This article is split into two parts, with Part I discussing the first CCI order with regard to DLF Ltd. v. Belaire Owners Association and Part II discussing the appeal to the abovementioned order before the COMPAT and the subsequent CCI order regarding the same case. This part seeks to analyze the facts of the case and the decision reached by the CCI on the basis of the report of the DG.
Introduction
The Competition Act, 2002 which was enacted in order to provide India with a modern competition law in keeping with internationally established antitrust principles, seeks to effectively regulate competition in all economic sectors, including the real estate sector and is enforceable through the Competition Commission of India (CCI), which replaced the old Monopolies and Restrictive Trade Practices Act Commission in October, 2009.
The DLF case began when the Owners’ Association of “Belaire” (a DLF building complex in Gurgaon) filed a complaint against DLF for breaching provisions of the Competition Act, 2002 dealing with abuse of dominance. On hearing the evidence, the CCI pronounced DLF Limited (DLF) guilty for grossly abusing its dominant market position in the relevant real estate market to impose unfair sale conditions for apartments in the Belaire complex. DLF incurred a penalty of INR 6,300 million (7% of DLF’s average turnover for the last three financial years) and a ‘cease and desist’ order were issued against them as well.
Background of the Case
DLF announced the launch of a Housing Complex, named Belaire comprising five multi-storied residential buildings to be constructed in DLF City, Gurgaon, Haryana. DLF however imposed highly arbitrary, unfair and unreasonable conditions on the owners of apartments in the complex in their buyer agreements. These unfair conditions were brought to the notice of the CCI by the Belaire Owners’ Association.
The CCI analyzed this information, and on review held that a prima facie case of abuse of dominance existed and requested the Director General (DG) to conduct further investigation. DLF immediately challenged the CCI’s jurisdiction, but dropped the matter subsequently. The DG conducted an in-depth investigation and discovered that the conditions imposed by DLF did indeed violate the Competition Act.
The relevant market was delineated on the basis of services provided by developers for construction of ‘high end buildings’ in Gurgaon. The DG by way of a plus factor analysis[1] concluded that DLF was abusing its dominant position.
Key Issues
Using the DG’s report, the CCI framed the following four issues and dealt with them as stated hereinafter:
Issue 1: Applicability of the Competition Act to the instant case
Relying on jurisprudence laid down in the MRTP Commission[2] and several Supreme Court judgments,[3] the CCI concluded that housing activities undertaken by DLF are considered as ‘services’[4] as it may have a wide interpretation.
Although the agreements between DLF and the owners were entered into before the Competition Act came into force that is irrelevant as the Act is applicable to agreements entered into prior to enforcement[5].
The CCI held that market leaders like DLF by virtue of being in a dominant position lay down the standard for industry practice and this contravenes the Competition Act, thus setting aside DLF’s contention that it had incorporated the impugned conditions to meet competition.
Issue 2: Determination of relevant market
Relevant product market: The CCI referred to the DG report, which described the DLF’s services as services provided by real estate developers for ‘high-end’ residential building in Gurgaon to say that while no cast-iron rule can be applied to determine what constitutes ‘high-end’, it is not a function of size alone but incorporates size, reputation of location, characteristics of neighbors, quality of construction, customers’ capacity and willingness to pay in the instant case.
Relevant geographic market: The CCI established that the relevant market is the market for services of the builder for high-end accommodation in Gurgaon since the decision to buy this kind of accommodation at this location is not easily substitutable with a decision to purchase a similar apartment in any other geographical location.
It was thus decided that high end residential apartments in Gurgaon constitute the relevant market.
Issue 3: Determination of Dominant Position
DLF had the highest market share (45%) (while the closest competitor’s share was less than half of DLF’s share). Due to this, there were no competitive constraints on DLF. DLF also had the early mover’s advantage in the real estate sector which naturally has entry barriers due to high cost of land and brand value of incumbent market leaders. The CCI’s analysis concluded that DLF, was way ahead of its competitors and faced almost no threat in the market due to low market concentration by virtue of its level of vertical integration, brand value and financial strength.
Issue 4: Determination of Abuse of dominance by DLF
The informant, Belaire Owners Association, alleged that DLF imposed on prospective apartment buyers through the Provisional Booking Agreement, signed by the buyer after having paid substantial costs (thus leaving no option to object to the lop-sided provisions).
The CCI in its supplementary order in January 3, 2013 analyzed the malpractices carried out by DLF including DLF’s unilateral powers to change clauses in the agreements and supercede its terms without any rights given to the buyers, DLF’s discretion to change inter se areas for different uses like residential, commercial etc. without informing buyers, making preferential location charges payable up-front with no guarantee of that location being provided (and adjustment of amount on not getting the desired location on payment of last installment with no interest), DLF’s sole discretion to determine ownership rights, DLF’s enjoyment of full rights on the community buildings, sites, recreational and sporting activities including those on maintenance, linkage discretion, liability for external development cost on buyers, forfeiture of earnest money in several situations, lack of buyers’ exit options (money back without interest in case of delay beyond three years), exit option for DLF at DLF’s discretion with no penalty, and reservation of essential rights by DLF.
The CCI considered these clauses as clear evidence of unequal bargaining power between the parties. Thus, it ruled that DLF had violated § 4 of the Competition Act, 2002 and thereby imposed a fine and issued a cease and desist order against DLF.
The CCI also recommended that Central Government and State Governments formulate real estate regulations to ensure overall consumer welfare and discourage unfair trade practices.
Impact
Being appealable to the Competition Appellate Tribunal, the CCI order which effectively lent judicial credence to the findings of the DG did not have any long-lasting legal implications. However, the order did create ripples due to the somewhat novel methods used to ascertain dominance in the relevant market. Earlier cases set a precedent for use of economic analysis taking into consideration a number of factors other than pure market share to ascertain questions of anti-competitive practices and abuse of dominance. These being missing in this order provided DLF with a cast iron ground to appeal the CCI order before the COMPAT.
This post has been authored by Pratik Ranjan Das and Yamini Kumar, students at the West Bengal National University of Juridical Sciences and members of the Society for International Trade and Competition Law.
[1] Plus factors in Indian competition law are provided in § 19(4) of the Competition Act, 2002.
[2] Kingfisher Airline Ltd. and Another v. Competition Commission of India & Others, Case No. Misc. 1/ 2010 (4/2009).
[3] Lucknow Development Authority v. M. K. Gupta, (1994) 1 SCC 243, Chandigarh Housing Board v. Avtar Singh and Others, AIR 2011 SC 130.
[4] Consumer Protection Act, 1986, § 2(o); Competition Act, 2002, § 2(u)
[5] supra note 1.
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