One-Sided Contractual Terms Constitute Unfair Trade Practice Under Consumer Law In India.

Updated: Mar 22











INTRODUCTION:

A three-judge bench of the Supreme Court, in Ireo Grace Realtech Pvt. Ltd. v. Abhishek Khanna and Ors.[1], has inter alia held that developers cannot compel apartment buyers to be bound by one-sided contractual terms. Finding such one-sided agreements oppressive, the Court has held that the same would constitute an unfair trade practice under the consumer laws in India.

FACTS:

The Department of Town and Country Planning had granted a licence to Precision Realtors Pvt. Ltd. i.e., Respondent No. 3, Blue Planet Infra Developers and Madeira Conbuild Pvt. Ltd., i.e. Respondent No. 4, to develop a vast housing project called “The Corridors” in Sector 67-A, Gurgaon, Haryana (the “Project”). Subsequently, the licence for construction was transferred to Ireo Grace Realtech Pvt. Ltd. (the “Developer”). The building plans of the Project were sanctioned by the Directorate of Town and Country Planning, Haryana, on July 23, 2013 (“Sanctioned Building Plan”).

The Sanctioned Building Plan contained a detailed set of terms and conditions, which inter alia included provisions for fire safety and environmental clearance. Clause 3 of the Sanctioned Building Plan required clearance from the fire authority to be submitted within 90 days from the date of issuance of the Sanctioned Building Plan. Further, Clause 17(iv) of the Sanctioned Building Plan required the Developer to obtain a no objection certificate from the Ministry of Environment & Forests, before commencing construction of the Project.

The Developer opened booking for the apartments in 2013. On August 7, 2013, Respondent No. 1, an apartment buyer, was allotted a 2 BHK apartment in Tower-C of the Project. Similar allotment letters were issued to various other apartment buyers in the housing Project.

The environmental clearance granted by the Ministry of Environment & Forest Government of Haryana on December 12, 2013, required the Developer to submit a copy of the fire safety plan, approved by the fire department, before the commencement of the Project.

Thereafter, the Developer approached the Commissioner, Municipal Corporation, Gurgaon, for issuance of a no objection certificate for the firefighting scheme of the Project. The approval for the said scheme was granted on November 27, 2014.

Thereafter, the apartment buyers vide letter dated March 25, 2014, received a copy of the apartment buyer’s agreement (“ABA”) with a construction linked payment plan.

The terms and conditions of the ABA inter alia provided that (i) the apartment buyers would be required to deposit 20% of the sale consideration within 45 days of booking of the apartment and that the same would be deemed to constitute the earnest money; (ii) in case of a delay in payment of an instalment, the apartment buyer would be required to pay Interest @ 20% per annum on every delayed payment; (iii) in case the allottee failed, ignored or neglected to take possession of the apartment in accordance with the ‘Notice of Possession’, the allottee would be liable to pay ‘Holding Charges’ on the super area @ Rs. 7.5 per sq. ft. per month; (iv) in case the Developer failed to offer possession by the end of the grace period i.e., 42+6 months, it would be liable to pay delay compensation @ Rs. 7.5 per sq. ft. of the super area for every month of delay (which works out to approximately 0.9% to 1% interest per annum); (v) the delay compensation would be payable to the allottee only if the termination was ‘validly opted’; (vi) the delay compensation was limited to a fixed period of 12 months only, and no other claim whatsoever, whether monetary or otherwise, was payable by the Developer; (vii) the allottee would be deemed to have waived all its claims in respect of the area, specifications, quality, construction, any other provision in the apartment against the Developer upon taking possession of the apartment; (viii) in case the allottee neglected or failed to make timely payments as stipulated in the agreement, or failed to exercise the options offered by the Developer, the Developer could terminate the agreement and forfeit the earnest money; (ix) upon such termination, the Developer would be under no obligation, except to refund the amounts already paid by the allottee, without any interest. Such amount would be payable after forfeiture and deduction of the earnest money, interest on delayed payments, brokerage/commission/charges, service tax and other amounts due and payable to it. The principal amount after the aforesaid deductions would be refunded at an uncertain future date i.e. after the Developer had sold the apartment allotted to the allottees; (x) the allottees could cancel the agreement, solely in the event of a clear and unambiguous failure of the warranties of the Developer. In such a scenario, the allottee would be entitled to a refund of the instalments actually paid, along with an interest @ 8% p.a. within a period of 90 days from the date of determination to this effect. No other claim, whatsoever, monetary or otherwise would lie against the Developer.

On December 27, 2017, Respondent No. 1 filed a consumer complaint before the National Consumer Disputes Redressal Commission (“National Commission”), inter alia seeking refund of sale consideration along with an interest of 20% per annum, on account of inordinate delay in completion of construction and obtaining occupation certificate on part of the Developer.

Respondent No. 1 inter alia submitted that (i) the Developer had invited applications from the public for booking flats in the Project, by misrepresenting that all necessary approvals/ pre-clearances with respect to the constructions had already been obtained from the respective authorities; (ii) the Developer had misrepresented that the Project would have a 90-meters motorable access road approaching the Project from Junction 63A to 67A; (iii) the apartment buyers were induced to book apartments on false representations made by the Developer that construction of the Project would be completed within 42 months from the collection of the initial booking amount.

