SC Ruling on One-sided Forfeiture Clauses: Godrej Projects Development Limited v. Anil Karlekar & Ors.

INTRODUCTION

In a landmark ruling delivered on 3 February 2025, the Supreme Court¹ provided significant relief to homebuyers by scrutinizing the enforceability of one‑sided forfeiture clauses in builder–buyer agreements. The Hon’ble Court held that any forfeiture of earnest money upon cancellation of a flat booking must be reasonable and proportionate and cannot be so excessive as to amount to a penalty under Section 74 of the Contract Act. Strongly criticizing real‑estate developers for incorporating arbitrary and onerous terms, the Court declared that such clauses constitute “unfair trade practices” within the meaning of the Consumer Protection Act, thereby reinforcing the principle that contractual fairness must prevail in housing transactions.

BRIEF FACTS

The Buyers / Respondents booked a flat with the Godrej Projects Development Limited (“Developer”) in Gurgaon, Haryana, in 2014, and subsequently entered into an Apartment Buyer Agreement (“Agreement”) which inter alia stipulated a forfeiture clause in case of cancellation. The Agreement provided that 20% of the Base Selling Price (“BSP”) would be considered as earnest money, which would be forfeited in case the Buyer does not fulfil his obligation. In 2017, after the apartment was ready, the Developer offered possession, but the Buyer refused to accept possession on the grounds of market recession and declining property prices, and sought a full refund of approximately USD 55,672 (amount paid). The Developer invoked the forfeiture clause in the Agreement to forfeit 20% of the earnest money after the Buyer cancelled their bookings.

The Buyers filed a consumer complaint before National Consumer Dispute Resolution Commission (“NCDRC”), where they contested the unilateral enforcement of the forfeiture clause in the Agreement, 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. NCDRC ruled in favor of the buyers allowing the developer to forfeit only 10% of the 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 Developer appealed to the Supreme Court.

FINDINGS OF THE SUPREME COURT

Affirming the NCDRC’s ruling, the Supreme Court ruled that:

1. The Agreement provided a very flexible timeline for the Developer to deliver the house, which was subject to extension based on various factors. Further, if the Developer failed to abide by the deadline, the compensation to the Buyer was very meagre. Thus, the court ruled that the Agreement was one-sided and tilted in favor of the Developer making the forfeiture of 20% earnest money excessive and arbitrary.

2. Also, the Court referenced the landmark case of Central Inland Water Transport Limited and Another v. Brojo Nath Ganguly and Another², where the Court by taking recourse to Article 14 of the Constitution of India 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.³

3. Reference was also drawn to the case of Pioneer Urban Land and Infrastructure Limited v. Govindan Raghavan and Ors.⁴ to hold that the incorporation of one sided 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.⁵

4. Relying on Maula Bux v. Union of India,⁶ the Court held that if the forfeiture of earnest money is reasonable, then it does not fall within Section 74 of the Contract Act. However, where the breaching party undertook to pay a sum of money or to forfeit a sum of money which he had already paid to the other party, then that would constitute a penalty and Section 74 would get attracted. In the present case, the Court considered a 10% forfeiture of BSP to be reasonable.⁷ However, the payment of 6% interest by the Developer was disallowed. This is because the Buyer refused to take the property citing sharp decline in market prices, and the court reasoned that the refund ordered was adequate to enable the Buyer to secure an alternative property.⁸

OUR THOUGHTS

This judgment brings much‑needed clarity to the real estate sector, where developers have traditionally exercised disproportionate control by imposing terms heavily skewed in their favour. Clauses granting builders wide discretion over construction timelines or payment schedules will now be subject to stricter judicial scrutiny, ensuring greater fairness and balance in builder–buyer agreements.

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause. 

1. Civil Appeal No. 3334 of 2023 ↩︎
2. Civil Appeal No. 4412 and 4413 of 1985 ↩︎
3. Para 26 of (Civil Appeal No. 3334 of 2023) ↩︎
4. Civil Appeal No. 12238 of  2018 and 1677 of 2019 ↩︎
5. Para 27 of (Civil Appeal No. 3334 of 2023) ↩︎
6. Civil Appeal No. 851 of 1966 ↩︎
7. Para 37 of (Civil Appeal No. 3334 of 2023) ↩︎
8. Para 40 of (Civil Appeal No. 3334 of 2023) ↩︎