Supreme Court rules against forfeiture of earnest money in property dispute: Sudha Gupta vs. DLF Ltd. (2019)

Date of the Judgment: 7th March 2019

Citation: (2019) INSC 191 (07 March 2019)

Judges: Ranjan Gogoi, CJI, L. Nageswara Rao, J., Sanjiv Khanna, J.

Can a real estate developer forfeit a substantial amount of money paid by a buyer when the buyer defaults on payments? The Supreme Court of India addressed this question in a case concerning a plot of land in Gurgaon. The court examined whether the forfeiture of a significant portion of the payment made by the buyer was justified when the buyer defaulted on payments, especially when the seller resold the property at a higher price. The judgment was delivered by a three-judge bench comprising Chief Justice Ranjan Gogoi, Justice L. Nageswara Rao, and Justice Sanjiv Khanna, with the opinion authored by Justice Sanjiv Khanna.

Case Background

In 1991, Sudha Gupta (the appellant) applied for a plot of land in DLF Qutab Enclave, Gurgaon, and paid ₹1,00,800 as an initial payment. A Plot Buyer’s Agreement was executed on January 7, 1992, for a plot measuring 298.98 sq. meters. The total amount payable by the appellant was ₹8,83,916.14, which included the cost of the plot, external development charges, preferential location charges, contingency deposit, and interest. The appellant disputed the preferential location charges. She made several payments totaling ₹4,89,800 but defaulted on subsequent installments. Despite some defaults, the allotment was briefly cancelled and then restored upon a payment of ₹75,000. However, a cheque issued by the appellant for ₹66,279 bounced. DLF Ltd. (the respondent) cancelled the allotment on June 2, 1993, and forfeited ₹1,55,105 as ‘earnest money,’ refunding the remaining amount of ₹3,34,695. The appellant contested the forfeiture and sought possession of the plot, which was rejected by the Appellate Tribunal. The plot was later sold to third parties for a much higher price.

Timeline

Course of Proceedings

The Competition Appellate Tribunal directed DLF Ltd. to refund ₹3,34,695 with 9% interest, accepting DLF’s right to forfeit ₹1,55,105. The Tribunal rejected the appellant’s request for possession and registration of the sale deed, citing the judgment in Ghaziabad Development Authority vs. Ved Prakash Aggarwal (2008) 7 SCC 686, which held that specific performance cannot be granted under the Monopolies and Restrictive Trade Practices Act. The appellant then filed an appeal before the Supreme Court, challenging the forfeiture and seeking possession of the plot. After the impugned order, the appellant also filed a complaint under the Consumer Protection Act, 1986, which was dismissed by the Consumer Disputes Redressal Forum on grounds of limitation and the order passed by the Appellate Tribunal. The appellant also filed criminal complaints related to the transaction.

Legal Framework

This case was brought under Section 53T of the Competition Act, 2002, read with Section 55 of the repealed Monopolies and Restrictive Trade Practices Act, 1969. The core issue revolves around whether the forfeiture of a substantial amount of money by the seller constitutes an unfair trade practice. The Monopolies and Restrictive Trade Practices Act, 1969, aimed to prevent monopolies and restrictive trade practices that could harm consumers. The Competition Act, 2002, replaced the MRTP Act and further strengthened the framework to promote competition and prevent anti-competitive practices.

Arguments

Appellant’s Submissions:

• The appellant argued that the forfeiture of ₹1,55,105 was unjust and constituted an unfair trade practice.
• She contended that she was entitled to possession and registration of the sale deed for the plot upon payment of the balance amount.
• The appellant claimed compensation of ₹1,00,000 for the pecuniary loss and mental agony she suffered.
• She highlighted the fact that the respondent had resold the plot at a much higher price, indicating that the respondent had not suffered any loss due to her default.
• The appellant questioned the genuineness of the subsequent sale to the deleted respondents, pointing out discrepancies in their application form.

