Contracts form the foundation of commercial transactions, ensuring that parties adhere to their promises as set out therein. However, when contractual terms become excessively one-sided, courts have the power to intervene and declare them unfair or unconscionable. The recent judgment of the Hon’ble Supreme Court ("SC") in Godrej Projects Development Ltd. v. Anil Karlekar & Ors has reignited the debate on unfair contract terms, particularly in real estate agreements. This article examines the judgment, its implications on the broader issue of unfair contract terms in India.
The complainants, Anil Karlekar and others, booked an apartment in the "Godrej Summit" project in Gurgaon, Haryana, in January 2014, paying ₹10,00,000 as application money. They were allotted an apartment, and an Apartment Buyer Agreement ("ABA") was executed in June 2014. The developer completed construction and obtained an occupation certificate in June 2017, subsequently offering possession to the complainants. However, the complainants, citing market recession and declining property prices, refused to take possession and sought cancellation of the allotment along with a full refund of ₹51,12,310 paid by them so far. In response, the developer invoked the forfeiture clause in the ABA, which permitted the retention of 20% of the Basic Sale Price ("BSP") as earnest money. The National Consumer Disputes Redressal Commission ("NCDRC") later reduced the forfeiture amount to 10% of the BSP and directed the developer to refund the balance with 6% simple interest per annum. The developer subsequently challenged this decision before the SC.
The SC upheld the NCDRC’s finding that the 20% forfeiture clause was unreasonable and reduced it to 10% of BSP. However, the SC set aside the interest component, observing that the complainants had voluntarily cancelled the agreement due to falling market prices. It will further be relevant to refer to the following observations of the SC.
Protecting Consumers from Unfair Contracts
The SC recognized that the ABA was one-sided and unfairly tilted in favour of the developer. The forfeiture clause allowed the developer to retain 20% of the BSP in case of cancellation, but the compensation for delay in possession was minimal (₹5 per sq. ft. per month). The Court relied on Pioneer Urban Land and Infrastructure Ltd. v. Govindan Raghavan and Ireo Grace Realtech Pvt. Ltd. v. Abhishek Khanna, where similar buyer agreements were struck down as unfair.
The judgment reiterated the principle laid down in Central Inland Water Transport Corporation v. Brojo Nath Ganguly, which held that contracts with oppressive terms and signed with unequal bargaining power, are unenforceable. Effectively the SC reaffirmed that it will not enforce contracts where:
- One party has no real choice but to accept unfair terms.
- There is a significant power imbalance between the parties.
- The terms cause an unfair disadvantage to the weaker party.
The Doctrine of Unconscionability: Drawing the Line on Excessive Penalties
The doctrine of unconscionability prevents the enforcement of contract terms that are excessively unfair or exploitative, especially when imposed under unequal bargaining power. In Maula Bux v. Union of India, the SC held that forfeiture clauses must be reasonable and that if the forfeited amount is excessive, it becomes a penalty and cannot be enforced. Applying this principle, the SC in Godrej Projects Development Ltd. found that forfeiting 20% of the BSP was excessive and punitive and thus reduced it to 10%. This aligns with the NCDRC’s consistent approach of allowing only a 10% forfeiture in real estate cases (DLF Ltd. v. Bhagwanti Narula).
Legislative Framework: The Consumer Protection Act, 2019
The Consumer Protection Act, 2019 defines an “unfair contract” as one that imposes:
a) Excessive security deposits as a requirement from consumers;
b) Unreasonably high penalties for contract breaches;
c) Unilateral modifications by manufacturers, traders, or service providers;
d) Restrictions on consumer rights to sue or seek legal remedies; and
e) Imposing disproportionate obligations on consumers.
By recognizing that the ABA imposed an unfair and one-sided obligation on buyers, the SC reinforces consumer rights. Even though the Consumer Protection Act, 2019, was notified after the dispute arose, the SC emphasized that similar principles had been applied under the earlier Consumer Protection Act, 1986.
Central Inland Water Transport Corporation v. Brojo Nath Ganguly (1986)
The SC held that an unfair and unreasonable contract term could be struck down under Section 23 of the Indian Contract Act, 1872. It was found that the clause permitting the termination of an employee’s service without reason was arbitrary and against public policy. It held that such oppressive terms in standard-form contracts, especially between unequal parties, were invalid. The judgment emphasized that contracts must not be unconscionable or unfairly one-sided. This case reinforces the doctrine of unequal bargaining power in Indian contract law.
Pioneer Urban Land and Infrastructure Ltd. v. Govindan Raghavan (2019)
The SC held that a one-sided agreement favoring the builder, including clauses allowing delays in possession without penalty while penalizing the buyer for delays in the same breath was arbitrary and unreasonable. It reaffirmed that such contracts violate Section 2(1)(r) of the Consumer Protection Act, 1986, which defines unfair trade practices. The SC emphasized that buyers cannot be forced to accept oppressive terms due to unequal bargaining power. This judgment strengthened consumer rights in real estate transactions.
The SC’s decision in Godrej Projects Development Ltd. is a significant step towards addressing unfair contract terms in real estate transactions. By reducing the forfeiture amount, the SC reaffirmes that buyers should not be subjected to arbitrary penalties.
Way forward:
Strengthen RERA Enforcement: The Real Estate (Regulation and Development) Act, 2016 ("RERA") should be enforced more stringently to ensure that builder-buyer agreements and other real estate contracts are balanced and do not unfairly favor developers. This includes stricter oversight of contract terms, penalties for non-compliance, and a robust mechanism for buyers to challenge one-sided clauses. Regulatory authorities should proactively review agreements and penalize developers engaging in unfair trade practices.
Mandatory Scrutiny of Contracts: All real estate agreements, including sale agreements, allotment letters, and builder-buyer agreements, should undergo mandatory scrutiny by regulatory bodies or independent legal auditors to identify and remove unfair terms. This could be implemented through standardized contract templates prescribed by RERA, ensuring transparency and protecting homebuyers from hidden charges, arbitrary delays, and excessive penalty clauses. Additionally, buyers should be given a fair opportunity to negotiate terms rather than being forced to accept pre-drafted agreements.
Reforming Forfeiture Clauses: Current laws, including but not limited to RERA should be amended to place clear restrictions on forfeiture clauses that allow developers to retain a significant portion of the booking amount upon cancellation by the buyer. Instead, a fair framework should be established to ensure that both the parties are adequately compensated, i.e. the developers for actual losses incurred and buyers for any undue financial burden. This could include capping forfeiture amounts, requiring refunds in case of project delays or cancellations, and ensuring that penalties imposed on buyers are proportionate and reasonable.
While courts have played an important role in balancing contractual fairness, systemic reforms are essential to ensure consumer rights are protected at the outset, rather than requiring judicial intervention after disputes arise.
About the authors: Ashima Obhan is a Senior Partner and Aastha Srivastava is an Associate at Obhan & Associates.
Disclaimer: The opinions expressed in this article are those of the author. The opinions presented do not reflect the views of Bar & Bench.
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