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-S Sivakumar

July - Sep 2011Quarterly in house magazine of CREDAI National

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C 0 1 10 1 P FP E TT I T I N LAWAN ANALYSIS OF THE OR DER AG AINST DLF

-MMSharmaVaibhav ChoukseEDITOR'S BOXThis piece is for each one of us. Time has come for us to seriouslyre-look at our Agreements for any clauses that may have crept inunintentionally which may have far reaching implications.BACKGROUND

n the wake of economic liberalization and widespreadeconomic reforms introduced in India since 1991and in its attempt to march from a "Command andControl" regime to a regime based on free market

principles, India decided to replace its archaic Monopoliesand Restrictive Practices Act, 1969 with a modern competitionlaw, in sync with modern and internationally establishedcompetition law principles, in the form of the new CompetitionAct, 2002 (the Act). The Act, though enacted since 2003,remained under challenge before the Supreme Court andwas amended in accordance with the directions of theSupreme Court in 2007. The Central Government notifiedselected portions relating to prohibition of "anti competitive

agreements" (Section 3) and"abuse of dominantposition" (Section 4)

on 20th May, 2009and the portions

relating to

"regulation of combinations" (Section 6) i.e. regulationof mergers and acquisitions etc. has been notified witheffect from 1st June 2011. The provisions of the Act are allencompassing and cover all sectors of our economy, includingthe real estate sector.On Friday, August 12, 2011, a tectonic incident jolted thereal estate industry. The Competition Commission of India(CCI), the competition regulator created under the Act, thatis responsible for regulating competition in markets in India,vide an Order, in Belaire Owner's Association vs. DLF Limitedand HUDA (the Order) has imposed a penalty amountingto Rs 630 crores (INR 6.3 Billion) on DLF Ltd. (DLF) for abuseof dominant position for imposing unfair conditions in theagreements entered into by the company with flat buyersand directed DLF to 'cease and desist' from formulating andimposing such unfair conditions in its agreements with buyersin Gurgaon and to suitably modify such unfair conditionswithin 3 months of the date of receipt of this order. The hugepenalty imposed on DLF is calculated at the rate of 7% of itsaverage group turnover for the last three preceding financialyears and is the heaviest ever imposed for any competitionlaw violation in India so far. CCI in the said order has also

advised the Centre as well as State Governments to comeout with a regulatory framework for the realty sector.

In a separate report published in the Media, CCIhas also hinted at the possibility of initiating suomoto (of its own motion) investigations into the

flat buyers' agreements of other builders. Inan another event, the Maharashtra State

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Consumer Disputes Redressal Commission on August 19, 2011has ordered a Pune-based builder to pay a flat buyer Rs 45lakh fora flat he purchased for Rs 6.5 lakh in 2001 but neverreceived possession.The Commission has also reprimanded the builder for creatingthird party interest by selling the same flat to another buyer. Inthe case before the CCI, it was alleged by the complainanti.e. Belaire Owner's Association, Gurgoan that DLF hasimposed "arbitrary, unfair and unreasonable conditions"on the apartment allottees which amounted to abuse of itsdominant position, in the so called relevant market for servicesof developer / builder in respect of 'high-end 'residentialaccommodation in Gurgaon. So what are these clauses thatCCI found unfair and hence "abusive" in DLF's Belaire projectagreement in the Order? There are as many as 16 of them.1. Unilateral changes in agreement and suppression of terms

by the Builder without any right to the allottees.2. Builders' right to change the layout plan without

consent of allottees.3. Discretion of the Builder to change inter se areas for

different uses like residential, commercial etc.without even informing allottees.

4. Preferential location charges paid upfront, butwhen the allottee does not get the location asked for,he only gets a refund/adjustment amount at the time oflast instalment, and that too without interest.

5. Unilateral right of the Builder to increase/decreasesuper area at its sole discretion without consultingallottees, which nevertheless are bound to pay additionalamounts or accept a reduction in the area.

6. The proportion of land on which apartment is situatedon which allottees have ownership rights shall be decidedby the Builder.

7. The Builder continues to enjoy full rights on the communitybuildings, sites, recreational and sporting activities,including maintenance, with the allottee having no rightsin this regard.

8. The Builder has sole discretion to link one project to otherprojects, with consequent impact on ambience and qualityof living, with buyers having no right to object.

9. Allottees are liable to pay external development charges,without these being disclosed in advance and even if theseare enhanced.

10 . Total discretion of the Builder regarding arrangement forpower supply and rates levied for the same.

