Impact Of The Recent CCI Order Modifying Buyers Agreement In The DLF Case

Article by MM Sharma, Head Competition Law & Policy Practice, Vaish Associates, Advocates

BACKGROUND

In the wake of economic liberalization and widespread economic reforms introduced in India since 1991 and in its attempt to march from a "Command and Control" regime to a regime based on free market principles, India replaced its archaic Monopolies and Restrictive Practices Act, 1969 with a modern competition law, in sync with modern and internationally established competition law principles, in the form of the new Competition Act, 2002 (the Act). The Act, though enacted in 2002, remained under challenge before the Supreme Court and was amended in accordance with the directions of the Supreme Court in 2007. The Central Government notified selected portions relating to prohibition of "anti competitive agreements" (Section 3) and "abuse of dominant position" (Section 4) on 20th May, 2009 and the portions relating to "regulation of combinations" (Section 6) i.e. regulation of mergers and acquisitions etc. has been notified with effect from 1st June 2011. The provisions of the Act are all encompassing and cover all sectors of our economy, including the real estate sector. The Act is to be enforced thorough the Competition Commission of India ("CCI"), which has replaced the MRTP Commission since October, 2009.

Acting on a complaint filed by the Owners' Association of one of the DLF building "Belaire" in Gurgaon, in the case of Belaire Owners Association ("Informant') vs. DLF Limited & Ors. ("Opposite Parties")' , the CCI pronounced DLF Limited ("DLF") guilty for grossly abusing its dominant market position in the concerned relevant market and imposing unfair conditions in the sale of flats/apartments to home buyers/consumers in contravention of the provisions of the Competition Act, 2002 ("Act"). The CCI imposed a penalty of INR 6,300 million (USD 140 million), at the rate of 7% of the average turnover of DLF for the last three financial years and issued a 'cease and desist' order against DLF from imposing such unfair conditions in its agreements with buyers for residential buildings to be constructed in Gurgaon.

1. Background of the case

DLF announced the launch of a Group Housing Complex, known as The Belaire' consisting of 5 multi-storied residential buildings to be constructed in DLF City, Gurgaon, Haryana. In accordance with the initial plans/advertisements, each of the five multi-storied buildings would consist of only 19 floors with a total of 368 apartments to be constructed within a period of 36 months. However, it imposed highly arbitrary, unfair and unreasonable conditions on the Informant.

The CCI after considering the information provided by the Informant held that a prima facie case existed and directed for an investigation by the Director General ("DG"). The CCI's view was challenged by DLF on the grounds of jurisdiction before the Competition Appellate Tribunal ("COMPAT"), although the same was subsequently dismissed. The DG after conducting an in-depth investigation held that the Act was applicable in the instant case and delineated the relevant market on the basis of services provided by developers for construction of 'high end buildings' in Gurgaon. The DG analyzed the dominant position of DLF by placing reliance on each of the factors as mentioned in Section 19 (4) of the Act and held DLF to be abusing its dominant position.

2. Informant's Submissions

The Informant submitted that DLF had used its position of strength in dictating the terms of the Apartment Buyers Agreement ("Agreement') and imposed unilateral and one-sided clauses. DLF had excluded itself from any obligations and liabilities; and on the contrary has compelled the Informant to agree to all the terms of the Agreement in toto. The Informant has alleged that the various clauses of the agreement and the action of DLF pursuant thereto are prima facie unfair and discriminatory, thus attracting the provisions of Section 4 (2) (a) of the Acts.

3. Order of CCI

CCI dealt with each of the above issues individually:

Issue 1: Applicability of the provisions of the Act to the facts and circumstances of the instant case;

Whether 'sale of apartment' would constitute 'service' under the Act?

With respect to the primary issue whether sale of apartment amounts to sale of goods or services, CCI held that the term 'service' needs to be analyzed under the provisions of the Act. Pursuant to this, CCI heavily relied on jurisprudence laid down by the Monopolies and Restrictive Trade Practices Commission to determine the definition of service. Additionally, the CCI also placed reliance on several Supreme Court judgments' to conclude that housing activities undertaken by development authorities are considered as services and covered within the definition of service as provided under section 2 (o) of the Consumer Protection Act, 1986. Relying on the definition of service under the Consumer Protection Act along with section 2(u) of the Act, CCI held that "it is clear that the meaning of 'service' as envisaged under the Act is of very wide magnitude and is not exhaustive in application, thereby including the activities undertaken by DLF within its ambit."

Whether provisions relating to abuse of dominant position can be applied retrospectively?

