The Supreme Court of India (“Supreme Court”) while deciding an appeal in the case of Godrej Properties Development Limited v. Anil Karlekar (Civil Appeal No. 3334 of 2023), partly allowed the appeal upholding the decision of the National Consumer Disputes Redressal Commission (“NCDRC”), to the extent of directing refund of payment made by the Respondents for booking an apartment with the Appellant after deduction of only 10% (ten percent) of the Basic Sale Price (“BSP”) as a cancellation fee under the forfeiture clause in the contract under dispute.

Facts of the Case

In or around 2014, the Respondents had booked an apartment in the "Godrej Summit" project of the Appellant in Gurgaon, Haryana with BSP of Rs. 1,70,81,400 (Rupees one crore seventy lacs eighty-one thousand four hundred). The Respondents paid an amount of Rs. 10,00,000 (Rupees ten lacs) as application money. Consequently, the Appellant allotted an apartment to the Respondents and an Apartment Buyer Agreement (“Agreement”) was entered into between the Parties.

By June 2017, the Appellant completed the project and obtained the Occupation Certificate in respect thereof. The Appellant offered possession to the Respondents on June 28, 2017. However, citing reasons of recession in the market and lower prices for similar flats, the Respondents refused to take possession and sought cancellation of the allotment with full refund.

In view of the failure of the Appellant to agree to the Respondents’ request for cancellation, the Respondents filed Consumer Complaint No. 262 of 2018 before the NCDRC seeking a full refund of Rs. 51,12,310 (Rupees fifty-one lacs twelve thousand three hundred ten) with interest at 18% (eighteen percent) per annum. By its order and judgement dated October 25, 2022, NCDRC ordered the Appellant to deduct only Rs. 17,08,140 (Rupees seventeen lacs eight thousand one hundred forty), being 10% (ten percent) of the BSP, towards cancellation and refund the balance with 6% (six percent) interest. The Appellant preferred a review of the said order, which was also dismissed.

On January 10, 2023, the Appellant filed an appeal from the said order of the NCDRC before the Supreme Court.

Submissions on Behalf of the Appellant

The Appellant submitted before the Supreme Court that:

a. The Agreement had a specific “forfeiture clause” i.e. Clause 8.4, that allowed the Appellant to forfeit the entire earnest money [20% (twenty percent) of the BSP] and other dues in the case of cancellation by the buyer.

b. It was the Respondents who had sought to cancel the agreement due to a market recession, therefore, the Appellant is justified in forfeiting the earnest money deposit.

c. While the NCDRC had acknowledged the Appellant’s right to cancel the allotment as per the Agreement, it erred in reducing the forfeiture amount.

d. As per the findings of the judgement of the Supreme Court passed in the matter of Satish Batra v. Sudhir Rawal [(2013) 1 SCC 345)], if a contract clearly states that earnest money is a security for the due performance of the agreement, the seller is entitled to forfeit it if the buyer defaults. This position was reiterated by the judgement of the Supreme Court in Desh Raj v. Rohtash Singh [(2023) 3 SCC 714].

e. Therefore, the NCDRC had erred by interfering with the contractual terms under the Agreement.

Submissions on Behalf of the Respondents

The Respondents submitted that:

a. As per "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”, forfeiture of the earnest money cannot be allowed beyond 10% (ten percent) of the BSP.

b. The earlier judgement of the NCDRC passed in the matters of Komal Aggarwal v. Godrej Projects Development Limited [Consumer Case No. 2139 of 2018], DLF Limited v. Bhagwanti Narula [2015 SCC Online NCDRC 1613] and Ramesh Malhotra v. Emaar Mgf Land Limited [2020 SCC Online NCDRC 789], have consistently held that forfeiture of earnest money equivalent to 20% (twenty percent) of the BSP was unreasonable and reduced this amount to 10% (ten percent) of the BSP.

c. The Supreme Court in the matter of Pioneer Urban Land and Infrastructure Limited v. Govindan Raghavan [(2019) 5 SCC 725] held that a clause in an agreement which allows a builder to forfeit the earnest money is one-sided and an unfair trade practice. This position is upheld by the Supreme Court in Ireo Grace Realtech Private Limited v. Abhishek Khanna [(2021)  3 SCC 241].

d. Therefore, the forfeiture clause under the Agreement stipulating forfeiture of 20% (twenty percent) of the BSP was unreasonable and unconscionable.

Findings:

The Supreme Court noted that the law is clear that to justify the forfeiture of advance money being part of “earnest money” the terms of the contract should be clear and explicit. While the agreement in this case had a forfeiture clause allowing the Appellant to forfeit 20% (twenty percent) of the BSP as earnest money, the agreement was “one-sided and tilted in favour of the developer”. This is evident from the fact that in the event of Appellant’s default, particularly provided in Clauses 4.2 and 4.3 of the Agreement, the compensation given to the Respondents under the Agreement was meagre.

Referring to the definition of an “unfair contract” in the Consumer Protection Act, 2019, the Supreme Court noted that it includes imposing disproportionate penalties and unreasonable obligations on the consumer. Considering the judgement of the Supreme Court in Central Inland Water Transport Corporation Limited v. Brojo Nath Ganguly [(1986) 3 SCC 156], it is settled law that courts ought not to enforce unfair contracts.

Unlike Central Inland (supra), the judgement passed in Satish Batra(supra) and Desh Raj (supra),  were cases where the agreement was between two equal parties and were not one-sided unlike in the instance case. Therefore, the present case is squarely governed by Pioneer Urban (supra) and Ireo Grace(supra) judgements.

The Supreme Court also relied on the judgement of Maula Bux v. Union of India [(1969) 2 SCC 554], which held that if the forfeiture of earnest money is reasonable, it does not amount to a penalty.

In view of the above, the Supreme Court agreed with the NCDRC's decision that forfeiture of 10% (ten percent) of the BSP in this case was reasonable. However, the Supreme Court found that the NCDRC was not justified in awarding interest on the refund, given that the Respondents had cancelled the deal due to a recession in the market and that they would be able to invest in the primary market at a lower rate.

Ultimately, the Supreme Court partly allowed the appeal, upholding the order for a refund after deducting 10% (ten percent) of the BSP but removed the interest awarded by the NCDRC. The Appellant was directed to pay the remaining balance of Rs. 12,02,955 (Rupees twelve lacs two thousand nine hundred fifty-five) to the Respondents within six weeks.

Please find attached a copy of the judgement.

This update has been contributed by Murtaza Kachwalla (Partner) and S. M. Algaus (Principal Associate).

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