Law on forfeiture of earnest money: Real Estate

Question 1: How much deduction is reasonable and justifiable if the home buyer cancels the booking amount?

Answer: 

Case Law; Goutam Roy V/S Avalon Projects

CC No 1941 of 2018, Decided on 24.01.2023 (NC)

A landmark judgement National Commission (NCDRC)

Facts:

• Builder and Home buyer signed an agreement having forfeiture clause. In case of cancelling the booking by Home Buyer, 20% of total basic sale price shall be forfeited.
• Question before the National Commission was as to how much deduction is reasonable and justifiable

National commission while referring to number of SC cases on the issue relied upon section

74 of 1872 Contract Act that in case of breach of contract, actual damage is to be proved for

penalizing the other party. In such matters cancelling the booking flat or property by the

buyer, the property remains with builder only and there is hardly any loss to the builder

National commission ordered for forfeiture of 10% of the total sale cost of the property

Cases Referred:

Moula Bux V/S Union of India 1970 SC

Sirdar K B Ram Chandra Raj URS v/s SC 2015theory of actual damage as per section

74 of contract act

Question 2: Whether there can be any forfeiture of earnest money when agreement not signed ?

Answer: 

Case Law ; Amit Gupta & Anr. Versus. M/S. Vatika Limited ( National Commission) Consumer Case No. 425 Of 2018 

A landmark judgement National Commission (NCDRC)

Facts :

The OP sent the blank Builder Buyer Agreement to the complainants on 16.4.2015.  Some of the terms and conditions contained in the said agreement were not acceptable to the complainants.  Some of the objections raised by the complainants were as under:

1. It appears that full land has not yet been acquired for the said housing colony. 
2. Several exceptions including ‘specification and location’ of the flat as mentioned in the draft agreement  were not communicated earlier 
3. . Vatika has mentioned about earnest money with its definition.  So far the definition of  EM was not communicated to me either by the vatika or involved broker.  

Since the issues raised by the complainants were not addressed, they, vide email dated 06.12.2017 sought refund of the amount which they had paid to the OP along with interest.

Commission directed refund of the entire amount of Rs.37,05,892/ which the said complainant had paid to the OP, along with interest on that amount @ 9% per annum.

Question 3: What are the unfair clauses in the buyer builder agreement?

Answer: 

Case Law: Pioneer Urban Land & Infrastructure Ltd. Vs. Govindan Raghavan

 (2019) 5 SCC 725 decided on 2nd April 2019

Such wholly one-sided agreements were termed as unfair and were not approved by the Hon’ble Supreme Court in Pioneer Urban Land & Infrastructure Ltd. Vs. Govindan Raghavan (2019) 5 SCC 725, decided on 2nd April 2019 which to the extent it is relevant reads as under:

“Incorporation of one-sided clauses in an agreement constitutes an unfair trade practice as per section 2®of consumer protection act. .”

Quoted law-Section 2 (r) of the Consumer Protection Act, 1986 defines ‘unfair trade practices’ in the following words :

“‘Unfair trade practice’ means a trade practice which, for the purpose of promoting the sale, use or supply of any goods or for the provision of any service, adopts any unfair method or unfair or deceptive practice …”, and includes any of the practices enumerated therein. The provision is illustrative, and not exhaustive.

Question 4: Can there be any Forfeiture of earnest Money when only booking done and no further transaction completed?

Answer:

Case Law; Mr Dinesh R Humane& Mrs  Ranjana D. humane  v/s Piramal estate Pvt. Ltd 

Decided on 16 March 2021

(RERA Estate Appellant Tribunal ,Maharashtra)

Held

“Transaction of sale and purchase of the flat is cancelled at initial stage Allottee Marely booked the flat and paid some money towards the booking on printed form. Thereafter there is no progressing of the transaction Parties never reached to execute agreement for sale. In this peculiar matter it cannot be ignored that the object of RERA is to protect interest of consumer, so whatever amount is paid by home buyer to the promoter should be refunded to the allottee on his withdrawal from the project”

Click the link to see Questions and Answers June 2024

Civil Appeal No. 2646 Of 2009 (Civil Appellate Jurisdiction)

Decided On 14.05.2024 (55 Pages Judgment)

J.Bela M. Trivedi & J Pankaj Mithal

Case Title: 

Bar Of Indian Lawyers Through Its President Jasbir Singh Malik &Others 

Bar Council Of India Through By Its Secretary Mr. S. Radhakrishnan

Mathias                                                                                     Appellant(S)

V/S

K. Gandhi Ps National Institute of Communicable Diseases and Anr. Respondent(S) 

The present set of Appeals against the order passed by the National Consumer Disputes Redressal Commission (NCDRC), New Delhi

 In Revision Petition No.1392/2006, 

Decided on 06.08.2007. [NEW DELHI; MAY 14th, 2024.

NCDRC held that 

If there was any deficiency in service rendered by the Advocates/Lawyers, a complaint under the Consumer Protection Act, 1986 would be maintainable

Issue before Apex Court In above appeals 

Whether a “Service” hired or availed of an Advocate would fall within the definition of “Service” contained in the C.P. Act, 1986/2019, so as to bring him within the purview of the said Act?

