Supreme Court’s Ruling on Earnest Money Forfeiture: Analysis of Godrej Projects Development Ltd. v. Anil Karlekar & Ors., Civil Appeal No. 3334 of 2023 (2025 INSC 143)

On February 3, 2025, the Supreme Court of India, in Godrej Projects Development Ltd. v. Anil Karlekar & Ors., reaffirmed that forfeiture of earnest money is valid if it is reasonable and does not amount to a penalty under Section 74 of the Indian Contract Act, 1872.

This ruling clarifies the extent to which developers can enforce forfeiture clauses in real estate transactions while ensuring fairness for buyers. The Court upheld the National Consumer Disputes Redressal Commission (NCDRC)’s decision, which limited the forfeiture to 10% of the Basic Sale Price (BSP), rejecting the developer’s claim for 20% forfeiture as excessive.

Facts of the Case

The case arose from a real estate transaction where the respondents (buyers) had booked an apartment in the “Godrej Summit” project, located in Gurgaon, Haryana.

Chronology of Events:

1. January 10, 2014: Buyers booked an apartment and paid an earnest money deposit of ₹10,00,000.
2. June 20, 2014: An allotment letter was issued, confirming the booking, and an Apartment Buyer Agreement was executed.
3. June 20, 2017: The developer received an Occupation Certificate for the project.
4. June 28, 2017: Developer offered possession of the apartment to the buyers.
5. August 22, 2017: Buyers declined possession and sought cancellation, citing market recession and declining property prices.
6. September 29, 2017: Buyers sent a legal notice demanding a refund of ₹51,12,310/-.
7. November 14, 2017: Buyers filed a consumer complaint before the NCDRC seeking a full refund with 18% interest.
8. October 25, 2022: The NCDRC ruled that the developer could forfeit only 10% of the BSP and must refund the balance with 6% simple interest.
9. December 5, 2022: The developer’s review petition was dismissed by the NCDRC.
10. January 10, 2023: The developer challenged the NCDRC’s decision before the Supreme Court.

Key Legal Issues Before the Supreme Court

1. Is forfeiture of 20% of the BSP justified under the terms of the Apartment Buyer Agreement?
2. Does such forfeiture amount to a penalty under Section 74 of the Indian Contract Act?
3. Can courts intervene in contractual forfeiture clauses if they are one-sided or unconscionable?

Arguments Presented

Appellant’s Contentions (Godrej Projects Development Ltd.)

• The contract explicitly provided for forfeiture of 20% of the BSP in case of cancellation.
• The buyers voluntarily agreed to the terms and cannot challenge them later.
• The NCDRC exceeded its jurisdiction by modifying the contractual terms.
• Market recession is not a valid reason for cancellation, and the buyers defaulted at their own risk.
• Cited Satish Batra v. Sudhir Rawal (2013) 1 SCC 345 and Desh Raj v. Rohtash Singh (2023) 3 SCC 714, supporting forfeiture clauses in contracts.

Respondents’ Contentions (Buyers)

• The 20% forfeiture clause was one-sided and unfair, violating the principle of unconscionable contracts.
• Cited Ireo Grace Realtech Pvt. Ltd. v. Abhishek Khanna (2021) 3 SCC 241 and Pioneer Urban Land & Infrastructure Ltd. v. Govindan Raghavan (2019) 5 SCC 725, where the Supreme Court struck down one-sided clauses in real estate agreements.
• Under The Haryana RERA Regulations, 2018, a builder cannot forfeit more than 10% of the BSP.
• Cited Maula Bux v. Union of India (1969) 2 SCC 554, stating that forfeiture must be reasonable and cannot be a penalty.

Supreme Court’s Analysis and Reasoning

1. Validity of Earnest Money Forfeiture

• Earnest money is a security for performance, and its forfeiture is valid if the terms of the contract are clear and explicit (Satish Batra v. Sudhir Rawal).
• However, forfeiture should not be excessive or punitive (Maula Bux v. Union of India).

2. Unfair Contract Terms Cannot Be Enforced

• The Court reaffirmed that one-sided agreements favoring builders are not enforceable.
• Cited Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly (1986) 3 SCC 156, holding that courts will strike down unfair clauses in contracts where there is unequal bargaining power.

3. Regulatory Restrictions on Earnest Money Forfeiture

• Under Haryana RERA Regulations, 2018, forfeiture of earnest money beyond 10% of the BSP is not permitted.
• The Court relied on NCDRC’s consistent rulings since DLF Ltd. v. Bhagwanti Narula (2015 SCC OnLine NCDRC 1613), which capped forfeiture at 10% of the BSP.

4. No Interest on Refund Amount

• The Court removed the 6% interest awarded by the NCDRC, reasoning that:
  • The buyers chose to cancel the contract voluntarily.
  • They might have used the refunded money to purchase another property at a lower price.

Conclusion and Judgment

The Supreme Court partly allowed the appeal, holding that:

1. Forfeiture of earnest money is valid if it is reasonable and not punitive.
2. The developer could forfeit only 10% of the BSP, not 20%, as per regulatory norms and judicial precedents.
3. No interest is payable on the refunded amount, as the cancellation was at the buyers’ discretion.
4. The developer must pay the remaining refundable amount within six weeks.

Key Takeaways from the Judgment

• Forfeiture clauses in contracts must be reasonable and not penal in nature.

• Real estate buyers are protected from one-sided contractual terms.

• Courts can intervene to ensure fairness in agreements between parties with unequal bargaining power.

• Regulations such as Haryana RERA limit the amount that can be forfeited.

This ruling provides much-needed clarity on earnest money forfeiture, balancing the interests of both builders and buyers while ensuring fairness in real estate transactions.

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