Supreme Court clarifies assignment of contract rights in property sale: Kapilaben vs. Ashok Kumar (2019)

LEGAL ISSUE: Whether a contract for sale of property can be assigned to a third party without the consent of the original seller?

CASE TYPE: Civil Law – Specific Performance

Case Name: Kapilaben & Ors. vs. Ashok Kumar Jayantilal Sheth Through POA Gopalbhai Madhusudan Patel & Ors.

Judgment Date: 25 November 2019

Date of the Judgment: 25 November 2019

Citation: (2019) INSC 1234

Judges: Mohan M. Shantanagoudar, J. and Aniruddha Bose, J.

Can a person who was not originally part of a property sale agreement claim rights to that property? The Supreme Court of India recently addressed this question in a case involving a dispute over land in Vadodara. The Court examined whether a contract for sale of property can be transferred to someone else without the original seller’s agreement. This case clarifies the rules for assigning contracts, especially in property sales, and highlights the importance of consent from all original parties. The judgment was delivered by a two-judge bench comprising Justices Mohan M. Shantanagoudar and Aniruddha Bose, with Justice Shantanagoudar authoring the opinion.

Case Background

The case revolves around a property in Manjalpur, Vadodara, originally owned by Naranbhai Ramdas Patel. On 11 March 1986, Naranbhai and his relatives (Defendants 2-5) agreed to sell the property to original vendees (Defendants 6-9). The original vendees paid an initial amount of ₹1,54,251. The sale was contingent on the finalization of a Town Planning Scheme, after which the remaining payment would be made within three months, and the sale deed would be executed.

Later, on 14 September 1987, the original vendees entered into separate agreements with Respondent Nos. 1, assigning their rights under the 1986 agreement for ₹5,000 each. These 1987 agreements allowed Respondent Nos. 1 to develop a housing scheme on the land. Respondent Nos. 1 claimed that they took possession of the land, conducted a ceremony, registered members for the housing scheme, and obtained layout plans with Mr. Naranbhai Patel’s signature.

A dispute arose, and the original vendees filed a suit (SCS No. 194/1988) on 4 April 1988 against the original owners seeking specific performance of the 1986 agreement. The original owners claimed that they had canceled the 1986 agreement due to non-payment by the original vendees. Respondent Nos. 1, who were not part of this suit, filed their own suits (SCS Nos. 657-660/1988) on 21 November 1988, seeking specific performance of the 1987 agreements, alleging collusion between the original owners and the original vendees.

The original owners denied any dealings with Respondent Nos. 1, stating that the original vendees had no right to enter into agreements with them since they never became legal owners of the property.

Timeline:

Course of Proceedings

The original vendees’ suit (SCS No. 194/1988) was initially withdrawn, but Respondent Nos. 1 tried to get themselves added as co-plaintiffs, which was rejected by the High Court. The Supreme Court also dismissed the special leave petitions against the High Court order. Respondent Nos. 1’s application to revive the original vendees’ suit was also dismissed by both the trial court and the High Court.

In the suits filed by Respondent Nos. 1 (SCS Nos. 657-660/1988), the trial court dismissed all four suits, stating that the original vendees had waived their rights by withdrawing their suit and that the original vendees could not have assigned their obligations without the written consent of the original owner. The Additional District Judge affirmed this decision. However, the High Court reversed these decisions, stating that there was a valid assignment of rights in favor of Respondent Nos. 1, making them ‘representatives-in-interest’ of the original vendees.

Legal Framework

The Supreme Court considered the following legal provisions:

• Section 15(b) of the Specific Relief Act, 1963: This section allows a “representative in interest” of a party to a contract to seek specific performance, provided that the contract does not involve personal skills or bar assignment.
  
  “15. Who may obtain specific performance. — Except as otherwise provided by this Chapter, the specific performance of a contract may be obtained by — …(b) the representative in interest or the principal, of any party thereto: Provided that where the learning, skill, solvency or any personal quality of such party is a material ingredient in the contract, or where the contract provides that his interest shall not be assigned, his representative in interest or his principal shall not be entitled to specific performance of the contract, unless such party has already performed his part of the contract, or the performance thereof by his representative in interest, or his principal, has been accepted by the other party…”
• Section 31 of the Indian Contract Act, 1872: Defines a contingent contract as a contract to do or not to do something if some event collateral to such contract does or does not happen.
  
  “31. “Contingent contract” defined. —A “contingent contract” is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.”
• Sections 32 and 35 of the Indian Contract Act, 1872: These sections specify when contingent contracts can be enforced and when they become void.
  
  “32. Enforcement of contracts contingent on an event happening. —Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened.”
  
  “35. When contracts become void, which are contingent on happening of specified event within fixed time. —Contingent contracts to do or not to do anything, if a specified uncertain event happens within a fixed time, become void if, at the expiration of the time fixed, such event has not happened, or if, before the time fixed, such event becomes impossible.”
• Section 40 of the Indian Contract Act, 1872: Specifies that if a contract is of a personal nature, the promisor must perform it personally.
  
