Among the initial orders of the Competition Commission of India (CCI) was one against the real estate major DLF, which was accused of an abuse of dominance by Belaire Owners Association. DLF appealed against the order in the Competition Appellate Tribunal (Compat); the latter gave top priority to resolve the case by the end of September this year. A full year has now passed since the original CCI order. The outcome has implications for similar projects.
To briefly recapitulate, a group housing complex called Belaire consisting of five multi-storeyed residential buildings was to be built in DLF City, Phase V, Gurgaon, Haryana. According to DLF’s advertisement, the five buildings were to consist of 19 floors with 368 apartments in total, and construction was to be finished within 36 months. In fact, 29 floors were built, the number of apartments was increased to 564 and construction and delivery were delayed by two years.
The association of apartment owners in the Belaire complex filed a complaint with the CCI alleging that various clauses of the Apartment Buyer’s Agreement (ABA) signed with DLF were arbitrary, unfair, unreasonable and had adverse effects on their rights. The association also argued that DLF’s actions were discriminatory and, per se, its conduct constituted an abuse of dominant position. In particular, DLF had violated Section 4(2)(a) of the Competition Act, 2002.
The CCI in its main order concurred with this view and directed DLF to cease and desist from formulating and imposing unfair conditions in its agreements with buyers. It also imposed a penalty of Rs 630 crore on DLF.
Although there are some anti-competitive provisions in the Belaire ABA, these violate Section 3 of the Competition Act rather than section 4 and do not constitute an abuse of dominance because they have nothing to do with DLF’s market power. Rather, agreements like this one are the industry norm, among most large builders. They are partial proof that such agreements have nothing to do with the market power of DLF – as DLF itself has argued – and take place because of the nature of the construction business and the tardiness of the judiciary in India.
This is not to imply that there are no problems with the agreements used in the industry, but it is largely in contravention of the Contracts Act, 1872, rather than the Competition Act.
Note that an initial provision in the Belaire agreement states that DLF has “the absolute right to reject and refuse to execute any ABA without assigning any reason, cause or explanation to the intending allottee”. The relation between DLF and the allottee is a vertical one between a producer and a downstream buyer. Such a provision is a “refusal to deal”, a violation of Section 3(4)(d) of the Competition Act. This provision states that any two persons who have the financial wherewithal must be treated equally under the law, unless there are some legitimate grounds for doing so, which must be determined under a rule of reason. For instance, DLF may not wish to sell apartments to people with a proven criminal record on grounds that it will destroy the character of the complex. Clearly, Section 3(4)(d) is fundamental to a market economy so the offending provision in the ABA needs to be removed.
On the Contracts Act, a necessary first issue to take up is the poorly defined nature of the Belaire ABA. The Contracts Act requires agreements to clearly specify the object contracted for and delivery time; without these, such contracts may not constitute an agreement at all. By definition 2(e) of the Contracts Act, every promise and set of promises, forming the consideration for each other, constitute an agreement. A promise by definition 2(b) is a proposal made by the promisor that has been accepted by the promisee.
So, when DLF offers an apartment – of particular size and specification – and facilities, it is making a promise when the offer is accepted by signing the ABA. By definition, an agreement requires the promisee’s agreement to be an agreement at all. In the Belaire ABA, however, DLF reserves the right to change the promise without requiring the allottee’s consent!
This pattern of action recurs through the agreement. In representation E, DLF reserves the exclusive right to change the number of zones and their earmarked use from residential to commercial. In representation F, DLF can reduce unilaterally the land of 6.67 acres earmarked for the apartments, subject to the approval of the layout plan by the civic authority concerned. Such statements violate the basic definition of an agreement.
In any long-term contract to buy a residence, activity such as permissions to build, construction, sale and purchase take place concomitantly. This exigency, along with the prohibitively high costs of writing a contract covering every possibility, results in missing provisions and ambiguity. For instance, permissions may not have been obtained, there may be technical reasons for making changes, the builder may want to make changes within his rights or for safety reasons hitherto overlooked.
In the case of the Belaire ABA, the apartment buyer was sold an apartment, fully specified, but the rights to the roof on which the extra 10 floors were built had not been sold to the allottees. On the other hand, building extra apartments reduces the existing apartment owners’ pro rata share, which is clearly mentioned in another provision as the property of apartment owners. There is a missing provision or unspecified property right here, which creates ambiguity.
While an apartment buyer has been sold the use of the common areas, no density has been specified as to the number of people per square foot who will occupy the common areas. There is, again, an issue of property rights. To illustrate, suppose the entire apartment complex had to be sold. The apartment owners would get their pro rata share of the land under their respective apartments in addition to the value of their apartments. But to whom does the value of the other common areas accrue? Not only is the ownership of the common areas unspecified in the ABA, because DLF reserves the right to change these at will by representation E and F, it increases the ambiguity regarding ownership.
When the ABA was signed, it was provisional since the layout plan had not been approved. It is possible that the approving authority requires modifications that do not suit the buyer, in which case the buyer is well within his rights to renegotiate or exit. The ABA does not cover these possibilities.
Given the nature of the business of making and selling residential apartments, some ambiguity and contractual incompleteness are inevitable. But to write into the ABA that specifications can be changed at will by DLF goes against the grain of the Contracts Act and violates the very notion of an agreement itself. DLF should seek approval of any change in specification from all apartment buyers, especially significant changes. A great deal more transparency as well as clarity is required in the agreement on the exact property rights of apartment buyers and builders.
In order to rectify the Belaire ABA, the first step is to amend it with respect to the Contracts Act with the idea that the agreement should be well defined, meaningful and protect the interests of both consumers and builders, both of whom are making large investments. The process of clarifying ambiguous provisions should be a useful preliminary exercise for the CCI, before solving the knotty problem of whether an abuse of dominance has taken place or not.
The writer is a New Delhi-based freelance anti-trust economist
