Introduction
The Supreme Court’s judgment in Godrej Projects Development Ltd. v. Anil Karlekar & Ors. (Civil Appeal No. 3334 of 2023, decided on 3 February 2025) marks a critical intervention in the jurisprudence surrounding forfeiture clauses in builder–buyer agreements. The Court examined whether a clause allowing forfeiture of 20% of the Basic Sale Price (BSP) as earnest money was enforceable under consumer protection principles and contractual fairness doctrines. The decision balances contractual autonomy with judicial oversight against unconscionable clauses, reaffirming the consumer law principle that agreements must not disproportionately disadvantage buyers.
1. Factual Background and Procedural History
On 10 January 2014, the respondents (buyers) booked an apartment in the “Godrej Summit” project in Gurgaon, Haryana, paying ₹10,00,000 as application money. An allotment letter dated 20 June 2014 allotted them Apartment No. C-1501. An Apartment Buyer Agreement was executed the same day.
Upon completing construction, the developer (Godrej Projects Development Ltd.) received the Occupation Certificate on 20 June 2017 and offered possession on 28 June 2017. However, the buyers declined possession and, citing recession and a fall in property prices, sought cancellation and a full refund.
The developer offered to refund only ₹4,22,845, having forfeited 20% of the BSP (₹1,70,81,400). Aggrieved, the buyers filed Consumer Complaint No. 262/2018 before the NCDRC seeking a full refund with 18% interest. The NCDRC partly allowed the complaint, directing refund of the amount paid minus 10% of the BSP as earnest money, with 6% interest. A review petition was dismissed.
The developer challenged the NCDRC’s order before the Supreme Court under Section 23 of the Consumer Protection Act, 1986.
2. Identification of Legal Issues
The Supreme Court addressed the following legal issues:
- Whether a clause allowing forfeiture of 20% of the BSP as earnest money is enforceable.
- Whether the agreement was one-sided or unconscionable under consumer protection principles.
- Whether the NCDRC could reduce the forfeiture amount despite explicit contractual terms.
- Whether interest on the refunded amount was justified when cancellation was at the buyer’s instance.
3. Arguments of the Parties
Appellant (Godrej Projects Development Ltd.)
- Argued that the agreement clearly allowed forfeiture of 20% of the BSP as earnest money upon cancellation by the buyer.
- Cited Satish Batra v. Sudhir Rawal and Desh Raj v. Rohtash Singh to support enforceability of such forfeiture clauses.
- Asserted that buyers cancelled due to market price decline, not any fault of the developer.
Respondents (Buyers)
- Cited Ireo Grace Realtech Pvt. Ltd. v. Abhishek Khanna and Pioneer Urban Land v. Govindan Raghavan to argue that the clause was unconscionable and unenforceable.
- Pointed to consistent NCDRC rulings capping forfeiture at 10% of BSP.
- Relied on the RERA Act and Haryana RERA Regulations (2018), which limit forfeiture to 10%.
4. Court’s Analysis and Reasoning
a. Contractual Clauses and Forfeiture Rights
The Court examined Clauses 2.6 and 8.4 of the Buyer Agreement, which allowed forfeiture of 20% BSP as earnest money and other dues upon cancellation. These clauses were facially valid and mutually agreed.
b. Buyers’ Reason for Cancellation
The Court found that cancellation was based on market recession and declining property values, as admitted in buyer emails. The developer had fulfilled its obligations and received the Occupation Certificate.
c. Doctrine of Unconscionable Contracts
While upholding the developer’s right to forfeit earnest money under Satish Batra, the Court distinguished the present case by applying the rule in Pioneer Urban Land, Wing Commander Arifur Rahman, and Ireo Grace Realtech, which held that one-sided clauses are not enforceable.
The Court also cited Central Inland Water Transport v. Brojo Nath Ganguly, stating that:
“Courts will not enforce and will strike down an unfair and unreasonable clause in a contract entered into between parties who are not equal in bargaining power.”
d. Section 74 of the Indian Contract Act and Penalty Clause
The Court reiterated that forfeiture beyond a reasonable sum is penal in nature and subject to scrutiny under Section 74. Referring to Maula Bux v. Union of India, the Court noted that 10% is generally considered a reasonable cap for earnest money forfeiture.
e. NCDRC’s Consistent View
The Court upheld NCDRC’s jurisprudence in reducing forfeiture to 10% of BSP, finding it consistent with judicial precedent and consumer law principles. However, it held that awarding interest on the refund was not justified since the buyers themselves initiated cancellation.
5. Final Conclusion and Holding
The Supreme Court upheld the NCDRC’s decision to restrict forfeiture to 10% of the BSP (₹17,08,140) and directed refund of the balance ₹34,04,170. However, it reversed the grant of interest, reasoning that:
- Cancellation was voluntary.
- Buyers likely used the withheld funds for purchasing alternate property.
- There was no delay or deficiency on part of the developer.
The Court directed the developer to pay the remaining ₹12,02,955 (after accounting for an earlier interim refund) within six weeks. The appeal was partly allowed.
FAQs:
1. Can a real estate developer forfeit 20% of the sale price if a buyer cancels?
Not necessarily. The Supreme Court has held that forfeiture beyond 10% of the Basic Sale Price may be considered unfair and penal unless justified by clear evidence and equitable contract terms.
2. Are one-sided clauses in builder–buyer agreements enforceable?
No. If the contract is tilted heavily in favor of the builder and restricts remedies for the buyer, courts may strike down such clauses as unconscionable under consumer law.
3. What is the role of RERA in limiting forfeiture clauses
RERA and state-specific regulations (e.g., Haryana RERA) cap the forfeiture of earnest money to 10% of the Basic Sale Price, reinforcing fairness in builder–buyer contracts.
4. Can buyers get interest on refunds after cancelling a booking?
Not always. If the cancellation is voluntary and not due to any default by the builder, the buyer may not be entitled to interest on the refunded amount.
5. What is considered ‘earnest money’ under Indian contract law?
Earnest money is a deposit paid to demonstrate intent to complete a contract. Courts may allow its forfeiture upon default, but only if the clause is fair and the amount is reasonable (generally capped at 10%).
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