Gian Chand v. Gopala (1995) — Refund of Earnest Money & Contingent Contracts
Primary: earnest money refund; contingent contracts; frustration; Section 33 ICA
Secondary: land acquisition (S.4(1), S.6); failure of basis; restitution
Quick Summary
A buyer paid ₹20,000 as earnest money for a land share. The land later came under acquisition. The seller had not disclosed the earlier notification. The Supreme Court restored the trial court’s decree and ordered a refund with interest, treating the deal as frustrated and applying contingent contract logic.
- Acquisition (S.4(1) → S.6) defeated the sale’s foundation.
- Contract clause + Section 33 ICA supported refund.
Issues
- Is the appellant entitled to a refund of earnest money when land acquisition makes the sale impracticable?
Rules
- Section 33, Indian Contract Act: A contingent contract can be enforced when the related uncertain event becomes impossible; before that, it cannot.
- Land Acquisition: Section 4(1) is preliminary; a Section 6 declaration makes the acquisition conclusive for public purpose, frustrating a pending private sale.
- Earnest money is refundable where the contract’s basis fails or where a refund clause applies.
Facts — Timeline
Optional
13 Jan 1978 — Agreement
Buyer agrees to purchase 1/3rd share; pays ₹20,000 as earnest money. Sale deed due by 30 Apr 1978.
Earlier — S.4(1) Notification
A prior land acquisition notification existed but was not disclosed to the buyer.
Suit for Refund
Buyer sues to recover earnest money after learning of acquisition steps.
Trial → Appeal → Second Appeal
Trial Court grants refund with 6% p.a.; District Court reverses; High Court dismisses in limine.
Supreme Court (1995)
Appeal allowed; Trial Court decree restored—refund due as contract was frustrated and clause required repayment.
Arguments — Appellant vs Respondent
Appellant (Buyer)
- Non-disclosure of acquisition vitiated the deal’s basis.
- After S.6 declaration, sale became impossible/impracticable → refund.
Respondents (Sellers)
- Contend buyer not entitled to refund; treat payment as forfeitable.
- Argue suit should be dismissed (as lower courts did).
Judgment
For the Appellant
The Supreme Court restored the Trial Court’s decree. Given the S.6 declaration and the refund clause, the sale bargain failed. The buyer was entitled to ₹20,000 + interest (6% p.a.) from the suit date till realization.
Ratio Decidendi
- A contingent sale defeated by land acquisition entitles the buyer to refund (S.33 ICA + contract terms).
- S.4(1) → S.6 progression makes the public purpose conclusive, frustrating the private deal.
Why It Matters
The case safeguards buyers in acquisition-affected transactions. It confirms that earnest money is not a penalty when the deal’s core purpose collapses due to public acquisition.
Key Takeaways
- Disclosure of acquisition steps is vital.
- Once S.6 is declared, sale is effectively frustrated.
- Earnest money is refundable where basis fails.
- Draft clear refund clauses in sale agreements.
Mnemonic + 3-Step Hook
Mnemonic: “A-R-C” — Acquisition • Refund clause • Contingent
- Acquisition: Has S.6 confirmed public purpose?
- Refund clause: What does the agreement say?
- Contingent: If event defeats sale, refund follows.
IRAC Outline
Issue
Is the buyer entitled to refund of earnest money after acquisition frustrates the sale?
Rule
S.33 ICA (contingent contracts) + sale refund clause; S.6 makes acquisition conclusive.
Application
Non-disclosure + S.6 declaration defeated the bargain; seller cannot retain earnest money.
Conclusion
Refund with interest—Trial Court decree restored.
Glossary (Easy English)
- Earnest Money
- Advance showing serious intent to buy; may be refundable if the deal fails without buyer’s fault.
- Contingent Contract
- A promise that depends on an uncertain event (e.g., no acquisition).
- Frustration
- When an outside event destroys the main purpose of a contract.
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