11 . Arbitrary forfeiture of amounts paid by the allottees inmany situations..

12 . Allottees have no exit option except when the Builder failsto deliver possession within the agreed time, but evenin this case they get refund without interest, and that tooonly after the apartment is sold.

13 . The exit clause gives the Builder full discretion, includingthe right to abandon the project, without any penalty.

14 . The Builder has the sole authority to make additions/alterations in the buildings, with all the benefits flowingto the Builder, with the allottees having no say in thisregard.

15 . Third party rights can be created without allottee'sconsent, to the detriment of allottee's interests.

16 . Punitive penalties can be imposed by the Builder fordefault by allottees, but insignificant penalty for theBuilder's default.

2A ccording to the Order of CC I , DLF v iola ted S ect ion 4(2)(a)( i ) of the Act , deal ing with abuse of dominant positionby, inter alia, imposing , directly or indirectly , "unfairor discriminatory conditions or prices w ith respe ct to thepurchase or sale of goods or se rvices."

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ANALYSISThe Order of CCI in DLF case, imposing the highest penaltyever for competition law violation in India so far, is likelyto have vast ramifications in the real estate Arena in India,which is already reeling under the effects of high inflationand increased home loan rates, which has further dampeneddemand from homebuyers. There are many projects wheredelays are beyond the control of developers and if regulatorsstart imposing stringent measures, the sector will be negativelyimpacted. The DLF case might become a precedent forother such litigations to follow, which would pose a seriousproblematic situation for the industry.The decision assumes significance because, firstly, it has forthe first time in India that competition law has covered the"exploitative" nature of "abuse of dominant position" as thejurisprudence on abuse of dominant position mainly centeredaround the "exclusionary" abuses like predatory pricingor refusal to deal etc, which have an effect of excludingthe competitors, secondly, the decision has a overlap withthe well defined concepts of "unfair trade practice", whichhitherto have been deemed to be reserve for the ConsumerDisputes ,thirdly, the order has also exposed a largelyprevalent industry practice of builders appropriating thefunds raised from buyers for other projects, and finally, thedecision shows that the CCI continues to rely on internationalcase law and jurisprudence , particularly those in US andEU , while deciding cases but there remains some ambiguityon the methodology used by the CCI for the computationof the penalty, in the absence of well defined guidelinesfor imposition of such heavy monetary fines, unlike otherjurisdictions. Given the highly complex definition of whatconstitutes a "dominant position" under section 4 of the Act,which is not dependent only on market share, the Builderfraternity will need to be careful while drafting "Flat BuyerAgreements" to ensure that such violations are not repeatedso as to invite heavy Penalty.

COMPETITION COMPLIANCE - A WAY FORWARDThe real estate industry should understand that the purposeof competition law is to preserve free and fair competitionin the markets, which is in the interests of all companiesoperating in the industry and their clients as well. Competitionis necessary to achieve economic efficiency and is one of theessential conditions of a free market economy. Competitionencourages enterprises to be more efficient which reducesthe cost of products and services. This, in turn, leads to

reduction in prices and improves quality, thereby increasingthe demand for the products and services. These universalprinciples apply equally to the real estate sector. The realestate industry must, therefore, agree to voluntarily commititself to ensuring the highest standards of competition lawcompliance within the sector by adhering to the principles offair competition in all of its business practices and to ensurethat construction companies do not engage in conduct whichis anti-competitive. The flat buyer agreements, therefore,also need to be redrafted in sync with competition law ingeneral and in accordance with the provisions of the Act,in particular. For example, in the state of Maharashtra, allsuch agreements must conform to the model format prescribedunder the Maharashtra Ownership Flats Act 1963 (MOFA).Clauses 1 to 5, 8 to 13, and 22 of this model agreement arestatutory and must mandatorily form part of the agreement.Other clauses can and should be negotiated between thebuilder and the flat buyer if we are to see any semblanceof transparency in this area. In DLF case, CCI has definedthe relevant market as 'the high-end residential market inGurgaon'. Similar "relevant markets" may exist in other partsof the Delhi NCR such as in Greater NOIDA as well as inother metropolitan cities in India and in case any associationof the allottees of similar apartments were to file complaintswith the CCI, it shall have to intervene again on the basisof the precedent of the DLF case and the builders may haveto face similar penalties. The answer lies in introducing avoluntary in-house check of the clauses in the agreementsentered or to be entered with the prospective clients/buyersto make the agreements competition compliant.

