Flat purchase agreements no longer one-sided game

By Pritvish Shetty and Vistasp Irani, Vidhii Partners

When signing an agreement, it would be fair to presume that an individual reads, understands and vets the terms and conditions set forth in the document. Otherwise, it would be impossible to prove the intention and conduct of parties to a contract, unless there is a subsequent allegation of force or fraud.

The Supreme Court has upheld this principle in the case of Grasim Industries Ltd & Ors v Agarwal Steel (2010), more so in the case of commercial transactions. The terms and conditions of a commercial contract, which may seem biased by its mere construction, would be enforceable, considering that businessmen are capable of looking out for their own interests and foreseeing the risks and ramifications of the terms and conditions.

Flat purchase agreements
Pritvish Shetty
Vidhii Partners

However, such an interpretation would not be justifiable in an agreement between parties, where one party has a higher bargaining power than the other.

In the current scenario, when an individual seeks to purchase a flat, the flat purchaser is often subjected to the terms and conditions of a standard form agreement prepared by the developer.

Considering that the flat purchasers lack bargaining power, they seldom have the choice of altering or amending the terms that are drawn up in advance, and are aimed at benefitting the developer. The only options left with the buyers are either agree to the terms, however unreasonable they may seem, or to pass up the opportunity to buy their desired house.

Would it then be appropriate to apply the principles laid down under the Grasim Industries ruling to flat purchasers subjected to such unfair terms?

Fortunately, the Supreme Court has time and again come to the rescue of such aggrieved individuals with respect to the enforceability of such one-sided terms in a contract.

Flat purchase agreements
Vistasp Adil Irani
Vidhii Partners

In the case of Central Inland Water Transport Corporation Limited v Brojo Nath Ganguly (1986), the Supreme Court had laid down the principle that courts ought to strike down unfair and unreasonable clauses, when there is an apparent disparity in the bargaining power of one of the parties to such an agreement, where the weaker party has been subjected to such unfair and unreasonable terms.

Concurring with the full bench, the Supreme Court, in the case of Balmer Lawrie & Co & Ors v Partha Sarathi Sen Roy & Ors (2013), has enunciated further on the necessity to strike down unfair and unreasonable terms within a contract between parties who do not have equal bargaining power as they are affected by section 23 of the Indian Contract Act, 1872.

Following from this, it would not be incorrect to suggest that, where inequality of bargaining power arises from an arrangement where the weaker party would not be in a position to obtain the desired services without first subjecting itself to unreasonable, unfair and unjustified terms within an agreement, such terms would fall under section 23 of the Contract Act as being unlawful and void.

This was recently confirmed by the Supreme Court in the case of Pioneer Urban Land & Infrastructure Ltd v Govindan Raghavan (2019), where it was upheld that unreasonable terms in a contract will not be binding if it can be demonstrated that “the flat purchasers had no option but to sign on the dotted line”.

They further broadened the scope of an “unfair trade practice” under section 2(r) of the Consumer Protection Act, 1986, by including one-sided terms or clauses within the definition.

Would the recent developments give room for flat purchasers to negotiate such unfair and unreasonable clauses in standard form agreements prepared by developers, before execution? The authors do not believe that it would be the case, considering the norms and trade practices in the real estate sector.

But they definitely deliver a strong message to developers that the consumers shall be protected from unreasonable terms. It would be apt to conclude with Justice Ameer Ali’s holding on such unfair contracts in the case of Bengal Agency and State Syndicate v T N Khanna (1949) to shed some light on the reality of these situations: “A contract which reserves to the seller complete liberty or latitude to deliver or not to deliver or to make the contract… is not a contract at all – not a contract, but a carrot used for the purpose of attracting that useful animal, the buyer.”

Pritvish Shetty and Vistasp Irani are associates at Vidhii Partners.

Flat purchase agreements

Vidhii Partners
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Ballard Estate
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New Delhi | Kolkata | Bengaluru
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Email: vidhii.mumbai@vidhiipartners.com
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