Respondent’s Submissions:

• The respondent argued that the forfeiture of earnest money was in accordance with Clause 10 of the Plot Buyer’s Agreement.
• They contended that the appellant had defaulted on payments despite repeated communications and extensions.
• The respondent stated that the cancellation of allotment was justified due to the appellant’s failure to make timely payments.
• They maintained that the subsequent sale of the plot to the deleted respondents was valid and legitimate.
• The respondent argued that they had already refunded the amount due to the appellant after deducting the forfeited amount.

Table of Submissions:

Issues Framed by the Supreme Court

The Supreme Court addressed the following issues:

1. Whether the Appellate Tribunal was correct in rejecting the prayer for specific performance, i.e., possession and registration of the sale deed.
2. Whether the forfeiture of ₹1,55,105 by the respondent was justified and in accordance with the law.
3. What is the appropriate rate of interest to be paid on the refund amount?

Treatment of the Issue by the Court

Authorities

Cases Relied Upon:

• Ghaziabad Development Authority vs. Ved Prakash Aggarwal (2008) 7 SCC 686 – The Supreme Court of India. This case was cited by the Appellate Tribunal to reject the prayer for specific performance, stating that such relief cannot be granted under the repealed Monopolies and Restrictive Trade Practices Act.
• Kailash Nath Associates vs. DDA and Another (2015) 4 SCC 136 – The Supreme Court of India. This case was relied upon by the Supreme Court to hold that the forfeiture of ₹1,55,105 by the respondent was not correct and not in accordance with the law.
• Aloka Bose vs. Parmatma Devi, (2009) 2 SCC 582 – The Supreme Court of India. This case was cited to support the view that the signature of the vendee on the sale/conveyance deed is not mandatory.

Legal Provisions Considered:

• Section 53T of the Competition Act, 2002 – This section provides for appeals to the Supreme Court from orders of the Competition Appellate Tribunal.
• Section 55 of the repealed Monopolies and Restrictive Trade Practices Act, 1969 – This section was invoked as the case originated under this act.
• Clause 10 of the Plot Buyer’s Agreement – This clause was the basis for the respondent’s claim to forfeit the earnest money.

Table of Authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court agreed with the Appellate Tribunal’s view that specific performance could not be granted based on Ghaziabad Development Authority vs. Ved Prakash Aggarwal (2008) 7 SCC 686.
• The Supreme Court relied on Kailash Nath Associates vs. DDA and Another (2015) 4 SCC 136 to rule against the forfeiture of earnest money, stating that the respondent had not suffered any loss.
• The Supreme Court cited Aloka Bose vs. Parmatma Devi, (2009) 2 SCC 582 to support the view that the signature of the vendee on the sale/conveyance deed is not mandatory.

What weighed in the mind of the Court?

The Supreme Court was influenced by several factors in reaching its decision. The Court noted that while the appellant was a persistent defaulter, the respondent had resold the plot at a substantially higher price, indicating that they had not suffered any loss due to the appellant’s default. The Court also emphasized that the forfeiture of a significant amount of money was not justified when the seller had not incurred any actual loss. The Court’s decision was also influenced by the fact that the respondent had withheld crucial documents, which led the court to draw an adverse inference against them. The court also noted that the appellant did not have proper legal assistance.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

Logical Reasoning Flowchart:

The Supreme Court considered the alternative interpretation that the forfeiture was valid as per the agreement, but rejected it. The court held that the agreement cannot override the principles of fairness and justice, especially when the seller has not suffered any loss. The court also rejected the argument that the appellant’s persistent defaults justified the forfeiture, noting that the seller had profited from the resale of the plot. The court decided to direct the respondent to pay ₹30 lakhs to the appellant, which included the refund of the forfeited amount along with compensation, to balance the equities.

The court’s reasoning was that while the appellant was at fault for defaulting, the respondent’s actions in forfeiting a substantial amount and reselling the plot at a higher price were not justifiable. The court emphasized the need for fairness and equity in such transactions. The court also considered the fact that the appellant did not have proper legal assistance and that the respondent had withheld crucial documents.

The majority opinion was authored by Justice Sanjiv Khanna. There were no dissenting opinions.