Why Competit ion Compliance?Apart from causing a loss of reputation and adverse effecton the share valuation more so in the case of a publicquoted company, competition law litigation also happens tobe extremely expensive. The penalties and fines prescribedunder the Act are very high and the Act also incorporatesprovisions which, besides the liability on the company, theCCI may also fix personal liabilities on senior managementin case of even unintended violations by the employees ofthe company . More than 110 countries around the World,including neighbors like Pakistan and China, have alreadyimplemented a competition law regime; some 20 more arein the process of doing so. Competition law complianceshould, therefore, be at the heart of every business's riskmanagement strategy.

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Competition Compliance ProgramIt is therefore advisable that all companies should have a

Competition Compliance Programme (CCP) in place, whichis a multipronged tool to ensure compliance with Competitionlaw and rapid detection in case of any unintended violation.It works on the principle that 'prevention in better then cure'. Itis developed keeping in mind the specific requirements of anenterprise and has the following fundamental targets: Educating employees about the basic concepts of

competition law and about such conduct that violate it. Creating a system, which will detect any anti-

competitive conduct. Training the employees about the best practices fordealing with investigations by CCI, in case of an

unintended violation.An effective compliance programme would include impartingawareness and training to employees who may engagethemselves or are exposed to anti competitive conducts.The programme should provide for identifying possibleviolations so as to take pro-active, corrective and remedialsteps. The effective compliance not only reduces the risk ofcontraventions, but also facilitates timely detection and canbe useful in mitigating penalties by suggesting disclosure ofinformation at the first opportunity. To make the programmereally effective, a continuous review is essential. It also requirescontinuous_ backup from senior management, which shouldbe visible and reinforced from time to time.'CCP as a mitigating factor for deciding penaltiesThe presence of a well-defined CCP in enterprises has beenaccepted as a mitigating factor in determination of penaltyamounts by competition authorities in developed economiesand CCI can be no exception. In many jurisdictions, evenif a breach occurs, the degree to which an enterprise candemonstrate a genuine commitment to compliance withcompetition laws may be an important factor for considerationby the competition regulator while determining the severityof any penalties to be imposed. For example, in 2009, UKCompetition Authority (OFT) imposed a hefty fine of GBP130 Million on 103 Construction Companies. 25 companiesappealed against the fines imposed. The CompetitionAppellate Tribunal of UK, in March 2011, has reducedfines by 90 per cent in most cases as these companies wereable to demonstrate that they had an in house CCP. It is tobe noted that the parties received discount in the penalties

imposed proportionate to the percentage of their competitioncompliance program as a separate mitigating factor.However, "off the shelf" compliance programmes may notbe useful and may do more harm than good. Complianceprogrammes must, therefore, be designed under expertadvice and supervision and should be included in thecompany policy on a permanent basis.Role of Builder's Associations-International Practices: ApexBuilders associations can play a vital role in sensitizingtheir member builders on the benefits of competitioncompliance. In many other countries, responsible buildersassociations prescribe standard pro-forma contracts that areless skewed. In Australia, for example, there are three majorassociations of builders, each of which provides standardpro-forma contracts to the potential buyers for various kindsof contracts ranging from purchase of a new property toexisting property to renovation of bathrooms and kitchenin order to reasonably protect the interests of homebuyers.Recently, National Federation of Builders (NFB), a prominentbuilder's association in UK launched an industry-widecode of conduct. The code demands that UK constructioncompanies meet the highest standards of competition lawcompliance and will form a mandatory part of the NFB'scode of conduct for members. The trade and its Associations(especially when its members are rivals in market) need totake note of the "Do's and Don'ts". Similarly, under the Act,Trade Associations are not immune from the consequencesof an antitrust infringement. As a matter of fact, inquiries arealready going on against trade associations in other sectorssuch as tyres, cement, sugar etc. before CCI, for allegedlyfacilitating cartel like behavior amongst their members.Therefore, Apex Trade Associations of real-estate sector e.g.the Confederation of Real Estate Developers' Associationsof India (CREDAI), as the widely recognized apex body forprivate Real Estate developers in India, which has played animportant role in development of Indian real-estate industry,should also develop and adopt a competition friendly 'Codeof Conduct' for the betterment of its members.3 V A I S H A S S O C I A T E S , A D V O C A T E S H A V E T H E R E Q U I S I T E E X P E R T I S ET O O F F E R A " T A I L O R - M A D E " C C P .

MM Sharma (Former R egistrar In Cci) Heads The C ompetit ionLaw & Policy Practice In, Vaish Associates, Advocates;Vaibhav Choukse Is An Associate In The Competition LawTeam Of Vaish Associates. The Views Are Personal.

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