Unfair Contracts: A statutory nod to equitable law?

by | Feb 5, 2021

Supreme Court ruling on Ireo Grace Realtech Case observes unfair and oppressive real estate contracts

Recently, in Ireo Grace Realtech Private Limited v. Abhishek Khanna and Ors. (C.A. 5785 of 2019), India’s Supreme Court (the “SC”) examined the binding value of oppressive and one-sided contracts, and the recourse for affected parties under Indian consumer protection laws.

Background

The appellant, a real estate developer, had obtained permission to develop apartment towers in Gurugram and allotted various houses in the apartment towers to interested home buyers. The terms of the apartment buyer’s agreement (the “Agreement”) included payment of the amounts due in installments, termination rights, delay compensation, and other rights and obligations of the allottees and the developer. However, the developer was unable to complete and hand-over possession within the timelines prescribed in the Agreement.

The allottees approached the National Consumer Disputes Redressal Commission (the “NCDRC”) and sought a refund of the amounts paid. The developer contested this claim in part by stating that certain installments were not paid by the allottees, and therefore, the homebuyers were in breach of the Agreement.

The NCDRC, in its order, considered the terms of the Agreement as wholly one-sided and unjust. In addition, it ruled the Agreement’s terms as an unfair trade practice and allowed the allottees to claim a refund of the amounts paid so far. Thereafter, the developer approached the SC to, inter alia, overturn the verdict of the NCDRC regarding the validity and binding value of the apartment buyer’s agreement. The developer contended that the NCDRC had been given the powers to assess the fairness of a contract only under the recent Consumer Protection Act, 2019 (the “2019 Act”), and not under the erstwhile Consumer Protection Act, 1986 (the “1986 Act”). Therefore, its verdict was without any basis in relevant law.

The SC’s decision

The SC reviewed the terms of the Agreement and noted that there was a significant disparity in the rate of interest that had to be paid by the allottee to the developer in the event of a delay in payment of installments by the allottee, as compared to that payable by the developer for a delay in handing over possession. Further, the SC noted that the allottee’s termination rights included deductions and a refund of the installments paid by the allottee only after the apartment was sold by the developer to another person at a future date. In contrast, the allottee was allowed to terminate the Agreement only in specific situations, and upon a refund of the installments by the developer within ninety (90) days, the allottee would relinquish all legal claims against the developer.

Under the 1986 Act, any trade practice that adopted unfair methods or unfair practices for providing goods or services was regarded as an unfair trade practice. The SC held that the terms of the Agreement were clearly oppressive and one-sided, and therefore, constituted an unfair trade practice for the purpose of selling flats, and granted compensation to the homebuyers. Further, the SC also held that the NCDRC’s power to declare any contractual terms as unfair under the 2019 Act was derived from its powers to discontinue any unfair trade practices under the 1986 Act.

Analysis of the case

This verdict follows another recent SC division bench decision in Pioneer Urban Land & Infrastructure Limited v. Govindan Raghavan and Ors (AIR 2019 SC 1779.) The facts being similar to the Ireo Grace Realtech case, the SC interpreted one-sided clauses in contracts as unfair trade practices and held that terms of any contract framed by a builder will not be binding if it can be demonstrated that the flat purchasers had no leeway to negotiate the terms of the contract.

In these decisions, the SC has implicitly relied on the principle of equity developed under common law to ensure that the freedom of parties to freely contract is not abused by unfair and unconscionable terms agreed between unequal parties, which has been upheld in a number of cases.

In the case of Superintendence Company of India Private Limited v. Shri Krishan Murgai (AIR 1980 SC 1717), the SC noted the difference in bargaining powers between an employer and an employee to void a restrictive clause after the termination of the employment agreement.

The principle of equity and the role of courts for parties that are economically weaker or have lesser bargaining power was further elaborated in Central Inland Water Transport Corporation Limited v. Brojo Nath Ganguly and Ors. (AIR 1986 SC 1571), wherein the SC derived its power from Section 23 of the Indian Contract Act, 1872 (the “Contract Act”) to strike down unconscionable and unreasonable terms of an employment code of conduct.

The Indian judiciary has approached standard form contracts as typically entered into between unequal parties. If these contracts contain any patently unfair and unreasonable terms, such terms are opposed to public policy and can be declared void under the Contract Act. However, courts have held that the determination of what terms are unreasonable or unconscionable is to be made on a case-by-case basis. The introduction of the 2019 Act provides clarity going forward for the protection of consumers against unfair contracts.

Introduction of the 2019 Act

Under the 2019 Act, any contract by a manufacturer, trader or service provider with a consumer containing terms that cause a significant change in the consumer’s rights is an unfair contract. These terms can include excessive security deposits, disproportionate penalties to the losses incurred under the agreement, unilateral termination without reasonable cause or assignment by a party, or imposing unreasonable obligations that put the consumer at a disadvantage. Unfair contracts can be declared null and void under the 2019 Act by the NCDRC and the State Consumer Dispute Redressal Commissions.

This provision has been introduced to provide statutory relief to consumers who are forced to accept standard terms and conditions from real estate, financial, banking, insurance and any other services providers. With traders and service providers offering ‘take it or leave it’ terms of services to consumers across India, statutory recognition of the power to declare unfair contractual terms as void, benefits consumers who have no bargaining power. Companies in the insurance and financial services sectors must take due care to ensure that the terms provided to consumers are not excessive, disproportionate or unilateral in nature. The way forward is to level the playing field with consumers and operate with fair and reasonable terms.

About the Author

Neerav Merchant Author Majmudar & PartnersNeerav Merchant, Partner at Majmudar & Partners has over 22 years of experience in dispute resolution, arbitration, litigation, enforcement of foreign judgments and awards, asset recovery, technology and telecommunication, intellectual property, employment, anti-corruption, and real property matters.

He regularly speaks at several international forums, including seminars and conferences hosted by Asian Legal Business, International Bar Association, and Law Society of England and Wales. He is on the panel of arbitrators of Mumbai Centre for International Arbitration.

Read more about him here.

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