One-Sided Forfeiture Clauses in Apartment Buyer Agreements Constitute Unfair Trade Practice: Supreme Court
The Supreme Court, in Godrej Projects Development Ltd. v. Anil Karlekar & Ors., held that forfeiture of earnest money upon flat booking cancellation must be reasonable and not excessive, ensuring it does not amount to a penalty under Section 74 of the Contract Act, 1872. The Court criticized real estate developers for imposing one-sided forfeiture clauses in builder-buyer agreements, deeming them "unfair trade practices" under the Consumer Protection Act.
A bench of Justices B.R. Gavai and S.V.N. Bhatti heard the case, which involved the enforceability of such forfeiture clauses. The respondents had booked a flat in the Godrej Summit project (Gurgaon, 2014) and signed an Apartment Buyer Agreement (ABA) with a forfeiture clause. In 2017, after the flat was ready, they refused possession, citing market recession and sought a full refund of ₹51,12,310/-. The builder forfeited 20% of the earnest money under the ABA. The homebuyers challenged this, arguing that such forfeiture was excessive and effectively a penalty.
The NCDRC ruled in favor of the homebuyers, allowing the builder to forfeit only 10% of the Basic Sale Price (BSP) and ordering a refund of the remaining amount with 6% annual interest. The builder appealed to the Supreme Court, which upheld the NCDRC’s decision. Justice Gavai, authoring the judgment, found the agreement one-sided, making the 20% forfeiture excessive and arbitrary.
The Court referenced Pioneer Urban Land & Infrastructure Ltd., Wing Commander Arifur Rahman Khan v. DLF Southern Homes, and Ireo Grace Realtech v. Abhishek Khanna, reaffirming that one-sided clauses in buyer agreements constitute unfair trade practices. Citing Central Inland Water Transport Corp. v. Brojo Nath Ganguly (1986), the Court reiterated that unfair and unreasonable contracts, especially where parties have unequal bargaining power, cannot be enforced.