Flying in the Face: How Consumer Forums are Ignoring the Fateh Chand Dicta

Introduction

The consumer forums including the National Consumer Disputes Redressal Commission (National Commission) have consistently held in tandem that 10% of basic sale price (BSP) is reasonable amount to be forfeited as “earnest money” in string of cases such as Ramesh Malhotra v. Emaar Mgf Land Ltd.¹ and Saurav Sanyal v. Ireo (P) Ltd.² However, the author argues that such a stand flies in the face of dicta rendered by a Constitutional Bench in Fateh Chand v. Balkishan Dass³ which disapproved the forfeiting of even 10% of total sale consideration (TSP). Per contra, the consumer forums have delivered many judgments which allowed the builders to forfeit 10% of the TSP, even though no loss was pleaded and proved by them. The aforementioned stand, when juxtaposed to ratio laid down in Fateh Chand⁴ is in stark contrast to the object as envisaged by the Consumer Protection Act, 2019 (2019 Act)⁵.

Fateh Chand versus Balkishan Dass: Evolutionary jurisprudence

The Constitutional Bench of the Supreme Court evolved a jurisprudence of uniform applicability of Section 74 of the Contract Act, 1872⁶ (Contract Act) to every covenant involving a penalty whether it is for payment on breach of contract of money or delivery of property in future, or for forfeiture of right to money or other property already delivered unlike fine refinements of common law. In the instant case, Balkishan Dass (vendor) contracted to sell his rights to Fateh Chand (vendee) appertaining to the land for Rs 1,12,500. The essential recitals of the agreement were that the vendee would have to give another cheque for Rs 25,000 to vendor out of the sale price. Further, on failure of the vendee to get the sale deed registered, on account of any reason, the above sum of Rs 25,000 would be forfeited to vendor. Thus, the sum of Rs 25,000 consisted of two items of Rs 1000 received on 21-3-1949 and referred to in the agreement as “earnest money” and Rs 24,000 agreed to be paid by the vendee to vendor as “out of the sale price”. The vendor submitted that the amount of Rs 25,000 was to be regarded as “earnest money” and claimed to forfeit on account of failure on part of vendee to fulfil his obligations under the contract. The Court, however disagreed with the submission that the whole amount of Rs 25,000 could be forfeited. It adjudicated the claim of the vendor in the light of Section 74 of the Contract Act, which in its material part provides:

74. Compensation for breach of contract where penalty stipulated for.—When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.

The Court clenched the opportunity to hold that the amount of Rs 1000 was regarded as earnest money by the parties and the covenant for forfeiture of Rs 24,000 was manifestly a stipulation by way of penalty; albeit both the amount expressly attracted Section 74 of the Contract Act, 1872.⁷ Thus, although the section does not require that an actual damage or loss is necessarily to be caused to the aggrieved party, it does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good loss or damage which the parties knew when they made the contract or which naturally arose in the usual course of things, or, to be likely to result from the breach. The judgment paved the way to forfeiture of a nominal amount by the aggrieved party when no loss is pleaded and proved. The Supreme Court also disagreed with the reasoning of the High Court which rendered 13% of the TSP as a reasonable amount and therefore could be forfeited. It also discarded a suggestion in para 16 of the judgment⁸ that 10% constituted a reasonable amount to be forfeited out of the TSP.

Clarifying the law: Kailash Nath Associates versus DDA

The two-Judge Bench in Kailash Nath Associates v. DDA⁹ although was tasked to find out if the Delhi Development Authority (DDA) lawfully forfeited the earnest money deposited by Kailash Nath Associates and went to decide that the instant case did not result in “a contract” and Section 74 of the Contract Act therefore could not be attracted as it covers only “compensation for breach of contract where penalty stipulated for”. The Court, nevertheless seized the opportunity to clarify the law on Section 74 in para 43 of the judgment¹⁰ that if damage or loss is not suffered, the law does not provide for a windfall. It laid down that: 43.3. Since Section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the section.

In sum and substance, the Constitutional Bench in Fateh Chand (supra)¹¹ and the judgment in Kailash Nath¹² held that if no loss is caused to a seller who has in his pocket monies of buyer, then the seller can only forfeit a nominal amount unless the seller has pleaded and proved that losses have been caused to him on account of the breach of contract by the buyer.

The overall effect of harmoniously interpreting both the dicta cumulatively provide the following legal proposition: the Court would only allow a nominal amount to be forfeited even if the contractual clauses provide otherwise unless the seller has pleaded and proved that losses have been caused to him on account of the breach of contract by the buyer. The Delhi High Court in M.C. Luthra v. Ashok Kumar Khanna¹³ was entrusted by the parties to adjudicate if the seller was entitled to forfeit the earnest money of Rs 9,00,000 as provided under the agreement on breach of contract by the buyer and noted:

18. … if there is no loss which is suffered by a seller then there cannot be forfeiture of large amounts which is not a nominal amount, simply because a clause in a contract provides so.

Outlawed approach of consumer forums: Ignoring the Fateh Chand judgment

The consumer forums, particularly National Commission taking cue from Maula Bux v. Union of India¹⁴ which was an extension of Fateh Chand¹⁵ dicta have consistently taken a stand that 10% of BSP is a reasonable amount to be forfeited as “earnest money” in string of cases such as Ramesh Malhotra¹⁶ and Ireo (P) Ltd.¹⁷ These cases authoritatively bind the subordinate forums as well. The author, however argues that the decisions rendered by consumer forums fly in the face of Fateh Chand judgment¹⁸. The Constitutional Bench in Fateh Chand¹⁹ had categorically disapproved the line of reasoning adopted by the High Court that 13% of the total consideration could be forfeited being a reasonable amount. The Bench had also discarded suggestion that even a 10% of the total consideration could be said to be a reasonable amount to be forfeited under Section 74 of the Contract Act. In substance, the Bench allowed a nominal amount to be forfeited. The author further argues that in many cases, the parties expressly provide a substantial sum in the contract termed as “earnest money”. In those categories of cases, the intention and conduct of the parties must be weighted to come to a conclusion as to whether the sum constituted an earnest money or penalty by way of stipulation. In the light of Fateh Chand²⁰, the amount stipulated to be forfeited as way of penalty in case of breach of contract, loss or damage ought to be proved. In other cases, where the aggrieved party is unable to assess or prove the damage, a nominal amount (if named “earnest money”) can be allowed to be forfeited as per jurisprudence evolved by the courts in India, more particularly in Fateh Chand²¹. The Consumer Protection Act, 2019 was enacted as a “beneficial legislation”. More so, it is incumbent on the forums to grant fruits of the beneficial legislation on the consumers. Although, that has not been the case as forums have been consistent in ordering the forfeiture of 10% of TSP which constitutes a bulk of BSP. For instance, a builder proposes to sell a unit in 2 crores. Apartment builder agreement is executed between the builder and the purchaser. During subsistence, the purchaser defaults on payment and consequently, builder forfeits 20 lakhs as 10% of TSP while cancelling the allocation. The builder, thereafter, sells the unit to prospective buyer at 2.2 crores. The instances indicate one of the many cases where builders gain unlawful enrichment at the expense of the purchasers who suffer gargantuan monetary loss. That could not have been intention of the drafters of Consumer Protection Act, 2019.