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Varadarajulu Iyer Vs. Arumugha Goundan and ors. - Court Judgment

LegalCrystal Citation
SubjectContract
CourtChennai High Court
Decided On
Case NumberLetter Patent Appeal No. 94 of 1956
Judge
Reported inAIR1960Mad203
ActsIndian Contract Act - Sections 55; Specific Relief Act - Sections 24
AppellantVaradarajulu Iyer
RespondentArumugha Goundan and ors.
Cases ReferredShanmugam Pillai v. Annalakshmi Ammal
Excerpt:
.....by appellant to original vendors--cancellation of lease for default in yearly payments of rent--agreement of sale by appellant to original vendors--term of forfeiture of rights--time not essence of contract--no forfeiture of right.; the general rule is that a plaintiff who seeks specific performance of an agreement should show that he has performed or has been ready and willing to perform all the obligation on his part under the contract and is further ready to perform and willing to do so in regard to the things to be done by him in future.; ordinarily time would not be of the assessee in regard to an agreement for sale of immovable property. in an ordinary agreement for sale of immovable property which creates mutual rights and obligations where time is not made the essence..........of a contract would depend on the intention of the parties thereto. a mere stipulation as to time for performance cannot make it an essential term. but a contract may, by express stipulation, make a term therein as to the time for performance, as an essential term; or even if there is no such express term, such a provision can be implied in the circumstances. in jamshed v. burjorji, ilr 40 bom 289: (air 1915 pc 83) the privy council held that, as a general rule, time would not be of the essence in regard to an agreement for sale of immoveable property.the reason for the rule appears to be that, under the equitable principle which governs the rights of the parties in cases of specific performance of contracts to sell real estate, the court looks not to the letter but at the.....
Judgment:
(1) This is an appeal under Cl. 15 of the Letters Patent, against the decree and judgment of Krishnaswami Nayudu J. in S.A. No. 1087 of 1953.

(2) The suit, to which the appeal relates, was one for specific performance of an agreement of sale executed by the appellant in favour of the respondents 1 and 2. Since the filing of the appeal, the first respondent died, and respondents 2 to 4 are on record representing her interest. The properties originally belonged to the first respondent, and she along with her husband and children, executed a deed of sale in favour of one Kuppuswami. A few months after the sale, on 11-11-1943, Kuppuswami conveyed the properties to the appellant. On 15-11-1943, the appellant granted a lease of the properties to respondents 1 and 2 for a period of 5 years on a yearly rent of Rs. 270; the lease imposed certain conditions as to the regular payment of rent for forfeiture of the rights under the lease in default thereof. Two weeks after the grant of the lease, there was an agreement, Ex. A. 1, entered into between the parties under which the appellant agreed to sell to respondents 1 and 2 the properties for a consideration of Rs. 3300.

It was stipulated that the agreement should be performed within a period of 7 years. A sum of Rs. 10 was paid towards the price on the date of the agreement and the balance was to be paid at the time f the conveyance. It was also agreed that the purchasers, respondents 1 and 2, would forfeit their rights under the agreement if they did not carry out faithfully the conditions of the lease under which they were then in possession of the properties. The portion relating thereto in Ex. A. 1 runs,

"Further in accordance with the condition set out, the lease deed under which possession of these properties were given to individuals 2 and 3 on 15-11-1943 by individual No. 1 if (any) default is committed, and (or)if individuals Nos. 2 and 3 fail to pay to individual No. 1 the aforesaid sum of Rs. 3290 within the time stipulated above, this agreement, shall stand cancelled as per the (terms of) agreement mentioned herein without reference to the said time limit."

(3) There was a default in regard to payment of rent under the lease deed. Thereupon, the appellant under Ex. B. 4 proceeded to cancel the agreement to sell. He also filed O. S. No. 389 of 1946 on the file of the District Munsif Court, Salem, for recovery of possession of the properties, together with the arrears of rent. The suit was dismissed on the ground that there was no valid service of notice previous thereto. A fresh suit, after giving the necessary notice, O. S. No. 186 of 1948 was filed for the same reliefs. That suit was decreed. Against the decree, respondents 1 and 2 filed an appeal to the District Court, Salem, which was subsequently transferred to the Sub Court, and registered as A. S. No. 2 of 1951.

In the meanwhile, they had instituted O. S. No. 242 of 1950 in the same court, the suit out of which this appeal arises for specific performance of agreement of sale. Both the appeal and the suit were heard together and disposed of by a common judgment. In the appeal, the learned Subordinate Judge sustained the decree for arrears of rent, but dismissed the claim for possession. In the suit, he passed a decree, directing specific performance.