Facts of the case 

1. Mr. D.K. Gandhi had hired the services of the appellant as an advocate for filing a Complaint in the Court of Metropolitan Magistrate, Tis Hazari Court, Delhi, against one Kamal Sharma under Section 138 of the Negotiable Instruments Act, as the cheque for Rs.20,000/- issued by the said Kamal Sharma in favour of the respondent D.K. Gandhi was dishonoured.

2. During the course of the said complaint case, the accused Mr. Sharma agreed to pay the sum of Rs.20,000/- for the dishonoured cheque besides Rs.5,000/- as the expenses incurred by the complainant and the appellant had received from the accused Mr. Sharma the DD/pay order for Rs.20,000/- and the crossed cheque of 4 Rs.5,000/- on behalf of the respondent

3. The appellant did not deliver the cheques to the respondent
   Not only this the appellant also filed a suit for recovery of Rs.5,000/- in the court of Small Causes, Delhi raising a plea that the sum was due to him as his fees
4. Subsequently, the appellant gave the DD/pay order for Rs.20,000/- and cheque for Rs.5,000/- to the respondent, however, the payment of cheque for Rs.5,000/- was stopped by the accused Mr. Sharma at the instance of the appellant.

5. Hence complaint before consumer forum at Delhi by complainant D K Gandhi which was decided in the favour of the complaint
   Appellant filed an appeal before the State Commission, which by the order dated 10.03.2006 allowed the same holding that the services of lawyers/advocates did not fall within the ambit of “service” defined under section 2(1)(o) of the CP Act, 1986.
   The NCDRC in the Revision Application reversed the order and reasoned judgment was passed in favour of complainant

Basic Question of Law under consideration:

• “Contract of personal service “& “Contract for service” 
• Relationship between a lawyer &client 
• Significance of Role of the Bar in the legal system. The Bar is supposed to be the spokesperson for the judiciary as Judges do not speak The Bar is an integral part of the judicial administration. The Bar and the Bench maintain dignity and decorum of each other

Points raised /submissions made during the course of proceedings 

1) The Bar Council of India and State Bar Councils are invested with the disciplinary powers. 
The professional misconduct if any, which includes cases of negligence is covered by the special law i.e., Advocates Act, 1961. Lawyers are bound by ethical and professional obligations Professionals are governed by their respective Councils like Bar Councils or Medical Councils also would not absolve them from their civil or criminal liability arising out of their professional misconduct or negligence. Hence The Advocates Act being special law would prevail over the CP Act so far as the conduct of Advocates are concerned.

The disciplinary powers for taking action against the Advocates and impose punishment for their misconduct have been conferred upon the State Bar Councils and Bar Council of India as the case may be under the Chapter V of the Advocates Act.

2) A unique feature which distinguishes an Advocate from other professional
An Advocate has a duty to the court and his peers, in addition to his duty to the client The legal profession is an extension of system of justice, and the success of judicial process depends on the independence of the Bar. 

3) Code of conduct
The Bar Council of India Rules, 1975 (for short “the BCI Rules”), in Part VI Chapter II provide for the “Standards of Professional Conduct and Etiquette” to be observed by all the advocates under the Advocates Act, 1961 (for short “the 1961 Act”). In the Preamble to Chapter II, the BCI Rules provide as follows: “An advocate shall, at all times, comport himself in a manner befitting his status as an officer of the Court, a privileged member of the community, and a gentleman, bearing in mind that what may be lawful and moral for a person who is not a member of the Bar, or for a member of the Bar in his non-professional capacity may still be improper for an advocate

4) A professional cannot be treated equally or at par with a businessman or a trader or a service provider of products or goods,” (Justice Trivedi)
Professionals could not be called Businessmen or Traders, nor Clients or Patients be called Consumers. The terms ‘businesses or ‘trade’ having a commercial aspect involved, legal profession is the sole profession, where advocates have no control over their environment. The environment they work in is controlled by the presiding Judge.

In Indian Medical Association (supra) it is observed: – “In the matter of professional liability professions differ from other occupations”

5) Difference between Advocate -client relationship
There is a fundamental difference between the nature of professional-client relationship. The complexity of legal issues, and the diversity of legal contexts also would take the legal services rendered by the Advocates outside the purview of the services defined under the CP Act

6) The summary nature of proceeding under the consumer protection law would lead to speculative/vexatious claims
The legal profession is a noble profession and allowing consumer protection law to apply to the Advocates would open floodgates of unnecessary litigations and it would not be in the larger public interest to do so.

7) Advocates can be broadly classified into two categories based on the terms of their engagement and the nature of work being done by them for their clients –

(1) Advocates engaged by clients to conduct their cases and then represent them before any court (Contract of Personal Service)
(2) Advocates engaged by clients to provide their professional expertise for providing legal opinions, issuing legal notices, drafting agreements, etc. The clients outside the grounds of the court and outside the litigation  process i.e., who are not engaged on the strength of a vakalatnama but engaged to provide legal services outside the court process, would come within the purview of a service provider, and any deficiency or shortcoming in the professional services rendered by such Advocates, completely outside the confines of the litigation process, would be covered under the CP Act.

