If Forfeiture Of Earnest Money Under A Contract Is Reasonable, It Won’t Fall Within Section 74 Of Indian Contract Act: SC
The Apex Court partly allowed a Civil Appeal preferred against the Judgment of the National Consumer Disputes Redressal Commission (NCDRC).
The Supreme Court reiterated 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 (ICA), inasmuch as, such a forfeiture does not amount to imposing a penalty.
The Court was hearing a Civil Appeal preferred against the Judgment of the National Consumer Disputes Redressal Commission (NCDRC) by which it disposed of a Consumer Complaint.
The two-Judge Bench of Justice B.R. Gavai and Justice S.V.N. Bhatti observed, “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.”
The Bench added 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.
Senior Advocate Dhruv Mehta appeared for the Appellant while AOR Aishwarya Sinha appeared for the Respondents.
Factual Background
In 2014, the Complainants had booked an Apartment with the Appellant in the project by the name “Godrej Summit” by an Application Form and submitted Rs. 10,00,000/- as application money. Thereafter, by an allotment letter, the Appellant allotted an Apartment on the 14th floor in Tower ‘C’ to the Complainants in the said project, pursuant to which an Apartment Buyer Agreement was entered into between the parties. The Appellant upon completion of construction applied to and subsequently received the Occupation Certificate from the Director, Town & Country Planning Department, Haryana. The Appellant offered possession to the Complainants and the Complainants, however, sought cancellation of the allotment and further sought full refund of the amount paid. In 2017, the Complainants served a legal notice to the Appellant for refund of the amount paid totalling Rs. 51,12,310/- and then the Complainants filed a Consumer Complaint before the NCDRC praying that the Appellant be directed to refund the sum totalling Rs. 51,12,310/- paid by the Complainants so far, with interest @ 18% per annum, calculated from the date of making each payment till the date of realization of the sum.
The NCDRC disposed of the Consumer Complaint by directing the Appellant to deduct only 10% of the BSP i.e., Rs. 17,08,140/- only towards cancellation of the Complainants’ Apartment and refund the balance amount Rs. 34,04,170/- (i.e. Rs. 51,12,310/- minus Rs. 17,08,140/-) along with simple interest @ 6% per annum from the date of each payment till the date of refund within three months. In 2022, the NCDRC also dismissed the Review Application filed by the Appellant challenging the impugned Order. Being aggrieved, the Appellant approached the Apex Court. By an Order, the Court while issuing notice had granted stay of the impugned Order on the condition that the Appellant refunds the amount deposited by the Complainants after deducting 20% (earnest money deposit) along with interest @ 6% per annum from the date of cancellation of the contract.
Reasoning
The Supreme Court after hearing the contentions of the counsel, noted, “Relying on the aforesaid observations of this Court, 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. The NCDRC has initially taken this view in the case of DLF Ltd. v. Bhagwanti Narula (supra). The said view has been followed subsequently in various judgments of the NCDRC. We see no reason to upset the view consistently taken by the NCDRC based on the judgment of this Court in the case of Maula Bux (supra).”
The Court said that the NCDRC was not justified in awarding interest on the amount to be refunded. Furthermore, it took note of the fact that after the agreement was entered into between the Parties in the year 2014, only after the possession was offered by the Appellant to the Respondents, they sought cancellation of the allotment and the reason given by them is that on account of sharp decline in the prices, a person would be able to buy a flat at a substantially lower price even in Primary market.
“It is quite probable that the Respondents would have utilised the money which was payable by them to the Appellant for purchasing another property at a lower rate. … In the facts and circumstances, therefore, we find that the NCDRC was not justified in awarding interest on the amount to be refunded by the Appellant”, it concluded.
The Court, therefore, directed that the Appellant is required to pay the balance amount of Rs. 12,02,955/- to the Respondents within six weeks.
Accordingly, the Apex Court partly allowed the Appeal.
Cause Title- Godrej Projects Development Limited v. Anil Karlekar & Ors. (Neutral Citation: 2025 INSC 143)
Appearance:
Appellant: Senior Advocate Dhruv Mehta, AOR Randhir Kumar Ojha, Advocates Kapil Madan, Saurabh Gauba, Akshit Narula, Shailendra Pratap Singh, and Surabhi Kapur.
Respondents: AOR Advocate Aishwarya Sinha and Advocate Aditya Malhotra.
