Supreme Court on Unfair Terms in Apartment Buyer Agreements: Pioneer Urban Land vs. Govindan Raghavan (2019)

Introduction

Date of the Judgment: April 2, 2019
Citation: [Not Available in Source]
Judges: Uday Umesh Lalit, J. and Indu Malhotra, J.

Can a builder enforce a contract with clauses that heavily favor them over the buyer? The Supreme Court of India recently addressed this issue in a case concerning a delayed apartment project. The court examined the fairness of an apartment buyer’s agreement, specifically focusing on whether the builder could compel the buyer to accept possession after a significant delay, and whether the terms of the agreement were one-sided. This judgment, authored by Justice Indu Malhotra, clarifies the rights of consumers in real estate transactions.

Case Background

The case involves a residential project called “Araya Complex” in Gurugram. The respondent, Mr. Govindan Raghavan, entered into an Apartment Buyer’s Agreement on May 8, 2012, with the appellant, Pioneer Urban Land & Infrastructure Ltd., to purchase an apartment for ₹4,83,25,280. According to the agreement, the builder was to apply for an Occupancy Certificate within 39 months from the start of excavation, with a 180-day grace period. The excavation began on June 4, 2012, meaning the builder should have applied for the Occupancy Certificate by September 4, 2015, or by March 4, 2016, including the grace period. However, the builder failed to do so. Consequently, the respondent filed a consumer complaint on January 27, 2017, seeking a refund, compensation, and litigation costs due to the delay.

Timeline

Course of Proceedings

The National Commission initially passed an ex-parte interim order on February 6, 2017, restraining the builder from canceling the allotment. During the proceedings, the builder obtained the Occupancy Certificate on July 23, 2018, and offered possession on August 28, 2018. The builder argued that the respondent should take possession, but the respondent refused, citing the inordinate delay and having already acquired an alternate property. The National Commission ruled in favor of the respondent on October 23, 2018, stating the respondent could not be forced to take possession after such a long delay. The Commission ordered a refund of ₹4,48,43,026 with interest at 10.7% per annum, as per the Haryana Real Estate (Regulation and Development) Rules, 2017. The builder then appealed this order to the Supreme Court.

Legal Framework

The case is primarily governed by the Consumer Protection Act, 1986, which defines “service” to include construction of houses or flats. Section 2(o) of the Consumer Protection Act, 1986 defines service. The Act also defines “unfair trade practices” under Section 2(r). The Haryana Real Estate (Regulation and Development) Rules, 2017, particularly Rule 15, were also relevant. Rule 15 specifies the interest rate for refunds in cases of project delays or discontinuations, stating:

“15. An allottee shall be compensated by the promoter for loss or damage sustained due to incorrect or false statement in the notice, advertisement, prospectus or brochure in the terms of Section 12. In case, allottee wishes to withdraw from the project due to discontinuance of promoter ’s business as developers on account of suspension or revocation of the registration or any ot her reason(s) in terms of clause (b) sub -section (I) of Section 18 or the promoter fails to give possession of the apartment/ plot in accordance with terms and conditions of agreement for sale in terms of sub -section (4) of section 19. The promoter shall return the entire amount with interest as well as the compensation payable. The rate of interest payable by the promoter to the allottee or by the allottee to the promoter, as the case may be, shall be the State Bank of India highest marginal cost of lending rate plus two percent. …”

Arguments

Appellant (Builder)’s Arguments:

• The respondent was not entitled to a refund because they did not terminate the agreement as per Clause 11.5(ii), which requires a 90-day termination notice.
• The consumer complaint was premature as per Clause 11.5 (ii), because the respondent could claim refund only after 12 months after the grace period i.e. after 04.03.2017, but the complaint was filed on 27.01.2017.
• If the consumer complaint is considered a termination notice, the builder should only be liable to pay interest 90 days after the date of the National Commission’s order (October 23, 2018).
• The National Commission erred in awarding interest at 10.7% p.a. because Clause 20 of the agreement specifies 6% p.a., and Clause 11.5 specifies 9% p.a.
• Relied on Bharathi Knitting Company v. DHL Worldwide Express Courier Division of Airfreight Ltd., (1996) 4 SCC 704 to argue that compensation cannot exceed the rate prescribed by the agreement.

Respondent (Flat Purchaser)’s Arguments:

• The filing of the consumer complaint should be considered as a termination notice under Clause 11.5(ii).
• The builder offered possession after an inordinate delay of almost three years, making it impossible for the respondent to accept.
• The clauses of the agreement were one-sided. For example, the builder could charge 18% p.a. for delayed payments by the respondent, but only offered 9% p.a. for delays in handing over possession.
• The National Commission correctly ordered interest at 10.7% p.a. as per the Haryana Real Estate Rules, 2017.
• The respondent had taken a loan and was paying 10% interest, so the 10.7% interest awarded by the Commission was fair.

Innovativeness of the argument: The respondent’s argument that the filing of the consumer complaint should be considered as a termination notice is an innovative approach in the given circumstances.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issues addressed by the court were:

1. Whether the clauses in the Apartment Buyer’s Agreement were binding on the respondent, given their one-sided nature.
2. Whether the respondent was entitled to a refund of the amount deposited along with interest, given the delay in obtaining the Occupancy Certificate and offering possession.
3. Whether the National Commission was justified in awarding interest at 10.7% p.a.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon:

Legal Provisions Considered:

Judgment

How each authority was viewed by the Court:

• Lucknow Development Authority v. M.K. Gupta, (1994) 1 SCC 243*: Followed to establish that delay in handing over possession is a deficiency of service.
• Fortune Infrastructure & Anr. v. Trevor D’Lima & Ors., (2018) 5 SCC 442*: Followed to support the view that a person cannot be made to wait indefinitely for possession and is entitled to a refund.
• Central Inland Water Transport Corporation Limited and Ors. v. Brojo Nath Ganguly and Ors., (1986) 3 SCC 156*: Followed to strike down unfair and unreasonable contracts.
• Bangalore Development Authority v. Syndicate Bank, (2007) 6 SCC 711*: Followed to justify the award of interest from the date of payment until the date of refund.
• Bharathi Knitting Company v. DHL Worldwide Express Courier Division of Airfreight Ltd., (1996) 4 SCC 704*: Not followed. The court did not accept the argument that compensation cannot exceed the rate prescribed by the agreement.

