Wednesday, May 28, 2014

Guest Post: COMPAT upholds CCI order in DLF Belaire Owners Association Case

[The following post is contributed by Vaibhav Choukse, Senior Associate - Competition Law and Policy, Vaish Associates Advocates. Views are personal.]

Introduction

On May 19, 2014, in a landmark order, the Competition Appellate Tribunal (“COMPAT”) upheld the order of the Competition Commission of India (“CCI”) imposing a record penalty of INR 630 crores (USD 140 million) on DLF Limited (“DLF”) for abusing its dominant position (“COMPAT Order”). Based on a media report, the allottees are planning to move the COMPAT to file compensation claims under Section 53-N of the Competition Act, 2002 (the “Act”).

The COMPAT observed that the “Competition Law must be read in the light of the philosophy of the Constitution of India, which has concern for the consumers and the dominant player in the market has a special duty to be within the four corners of law.”

Background

On the basis of information filed by Belaire Owners’ Association, an association formed by the apartment allottees of a DLF building, the CCI found DLF guilty for abusing its dominant position in the market for services of developer/builder in respect of high-end residential accommodation in Gurgaon in contravention of Section 4 of the Act. The CCI imposed a penalty of INR 630 crores (USD 140 million), at the rate of 7% of the average turnover of DLF and issued a cease and desist order against DLF from imposing unfair conditions in the Apartment Buyer's Agreement (“ABA”) executed between DLF and allottees. CCI also directed DLF to suitably modify the terms of the ABA.

Following the order of CCI, DLF moved to COMPAT challenging the findings of the CCI. During the pendency of appeal, COMPAT directed the CCI to furnish a suitably modified ABA post consideration of the draft modified terms submitted by DLF and Association. Following the directions of COMPAT, the CCI suitably modified the abusive clauses of ABA.

Findings of the COMPAT

COMPAT has, inter alia, made the following observations:

Issue I: Jurisdiction of the CCI

The CCI was right in assuming the jurisdiction on the basis of the definition of the term ‘service’ in Section 2 (u). The term ‘service’ as contemplated in Section 4 has a direct relation to Section 2 (u), which provides for the ‘service’ of the nature which is being provided by DLF i.e. real estate & construction.

Issue II: Retrospective Operation of the Act & Applicability of Kingfisher Judgment

Retrospective Operation of the Act: Section 4 is not retrospective in operation. Section 4 (2) (a) will only attract if there is an imposition of unfair or discriminatory condition or price. In 2006-07, when the Section 4 was not in force, the allottees entered into ABA voluntary without any element of coercion and hence, there was no imposition of any condition in the ABA by DLF.

Applicability of the Kingfisher Judgment: COMPAT rejected CCI’s approach in examining the clauses of ABA and observed that all acts done in pursuance of the agreement before the Act came into force would be valid and cannot be questioned. But if the parties want to perform certain acts in pursuance of the agreement, which are now prohibited by the Act, then those acts would be illegal. No provision in the Act permits the re-writing of the agreements. If DLF acted in pursuance of ABA, which was contrary to the Act, then CCI could have taken an exception to those ‘acts’, but not to the ‘clauses’ of ABA, which were valid. Also, the continuation of the agreement after May 20, 2009 by itself would not attract the mischief of the Act, unless there was some act in pursuance of those clauses, which were not contemplated in the agreement and would, therefore, amount to an imposition of condition.

Moreover, the CCI cannot direct modification of the ABA. The power to modify agreements lies under Section 27(d). Only the agreement under Section 3 (anti-competitive agreements) can be ordered to be modified under Section 27(d), since, Section 27 speaks about ‘action’ when it speaks about contravention of Section 4.

Issue III: Relevant Market and Dominant Position of DLF

Relevant Market: The CCI market definition was correct i.e. services of developer / builder in respect of high-end residential accommodation in Gurgaon. On the issue of Geographic Market, it was observed that, the residential housing is not connected with investment. Ordinarily, for a common man, basic need is food, other amenities of life and a property to reside, as that creates a sense of security in his mind. If that is so, it will be futile to examine the question only from the angle of investors.

Dominance: The CCI’s reliance on the CMIE (Centre for Monitoring Indian Economy Private Limited) data over other data/ reports available while assessing market share (55%) of DLF was correct. DLF’s market share was more than double of its next biggest competitor, Unitech. DLF is a market leader and enjoy a unique position as it lay down the rules of the game, which power/strength it exercises in its favor to the potential detriment of its competitors and consumers' interests.