  “40. Person by whom promise is to be performed. —If it appears from the nature of the case that it was the intention of the parties to any contract that any promise contained in it should be performed by the promisor himself, such promise must be performed by the promisor. In other cases, the promisor or his representative may employ a competent person to perform it.”
• Section 53 of the Indian Contract Act, 1872: States that if one party to a contract prevents the other from performing their promise, the contract becomes voidable at the option of the prevented party, who is entitled to compensation.
  
  “53. Liability of party preventing event on which the contract is to take effect. —When a contract contains reciprocal promises, and one party to the contract prevents the other from performing his promise, the contract becomes voidable at the option of the party so prevented: and he is entitled to compensation from the other party for any loss which he may sustain in consequence of the non-performance of the contract.”
• Section 40 of the Transfer of Property Act, 1882: States that a contract for sale of immovable property does not create any interest in or charge on the property.

Arguments

Appellants’ Arguments:

• There was no direct contractual relationship between the Appellants and Respondent Nos. 1.
• The 1987 agreements were contingent contracts dependent on the completion of the 1986 agreement, which was cancelled.
• The assignment under the 1987 agreements was essentially a novation of the 1986 agreement, requiring the Appellants’ consent, which was not given.
• Respondent Nos. 1 did not demonstrate readiness and willingness to fulfill their contractual obligations.

Respondent Nos. 1’s Arguments:

• The Appellants were colluding with the original vendees to avoid the sale.
• The 1986 agreement could not have been terminated, as evidenced by the Power-of-Attorney dated 11.11.2001.
• There is no implied prohibition against assigning the interest in the 1986 agreement.
• The conduct of the original owner, Naranbhai Patel, implied consent for the assignment.

The innovativeness of the argument by Respondent Nos. 1 was that they relied on the Power of Attorney dated 11.11.2001, to show that the 1986 agreement was still in force, and that the original owners were aware of the assignment to Respondent Nos. 1.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether there was a valid assignment of rights by the original vendees in favor of Respondent Nos. 1 under the 1987 agreements?
2. Whether the right of Respondent Nos. 1 to seek specific performance survives subsequent to the cancellation of the 1986 agreement by the Appellants and withdrawal of suit in SCS No. 194/1988 by the original vendees?
3. Whether relief may be granted to Respondent Nos. 1, and if so, of what nature?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court held that there was no valid assignment of rights from the original vendees to Respondent Nos. 1, as the 1987 agreements essentially substituted liabilities without the consent of the original owners. The Court emphasized that the original vendees had not fulfilled their obligations under the 1986 agreement, and therefore, could not assign their rights.

The Court also noted that the 1987 agreements were contingent contracts dependent on the 1986 agreement, which was cancelled. Therefore, Respondent Nos. 1 could not seek specific performance of the 1987 agreements.

The Court concluded that while Respondent Nos. 1 were not entitled to specific performance, they were entitled to compensation for the loss of opportunity and inconvenience suffered.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Khardah Company Ltd v. Raymon & Co (India) Private Ltd., AIR 1962 SC 1810:* The Court relied on this case to emphasize that obligations under a contract cannot be assigned without the consent of the promisee.
• Indu Kakkar v. Haryana State Industrial Development Corporation Ltd. and Another, (1999) 2 SCC 37:* The Court used this case to reiterate that a party cannot transfer liabilities without the other party’s consent, especially in contracts involving mutual rights and obligations.
• Shyam Singh v. Daryao Singh (Dead) By LRs. and Others, (2003) 12 SCC 160:* The Court distinguished this case on facts, stating that the contract in that case did not implicitly bar assignment.
• Ram Baran Prasad v. Ram Mohit Hazra and Others, AIR 1967 SC 744:* The Court distinguished this case on facts, stating that the contract in that case did not implicitly bar assignment.
• Habiba Khatoon v. Ubaidul Huq and others, (1997) 7 SCC 452:* The Court distinguished this case on facts.
• Pollock and Mulla, The Indian Contract and Specific Relief Acts:* The Court used this book to explain that contracts involving personal skills or qualifications are not assignable.

What weighed in the mind of the Court?

The Supreme Court focused on the following points to arrive at its decision:

• The absence of a direct contractual relationship between the Appellants and Respondent Nos. 1.
• The contingent nature of the 1987 agreements, which were dependent on the 1986 agreement.
• The lack of consent from the Appellants for the assignment of the contract.
• The fact that the original vendees had not fulfilled their obligations under the 1986 agreement.
• The principle that obligations under a contract cannot be assigned without the consent of the other party.

The Court emphasized that contracts involving mutual rights and obligations require the consent of all parties for any assignment of liabilities. The Court also considered that the 1987 agreements were more than just an assignment of rights, but also included a development agreement for a housing scheme, which was based on the understanding between the original parties. The Court also noted that the original vendees had not fulfilled their obligations under the 1986 agreement, prior to the purported assignment under the 1987 agreements.

The Court also considered that the original owners were only carrying out their contractual obligation by signing the development permissions for the suit property, and that the same did not indicate that they were under the impression that the permissions were now to be obtained for the benefit of Respondent Nos. 1.