“We have no hesitation in observing that the first respondent was anxious to cancel the allotment as the prices had substantially increased…”

“Therefore, we would hold that the forfeiture of Rs. 1,55,105/- (Rupees one lakh fifty-five thousand one hundred five) by the first respondent was not correct and in accordance with the law laid down by this Court in Kailash Nath Associates vs. DDA and Another (2015) 4 SCC 136.”

“Keeping in view the aforesaid facts and circumstances, we deem that it would be just, fair and appropriate that the first respondent is directed to pay an amount of Rs. 30 lakhs (Rupees thirty lakhs) to the appellant…”

Key Takeaways

• Real estate developers cannot forfeit earnest money if they have not suffered any actual loss due to the buyer’s default.
• Courts will look into the fairness and equity of the transaction, rather than strictly enforcing contractual terms, especially when there is a substantial disparity in bargaining power.
• Sellers must provide detailed documentation and cannot withhold crucial information.
• Buyers who default on payments may still be entitled to a refund of their payments, minus any actual losses suffered by the seller.
• This case sets a precedent for protecting buyers from unfair practices in real estate transactions.

Directions

The Supreme Court directed the first respondent, DLF Ltd., to pay ₹30 lakhs to the appellant, Sudha Gupta, within six weeks from the date of the order. In case of failure to make the payment within the stipulated time, DLF Ltd. was directed to pay interest at 12% per annum from the date of the order until the payment is made. The amount was to be deposited in the Registry of the Supreme Court, and the appellant was entitled to withdraw the same.

Development of Law

The ratio decidendi of this case is that a seller cannot forfeit the earnest money if they have not suffered any actual loss due to the buyer’s default, particularly when the seller has resold the property at a higher price. This judgment reinforces the principle of fairness and equity in contractual transactions and clarifies the limits on the seller’s right to forfeit earnest money. It also establishes that the courts will not enforce contractual terms that lead to unjust enrichment of one party at the expense of the other. This decision has changed the previous position of law by emphasizing the need for actual loss to justify forfeiture, moving away from a strict contractual interpretation.

Conclusion

In conclusion, the Supreme Court ruled against the forfeiture of earnest money by DLF Ltd., emphasizing that the company had not suffered any actual loss. The court directed DLF Ltd. to pay ₹30 lakhs to Sudha Gupta, which included the refund of the forfeited amount and compensation. This judgment underscores the importance of fairness and equity in real estate transactions and sets a precedent for protecting buyers from unfair practices.

Category

Parent Category: Real Estate Law

Child Categories:

• Property Disputes
• Earnest Money
• Forfeiture
• Consumer Protection
• Unfair Trade Practices
• Specific Performance
• Competition Act, 2002
• Monopolies and Restrictive Trade Practices Act, 1969
• Contract Law

Parent Category: Competition Act, 2002

Child Category: Section 53T, Competition Act, 2002

Parent Category: Monopolies and Restrictive Trade Practices Act, 1969

Child Category: Section 55, Monopolies and Restrictive Trade Practices Act, 1969

FAQ

Q: Can a builder forfeit my booking amount if I fail to pay installments on time?

A: According to the Supreme Court, a builder cannot forfeit your booking amount if they have not suffered any actual loss due to your default. If the builder resells the property at a higher price, they cannot forfeit your money.

Q: What should I do if a builder tries to forfeit my booking amount?

A: You should first try to negotiate with the builder. If that doesn’t work, you can approach the consumer court or other relevant legal forums. You can also cite this Supreme Court judgment to support your case.

Q: What does ‘earnest money’ mean in a property purchase?

A: Earnest money is the initial payment made by the buyer to the seller as a commitment to purchase the property. It is usually a part of the total sale price.

Q: What is specific performance in a property transaction?

A: Specific performance is a legal remedy where a court orders a party to fulfill their contractual obligations, such as transferring ownership of a property. However, if the property has been sold to a third party, specific performance may not be possible.

Q: What is an unfair trade practice in real estate?

A: An unfair trade practice in real estate includes actions by the seller that are deceptive, fraudulent, or that exploit the buyer. Forfeiting a substantial amount of money without any actual loss to the seller can be considered an unfair trade practice.