Looking into the aspects of applicability of the Act to agreements entered prior to the coming into force of the Act. the CCI relied on the recent judgment passed by the Bombay High Court in the matter of Kingfisher Airlines Ltd. vs. CCI and held that the Act applies not only to all existing agreements but also covers those agreements, entered into prior to the coming into force of the provisions under the Act, and implemented now. In the instant case, the agreements, although were entered between DLF and the allottees before the Act came into force, they remained operational even after the said date. Therefore, if DLF acting under the clauses cancels allotment under the agreement, which are now prohibited by the Act, such action can certainly be examined under the relevant provisions of the Act.

Why industry practice cannot be used as defense?

With regard to the issue of clauses adopted as per industry practice, the CCI held that industry practices emanate from market leaders and are followed by the rest. Market leaders are not constrained by practices adopted by minority players or require incorporation of arbitrary clauses in the agreement. DLF being the market leader in the real estate sector and in the relevant market in particular it was held to be enjoying a dominant position. The CCI upheld "in terms of section 4 the responsibility of the dominant player has been made more onerous and if such practices are also adopted by a non-dominant player it may not fall within the ambit of section 4". Further, DLF's contention that it had incorporated impugned conditions to meet the competition was also set aside.

Issue 2: Determination of Relevant Market

Relevant product market: With respect to the issue of relevant product market, CCI referred to the DG report, which described the nature of service provided by DLF in the instant case as services by developer / builder in respect of 'high-end' residential building in Gurgaon and held that although there can be no hard and fast rule to determine what constitutes 'high-end', the same needs to be determined on the basis of facts and circumstances of each case. 'High-end' is not a function of size alone but includes a complex mix of factors such as size, reputation of location, characteristics of neighbors, quality of construction and actual customers and their capacity to pay.

Relevant geographic market: The CCI after considering several factors including local specification requirements and consumer preferences held that the relevant market is the market for services of developer/builder in respect of high-end residential accommodation in Gurgaon. A decision to purchase a high-end apartment in Gurgaon is not easily substitutable by a decision to purchase a similar apartment in any other geographical location.

The CCI's scope was limited to the extent of purchasing power of average citizens and small increase in prices was immaterial in such cases. The CCI relied on the CMIE data as available in the public domain and refused to place reliance on the JLLM report by concluding that high end residential apartments in Gurgaon would constitute the relevant market.

Issue 3: Determination of Dominance

It was held that DLF had the highest market share (45%), vis-a-vis the market share of the nearest competitor (19%) which was more than twice of its competitor, leading to hardly any competitive constraints. Further, DLF had a clear early mover's advantage and occupies a leadership position as real estate is a sector with natural entry barriers due to high cost of land and brand value of incumbent market leaders. The CCI while analyzing several factors held that DLF due to its level of vertical integration, presence in real estate sector and financial strength was way ahead of its competitors. The market having low level of concentration, DLF faced negligible threat from its rivals.

Issue 4: Determination of Abuse of dominance by DLF

The final and the most significant issue was to determine whether the acts done by DLF amounts to an abuse of dominant position by them. The abuse was alleged to be committed by imposing unfair conditions on the buyer by the through the Provisional Booking agreement, which is signed by the buyer after having paid substantial costs, therefore, leaving no option to the buyer to object to loop-sided provisions of the agreement. The malpractices in the Agreement were present in several clauses as have been analyzed subsequently.

The CCI also recommended that Central Government and State Governments should come out with real estate regulations for ensuring overall consumer welfare and to discourage unfair trade practices prevalent in the sector.

4. Appeal before Competition Appellate Tribunal

CCI vide order dated 12.08.2011, besides imposing penalty of Rs. 630 Crores on DLF Ltd. under section 27(b) of the Act, also passed the following directions under section 27(a) of the Act:

1. To cease and desist from formulating and imposing such unfair conditions in its Agreement with buyers in Gurgaon.
2. To suitably modify unfair conditions imposed on its buyers as referred to above, within 3 months of the date of receipt of the order.

The said order of CCI was challenged by DLF on several grounds by filing appeals before the Competition Appellate Tribunal ("COMPAT").

COMPAT after the hearing the matter on 09.11.2011, granted stay against the orders of CCI imposing penalty under section 27(b) of the Act subject to DLF furnishing an undertaking to pay 9% interest on the amount of penalty to be determined by COMPAT for the period from the date of order by CCI till the date of payment by DLF. Regarding the direction at serial no. (ii), COMPAT ordered that the directions of CCI for modifications of terms of the Agreement shall remain in abeyance. However, the direction of CCI at serial no. (i) to "cease and desist" with the implementation of the Agreement was not stayed. On the next date of hearing i.e. on 29.03.2012, COMPAT, remanded the matter, along with the draft modified terms and conditions submitted by the parties, to CCI, for determining the manner and extent in which the Agreement needs to be modified, under section 27(d) of the Act, after considering the drafts modified Agreements submitted by the parties.