The Court also considered that the original vendees had not shown any readiness or willingness to pay the remaining consideration to the Appellants, and that they had abandoned their rights under the 1986 agreement.

The Court also noted that the 1987 agreements were independent agreements for sale which were contingent on the execution of the 1986 agreement.

The Court also considered that the term ‘name proposed by the vendee’ in the 1986 agreement refers to a nominee to be proposed at the time of execution of the sale deed, and not a subsequent assignee.

The Court also considered that the 1987 agreements were not a simple assignment of rights, but also included additional obligations such as reimbursement of the cost of acquiring planning permissions, and getting the suit property leveled for the purpose of construction.

The Court also considered that the payment of the remaining consideration under the 1987 agreements was to be made to the original vendees, and not the Appellants, and that the possession of the suit property was to be handed over by the original vendees.

The Court also considered the fact that the original vendees had withdrawn their suit (SCS No. 194/1988), and that the same had attained finality before the Supreme Court.

The Court also considered the fact that the Respondent Nos. 1 had conceded before the trial court that the Appellants had given their signatures on the layout plan for the housing scheme on the suit property to the original vendees, and not to Respondent Nos. 1.

The Court also considered the fact that the advertisement regarding the ‘Unnati Park’ housing scheme nowhere indicates that the Appellants/original owners were developing the project on the suit property in partnership with Respondent Nos. 1.

The Court also considered the fact that the original vendees had stated in the cancellation notice of the Power of Attorney that they have ‘joint ownership’ of the suit property, and that there was some merit in the argument that the Appellants and the original vendees were acting in collusion.

The Court also considered the fact that the Town Planning Scheme was finalized prior to the 1986 agreement, and that the deadline stipulated under the 1986 agreement for payment of remaining consideration by the original vendees had long since lapsed.

The Court also considered the fact that the trial court had found that though the suit property de jure vested with the concerned government authority under the Town Planning Scheme, the de facto possession of the property remains with the Appellants and the original vendees have not taken possession thereof.

The Court also considered the fact that the original vendees had not shown any readiness or willingness to pay the remaining consideration to the Appellants.

The Court also considered the fact that the original vendees had withdrawn their suit (SCS No. 194/1988), which showed that they did not intend to enforce the 1986 agreement.

The Court also considered the fact that the application of Respondent Nos. 1 under Order XXXIX was moved after a delay of three years and six months, and that the said delay had not been satisfactorily explained.

The Court also considered the fact that the original vendees had revoked the Power of Attorney, and that status quo had been restored.

The Court also considered the fact that the Trial Court and the High Court had concurrently found in the separate application made by the plaintiffs in SCS No. 658/1988, that the original vendees cannot be compelled to continue their suit against their desire.

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Ratio Decidendi

The Supreme Court’s decision was based on the following key principles:

• Assignment of Contractual Obligations: Obligations under a contract cannot be assigned without the consent of the other party. This is particularly true in contracts involving mutual rights and obligations.
• Contingent Contracts: A contingent contract is dependent on the fulfillment of a prior condition. If the prior condition fails, the contingent contract cannot be enforced.
• Readiness and Willingness: A party seeking specific performance of a contract must demonstrate readiness and willingness to fulfill their own obligations under the contract.
• Privity of Contract: A person who is not a party to a contract cannot enforce it, unless they are a legal representative of a party to the contract.
• Nature of the Contract: If the contract is of a personal nature, i.e. if it requires personal skills or qualifications, it cannot be assigned.

Decision

The Supreme Court partly allowed the appeals, setting aside the High Court’s judgment. The Court held that Respondent Nos. 1 were not entitled to specific performance of the 1987 agreements, as there was no valid assignment of rights from the original vendees. However, the Court directed the Appellants to refund the amount of ₹20,000 paid by Respondent Nos. 1, along with 12% interest per annum from 14 September 1987, until the date of payment. Additionally, the Court directed the Appellants to pay ₹1,00,000 as compensation to Respondent Nos. 1 for loss of opportunity and inconvenience.

Flowchart of the Case

Ratio of the Judgement

Sentiment Analysis of the Judgement

Key Takeaways:

• Consent is Crucial: In property sale agreements, the assignment of rights to a third party requires the consent of all original parties.
• No Automatic Assignment: The transfer of a contract to a third party is not automatic. It is not sufficient for a party to simply assign their rights to a third party.
• Contingent Contracts: If a contract is contingent on another contract, the contingent contract cannot be enforced if the prior contract is cancelled.
• Obligations Cannot be Assigned: Obligations under a contract cannot be assigned without the consent of the other party.
• Readiness and Willingness: A party seeking specific performance of a contract must demonstrate readiness and willingness to fulfill their own obligations under the contract.
• Monetary Compensation: If specific performance is not possible, a party may be entitled to monetary compensation for loss of opportunity and inconvenience.
• Privity of Contract: A person who is not a party to a contract cannot enforce it, unless they are a legal representative of a party to the contract.