SUPREME COURT UPHOLDS CONSUMER RIGHTS AND LIMITS FORFEITURE IN BUILDER-BUYER AGREEMENTS
The Judgment in the Case of Godrej Projects Development Limited v. Anil Karlekar & Ors. (Civil Appeal No. 3334 of 2023) was delivered by a Division Bench of the Supreme Court of India, comprising Hon’ble Justice B.R. Gavai and Justice S.V.N. Bhatti, on February 03, 2025. The case deals with forfeiture clauses in builder-buyer agreements and consumer protection. The Supreme Court ruled that excessive forfeiture is unfair and upheld the NCDRC’s decision to cap it at 10% of BSP.
Brief Facts of the Case
The Respondent s (Complainants) booked an apartment in “Godrej Summit” (Gurgaon) on January 10, 2014, paying ₹10,00,000 (Ten Lakhs) as application money. The Appellant (Godrej Projects Development Ltd.) issued an Allotment Letter on June 20, 2014, pursuant to which an Apartment Buyer Agreement was entered into between the Parties. After completing construction, the Appellant obtained an Occupation Certificate from the Director, Town & Country Planning Department, Haryana on June 20, 2017. Appellants offered possession to the Complainants on June 28, 2017. The Respondent’s refused possession, citing the abandonment of internal roads and a market price drop, and sought a refund of ₹51,12,310. Subsequently, on 14th November 2017, the Complainants filed Consumer Complaint No. 262 of 2018 before the National Consumer Disputes Redressal Commission (NCDRC), seeking a refund of ₹51,12,310 along with interest at 18% per annum. The NCDRC, by its order dated 25th October 2022, directed the Appellant to deduct only 10% of the Basic Sale Price (₹17,08,140) as cancellation charges and refund the balance amount of ₹34,04,170 with simple interest at 6% per annum from the date of each payment till the date of refund, to be made within three months. The Appellant’s Review Application against this Order was dismissed on 5th December 2022. Aggrieved by the NCDRC’s decision, the Appellant filed the present appeal on 10th January 2023 under Section 23 of the Consumer Protection Act, 1986. The Supreme Court, by its Order dated 24th April 2023, granted a stay on the impugned order of the NCDRC, subject to the condition that the Appellant refunds the amount paid by the Complainants after deducting 20% as an earnest money deposit, along with simple interest at 6% per annum from the date of cancellation of the contract.
Issues
- Whether the forfeiture of 20% of BSP as per the Apartment Buyer Agreement was enforceable?
- Whether the NCDRC was correct in reducing the forfeiture amount to 10% of BSP?
- Whether the forfeiture clause was one-sided and unconscionable under consumer protection laws?
Contentions By Both Parties
Appellant Contentions (Godrej Projects Development Ltd.)
The Appellant contended that the NCDRC erred in interfering with the contractual terms, as the Agreement explicitly permitted the forfeiture of 20% of the Basic Sale Price (BSP) upon cancellation. It was argued that Clause 2.6 of the Agreement clearly designated 20% of the BSP as earnest money, which could be lawfully forfeited in case of cancellation by the buyer. The Appellant further asserted that the Complainants voluntarily sought cancellation due to a market recession and not due to any delay or fault on the part of the Appellant. In support of their position, the Appellant relied on the judgments in Satish Batra v. Sudhir Rawal (2013) and Desh Raj v. Rohtash Singh (2023), which upheld the principle that earnest money can be forfeited if the terms of the contract expressly provide for such forfeiture.
Respondents Contentions (Anil Karlekar & Ors.)
The Respondent contended that the Builder Buyer Agreement was one-sided, unfair, and unreasonable, heavily favoring the Appellant builder. The flat purchaser had no option but to sign the agreement as drafted by the builder, making it anC unfair trade practice under Section 2(1)(r) of the Consumer Protection Act, 1986. Clause 23.4, which allowed the builder to terminate the agreement and forfeit the entire earnest money without fair recourse for the buyer, which was arbitrary and unjust. Additionally, Clause 11.5(v) restricted the purchaser’s ability to terminate the Agreement, further demonstrating the lack of equal bargaining power between the parties. The builder imposed one-sided and unreasonable terms, violating the principles of fairness and consumer rights. The Supreme Court, in previous cases such as Pioneer Urban (AIR 2019 SUPREME COURT 4055), Wing Commander Arifur Rahman Khan (AIRONLINE 2020 SC 693), and Ireo Grace Realtech(AIR 2021 SUPREME COURT 437), had already held similar agreements to beinvalid.Furthermore, the forfeiture of the entire earnest money was unreasonable and in the nature of a penalty, which was not justified under Section 74 of the Indian Contract Act, 1872.
