Competition - India
Competition Commission imposes heavy penalties for abuse of dominance
Competition Commission imposes heavy penalties for abuse of dominance
September 22 2011
Background
In its August 12 2011 decision in Belaire Owners' Association v DLF Limited (19/2010) the Competition Commission of India imposed a penalty on DLF Ltd, India's largest real estate developer. The penalty comprised 7% of DLF's average turnover for the last three years, amounting to Rs6.3 billion, and was imposed for abuse of DLF's dominant position following the inclusion of unfair conditions in agreements it concluded with a number of flat buyers. The commission also directed DLF to cease and desist from formulating and imposing such unfair conditions in its agreements with buyers in Gurgaon, and to modify unfair conditions imposed on its buyers within three months of the date of receipt of this order.
Facts
In its initial order (passed under Section 26(1) of the Competition Act 2002), the commission had formed an opinion that a prima facie case existed and directed the director general to investigate the matter. This view was challenged by DLF before the Competition Appellate Tribunal, raising issues of jurisdiction, among other things. On August 18 2010 the tribunal refused to intervene at this stage and observed that DLF could raise these issues before the commission (for further details please see "Competition Appellate Tribunal allows Competition Commission to continue DLF probe").
In turn, Belaire Owners' Association argued that DLF had imposed "arbitrary, unfair and unreasonable conditions" on the buyers that had been allocated apartments for the Belaire housing complex (located in Gurgaon and under construction by DLF). It argued that such conditions amounted to abuse of DLF's dominant position in the relevant market - namely, high-end residential accommodation in Gurgaon. Some of the unfair conditions impugned by the informant were as follows:
The number of floors (which initially stood at 19 and on which basis the apartment allottees had booked their respective apartments) has been increased to 29, thus resulting in the areas and facilities originally earmarked for the apartment allottees being substantially compressed and leading to delay in completion of the project.
The apartment buyers' agreement was signed several months after the booking of the apartment, by which time the allottees had already paid a substantial amount and had little option but to adhere to the dictates of DLF.
The agreement stipulated that DLF had the absolute right to reject and refuse to execute any apartment buyers' agreement without assigning any reason, cause or explanation to the allottees.
The agreement was executed with the apartment buyers and construction started without an approved building plan. No consent of the apartment allottees was required for any change or condition imposed at the time of approval of the layout plan.
The agreement did not contain the proportionate liability clause to tie commensurate penalties or damages to DLF for breach of its obligations.
After conducting an in-depth investigation into the allegations, the director general held that DLF, in exercise of its market power and dominance, had imposed unfair conditions of sale on consumers in violation of Section 4(2)(a)(i) of the act (for further details please see "Important cases before the Competition Commission").
Decision
After considering the director general's report and the submissions made by the respondents, the commission made the following rulings.
The commission held that the Competition Act applied to all existing agreements, including any that were entered into before Section 4 of the act came into force, as documents filed by the informant showed that in some cases the agreements were entered into between DLF and the allottees after the date of commencement of Section 4 of the act.
The commission considered the definition of 'relevant market' in the context of Section 4, read with Section 2(r), Section 19(5), Section 19(6) and Section 19(7) of the act. It held that, in a vast majority of cases, a small (ie, 5%) increase in the price of an apartment in Gurgaon would not make a person shift his or her preference to Ghaziabad, Bahadurgarh or Faridabad on the peripheries of Delhi, or even to Delhi. Therefore, the commission held that the 'relevant market' was the market for services of a developer or builder in respect of 'high-end' residential accommodation in Gurgaon.
The commission further considered whether DLF was dominant in this market, in the context of Section 4 read with Section 19 (4) of the act. Due to the sheer size and resources, market share and economic advantage that DLF enjoyed over its competitors, DLF was not sufficiently constrained by other players operating on the market and had a significant position of strength by virtue of which it could operate independently of competitive forces (restraints) and could also influence consumers in its favour in the relevant market.
After considering the various factors and replies from the parties concerned, the commission held that DLF Ltd had contravened Section 4(2)(a)(i) of the act by directly or indirectly imposing unfair or discriminatory condition in the sale of services, as it had:
commenced the project without approval;
increased the number of floors after commencement;
increased the floor area ratio and density per acre;
delayed completion;
possessed and forfeited payments; and
included clauses in the agreement that were heavily biased in favour of itself and against consumers.
As of August 30 2011 the commission had disposed of 10 further complaints pending against DLF. The commission found DLF guilty of abuse of its dominant position in its other Gurgaon projects and issued a cease and desist order against DLF.
Comment
The decision is the first time in India that competition law has covered the exploitative nature of abuse of a dominant position. Previously, jurisprudence on abuse of a dominant position centred mainly on exclusionary abuses (eg, predatory pricing or refusal to deal), which have the effect of excluding competitors. The decision also overlaps with the well-defined concepts of 'unfair trade practice', which have hitherto been reserved for consumer disputes, and has exposed the common industry practice of builders appropriating the funds raised from buyers for other projects.