(4) It is admitted that the decree relating to the arrears of rent has been paid and satisfied. But the appellant filed an appeal to the District Court, Salem, against the decree for specific performance, That failing, a second appeal was taken to this court. Krishnaswai Nayudu J. who heard the appeal, agreed with the conclusions arrived at by the lower courts, and dismissed it. While so doing, the learned Judge granted leave under Cl. 15 of the Letters Patent for a further appeal.

(5) Under the agreement of sale, Ex. A. 1, it was stipulated that respondents 1 and 2, who happened to be in possession of the properties as lessees, should not merely pay the balance of the consideration for the sale within the time specified, but, also perform the obligations under the lease deed as stipulated therein. The obligation to pay rent punctually was primarily one under the lease deed, where there was also a provision for default.

But Ex. A. 1, which came into existence subsequently, provided that non-payment of rent in a manner agreed to would entail forfeiture of rights of respondents 1 and 2 under the agreement. Krishnaswami Nayudu J. held that the provision in Ex. A. 1, enabling the appellant to cancel the agreement of sale for default in the regular payment of rent, amounted to a penalty which could be relieved against, and that the lower courts were justified in relieving the defaulters from the consequences of their omission, and in decreeing specific performance of the agreement of sale.

(6) It was contended before us that the provision in Ex. A. 1, which enabled the seller to cancel the agreement in the event of the purchaser defaulting in the performance of another agreement, would not amount to a penalty, as it was open to a person in the position of the appellant to agree to sell for a certain consideration provided that, in the meanwhile, the rents were regularly paid. A default therefore in the regular payment of rent would amount to a breach of the conditions of the agreement, and such a breach could not be relieved against by the court.

(7) It has to be considered whether regular payment of rent was a condition precedent to the enforcement of rights under Ex. A. 1. The effect of stipulations as to the punctual payment of rent in the agreement of sale would at best amount to an incorporation therein of the terms of the lease deed. If so treated, the provision in the latter would become a term in the agreement for sale. A default in the payment of rent would thus constitute nonperformance of one of the terms of the agreement within the time prescribed therein. Would such default of payment of rent entitle the seller to repudiate the agreement of sale? The general rule is that a plaintiff, who seeks specific performance of an agreement, should show that he has performed, or has been ready and willing to perform all the obligations on his part under the contract and is further ready and willing to do so in regard to the things to be done by him in future.

Although no provision of the Specific Relief Act expressly states that a plaintiff in a suit for specific performance should aver his readiness and willingness to perform his part of the contract, it has been held that it is necessary in such a suit to allege his readiness and willingness to perform his part of the contract. Vide Arjuna Mudaliar v. Lakshmiammal, 1948-2 Mad. L. J. 271: (AIR 1949 Mad 265). Sec. 24(b) of the Specific Relief Act states that "specific performance of a contract cannot be enforced in favour of a person who violates any essential term of the contract that on his part remains to be performed." In the present case, it is stated that respondents 1 and 2 violated an essential term of the contract, viz. that relating to the punctual payment of rent.

The question is whether a violation of such a term would amount to one which would show that he was not ready and willing to perform his part of the contract, or would disentitle him to the relief as to specific performance. Sir Edward Fry in "A treatise on the Specific Performance of contracts 4th Edn. states at page 404,

"Of what terms must the plaintiff show the performance? The answer is that he must show performance of:

(i) All conditions precedent;

(ii) The express and essential terms of the contract;

(iii) Its implied and essential terms, and

(iv) All representations made at the time of the contract on the faith of which it was entered into; but have he need not show performance of

(v) non-essential terms;

(vi) The terms of a collateral contract, or

(vii) Terms of which the defendant as prevented or waived the performance. Lastly, it will be necessary to consider.

(viii) terms, the performance of which has become impossible without the plaintiff's fault or default."

(8) It is contended that regular payment of rent was a condition precedent attached to the obligation under the agreement. Independent of the stipulation as to time for the payment of the rent and price, there is no other condition imposed on the purchaser before he would be entitled to the rights created under Ex. A. 1. Therefore, if it were to be held that punctual payment of the rent within the time specified in the lease deed was an essential term under Ex. A. 1, it could be said that it was a condition precedent for requiring the appellant to execute a sale deed.

If, on the other hand, it were to be held that the stipulation as to the payment of rent within the time specified was not essential part of the contract for sale, it would follow that there would be no such condition precedent. It has, therefore, to be seen whether the time fixed for payment of rent under the lease deed, which should be deemed to be incorporated in Ex. A. 1 was of the essence of the contract. S. 55 of the Indian Contract Act, so far as it is relevant, states:

"When a party to a contract promises to do a certain thing at or before a specified time, or certain things at or before specified terms, and fails to do any such thing at or before the specified time, the contract, or so much of it as has not been performed becomes viodable at the option of the promisee, if the intention of the parties was at that time should be of the essence of the contract.