Accordingly, CCI after prolonged hearing of parties on the modified terms and conditions suggested by both sides, vide its order dated 03.01.2013 has modified the standard terms and conditions of the flat buyers agreement in a detailed order, which seems to have created a stir amongst the real estate sector as to whether these terms and conditions suggested by the CCI would apply to all builders flats in respect of the respective flat buyer agreements?

5. Impact of recent CCI order modifying the Buyers agreement

The recent order dated 03.01.2013 by CCI in the DLF case is not applicable to the flat buyer agreements of the other builders. The order is in the nature of a final order by CCI under section 27(d) of the Act which is still subject to challenge by DLF and the informant Bellaire association in the pending appeal before COMPAT.

In this order, CCI has tried to remove the unfair and one sided clauses in the Flat Buyer Agreement which were till now common to most of similar agreements of other builders, at least in North India. The broad salient features of the modifications suggested are –

1. Making time an essence of contract for both parties, which was earlier meant only to be complied with by the buyers by making timely payment of installments to the builders or to face penalty by heavy interests etc. There was no corresponding obligation upon the builder to follow the schedule for construction of the flat. – Please refer to clause 8 and 10.1;
2. Listing out the events of defaults and consequences thereof even for the builder which was conspicuously absent in the original agreement. The list, for the first time, prescribes identifiable milestones of construction, even though, admittedly, specific timelines are not provided (and perhaps were also difficult to be provided)- Refer to clause 12 ;
3. Rejection of the right of the company to make additional constructions – Refer to clause 22;
4. Curtailing the right of the builder to nominate either the RWA or a maintenance agency "at its sole discretion" and to force a tripartite agreement upon the apartment owners or the RWA and empowering the RWA to modify and even cancel the said tripartite agreement – Refer to clause 14.1;
5. Simplifying the extra ordinarily large clause regarding use of common areas by the flat owners (Refer to clause 1.7) and deleting the clause which excluded the ownership rights right of usages etc. of the land areas, facilities and amenities etc. from the scope of the agreement (Refer to clause 1.8).

Let me now try to remove some commonly held misconceptions about this recent order by CCI –

Q. Assuming COMPAT approves the changes, will this set a precedent? Will other realty players modify their agreements too?

Ans. If COMPAT approves the modifications suggested by CCI without any major changes, after hearing DLF on each modification, it may for some time cause some flutter in the builders community but it will not form a legal precedent since DLF can and will still challenge the order of COMPAT before the Supreme Court. It is only the decision of the Supreme Court which can set a precedent. It may not automatically bind other builders to change their agreements since they will not be parties in the particular case unless the Supreme Court order so directs.

Q. How will this impact the industry at large?

Ans. It's only in case the Supreme Court directs all the builders to modify their agreements or declares agreements contrary to the "modified agreement" as may be agreed upon by the Supreme Court after a hearing of both sides, then it will affect the industry in a big way. There upon the industry will, in my view, have to become per force "overtly friendly to the customers" and may stop any exploitative business practices.

Q. How can the consumer be assured of a transparent regime? Unless there is a regulator, how can this be enforced? DLF was a unique case in which the CCI could nail them. Not in all cases can market dominance can be proved as illustrated by several cases in CCI itself. Is CCI actually emerging as a de facto regulator for the real estate sector also?

Ans. CCI is not a panacea for all ills affecting the real estate sector, which badly needs a sector regulator. Unfair conditions in the buyer agreements of all builders cannot be successfully challenged by the buyers unless the particular builder holds a dominant position in the relevant product and geographic market. This is one of the main grounds of appeal of DLF that CCI has not conducted the necessary economic analysis to determine the correct relevant geographic market and its finding about DLF being in a dominant position within the relevant market of the high end apartments, which was confined to Gurgaon by CCI, is not correct. Incidentally, CCI itself has closed a large number of cases, including one against DLF itself in Chennai, on ground of absence of dominant position in the relevant markets. However, till the time an effective real estate regulator, like SEBI for investment protection, emerges, CCI will continue to attract attention of the common flat buyers from the middle class.

In the end, I may add that the public need to be now more cautious while responding to the lucrative advertisement given by the prominent builders' day and day out. There is very little awareness about the reach of the competition law in the common public which is one of the reasons for a plethora of complaints filed before CCI by most of the flat buyers which were mostly closed by CCI. It is important to be informed that the objective of competition law is not for the welfare of the individual consumer but for the protection and promotion of competition in the relevant markets which in the longer run ultimately benefits consumers as a group by providing wider choice of services, better quality of products and services and cheaper prices for the same. In addition, competition law also aims to provide a level playing field to all the players in the market, thereby preventing exercise of market power either by the dominant players or by smaller players coming together as a cartel.

© 2013, Vaish Associates, Advocates,
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