2025 (2) TMI 311 - SC - Indian Laws

Reduction in the forfeiture price - Direction to Appellant to deduct only 10% of the Basic Sale Price (BSP) towards cancellation of the Complainants Apartment - refund of balance amount with interest - unfair trade practice - HELD THAT - This Court in the case of Satish Batra v. Sudhir Rawal 2012 (10) TMI 595 - SUPREME COURT has held that to justify the forfeiture of advance money being part of earnest money the terms of the contract should be clear and explicit. It has been observed that the earnest money is paid or given at the time when the contract is entered into and as a pledge for its due performance by the depositor to be forfeited in case of nonperformance by the depositor. However this Court clarified that if the payment is made only towards part-payment of consideration and not intended as earnest money then the forfeiture clause will not apply. On considering the obligations of the Developer in the event it does not comply with the timelines a very meagre compensation is provided to the Apartment purchaser. Not only that clause 4.2 of the Agreement which provides that the Apartment shall be ready for occupation within 42 months from the date of issuance of Allotment Letter also provides that the Developer would be entitled for a grace period of 6 months over and above this 42 months period. The said clause 4.2 further provides for various eventualities in case of which the Developer would be entitled to further extension of period for handing over the possession - In any case clause 4.3 of the Agreement provides that subject to the provisions of clause 4.2 of the Agreement if the Developer fails or neglects to issue the Possession Notice on or before the Tentative Completion Date and/or on such date as may be extended by mutual consent of the Parties the Developer shall be liable to pay to the Buyer a meagre compensation for such a delay at the rate of Rs.5/- per month per square feet of the Super Built Up Area of the Apartment. It can thus be seen that the Agreement is one-sided and totally tilted in favour of the Developer. In the case of CENTRAL INLAND WATER TRANSPORT CORPN. LTD. VERSUS BROJO NATH GANGULY 1986 (4) TMI 271 - SUPREME COURT this Court by taking recourse to Article 14 of the Constitution of India has held that the courts will not enforce an unfair and unreasonable contract or an unfair and unreasonable clause in a contract entered into between Parties who are not equal in bargaining power. In the case of Desh Raj and others 2022 (12) TMI 1556 - SUPREME COURT this Court was considering an Agreement to Sell with respect to the landed property. A perusal of the judgment would reveal that it was a case of an Agreement between two equal Parties and there are no terms in the Agreement which could be said to be one-sided and tilted totally in favour of one of the Parties - the present case would not be governed by the law laid down by this Court in the case of Desh Raj and others. It can be seen that this Court has held that if the forfeiture of earnest money under a contract is reasonable then it does not fall within Section 74 of the Indian Contract Act 1872 inasmuch as such a forfeiture does not amount to imposing a penalty. It has further been held that however if the forfeiture is of the nature of penalty then Section 74 would be applicable. This Court has further held that under the terms of the contract if the party in breach undertook to pay a sum of money or to forfeit a sum of money which he had already paid to the party complaining of a breach of contract the undertaking is of the nature of a penalty. The NCDRC in a series of cases right from the year 2015 has held that 10% of the BSP is a reasonable amount which is liable to be forfeited as earnest money - Though it is not inclined to interfere with the direction of the NCDRC for refund of the amount in excess of 10% of the BSP however it is found that the NCDRC was not justified in awarding interest on the amount to be refunded. Conclusion - i) The forfeiture clauses must be reasonable and not one-sided to be enforceable. ii) The NCDRC s reduction of the forfeiture to 10% of the BSP was upheld. iii) The award of interest on the refunded amount was overturned. Appeal allowed in part.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

• Whether the National Consumer Disputes Redressal Commission (NCDRC) was justified in modifying the contractual forfeiture clause, reducing the forfeiture from 20% to 10% of the Basic Sale Price (BSP) for the cancellation of the apartment.
• Whether the forfeiture clause in the Apartment Buyer Agreement was one-sided and unconscionable, thus unenforceable.
• Whether the NCDRC was justified in awarding interest on the refunded amount.

