'One-Sided Forfeiture Clause In Apartment Buyer Agreements Unfair Trade Practice' : Supreme Court Rejects Builder's Appeal

In a major relief to homebuyers, the Supreme Court (Feb. 3) ruled that earnest money forfeited upon flat booking cancellation must be reasonable and not excessive enough to be considered a penalty under Section 74 of the Contract Act, 1872. The Court criticized real-estate developers for including one-sided, excessive forfeiture clauses in builder-buyer agreements, deeming them "unfair trade practices" as per the Consumer Protection Act..

A bench of Justices B.R. Gavai and S.V.N. Bhatti heard the case where the dispute pertained to the enforceability of the one-sided (forfeiture) clauses in the builder-buyer agreements.

The Respondents booked an apartment in the Godrej Summit project in Gurgaon, Haryana, in 2014. An Apartment Buyer Agreement (ABA) was signed, which stipulated a forfeiture clause in case of cancellation. In 2017, after the apartment was ready, the builder offered possession, but the complainants refused to take it, citing market recession and declining property prices. They sought a full refund of ₹51,12,310/- (amount paid).

The Appellant-Godrej Projects Development Ltd. invoked the forfeiture clause in the Apartment Buyer Agreement (ABA) to forfeit 20% of the earnest money after homebuyers canceled their bookings.

The homebuyers contested the unilateral enforcement of the forfeiture clause in the ABA, arguing that the 20% forfeiture was excessive, unjust, and effectively a penalty under Section 74. They claimed that booking cancellations did not represent a breach of contract that would justify the forfeiture as a penalty.

The National Consumer Disputes Redressal Commission (NCDRC) ruled in favor of the respondents-flat purchasers allowing the builder to forfeit only 10% of the Basic Sale Price (BSP) as earnest money instead of 20% and directed the refund of the remaining amount with 6% interest per annum.

Assailing the NCDRC's decision, the builder appealed to the Supreme Court.

Affirming the NCDRC's ruling, the judgment authored by Justice Gavai ruled that the Agreement was one-sided and tilted in favor of the Developer making the forfeiture of 20% earnest money excessive and arbitrary.

Reference was drawn to the case of Pioneer Urban Land and Infrastructure Limited followed by Wing Commander Arifur Rahman Khan and Aleya Sultana and Ors. v. DLF Southern Homes Pvt Ltd. and Ireo Grace Realtech Private Limited v. Abhishek Khanna to hold that the incorporation of one-sided and unreasonable clauses in the Apartment Buyer's Agreement constitutes an “unfair trade practice” under the consumer protection laws.

"term of a contract will not be final and binding if it is shown that the flat purchasers had no option but to sign on the dotted line, on a contract framed by the builder. The contractual terms of the agreement dated 8- 5-2012 are ex facie one-sided, unfair and unreasonable. The incorporation of such onesided clauses in an agreement constitutes an unfair trade practice as per Section 2(1)(r) of the Consumer Protection Act, 1986 since it adopts unfair methods or practices for the purpose of selling the flats by the builder.", the court observed in Pioneer Urban Land's case.

Also, the Court referenced the landmark case of Central Inland Water Transport Corporation Limited and Another v. Brojo Nath Ganguly and Another, (1986) 3 SCC 156 where the 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.

Also From Judgment: S. 74 Contract Act | Forfeiture Of Earnest Money Permissible If It's Not Excessive Amounting To Penalty : Supreme Court

Case Title: GODREJ PROJECTS DEVELOPMENT LIMITED VERSUS ANIL KARLEKAR & ORS.

Citation : 2025 LiveLaw (SC) 150

Click here to read/download the judgment

Appearances:

For Appellant(s) : Mr. Dhruv Mehta, Sr. Adv. Mr. Kapil Madan, Adv. Mr. Saurabh Gauba, Adv. Mr. Akshit Narula, Adv. Mr. Shailendra Pratap Singh, Adv. Mr. Randhir Kumar Ojha, AOR Ms. Surabhi Kapur, Adv.

For Respondent(s) : Mr. Ashwarya Sinha, AOR Mr. Aditya Malhotra, Adv.

Related - Uniform Model Builder-Buyer Agreement Vital For Entire Country; Guarantees Check On Defrauding Builders : Supreme Court