If it was not the intention of the parties that time should be of the essence of the contract, the contract does not become voidable by the failure to do such thing at or before the specified time; but the promise is entitled to compensation from the promisor for any loss occasioned to him by such failure."

(9) The question whether time was of the essence of a contract would depend on the intention of the parties thereto. A mere stipulation as to time for performance cannot make it an essential term. But a contract may, by express stipulation, make a term therein as to the time for performance, as an essential term; or even if there is no such express term, such a provision can be implied in the circumstances. In Jamshed v. Burjorji, ILR 40 Bom 289: (AIR 1915 PC 83) the Privy Council held that, as a general rule, time would not be of the essence in regard to an agreement for sale of immoveable property.

The reason for the rule appears to be that, under the equitable principle which governs the rights of the parties in cases of specific performance of contracts to sell real estate, the court looks not to the letter but at the substance of the agreement in order to ascertain whether the parties, notwithstanding that they named a specific time within which completion was to take place, really and in substance intended no more than that it should take place within a reasonable time. But time can be made the essence of contract even in regard to an agreement to convey immoveable properties either by express stipulation or by subsequent notice.

The general rule is that an intention to make time the essence of the contract should be absolutely clear. Therefore, in an ordinary agreement of sale of immoveable property which creates mutual rights and obligations, where time is not made the essence of contract, failure to perform certain of the obligations thereunder by one party or the other, in accordance with the strict letter of the contract, that is, within the time fixed thereby, cannot be held to be a breach of an essential term. This would be so even in a case where the contract provided that the non-performance of such terms would entail the forfeiture or cancellation of the rights thereunder, the reason being that once court finds that time was not of the essence, such a term should be construed as one in terrorem and relieved against.

In a case therefore where time was not of the essence of the contract, it would follow that non-performance of the obligations within the time specified would not constitute a breach of an essential term of the contract, and as such it could not be stated that the plaintiff in a suit for specific performance was not ready and willing to perform his part of the contract in order to constitute a valid defence to such action.

(10) But there may be cases where time is made the essence of the contract. There may be also cases where, though time was not made expressly as the essential term of the contract, the substance or nature of the contract is such that time would be deemed to be of the essence. In regard to contracts relating to immovable property, such cases occur in contracts for repurchase of reconveyance of property. In these cases, there is generally an outright sale of the property accompanied by an agreement to reconvey the same on being so required to do by the original vendor within the stipulated time.

As was observed in Balasundara Mudaliar v. Muthuvenkatachala Mudaliar , the title of the first purchaser in such cases would be practically in abeyance till after the expiry of the period mentioned in the agreement, as such title would be lost at the option of the other party. In such cases it would be inequitable to hold that time would not be of the essence of the contract as there would be uncertainty in the title of the first purchaser. In those cases time should be and is always considered of the essence of the contract.

That is so, for another reason as well. A sale followed by contract of reconveyance which obliges the purchaser to reconvey the property at the request of the original vendor within the time specified could be considered only as conferring a power or privilege on the original vendor. For one thing, there is seldom any mutuality in such a contract for reconveyance e.g. it would not be open to the first purchaser to insist upon the original vendor purchasing back the property within the particular time. The right created under the agreement is in favour of the original vendor to be exercised at his option.

That could therefore be construed only as mere power or privilege. In Samparapuri Chettiar v. Sutharsana Chettiar, ILR 42 Mad. 802: (AIR 1919 Mad 544) it was held that the principle that time might not be of the essence of the contract in cases of agreements for sale of immoveable property, would not be applicable to re-sale of the property conveyed. Sadasiva Aiyar J. observed that the right to re-purchase was an option and must be exercised according to the strict terms of power.

(11) Being thus in the nature of power or privilege, it should be construed strictly and any stipulation as to the time for the exercise of power would govern the same and would be an essential term of the contract. In 'A treatise on the Specific Performance of Contracts", 4th Edn. at page 472, Sir Edward Fry states,

"Where the contract contains stipulations in favour of one party and not of the other, as, for instance, an option is in anywise unilateral, the court if it does not consider time as originally of the essence, will, as we shall hereafter see, look at it with more than usual strictness."

(12) Again at page 476 it is stated,

"Where the contract is in anywise unilateral, as, for instance, in the case of an option to purchase, a right of renewal, or of any other condition in favour of one party and not of the other, then any delay in the party in whose favour the contract is binding is looked at with special strictness.'

