that the distinction between a strict penalty and liquidated damages for a breach of contract was important in common law where liquidated damages were considered sufficient compensation for breach of contract, but sums stipulated by way of penalty stood on a differ­ent footing. He then said:

“But as regards the equitable remedy the distinction is unimportant; for the fact that the sum named is the amount agreed to be paid as liquidated damages is, equally with a penalty strictly so called, inef­fectual to prevent the Court from enforcing the contract in specie.

9. Transfer of possession:

In the instant case, there was a transfer by the lessee with reservation to take back possession on the transferee’s failure to discharge the lessees, holding towards the lessor within stipulated time. The lessor accepted part payment from the transferee without recog­nizing him as debtor. The balance was not paid either by the transferee or the lessee. It was held that the lessee was entitled to get back possession from the transferee.

10. Unless and until the contrary is proved:

The fact that the parties themselves have provided a sum to be paid by the party breaking the con­tract does not by itself remove the strong presumption contemplated by the use of the words “unless and until the contrary is proved”. The sufficiency or insufficiency of any evidence to remove such a presumption is a matter of evidence.

The fact that the parties themselves specified a sum of money to be paid in the event of its breach is, no doubt, a piece of evidence to be considered in deciding whether the presumption has been repelled or not. But, it is nothing more than a piece of evidence. It is not conclusive or decisive.

The second assumption underlying the contentions on behalf the Defendants-Appellants is that, once the presumption, contained in explana­tion to Section 12 of the old Act, is removed, the bar contained in Section 21 of the old Act, against the specific enforcement of a contract for which compensation in money is an adequate relief, automatically operates, over­looks that the condition for the imposition of the bar is actual proof that compensation in money is adequate on the facts and circumstances of a particular case before the Court.

The effect of the presumption is that the party coming to Court for the specific performance of a contract for sale of immovable property need not prove anything until the other side has re­moved the presumption. After evidence is led to remove the presumption, the plaintiff may still be in a position to prove the other evidence in the case, that payment of money does not compensate him adequately.