The Supreme Court held that the terms of the Apartment Buyer’s Agreement were one-sided and unfair to the respondent. The court emphasized that the respondent could not be compelled to take possession of the flat after an inordinate delay. The court also upheld the National Commission’s decision to award interest at 10.7% p.a., finding it to be equitable and in line with the Haryana Real Estate Rules, 2017. The court observed that there were stark incongruities between the remedies available to both the parties. The court noted that the builder could charge 18% p.a. for delayed payments by the respondent, but only offered 9% p.a. for delays in handing over possession. The court also highlighted that the builder could forfeit the entire amount of earnest money towards liquidated damages if the respondent failed to rectify any default, while the respondent had to wait for a period of 12 months after the end of the grace period before serving a termination notice.

The court stated that, “A term of a contract will not be final and binding if it is shown that the flat purchasers had no option but to sign on the dotted line, on a contract framed by the builder.”

The court further observed that, “The contractual terms of the Agreement dated 08.05.2012 are ex-facie one-sided, unfair, and unreasonable. The incorporation of such one-sided clauses in an agreement constitutes an unfair trade practice as per Section 2 (r) of the Consumer Protection Act, 1986 since it adopts unfair methods or practices for the purpose of selling the flats by the Builder.”

The court also stated that, “The Respondent – Flat Purchaser could not be compelled to take possession of the flat, even though it was offered almost 2 years after the grace period under the Agreement expired.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Unfair Contractual Terms: The court found the terms of the Apartment Buyer’s Agreement to be heavily skewed in favor of the builder, with significant disadvantages for the buyer.
• Inordinate Delay: The delay of almost three years in obtaining the Occupancy Certificate and offering possession was a critical factor that the court considered.
• Protection of Consumer Rights: The court emphasized the need to protect consumers from unfair trade practices and one-sided contracts.
• Equitable Relief: The court aimed to provide equitable relief to the respondent, who had suffered due to the builder’s delay and unfair contractual terms.
• Statutory Compliance: The court upheld the National Commission’s decision to apply the Haryana Real Estate Rules, 2017, which provided a fair interest rate.

Fact:Law Ratio:

Logical Reasoning:

Key Takeaways

• One-sided contracts are not enforceable: Builders cannot enforce contractual terms that are heavily biased in their favor.
• Timely delivery is crucial: Builders must ensure timely delivery of possession within the agreed-upon timeframe.
• Consumers have a right to refund: Flat purchasers have the right to seek a refund with interest if possession is delayed unreasonably.
• Fair interest rates: Interest rates for delayed possession should be fair and in line with statutory rules.
• Consumer protection: The judgment reinforces the importance of consumer protection in real estate transactions.

Directions

The Supreme Court directed the appellant (builder) to refund the amount to the respondent within three months from the date of the judgment.

Specific Amendments Analysis

Not applicable as there is no discussion of any specific amendment in the judgment.

Development of Law

The ratio decidendi of this case is that one-sided and unfair clauses in apartment buyer agreements are not enforceable, and that consumers have a right to seek a refund with reasonable interest if possession is delayed unreasonably. This judgment reinforces the principle that contracts must be fair and equitable, especially in consumer transactions, and that builders cannot exploit their superior bargaining power to the detriment of flat purchasers. This case does not change the previous position of law but reinforces it.

Conclusion

The Supreme Court dismissed the builder’s appeal, affirming the National Commission’s order to refund the amount with interest. The judgment highlights the importance of fair contractual terms and timely delivery of possession in real estate transactions, protecting the rights of consumers against unfair practices by builders. The court emphasized that one-sided agreements are not enforceable and that consumers are entitled to seek a refund with interest if there is an unreasonable delay in handing over possession.

Category

• Consumer Law
  • Consumer Protection Act, 1986
  • Unfair Trade Practices
  • Deficiency of Service
• Real Estate Law
  • Apartment Buyer Agreement
  • Possession Delay
  • Occupancy Certificate
• Contract Law
  • Unfair Contract Terms
  • One-Sided Contracts
• Consumer Protection Act, 1986
  • Section 2(o), Consumer Protection Act, 1986
  • Section 2(r), Consumer Protection Act, 1986

FAQ

Q: What does this judgment mean for flat purchasers?
A: This judgment means that flat purchasers are protected from unfair terms in apartment buyer agreements. If a builder delays possession unreasonably, the purchaser has the right to seek a refund with interest.

Q: Can builders include any clause they want in the agreement?
A: No, builders cannot include clauses that are one-sided, unfair, and unreasonable. The court will not enforce such clauses.

Q: What is considered an unreasonable delay in handing over possession?
A: An unreasonable delay is when the builder fails to hand over possession within the agreed-upon timeframe or within a reasonable time thereafter. In this case, a delay of almost three years was deemed unreasonable.

Q: What interest rate is applicable for refunds in case of delay?
A: The interest rate should be fair and in line with statutory rules. In this case, the court upheld the National Commission’s decision to award interest at 10.7% p.a., as per the Haryana Real Estate Rules, 2017.

Q: What should I do if my builder is delaying possession?
A: You can file a consumer complaint seeking a refund with interest. You may also be entitled to compensation for the hardship caused by the delay.