The Advocates Act defines “Advocate” separately from “Legal Practitioner”

 Advocate is included in the definition of “Legal Practitioner” but legal practitioner is not included in the definition of “Advocate.”

“Sec.2(1)(a) – “advocate” means an advocate entered in any roll under the provision of this Act;” 

Section 2(1)(i) – “Legal Practitioner” means an advocate or vakil of any High Court, a pleader, mukhtar or revenue agent;”

8) The Legislature never intended to include the Professions or the services rendered by the Professionals within the purview of the CP Act 1986 as re-enacted in 2019, 

There was not a whisper in the statement of objects and reasons either of the CP Act, 1986 or 2019 to include the Professions or the Services provided by the Professionals like Advocates, Doctors etc. The CP Act 1986 was repealed and the CP Act, 2019 came to be re-enacted. The statement of objects and reasons for re-enacting the said Act of 2019 reads as under: – 

“The Consumer Protection Act, 1986 (68 of 1986) was enacted to provide for better protection of the interests of consumers and for the purpose of making provision for establishment of consumer protection councils and other authorities for the settlement of consumer disputes, etc. The modern market place contains a plethora of products and services. The emergence of global supply chains, rise in international trade and the rapid development of e-commerce have led to new delivery systems for goods and services and have provided new options and opportunities for consumers. Equally, this has rendered the consumer vulnerable to new forms of unfair trade and unethical business practices. 

we are of the opinion that neither the Professions nor the Professionals were ever intended to be brought within the purview of the CP Act either of 1986 or 2019.

Cases cited:

• State of Karnataka vs. Vishwabharathi House Building Coop. Society and Others a three-Judge Bench while dealing with the issue raised about the constitutional validity of the CP Act 1986, had elaborately considered the history, objects and purpose of enacting the law

  The framework for the Consumer Act was provided by a resolution dated 9-4-1985 of the General Assembly of the United Nations Organisation. This is known as “Consumer Protection Resolution No. 39/248”. India is a signatory to the said Resolution

• Common Cause, A Registered Society vs. Union of India and Others

  CP Act intended to protect the consumer from exploitation by unscrupulous manufacturers and traders of consumer goods. three-tier fora comprising the District Forum, the State Commission and the National Commission came to be envisaged under the Act for redressal of grievances of consumers”

• Lucknow Development Authority vs. M.K. Gupta, SC,1993

  “To begin with the preamble of the Act, which can afford useful assistance to ascertain the legislative intention, it was enacted, ‘to provide for the protection of the interest of consumers.”

• Dharangadhra Chemical Works Ltd. vs. State of Saurashtra and Others., AIR 1957 SC 264.

   “The correct method of approach, therefore, would be to consider whether having regard to the nature of the work there was due control and supervision by the employer”

  In order to assess whether the client exercises direct control over the Advocate, the Court cited several provisions of the Civil Procedure Code. One such concerned provision was Order III Rule 4, as per which a pleader cannot act in the Court for any person unless he/she is appointed by such person. Now, the document for appointing a pleader. The document used for the appointment of a pleader is known as “Vakala Nama”. The Court noted that by virtue of such “Vakalatnama,” advocates have certain duties, including the one to their client.

  It is further stated “In my opinion it is impossible to lay down any rule of law distinguishing the one from the other. It is a question of fact to be decided by all the circumstances of the case. The greater the amount of direct control exercised over the person rendering the services by the person contracting for them the stronger the grounds for holding it to be a contract of service, and similarly the greater the degree of independence of such control the greater the probability that the services rendered are of the nature of professional services and that the contract is not one of service.”

  In view of this above projection, the Court noted that “a considerable amount of direct control is exercised by the Client over the manner in which an Advocate renders his services during the course of his employment.”

  After citing the above attributes, the Court concluded that Services of an advocate would come under the contract ‘of personal service’ thus, the same would stand excluded from the definition of Service as provided under section 2(42) of the Act.

  “As a necessary corollary, a complaint alleging “deficiency in service” against Advocates practising Legal Profession would not be maintainable under the CP Act, 2019.,” the Court said.

Operative part of the Judgment:

 In that view of the matter, we summarize our conclusions as under- 

1. The Legislature never intended to include either the Professions or the services rendered by the Professionals within the purview of the said Act of 1986/2019.The very purpose and object of the CP Act 1986 as re-enacted in 2019 was to provide protection to the consumers from unfair trade practices and unethical business practices,

2. The Legal Profession is sui generis i.e. unique in nature and cannot be compared with any other Profession.

3. A service hired or availed of an Advocate is a service under “a contract of personal service,” and therefore would fall within the exclusionary part of the 43 definitions of “Service” contained in Section 2 (42) of the CP Act 2019.
   “a considerable amount of direct control is exercised by the Client over the manner in which an Advocate renders his services during the course of his employment.” The Court concluded that Services of an advocate would come under the contract ‘of personal service’ thus, the same would stand excluded from the definition of Service as provided under section 2(42) of the Act.

4. A complaint alleging “deficiency in service” against Advocates practising Legal Profession would not be maintainable under the CP Act, 2019