ISSUE-WISE DETAILED ANALYSIS

1. Modification of the Forfeiture Clause by NCDRC

Relevant legal framework and precedents:

The Consumer Protection Act, 1986, and precedents from the Supreme Court, such as Satish Batra v. Sudhir Rawal and Desh Raj v. Rohtash Singh, were considered. These precedents discuss the enforceability of forfeiture clauses and the conditions under which they may be deemed reasonable or excessive.

Court's interpretation and reasoning:

The Court examined the terms of the Agreement, specifically clauses 2.6 and 8.4, which allowed the developer to forfeit 20% of the BSP as earnest money. The Court noted that the NCDRC had consistently reduced such forfeiture clauses to 10% of the BSP, considering them unreasonable and excessive.

Key evidence and findings:

The Court found that the Respondents had cancelled the deal due to a market recession, as evidenced by their email communication. The NCDRC had acknowledged this reasoning and found the forfeiture of 20% of the BSP excessive.

Application of law to facts:

The Court applied the principles from Maula Bux v. Union of India, which held that forfeiture of reasonable earnest money does not amount to a penalty. The NCDRC's consistent view that 10% of the BSP is reasonable was upheld.

Treatment of competing arguments:

The Appellant argued that the NCDRC erred in interfering with the contractual terms, while the Respondents contended that the forfeiture clause was one-sided and unconscionable. The Court sided with the Respondents, finding the clause unreasonable.

Conclusions:

The Court concluded that the NCDRC was justified in reducing the forfeiture to 10% of the BSP, aligning with established precedents.

2. Enforceability of the Forfeiture Clause

Relevant legal framework and precedents:

The Court referenced the Consumer Protection Act, 1986, and the Consumer Protection Act, 2019, which defines "unfair contract." Precedents such as Pioneer Urban Land and Infrastructure Limited v. Govindan Raghavan were considered.

Court's interpretation and reasoning:

The Court found that the Agreement was one-sided, heavily favoring the Developer, and thus constituted an unfair contract under the Consumer Protection Act, 2019.

Key evidence and findings:

The Court noted the disparity in remedies available to both parties, with the Developer having significant advantages in the Agreement.

Application of law to facts:

The Court applied the principles from Pioneer Urban Land and Infrastructure Limited, finding the Agreement's terms ex facie one-sided and unfair, thus constituting an unfair trade practice.

Treatment of competing arguments:

The Appellant relied on precedents supporting the enforceability of forfeiture clauses, while the Respondents argued the clause was unfair. The Court agreed with the Respondents.

Conclusions:

The Court concluded that the forfeiture clause was unenforceable due to its one-sided nature.

3. Awarding of Interest on the Refunded Amount

Relevant legal framework and precedents:

The Court examined the NCDRC's decision to award interest on the refunded amount, considering the circumstances of the case.

Court's interpretation and reasoning:

The Court found that the NCDRC was not justified in awarding interest, as the Respondents had sought cancellation due to market conditions, potentially benefiting from the refunded amount.

Key evidence and findings:

The Court noted the Respondents' reasoning for cancellation and the possibility of utilizing the refunded amount for other investments.

Application of law to facts:

The Court applied the principle that interest should not be awarded when the party seeking cancellation benefits from the refund.

Treatment of competing arguments:

The Appellant argued against the interest award, while the Respondents sought it. The Court sided with the Appellant.

Conclusions:

The Court concluded that the NCDRC erred in awarding interest on the refunded amount.

SIGNIFICANT HOLDINGS

Core principles established:

The Court reaffirmed that forfeiture clauses must be reasonable and not one-sided to be enforceable. It upheld the NCDRC's consistent view that 10% of the BSP is a reasonable forfeiture amount.

Final determinations on each issue:

• The NCDRC's reduction of the forfeiture to 10% of the BSP was upheld.
• The forfeiture clause was deemed one-sided and unenforceable.
• The award of interest on the refunded amount was overturned.

The appeal was partly allowed, with the Appellant directed to refund the balance amount without interest.