Contract Law

Tarsem Singh v. Sukhminder Singh

(1998) 3 SCC 471

Facts

Tarsem Singh and Sukhminder Singh entered into an agreement concerning the sale or transfer of land.
Earnest money was paid under the agreement.
The parties believed that the subject matter and extent of the transferable interest were as described in the agreement.
It later emerged that they were mistaken about an essential fact concerning the land or the right that could legally be transferred.
Because the parties were not ad idem on the essential subject matter, the transaction could not proceed as contemplated.
One party nevertheless sought to forfeit the earnest money under the forfeiture clause.
The other argued that the agreement itself was void for mutual mistake under Section 20.

Whether a mutual mistake concerning an essential fact rendered the agreement void.
Whether an earnest-money forfeiture clause can be enforced when contained in a void agreement.

Under Section 20, an agreement is void where:
both parties are under a mistake;
the mistake concerns a matter of fact;
the fact is essential to the agreement.
The mistake must be mutual and fundamental.
A collateral or minor error does not invalidate the contract.
Where the agreement is void from the beginning:
contractual obligations do not arise;
a forfeiture clause contained in it cannot be independently enforced.
Benefits received under the void agreement may have to be restored under Section 65 where applicable.

The parties did not merely differ later about performance or interpretation.
Their agreement was founded on a shared factual assumption about the subject matter of sale.
That assumption was incorrect.
The mistake went to the identity, extent or existence of the transferable interest and was therefore essential.
Without the assumed fact, the bargain in its agreed form could not exist.
The Court treated the absence of consensus as falling within Section 20 rather than:
breach;
frustration;
unilateral mistake.
Since the agreement was void, the party seeking forfeiture could not rely on one of its clauses as though the remainder of the agreement were valid.
A forfeiture provision is a secondary contractual right dependent upon a valid primary contract and a breach of that contract.
Here there was no valid enforceable bargain and therefore no contractual breach capable of activating forfeiture.
The earnest money had to be restored rather than retained as a penalty.
The Court distinguished voidness through mutual mistake from illegality under Sections 23 and 24; the legal consequence arose because the parties were never truly ad idem regarding an essential fact.

The Supreme Court held that the agreement was void under Section 20.
The earnest-money forfeiture clause could not be enforced, and the amount was refundable.
Use this case for: a mutual mistake about an essential fact makes the agreement void and defeats any contractual forfeiture clause.