Summary
Apartment buyers cancelled their booking after possession was offered because market prices had fallen. The Supreme Court upheld the NCDRC's decision to limit the builder's forfeiture to 10% of the basic sale price instead of the agreed 20% earnest money, because the agreement was one-sided in the builder's favour. It set aside the 6% interest the NCDRC had awarded on the refund.
Issues
- Whether a builder can enforce a clause forfeiting 20% of the basic sale price as earnest money when the buyers cancel after being offered possession.
- Whether the apartment buyer agreement was one-sided and unfair, so that Satish Batra and Desh Raj do not govern it.
- Whether forfeiture of earnest money beyond a reasonable amount is a penalty under Section 74 of the Contract Act.
- Whether the buyers were entitled to interest on the refund.
Provisions considered
- Section 2(1)(r), Consumer Protection Act, 1986Following Pioneer Urban Land, Arifur Rahman Khan and Ireo Grace, ex facie one-sided, unfair and unreasonable terms in a builder-buyer agreement amount to an unfair trade practice under this definition, which is illustrative and not exhaustive. (¶¶ 27, 30, 32)
- Section 2(46), Consumer Protection Act, 2019The Court noted the new statutory definition of 'unfair contract', which covers manifestly excessive security deposits and penalties wholly disproportionate to the loss. It observed that the definition applies only after the 2019 Act came into force, but that such one-sided agreements were already treated as unfair trade practices before that. (¶¶ 31, 32)
- Section 74, Indian Contract Act, 1872Relying on Maula Bux, forfeiture of a reasonable amount of earnest money is not a penalty and falls outside Section 74. A forfeiture in the nature of a penalty attracts Section 74. On this basis the NCDRC's consistent view that 10% of the basic sale price is a reasonable forfeiture was upheld. (¶¶ 37, 38, 39)
- Article 14, Constitution of IndiaThrough Central Inland Water Transport v. Brojo Nath Ganguly, courts will not enforce, and will strike down, unfair and unreasonable contracts or clauses between parties of unequal bargaining power, such as standard-form agreements the weaker party must sign on the dotted line. (¶ 26)
Held
- To justify forfeiting advance money as earnest money, the contract terms must be clear and explicit. Earnest money is a pledge for performance and may be forfeited on the depositor's default, but a mere part-payment of price that is not earnest money cannot be forfeited (Satish Batra, Desh Raj). (¶¶ 18, 19, 20, 21)
- The agreement was one-sided and tilted in the developer's favour. The developer could forfeit 20% of the basic sale price on the buyer's default, but for its own delay it had a 42-month period plus a 6-month grace period, open-ended extensions, and an obligation to pay only Rs.5 per sq ft per month as compensation. (¶¶ 22, 23, 24, 25)
- Satish Batra and Desh Raj were distinguished. The Satish Batra clause was reciprocal, since the vendor had to pay double the earnest money on its own default, and Desh Raj involved an agreement between equal parties. The case was instead governed by Pioneer Urban Land, Arifur Rahman Khan and Ireo Grace, under which builders cannot bind buyers to one-sided terms. (¶¶ 33, 34, 35, 36)
- Forfeiture of a reasonable amount of earnest money is not a penalty, but a forfeiture in the nature of a penalty falls under Section 74 (Maula Bux). There was no reason to disturb the NCDRC's consistent view since 2015 that 10% of the basic sale price is the reasonable amount to forfeit. (¶¶ 37, 38, 39, 40)
- The buyers cancelled only after possession was offered, and only because prices had fallen sharply and a similar flat was available more cheaply. They had probably used the money for another purchase, so the NCDRC was not justified in awarding interest on the refund. (¶¶ 15, 17, 41, 42, 43)
Result
Appeal partly allowed; forfeiture limited to 10% of the basic sale price (Rs.17,08,140) as directed by the NCDRC, but the award of interest set aside; the appellant, having already refunded Rs.22,01,215 under the interim order, to pay the balance of Rs.12,02,955 within six weeks.