Introduction:

In a significant ruling, the Supreme Court of India, comprising Justices Hrishikesh Roy and Pankaj Mithal, reiterated that when a transaction is impacted by the doctrine of lis pendens, the defenses of being a bona fide purchaser or lacking notice of a prior sale agreement cannot be invoked. The Court was hearing an appeal against a High Court judgment that decreed specific performance of a sale agreement, despite a subsequent sale deed executed during the pendency of the suit. The case revolved around an agreement executed on August 17, 1990, in which the plaintiff sought specific performance, while the defendant denied the existence of the agreement. During the trial, another party was impleaded, claiming to be a bona fide purchaser of the disputed property, having purchased the land during the pendency of the suit. The Supreme Court ultimately upheld the High Court’s decision, affirming the application of lis pendens and directing specific performance of the original sale agreement.

Plaintiff’s Argument:

The plaintiff in the case entered into a sale agreement with the original defendant on August 17, 1990. The plaintiff asserted that the defendant had agreed to sell a specific parcel of land but had failed to execute the sale deed within the stipulated time. On December 24, 1992, the plaintiff filed a suit for specific performance, seeking the enforcement of the agreement. The plaintiff contended that the sale agreement was genuine, valid, and enforceable.

During the pendency of the suit, the defendant sold the same piece of land to another person (defendant no. 2) on January 8, 1993. The plaintiff argued that this sale was executed during the pendency of the suit and was therefore affected by the doctrine of lis pendens, which protects the rights of parties involved in ongoing litigation. The plaintiff further argued that the subsequent purchaser (defendant no. 2) could not claim protection as a bona fide purchaser, as the doctrine of lis pendens applies to any sale during the pendency of the suit, regardless of whether the subsequent purchaser had notice of the prior agreement.

The plaintiff also claimed that the sale to defendant no. 2 was executed shortly before the date fixed for the original defendant’s appearance in court, raising suspicions of a fraudulent transaction.

Defendant’s Argument:

The original defendant denied executing the sale agreement and asserted that no valid agreement existed between him and the plaintiff. The defendant argued that the plaintiff was not entitled to specific performance because the terms of the agreement were not fulfilled and the plaintiff had delayed filing the suit.

Defendant no. 2, who was impleaded during the pendency of the suit, argued that he was a bona fide purchaser for value and had no notice of the prior agreement between the plaintiff and the original defendant. He claimed he had acted in good faith, purchased the land legally, and was unaware of any ongoing litigation or agreement between the plaintiff and the original defendant. As such, he contended that he should be protected under Section 41 of the Transfer of Property Act, 1882, which provides protection to bona fide purchasers for value without notice of prior claims.

The trial court initially found the sale agreement to be genuine but refrained from decreeing specific performance due to the subsequent sale deed executed in favor of defendant no. 2. The trial court held that defendant no. 2 was a bona fide purchaser and had no notice of the prior sale agreement. It granted alternative relief to the plaintiff, allowing the recovery of the advance amount paid under the agreement.

However, the First Appellate Court reversed this finding, holding that the sale agreement between the plaintiff and the original defendant was a collusive transaction, and thus, the plaintiff was not entitled to specific performance. It upheld the sale deed executed in favor of defendant no. 2.

Court’s Judgment: The High Court, when approached by the plaintiff, overturned the First Appellate Court’s judgment. It decreed specific performance of the sale agreement, rejecting the contention that defendant no. 2 was a bona fide purchaser without notice of the prior agreement. On the facts, the High Court noted that defendant no. 2 was a resident of the same village as the original defendant and the plaintiff, making it difficult to believe that he had no knowledge of the prior agreement. The High Court concluded that the sale deed executed in favor of defendant no. 2 was a bad-faith transaction intended to frustrate the plaintiff’s rights under the prior agreement.

Defendant no. 2 then appealed to the Supreme Court, challenging the High Court’s judgment.

Supreme Court’s Observations:

• Lis Pendens Doctrine:

The Supreme Court, in its judgment authored by Justice PK Mishra, extensively discussed the doctrine of lis pendens as embodied in Section 52 of the Transfer of Property Act, 1882. The Court cited several precedents, reiterating that the doctrine applies to all transactions executed during the pendency of a suit, regardless of whether the transferee was aware of the ongoing litigation. The Court emphasized that lis pendens is a principle of public policy designed to prevent third-party transactions from frustrating the rights of parties involved in litigation.

In particular, the Court referred to Usha Sinha vs. Dina Ram (2008) 7 SCC 144, where it was held that lis pendens applies irrespective of the transferee’s knowledge of pending proceedings. Similarly, in Sanjay Verma vs. Manik Roy (2006) 13 SCC 608, the Supreme Court observed that a transferee pendente lite is bound by the decree as if he were a party to the suit, and no question of good faith or bona fides arises in such cases.

• Bona Fide Purchaser Defense:

The Court rejected the argument that defendant no. 2 was a bona fide purchaser without notice of the prior agreement. It held that once the transaction was found to be affected by the doctrine of lis pendens, the defense of being a bona fide purchaser was not available. The Supreme Court, citing its earlier decision in Guruswamy Nadar vs. P. Lakshmi Ammal (2008) 5 SCC 796, noted that the principle of lis pendens applies even to those who purchase the property in good faith.

The Court also referred to the recent decision in Chander Bhan (D) through Lr. Sher Singh vs. Mukhtiar Singh & Ors, where it was held that once a transaction is declared illegal due to lis pendens, the defense of being a bona fide purchaser for valuable consideration is liable to be rejected.

Trial Court and First Appellate Court’s Errors:

The Supreme Court found that the trial court erred in not granting specific performance of the sale agreement, despite finding the agreement genuine. It held that the trial court’s reasoning—that defendant no. 2 was a bona fide purchaser without notice—was flawed in light of the doctrine of lis pendens. The Court observed that once the sale agreement was proven and the subsequent sale was executed during the pendency of the suit, the doctrine of lis pendens would automatically apply, rendering the sale deed in favor of defendant no. 2 void.

The Supreme Court also took exception to the First Appellate Court’s finding that the sale agreement between the plaintiff and the original defendant was collusive. The Court noted that the trial court had partly decreed the suit by allowing the recovery of the advance amount paid under the agreement, and this part of the decree had not been challenged by the defendants through a cross-appeal or cross-objections. In the absence of such an appeal, the First Appellate Court could not have recorded a finding that the agreement was collusive.

Conclusion of the Case:

Ultimately, the Supreme Court upheld the High Court’s judgment, decreeing specific performance of the sale agreement. It rejected the defense raised by defendant no. 2 and held that the sale deed executed in his favor during the pendency of the suit was null and void under the doctrine of lis pendens. The Court concluded that the plaintiff was entitled to specific performance of the original sale agreement, and the sale to defendant no. 2 could not stand.