The Developer filed its reply to the consumer complaint, submitting that there was no delay in offering possession of the apartments on its part and hence, the complaint was premature and liable to be dismissed. Similar complaints in relation to the Project were filed by various other apartment buyers before the National Commission. These batch of consumer complaints were decided by the National Commission vide judgment and order dated March 28, 2019. The National Commission inter alia directed refund of the amounts deposited by the apartment buyers in the Project on account of the inordinate delay in completing the construction and obtaining the occupation certificate. Aggrieved by the said decisions, the Developer filed appeals Under Section 23 of the Consumer Protection Act, 1986 (“1986 Act”).

ARGUMENTS ADVANCED:

The Developer inter alia submitted that (i) the period of 42 months for handing over possession would commence only after the conditions mentioned in the Sanctioned Building Plan were fulfilled; (ii) delays were inevitable in large development projects, where multiple towers were being constructed; (iii) the finding recorded by the National Commission — that the clauses of the ABA were one-sided and unfair — was illegal and without jurisdiction, under the 1986 Act. It was only under the Consumer Protection Act, 2019 (“2019 Act”), which came into effect on July 20, 2020, that the State Consumer Forum and the National Commission were conferred with the power to declare contractual terms that were unfair to consumers as null and void. Such power did not exist under the 1986 Act.

Apartment Buyers inter alia submitted that (i) the building plans were approved on July 23, 2013, and the Developer was required to hand over possession of the apartments within a period of 42 months from the date of approval, which expired on January 22, 2017; (ii) Several homebuyers had undertaken loans to pay the instalments, on which interest up to 7.90% was being paid. On account of the inordinate delay, which had occurred, they were unable to pay further instalments and insisted on refund of the amounts paid; (iii) The ABA contained one-sided clauses, which were not final and binding on the apartment buyers and would constitute an unfair trade practice.

FINDINGS:

The Court observed that the factum of delay on part of the Developer in completing the construction and making the offer of possession was undisputed. Upon perusing the terms of the ABA, the Court found that the same were wholly one-sided and were entirely loaded in favour of the Developer, and against the allottee at every step. It held that the terms of the ABA were oppressive and unreasonable and the same would constitute an unfair trade practice under the 1986 Act.

The Court further observed that whilst an “unfair contract” had been defined under the 2019 Act, and powers had been specifically conferred on the State Consumer Fora and the National Commission to declare contractual terms, which are unfair, as null and void, such statutory recognition of the said power was implicit under the 1986 Act. The Court categorically held that the Developer could not compel the apartment buyers to be bound by the one-sided contractual terms contained in ABAs.

To decide on the issue of whether the apartment buyers were bound to accept the offer of possession made by the Developer where the occupation certificate had been issued, along with the payment of delay compensation, or were entitled to terminate the ABA, the Court categorised the allottees into two broad categories. Category A comprised apartment buyers whose allotments fell in Phase 1 of the Project, where the Developer has been granted occupation certificate, and the offer of possession had been made. Category B comprised apartment buyers whose allotments fell in Phase 2 of the project, where the occupation certificate had not been granted so far. The Developer had made an alternate offer of allotment of apartments to Category B apartment buyers, in Phase 1 of the Project.

Regarding Category A, the Court found that such allottees (except the allottee(s) who had filed an application under the Insolvency and Bankruptcy Code, 2016) were obligated to take possession of the apartments since the construction was completed, and possession was offered on June 28, 2019, after the issuance of the occupation certificate on May 31, 2019. The Court, however, directed the Developer to pay delay compensation to such allottees as per the ABA.

With regard to the allottee that had filed an application under the Insolvency and Bankruptcy Code, 2016, the Court directed the Developer to refund the amount deposited by him, along with interest.

In case of category 2 allottees, it was held that such allottees were entitled to refund of the entire amount deposited by them, along with compensation and interest. The Court also observed that Category B allottees were not bound to accept the Developer’s alternate offer on account of the inordinate delay in completing the construction of the towers where units were previously allotted to them. The Court observed that the occupation certificate was still not available (even as on date of the judgment) and the same clearly amounted to deficiency of service. The Court observed that the allottees could not be made to wait indefinitely for possession of the apartments allotted to them, nor could they be bound to take the apartments in Phase 1 of the Project.

While deciding the amount of interest payable by the Developer, the Court observed that the delay compensation specified in the ABA (approximately 0.9% to 1% interest per annum), on the amount deposited by the apartment buyer, could not be accepted as being adequate compensation for the delay in the construction of the Project. On the other hand, the Court also observed that the claim of the apartment buyers for payment of compound interest @ 20% per annum had no nexus with the commercial realities of the prevailing market. To balance the competing interest of both parties, the Court, in the interest of justice and fair play, fixed the interest @ 9% simple interest per annum. While arriving at this figure, the Court specifically took cognizance of the prevailing market conditions because of the Covid-19 pandemic and its impact on the construction industry.

CONCLUSION:

In keeping with its progressive and consumer centric view, the Supreme Court has ensured that parties in unequal bargaining positions are placed on an equitable footing. The Court has also kept in mind the commercial realities of the construction industry and the prevailing financial impact of the pandemic on the said sector. It has sought to strike a harmonious balance between the competing interests of the apartment buyers and developers, thereby giving necessary impetus to economic development and social welfare at large.









For further information, please contact:

Aditya Mehta, Partner, Cyril Amarchand Mangaldas

aditya.mehta@cyrilshroff.com

[1] AIR 2021 SC 437

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