Supreme Court
The Supreme Court held that the Agreement was one-sided and unfair, compelling buyers to accept terms dictated by the builder. It ruled that such clauses amounted to unfair trade practices under Section 2(1)(r) of the Consumer Protection Act, 1986. Relying on its previous decisions in Pioneer Urban Land & Infrastructure Ltd., Wing Commander Arifur Rahman Khan & Aleya Sultana, and Ireo Grace Realtech Pvt. Ltd., (supra) the Court reaffirmed that agreements imposing unreasonable disadvantages on consumers cannot be enforced. The Court distinguished the present case from Satish Batra and Desh Raj, where the agreements were between parties with equal bargaining power and lacked such oppressive terms. It also referred to Maula Bux v. Union of India (1970 AIR 1955), emphasizing that forfeiture of earnest money is valid only if reasonable and that excessive penalties fall under Section 74 of the Indian Contract Act, 1872. The Supreme Court upheld the NCDRC’s direction to refund the amount exceeding 10% of the Basic Sale Price (BSP) but found that awarding interest on the refund was unjustified. The Court noted that the buyers (Respondents) sought cancellation only after the builder (Appellant) offered possession, citing a decline in market prices as their reason. This indicated that the buyers might have used the refunded amount to purchase another property at a lower price. Given these circumstances, the Court ruled that the builder was not liable to pay interest on the refund amount. However, since only ₹22,01,215/- had been refunded so far, the builder was directed to pay the remaining ₹12,02,955/- within six weeks from the date of the Judgment.
Key Takeaways from the judgment
- The Supreme Court upheld NCDRC’s power to modify unfair contract terms and protect consumer rights.
- The Court upheld the NCDRC’s ruling that forfeiting 10% of the Basic Sale Price (BSP) is reasonable, but anything beyond that would be excessive.
- The Court reaffirmed its stance in previous rulings (Pioneer Urban, Arifur Rahman Khan, and Ireo Grace Realtech), holding that unfair agreements cannot be enforced.
- Cases like Satish Batra and Desh Raj were distinguished, as they involved agreements between parties with equal bargaining power.
- The forfeiture of earnest money is valid only if reasonable, as per Maula Bux v. Union of India, and excessive penalties are governed by Section 74 of the Indian Contract Act, 1872.
- Consumer protection prevails over one-sided contracts, builders cannot impose excessive forfeiture clauses.
- RERA regulations limit forfeiture to 10% of BSP, making the Appellant’s 20% claim unenforceable.
- A one-sided and unfair agreement that forces buyers to accept the builder’s terms constitutes an unfair trade practice under Section 2(1)(r) of the Consumer Protection Act, 1986.
- Consumer protection laws safeguard buyers from agreements that impose unreasonable disadvantages and limit their bargaining power.
Conclusion
The Supreme Court dismissed the appeal, affirming that forfeiture beyond 10% of BSP is unreasonable. The ruling reinforces homebuyers’ protection against arbitrary financial penalties in real estate transactions.
Baddam Parichaya Reddy
The Indian Lawyer & Allied Services
Associate
Editor’s Comments
The real estate sector in India sees domination by builders. All builders have agreements that are heavily loaded against the buyers thereby giving them an unfair advantage over the buyer. Such unfair agreements are deemed to fall within the definition of “unfair trade practice” under the Law. As litigation in India takes very long time and is invariably protracted buyers are reluctant to approach the court even though there are specalised courts formed under the RERA Act. Though these courts tend to favour the buyer, but the sheer length of time in actually getting the orders of the RERA courts executed results in the buyers losing their hard-earned money for years and by the time they get it they would have waited for 20-25 years. Taking advantage of this situation, the builders are emboldened by the protracted court system and continue to heap unfair clauses on the unsuspecting buyer. It is time that some legislation should be passed by making the builders liable for such unconscionable agreements that they enter into with the buyers.
Sushila Ram
Advocate and Editor
Chief Consultant
The Indian Lawyer & Allied Services
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