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Provide service in earnest

Often, when you apply for a flat or a plot, you are asked to make a certain initial payment as earnest money. You are told that you will forfeit that amount if, after the allotment, you withdraw or express your unwillingness to go ahead with the purchase. The intention here is basically to bind the purchaser to the contract and ensure that once an allotment is made, the applicant does not change his mind and withdraw from the scheme, thereby disrupting the entire allotment process.

In other words, the forfeiture of the earnest money is, in a way, a penalty imposed on the consumer for failing to keep his side of the bargain. Now what if the seller or the service provider himself violated the terms and conditions?

In an order of far reaching significance, the highest consumer court in the country recently held that “on principles of equity and fair play, a party at fault cannot enjoy the benefits of its own fault”. In other words, it held that a party or a service provider that does not fulfil its part of the contract, cannot bind the other party to the terms of the contract.

The issue here was about the forfeiture of the earnest money paid to the Punjab Urban Planning and Development Authority (Puda) by the consumer, Shakuntla Devi Saini. Declining the plot allotted to her on the ground that Puda did not follow the declared procedure and ask for her preference, she sought return of Rs 50,000 paid as earnest money.

While upholding her right to get back the money along with interest and a compensation of Rs 20,000, the National Consumer Disputes Redressal Commission drew a distinction between the order of the Supreme Court in the case of Huda vs Kewal Krishan Goel and the present case. The Supreme Court had held in that case that the earnest money is a part of the purchase price when the transaction gets through and the same is forfeited when the transaction falls through by reason of the default or failure on the part of the vendee. In this case, however, Puda itself did not follow the rules of allotment drawn up by it. So Puda, which was at fault, cannot deny the earnest money to the party which was not at fault, the commission said (Puda vs Mrs Shakuntla Devi Saini, RP No. 1490 of 2008).

The order of the apex consumer court in this case would apply to all contracts where the service provider does not stick to his side of the deal.

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