DLF case

DLF case comment

Project on:

“THE DLF CASE COMMENT”

Submitted as per the requirement of the course curriculum of

“Competition law”

Submitted to:

Prof. Rahul Singh

Course Teacher

Submitted by:

Piyush Rajput

I.D. No. 578

3rd Trimester LL.M. (Business Law)

Batch: 2013 – 2014

NATIONAL LAW SCHOOL OF INDIA UNIVERSITY, BANGALORE

Piyush Rajput LL.M 1 year I.D No. 578 Page 1

DLF case comment

ABSTRACT

Henry Clay, American Secretary of State remarked in the 19th Century: “of all human powers operating

on the affairs of mankind, none is greater than that of competition.” Though Competition is vital in all the

sectors of the economy, it becomes imperative in a sector like Read Estate since it has the inherent

capability of affecting other sectors of the economy. This project seeks to revisit the competition issues in

the real estate sector in India, after the DLF Order which has been hailed as “landmark” by many. The

scope of the project is restricted to the housing industry. It analyses the consumers’ position and also the

industry position and the proposed changes in the law governing the real estate sector.


DLF case comment

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.


DLF case comment

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.

Key Issues

The CCI on the basis of the DG report framed four major issues for consideration which are as follows:

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

Issue 2: Meaning and definition of the term relevant market, in the context of section 4 read with section 2

(r), and section 19 of the Act;

Issue 3: Whether DLF is occupying a dominant position in the above relevant market?

Issue 4: If yes. Whether DLF has abused its dominant position in the relevant market?

3. Order of CCI

CCI dealt with each of the above issues individually:


DLF case comment

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.


DLF case comment

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


DLF case comment

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.

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:

i. To cease and desist from formulating and imposing such unfair conditions in its Agreement

with buyers in Gurgaon.

ii. 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.

JUDGEMENT DATED MAY 19TH 2014

Real estate major DLF will have to pay Rs. 630 Crore for unfair business practices, upholding the 2011

order passed by the fair trade watchdog CCI, the competition appellate tribunal said that India’s biggest

Real estate must pay up the hefty fine.


DLF case comment

CONCLUSION AND RECOMMENDATIONS

The real estate sector in India is plagued by the requirement of around 52 approvals for every project that

is proposed to be undertaken by them. This leads to a time period of two to three years differing from

state to state. In such a scenario, it is a major concern that even though the Real Estate Bill makes

promising provisions, it will just be another “approval requirement” for the developers. Among industry

players, when asked about the provision of the Bill they found most regressive, 47% opted for mandatory

registration of each project with the Real Estate Regulatory Authority.

Considering these points, it is recommended that there should be attempts made to reduce the amount of

approvals required to be taken by the developers. Developers have time and again brought forward the

demand for single window clearance in the sector. If the Real Estate Regulatory Authority cannot be

made a single window clearance immediately, attempts should be made towards that direction and to see

that this Authority does not end up becoming another “approval” for the developers. Again, as regards

competition, the Authority must ensure proper coordination with the CCI and the two bodies must work

together to improve the face of the Indian Real Estate Industry.


Documents

DLF case