Issue IV: Abuse of Dominant Position by DLF

COMPAT did not consider any ABAs executed after May 20, 2009 and restricted the inquiry only to the ABAs executed in 2006-2007 against which the information was filed with the CCI. COMPAT only focused on the actions taken by DLF pursuant to ABA, post May 20, 2009.

ABA authorizes DLF to increase the number of floors by constructing additional floors, but this imposition of additional construction without intimation & consent from allottees and without prior approval from the Government Authority amounts to abuse of dominant position by DLF.

The DLF offer to the original allottees regarding moving to a higher floor is discriminatory vis-à-vis other allottees. It is against Article 14 of the Constitution of India and Section 4(2) (a) (i) of the Act.

Unilateral increase in the super area and holding charges by DLF was in breach of the ABA and amounted to abuse as DLF was well aware that allottees had no other choice, but to accept the same. The only option left with the allottees was to exit the scheme, which was unimaginably costly.

Issue V: Quantum of Penalty and Role of Government Departments

CCI has given sufficient reasons for imposing the penalty of INR 630 crores on DLF. Further, COMPAT severely criticized DTCP (Town & Country Planning Department, Haryana) for remaining blissfully ignorant about the illegal conduct and for not taking any action against DLF.

Analysis  

The COMPAT Order sends a strong signal to both the real estate industry and the state-level government authorities, and may even expedite the process of establishing a real-estate regulator by the new government. 

The COMPAT Order assumes significance because, firstly, it is one of the initial cases of the CCI and COMPAT which dealt with ‘exploitative’ nature of abuse (exploiting customers) as the jurisprudence on abuse of dominant position mainly centered on the ‘exclusionary’ abuses like price predation or refusal to deal etc., resulting in the exclusion of a competitor from the market. Secondly, the COMPAT recognizes the principle of ‘special responsibility of a dominant enterprise’. This principle had been laid down by European Court of Justice in the Michelin Case in 1983. It means that a firm in a dominant position has a special responsibility not to allow its conduct to impair undistorted competition on the market. Thirdly, COMPAT confirmed the approach of the CCI on penalty, unlike the cases in the past where COMPAT has substantially reduced the penalty imposed by the CCI.

At present, the CCI is investigating more than 70 real-estate companies for alleged cartelization. In the wake of the COMPAT Order, the real estate industry must agree to voluntarily commit itself to ensuring the highest standards of competition law compliance within the sector by adhering to the principles of fair competition in all of its business practices. In this regard, Apex Builders Associations like CREDAI can play a vital role in sensitizing their member builders on the benefits of competition compliance.  In many other countries, responsible builders associations prescribe standard pro-forma contracts that are less skewed. For example, in Australia, there are three major associations of builders, each of which provides standard pro-forma contracts to the potential buyers for various kinds of contracts ranging from purchase of a new property to existing property to renovation of bathrooms and kitchen in order to reasonably protect the interests of homebuyers. Recently, National Federation of Builders (NFB), a prominent builders association in United Kingdom launched an industry-wide code of conduct. The code demands that UK construction companies meet the highest standards of competition law compliance and will form a mandatory part of the NFB’s code of conduct for members. It is time that real-estate developers fastened their best practices to responsible compliance with the Competition Act.

- Vaibhav Choukse

4 comments:

Anonymous said...

How is Article 14 relevant to the discrimination by DLF?

Anonymous said...

Thanks Vaibhav for the summary. I represent Belaire Owners Association who fought this case together with Park Place and Magnolias Associations. We urge real estate industry bodies to come together and look at the woes their customers are facing. The number of cases are piling up in various forums not just CCI. They need to come up with a balanced model contract that their members must follow. Right now they are busy paying big bucks to their lawyers to see that they are not impacted and that customers remain the ultimate sufferers. They are still missing the point.

Anonymous said...

I guess, COMPAT has given a one line comparison between Art 14 (Right to equality) & Section Section 4(2) (a) (i) which prohibit a dominant player for applying dissimilar conditions to equivalent transactions.

COMPAT observed that "It is well known in law that where a provision could enable an authority to discriminate, such
provision itself is bad. On the touchstone of Article 14 of the Constitution, as also in the specific language of section 4(2)(a) of the Act."

Bangalore said...

DLF & other big builders in India are high-headed. High time to form a real estate regulator. In fact, according to the blog and ET news, CCI in investigating many builders for cartel as they have same contract terms. Our association in Karnataka has information that Investigation wing of CCI has found few big builders indulge in cartel like activity. and the investigating officer has informed CCI about it. Builder associations should do something like Australia & UK, as rightly mentioned in the post.