Builder may deduct only 10% of BSP as earnest money on buyer cancellation; excess refund ordered without interest

A Bench of Justices B.R. Gavai and S.V.N. Bhatti heard an appeal by a real estate developer challenging the National Consumer Disputes Redressal Commission's direction limiting forfeiture on cancellation of a flat booking and ordering a refund. The principal question was whether a contractual clause permitting forfeiture of 20% of the Basic Sale Price (BSP) on buyer default was enforceable, or whether it was an unfair, one‑sided term that the consumer forum could moderate.

The Court partly allowed the appeal but affirmed the NCDRC’s core relief that only 10% of the BSP could be forfeited as earnest money. The Bench held that the apartment buyer agreement was “one‑sided and totally tilted in favour of the Developer” and relied on precedents holding that unconscionable contractual terms in standard form agreements with unequal bargaining power could not be enforced. The Court accepted the NCDRC’s consistent view, based on earlier decisions and Maula Bux, that a 10% forfeiture of BSP was reasonable and did not amount to a contractual penalty. The Court, in its reasoning, observed: “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.” The Bench, however, held that the NCDRC erred in awarding interest on the excess refunded amount and therefore set aside the interest component. Pursuant to an earlier conditional stay order, the developer had already refunded part of the excess; the Court directed payment of the remaining Rs.12,02,955 within six weeks and dismissed the claim for interest on the balance.

Background The dispute arose from a 2014 allotment and buyer’s agreement for an apartment in a Gurgaon project, where the parties had agreed a BSP of Rs.1,70,81,400 and a 20% earnest money clause. Possession was called for in June 2017 after an occupation certificate; the buyers declined possession in August 2017 citing a fall in market prices and sought cancellation and full refund. The builders relied on clause 8.4 of the agreement, which purported to forfeit the entire 20% earnest money and any other dues upon termination for buyer default. The buyers sought refund of Rs.51,12,310 with interest before the NCDRC.

The NCDRC observed that while the developer could cancel the allotment and forfeit earnest money under the contract, “the condition of forfeiture of 20% of BSP, being the earnest money liable for forfeiture in case of cancellation appears unreasonable. It will be in the interest of justice and fair play to both sides, if OPs are allowed to deduct only 10% of the BSP…” The buyers’ communication stated, in part, “I want to cancel my booking of the said flat and demand that the amount paid till date be refunded along with applicable interest,” citing market recession and lower primary‑market prices.

On appeal under Section 23 of the Consumer Protection Act, 1986, the Supreme Court examined earlier authorities. It distinguished Satish Batra and Desh Raj on facts where forfeiture clauses were reciprocal or parties were of comparable bargaining power, and applied this Court’s decisions in Pioneer Urban, Ireo Grace and related precedents which invalidated one‑sided clauses in standard form apartment agreements as unfair trade practice. The Court also relied on the principle in Maula Bux that reasonable forfeiture is permissible but a forfeiture amount resembling a penalty would attract Section 74 of the Contract Act. Applying these principles, the Court found 10% of BSP reasonable, declined to uphold NCDRC’s interest award on the refunded balance, and ordered remaining payment to the buyers. The appeal was thus partly allowed.

Case Details: Case No.: CIVIL APPEAL NO. 3334 OF 2023 (2025 INSC 143) Case Title: Godrej Projects Development Limited v. Anil Karlekar & Ors. Appearances: For the Petitioner(s): Shri Dhruv Mehta, Senior Counsel For the Respondent(s): Shri Ashwarya Sinha, Counsel