(12) The distinction between two types of cases, namely, where (1) there was an ordinary agreement for sale with mutual rights and obligations and (2) an agreement which is unilateral amounting to nothing more than an option to repurchase was recognised in Shanmugam Pillai v. Annalakshmi Ammal, 1950-1 Mad. L. J. 683: (AIR 1950 FC 38). In that case there was a sale of certain properties by a person to another. As a part of the same transaction of the sale, two further transactions were entered into (1) a lease back of the properties by the purchaser in favour of the vendor and (2) an agreement for sale between the parties under which it was stipulated that if the agreed consideration was paid within the particular time, the properties would be reconveyed by the purchaser to the vendor.

It was expressly stipulated in the agreement of sale that time was of the essence of the agreement, and if there was default committed in respect of the regular payment of rent, the rights thereunder would be forfeited. Under the power reserved in the lease deed the lessor's representative terminated the lease, and also declared that the agreement to reconvey had become cancelled. A suit for specific performance at the instance of the original vendor was resisted on the ground that the default in the payment of rent entailed a forfeiture of the rights under the agreement.

The judgment of the majority of the learned Judges of the Federal Court held that, on a construction of the agreement, it was a contract for reconveyance, and what the vendor obtained was only a concession or privilege under the agreement. They held that the conditions for the exercise should be strictly complied with, and, they not having been complied with, the action for specific performance failed. At page 687 (of Mad LJ): (at p. 41 of AIR), Patanjali Sastri J. observed,

"It is well settled that, when a person stipulates for a right in the nature of a concession or privilege on fulfillment of certain conditions with a proviso that in case of default the stipulation should be void, the right cannot be enforced if the conditions are not fulfilled according to the terms of the contract. Such conditions though relating only to payment of money, are not regarded as a penalty and courts of equity will not afford relief against a forfeiture for their breach.

Mahajan and Mukherjee JJ. dissented from the view of the majority in regard to the construction of the agreement of sale. They held that the case was not one where a privilege had been conferred on the original vendor and it was open to the purchaser to enforce specific performance of the agreement to reconvey the property and maintain a suit to recover the price of the original vendor refused to purchase the property (Vide page 696 (of Mad LJ): (at p. 48 of AIR). It was, therefore, held that time was not of the essence of the contract, and the default in the payment of rent should be relieved against. It will be seen that the difference between the learned Judges was on the question of the construction of the agreement of sale in that case.

The majority of the judges held that, the contract being one of reconveyance, time would be of the essence, while the minority held that the contract was an ordinary one for conveyance and time not being of the essence, penalties stipulated in terrorem could be relieved against. In a case, therefore, where time is made the essence of the contract, or from the nature of the contract if it is found that time should be of the essence of such contract, as in a case of contract for reconveyance, the default in the performance of the relative obligation by one of the parties to the agreement would constitute failure to perform the condition precedent, and would entail forfeiture of his right which a court would not be competent to relieve against.

If, on the other hand, time is not of the essence, the contract being only for sale of immoveable property, any stipulation therein, prescribing that failure to comply with a term within a time would entail a forfeiture of the rights under the agreement, would amount to forfeiture for non-performance of a non-essential term, and could be relieved against by the court.

(13) In the present case, the contract is not one for reconveyance. The original sale was made to Kuppuswami. It was only a few months thereafter Kuppuswami sold to the appellant, who it was that entered into an agreement for sale with respondents 1 and 2, the original vendors. There is, therefore, a dissociation between the original sale under which respondent 1 and 2 parted with their title to the properties, and the subsequent agreement for sale with the appellant. It cannot be held that the sale by respondents 1 and 2 and the agreement of sale in their favour were parts of the same transaction, so as to make the agreement for sale one of repurchase merely conferring a privilege on respondents 1 and 2.

In our opinion, Ex. A. 1, is an independent contract for sale of the properties. There is no indication in the contract that time was its essence. Indeed the agreement providing a term of seven years for the completion of the contract cannot prima facie be held to be one where time was considered as the essence. Therefore, non-performance of one of its terms, namely, the regular payment of rent in respect of the collateral transaction of the lease, would not amount to a breach of any essential term of the agreement for sale.

(14) The learned advocate for the appellate referred to certain English cases where strict compliance of the terms and conditions of contract were insisted on. In the view we are taking of the case, we consider it unnecessary to either refer to or discuss them. We agree with Krishnaswami Nayudu J. that default in the punctual payment of rent under the lease deed which was stipulated to entail forfeiture of the rights under Ex. A. 1, should be relieved against.

(15) This appeal fails and is dismissed with costs.

(16) Appeal dismissed.


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