Dated 3rd December, 2020
COMPLAINT NO. CC006000000151210
BEFORE THE MAHARASHTRA RERA AUTHORITY, MUMBAI
The issue involved in the complainant is whether the forfeiture of amount clause in the agreement on Allottees default in making payment of installments of consideration as per time line is unfair and not enforceable on account of party’s unequal power of bargaining or not.
FACTS OF THE CASE IN BREIF
The Complainant a Non-Residential Indian purchased apartments in the Respondents residential project under a payment plan of 20% before registration of Agreement, 5% after registration of Agreement, 60% paid after the completion of final slab and the remaining 15% after transfer of possession of property. The Agreement was terminated by the Respondents due to non-payment of balance amount and the termination entitled the developer to forfeit 20% of the consideration amount in accordance with Clause 13(b) of the Agreement, along with the amount of interest payable by purchasers from the dates of termination to the dates of default. Therefore, a sum of Rupees 56, 66,800 /-was accordingly forfeited.
THE JUDGEMENT:
The Complainants in this case relied on Clause 7 of the model form of Agreement under MOFA, which upon termination provides for paying back of sale price that has been paid to the Promoters in lieu of the Agreement, as well as on Section 7 of RERA, contending the forfeiture would amount to unfair Trade Practice, they also cited the case of Pioneer Urban Land Vs. Govindan Raghwan Cr.A. 1238/2018 where the Hon’ble Supreme Court had held that the unfair clauses in a contract where the bargaining powers of the parties is unequal are not enforceable.
The Hon’ble Bench in this particular case referred to Section 7 of RERA which empowered the authority to revoke registration on the grounds of “Unfair Trade Practices” as defined under Section 7 (A) coupled with indulging In fraudulent practices as defined in Sec 7(B), they also rightly pointed out that in the before said case the Hon’ble Supreme Court while deciding upon the unfairness of clause had also referred to the Consumer Protection Act, 1986, to define “Unfair Trade Practice” and it was highlighted that the definition was illustrative and not exhaustive and therefore if the Promoter had indeed indulged in Unfair Trade Practices was liable to be decided on behalf of facts and circumstances of each case.
The Complainant further referred to Water Transport Corporation Limited Vs Boro Nath Ganguly (1986) 3 SCC 156 where the Hon’ble Supreme Court had upheld the purpose of Constitution to uphold Social and Economic Justice, and therefore establishing the duty of the court to refrain from enacting unfair and unreasonable contract and therefore, the Complainant contended that there was no corresponding clause for the Purchaser where in a contract there was a clause providing for forfeiture to the Promoter, rendering the contract one-sided.
As for the Respondents they claimed that even upon repeated intimations for payments and extension of payment date the Complainants failed to disburse the 60% and therefore weren’t entitled to the prayer granted. They relied on the judgment of Satish Batra v/s Sudhir Rawal MANU SC/ 0887/2012 wherein the Supreme Court had upheld the forfeiture of earnest amount upon default in payment of purchaser.
The court upon perusal of Section 13(b) believed that the developer indeed had a right to forfeit 20% of the amount along with the interests’ payable as per the terms of the Agreement, and held, that the default in payment of demand note, invites liability of cancellation. However, since the clause conferred unfair bargaining power on one party, and therefore was unreasonable and unfair.
The bench further looking into the spirit of Section 7 of MOFA clarified that the amount of taxes paid by the promoters cannot be reasonably returned to the Purchasers. Therefore the final order provided for return of the consideration paid deducting the taxes paid and the non refundable brokerage charge.
ANALYSIS
And whether a clause in the contract to ensure performance is to be held unreasonable and to confer unequal power? And whether the Promoter is entitled to receive a penalty in case where there has been a deliberate breach by the purchasers? Can the 20% be categorized as earnest money?
The Contract in the above case did not specify a compensation amount where the Promoter has been in default, however, section 18 of the RERA Act enables a protective shield In case the promoter fails to complete or is unable to give possession of an apartment, he is to return the amount received by him with prescribed interest, including compensation in the manner as provided under this Act, a similar shield however is absent for the Promoters under RERA.
Now, the “Earnest money is part of the purchase price when the transaction goes forward: it is forfeited when the transaction falls through, by reason of the fault or failure of the vendee.”[1] This definition has been approved and adopted by the Supreme Court in Maula Bux v. Union of India[2], In Shree Hanuman Cotton Mills v. Tata Aircraft Ltd[3].
It represents a guarantee that the contract will be fulfilled. Thus, the characteristic of earnest money is that is serves two purposes-firstly, it goes in part payment of the purchase money for which it is deposited and, secondly, but primarily, it is security for the performance of the contract[4]. Forfeit of earnest money hence acts as deterrent for the Purchasers to breach the contract.
Therefore in the present case where the where the Promoters have diligently moved to conduct the sale have been assisting throughout the entire process but still the Purchasers did not comply with their obligations a right to forfeit earnest money cannot be curtailed..
In case such as H.U.D.A. vs. Kewal Krishans[5], the Supreme Court has even acknowledged the right of the builder would to forfeit the amount paid by way of installments in a case where the allottee defaults in making the payment of the remaining installments[6].
However, even in case where the amount corresponding to 20% cannot be reasonably characterized as earnest money since the same is not explicitly mentioned in the agreement. Section 74 of the Indian Contract Act provides that if a sum is named in the contract as the amount to be paid in case of breach, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation.
It is also true that in every case of breach of contract the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree, and the Court is competent to award reasonable compensation and therefore return of entire amount in a case where the promoter put in sufficient efforts to complete the sail cannot also be held justifiable.
For forfeiture of a reasonable amount paid as earnest money does not amount to imposing a penalty. But if forfeiture is of the nature of penalty, s. 74 applies[7]. Where under the terms of the contract the party in breach has undertaken to pay a sum of money or to forfeit a sum of money which he has already paid upon breach of contract, the undertaking is of the nature of a penalty and such penalty is liable to be imposed.
Irrespective of all the above legal arguments, the question in the present case is also the unequal right to bargain imposed on the Promoter. A penalty of 20% amounting to 1/5 the cost of the entire property being absolutely fixed can be held unreasonable to some extent however, similarly the depriving the promoter of his right to forfeit cannot be held reasonable. And at the end a more justifiable decision could have been award of compensation of a reasonable amount which unfortunately was not granted in the present case.
REFERENCES
[1] Kunwar Chiranjit Singh v. Har Swarup, AIR 1926 PC 1
[2] 1970 AIR 1955, 1970 SCR (1) 928
[3] 1970 AIR 1986, 1970 SCR (3) 127
[4] Narendra Kumar Nakhat vs Nandi Hasbi Textile Mills Ltd. AIR 1997 Kant 185, 1998 92 CompCas 461 Kar
[5] 1996 AIR 1981, 1996 SCC (4) 249
[6] DLF Southern Towns (P) Ltd. v. Dipu C. Seminlal
[7] : Kunwar Chiranjit Singh v. Hat Swarup (t)
“Article by Ms Damini Srestha under internship of Adv Shankarlal Raheja
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