One-sided Forfeiture Clause in Apartment Buyer Agreements Unfair Trade Practice’: Supreme Court rejects Builder’s Appeal

Summary: An Apartment Buyer Agreement (“Agreement”) was entered into between the buyer and builder. The Agreement stipulated the forfeiture of the earnest money deposited by the buyer in the event of the seller not fulfilling the conditions stipulated under the Agreement. The Hon’ble NCDRC passed an order directing the builder to deduct only 10% of the basic sale price as the forfeiture amount. Hence, the builder preferred an appeal that the Hon’ble NCDRC cannot interfere with the contractual terms in derogation of the Agreement. The Hon’ble Apex Court, was pleased to upheld the ruling of the NCDRC and held that forfeiture amount cannot be in the form of penalty.

Facts:

1. A flat situated at Gurgaon, Haryana was booked by the complainant-respondent with the appellant and an amount of Rs. 10 lakh was submitted as the application money.
2. An Apartment Buyer Agreement was entered into between both the parties.
3. When the appellant offered the flat for possession to the complainant, the complainant sought cancellation of the allotment and demanded full refund of the amount paid however the builder forfeited 20% of the earnest money.
4. The complainant filed a complaint before NCDRC to direct appellant to pay Rs. 51,12,310 with interest @ 18% per annum.
5. The NCDRC directed appellant to deduct only 10% of the basic sales price and pay the balance to complainant.
6. The appellant filed the present appeal to challenge the order of NCDRC dated 25^th October 2022 before the Hon’ble Apex Court.

Issues:

1. Whether ex-facie one sided contractual terms in apartment building agreements constitute unfair trade practice?
2. Can an apartment building agreement stipulate the forfeiture of the earnest money deposit in a manner that is unreasonable or constitutes a penalty?

Appellant’s Arguments:

1. The appellant argued that the Agreement contained a forfeiture clause and NCDRC erred in interfering with the contractual terms.
2. The forfeiture was justified because the complainant themselves got out of the deal due to recession in the market.
3. Hence, on account of buyer’s event of default, they were entitled to forfeit the earnest money deposit and other dues including interest on delayed payments.

Respondent’s arguments:

1. The respondent cited certain precedents to show that the forfeiture of 20% of the basic sale price was not reasonable.
2. They placed reliance on the “The Real Estate (Regulation and Development) Act, 2016” and “The Haryana Real Estate Regulatory Authority Gurugram (Forfeiture of earnest money by the builder) Regulations, 2018 to establish that forfeiture of the earnest money deposit cannot be more than 10% of the basic sale price.

Court’s findings:

1. The Court took into consideration the reciprocal obligations of the Appellant when he cannot comply with the timelines stipulated in the Agreement.
2. The Court observed that the Agreement was one sided because if the appellant fails to give possession of the apartment within 42 months from the date of issuance of allotment letter, with a grace period of 6 months over and above this 42-month period, then the complainant is entitled to only a meagre amount of compensation.
3. The Court referred the case of Central Inland Water Transport Corporation Limited vs. Brojo Nath Ganguly, where the Court had held that as per Article 14 of the Constitution, Courts will not enforce an unfair and unreasonable contract between the parties who are not equal in the bargaining power.
4. The Court relied on another judgment in the case of Pioneer Urban Land and Infrastructure Limited where the Court had relied on Section 2(1)(r) of the Consumer Protection Act, 1986 to conclude that a contract cannot be final and binding where the purchasers are left with no option but to sign the contract framed by the builder on dotted line.
5. For the present case, the Court relied on the definition of “unfair contract” in the Section 2(46) of the Consumer Protection Act, 2019. The Court concluded that any ex-facie one sided contract would be hit by this definition.
6. The Court thus concluded that if the forfeiture of the earnest money is in the nature of a penalty, then Section 74 of the Indian Contract Act would be applicable, which in turn ensures that the forfeiture of the amount is not excessive.
7. The Court also observed that the NCDRC view is right as is evident from precedents which held that 10% of the basic sale price is reasonable amount to be forfeited.

Important legal concepts used:

1. Unfair trade practice: The Consumer Protection Act defines unfair or deceptive trade practices in relation to purchase or sale of goods/services.
2. Section 74 of the Indian Contract Act, 1872: If the forfeiture of the earnest money amounts to imposing a penalty, then it would fall under Section 74 of the Indian Contract Act, 1872.

Order:

The appeal was partly allowed, and the appellant was ordered to pay the balance amount to the respondent/complainant.

Case Title: Godrej Projects Development Limited v. Anil Karlekar and Others.

Case No.: Civil Appeal No. 3334 of 2023

Date of Pronouncement: 03.02.2025

Case citation: 2025 SCC OnLine SC 222