Forfeiture of Earnest Money and Unfair Contract Terms In The Event Of Cancellation Of Agreement

The Supreme Court, in the dispute between a real estate developer, Godrej Projects Development Limited, the Appellant, and apartment buyers, Anil Karlekar & Ors., Respondents/Complainant, partly allowed the appeal challenging the order of National Consumer Disputes Redressal Commission.

Background:
The Respondents/Complainant had booked an apartment in the Appellant's project, "Godrej Summit," in Gurgaon, Haryana, in 2014 and paid Rs. 51,12,310/-, an Apartment Buyer Agreement was entered into between the parties, with a clause stating that 20% of the Basic Sale Price (BSP) would be treated as earnest money, to be forfeited in case of cancellation by the buyer. The Appellant, Godrej, thereafter obtained the Occupation Certificate in 2017 and gave possession to the Respondents.

The Respondents refused to take possession and called for cancellation and full refund due to a market recession, stating that similar flats were available at lower prices.

National Consumer Disputes Redressal Commission: Ordered the Appellant to deduct only 10% cancellation charges of the BSP and to return the balance with 6% interest. The NCDRC considered the forfeiture clause of 20% as not reasonable though the cancellation was for the fault of the buyer and not the seller's fault.

The Appellant approached the Supreme Court on the ground that the NCDRC had no reason to interfere with the terms of the contract, as the latter clearly provided for forfeiture of 20% of the BSP as earnest money. However, the Supreme Court pointed out that under the Agreement between the parties, the Appellant was entitled to forfeit the entire earnest money upon termination of the agreement for non-payment by the buyer.

The Apex Court observed that the NCDRC had rightly held that the Appellant was entitled to cancel the apartment and forfeit the amount, as per the agreement. However, the Court looked for the corresponding obligation of the developer, and found that under the agreement, the compensation payable to the buyer in case of delay in giving possession by the developer was only meager.

Nevertheless, the Apex Court observed that the agreement was one-sided and tilted in favor of the developer, and the Court noted that the NCDRC has consistently held that the condition of forfeiture of 20% of the BSP was not reasonable and reduced it to 10% of the BSP.

The Supreme Court referred to earlier judgments such as Central Inland Water Transport Corporation Limited and Another vs Brojo Nath Ganguly (Click to Download) which held that courts can strike down unfair and unreasonable contracts, especially when parties have unequal bargaining power.

The Court also referred to Pioneer Urban Land and Infrastructure Limited vs Govindan Raghavan (Click to Download), where similar one-sided clauses in an agreement were considered as an "unfair trade practice".

Supreme Court considered the definition of “unfair contract” in the Consumer Protection Act, 2019 (Click to Download), which includes imposing disproportionate penalties on consumers and stated that though the aforementioned definition was applicable after 2019, the court had previously held such one-sided agreements as "unfair trade practice".

The Apex Court also distinguished its earlier judgments in Satish Batra vs Sudhir Rawal (Click to Download) and Desh Raj and others vs Rohtash Singh (Click to Download) , where forfeiture of earnest money was upheld, noting that in those cases, the contracts were not one-sided. The Court emphasized that forfeiture of earnest money should not be a penalty, and if it is disproportionate, then Section 74 of the Indian Contract Act, 1872 would be applicable. The Court agreed with the NCDRC that 10% of the BSP was a reasonable amount to be forfeited as earnest money. * The Court, however, found that the NCDRC was not justified in awarding interest on the amount to be refunded, given that the respondents sought cancellation due to market conditions, and might have used the money in the interim.

The Apex Court examined the following:
Unfair Contract Terms: The court emphasized that one-sided contract terms that significantly disadvantage consumers can be deemed unfair and unenforceable.

Unequal Bargaining Power: Contracts between parties with unequal bargaining power may be scrutinized by courts to ensure fairness.

Reasonable Forfeiture: Forfeiture of earnest money should be reasonable and not amount to a penalty.

Consumer Protection: The court upheld the principles of consumer protection by recognizing and addressing unfair practices in real estate contracts.

Balance of Obligations: The court stressed the need for a balance in the obligations of both the developer and the buyer in a real estate agreement.

Thus, Supreme Court partly allowed the appeal by the developer and upheld the NCDRC order to refund the amount exceeding 10% of the BSP but set aside the NCDRC's order to pay 6% interest on the refund amount. The developer/appeallant was directed to pay the balance amount to the respondents within six weeks.

Coram: Justice B. R. Gavai and Justice S. V. N. Bhatti
Between: Godrej Projects Development Limited Vs Anil Karlekar & Ors
Date of Judgment: 03-02-2025