Finally, the decision shows that the commission continues to rely on international case law when making its decisions, particularly that of the United States and the European Union. However, there remains some ambiguity in the methodology used by the commission for the computation of the penalty. Unlike in other jurisdictions, there are no well-defined guidelines for the imposition of such heavy monetary fines in India. Given the complex definition of what constitutes a 'dominant position' under Section 4 of the act, which is not only dependent on market share, builders in India must be careful when drafting flat buyer agreements.
Background
In its August 12 2011 decision in Belaire Owners' Association v DLF Limited (19/2010) the Competition Commission of India imposed a penalty on DLF Ltd, India's largest real estate developer. The penalty comprised 7% of DLF's average turnover for the last three years, amounting to Rs6.3 billion, and was imposed for abuse of DLF's dominant position following the inclusion of unfair conditions in agreements it concluded with a number of flat buyers. The commission also directed DLF to cease and desist from formulating and imposing such unfair conditions in its agreements with buyers in Gurgaon, and to modify unfair conditions imposed on its buyers within three months of the date of receipt of this order.
Facts
In its initial order (passed under Section 26(1) of the Competition Act 2002), the commission had formed an opinion that a prima facie case existed and directed the director general to investigate the matter. This view was challenged by DLF before the Competition Appellate Tribunal, raising issues of jurisdiction, among other things. On August 18 2010 the tribunal refused to intervene at this stage and observed that DLF could raise these issues before the commission (for further details please see "Competition Appellate Tribunal allows Competition Commission to continue DLF probe").
In turn, Belaire Owners' Association argued that DLF had imposed "arbitrary, unfair and unreasonable conditions" on the buyers that had been allocated apartments for the Belaire housing complex (located in Gurgaon and under construction by DLF). It argued that such conditions amounted to abuse of DLF's dominant position in the relevant market - namely, high-end residential accommodation in Gurgaon. Some of the unfair conditions impugned by the informant were as follows:
The number of floors (which initially stood at 19 and on which basis the apartment allottees had booked their respective apartments) has been increased to 29, thus resulting in the areas and facilities originally earmarked for the apartment allottees being substantially compressed and leading to delay in completion of the project.
The apartment buyers' agreement was signed several months after the booking of the apartment, by which time the allottees had already paid a substantial amount and had little option but to adhere to the dictates of DLF.
The agreement stipulated that DLF had the absolute right to reject and refuse to execute any apartment buyers' agreement without assigning any reason, cause or explanation to the allottees.
The agreement was executed with the apartment buyers and construction started without an approved building plan. No consent of the apartment allottees was required for any change or condition imposed at the time of approval of the layout plan.
The agreement did not contain the proportionate liability clause to tie commensurate penalties or damages to DLF for breach of its obligations.
After conducting an in-depth investigation into the allegations, the director general held that DLF, in exercise of its market power and dominance, had imposed unfair conditions of sale on consumers in violation of Section 4(2)(a)(i) of the act (for further details please see "Important cases before the Competition Commission").
Decision
After considering the director general's report and the submissions made by the respondents, the commission made the following rulings.
The commission held that the Competition Act applied to all existing agreements, including any that were entered into before Section 4 of the act came into force, as documents filed by the informant showed that in some cases the agreements were entered into between DLF and the allottees after the date of commencement of Section 4 of the act.
The commission considered the definition of 'relevant market' in the context of Section 4, read with Section 2(r), Section 19(5), Section 19(6) and Section 19(7) of the act. It held that, in a vast majority of cases, a small (ie, 5%) increase in the price of an apartment in Gurgaon would not make a person shift his or her preference to Ghaziabad, Bahadurgarh or Faridabad on the peripheries of Delhi, or even to Delhi. Therefore, the commission held that the 'relevant market' was the market for services of a developer or builder in respect of 'high-end' residential accommodation in Gurgaon.
The commission further considered whether DLF was dominant in this market, in the context of Section 4 read with Section 19 (4) of the act. Due to the sheer size and resources, market share and economic advantage that DLF enjoyed over its competitors, DLF was not sufficiently constrained by other players operating on the market and had a significant position of strength by virtue of which it could operate independently of competitive forces (restraints) and could also influence consumers in its favour in the relevant market.
After considering the various factors and replies from the parties concerned, the commission held that DLF Ltd had contravened Section 4(2)(a)(i) of the act by directly or indirectly imposing unfair or discriminatory condition in the sale of services, as it had:
commenced the project without approval;
increased the number of floors after commencement;
increased the floor area ratio and density per acre;
delayed completion;
possessed and forfeited payments; and
included clauses in the agreement that were heavily biased in favour of itself and against consumers.
As of August 30 2011 the commission had disposed of 10 further complaints pending against DLF. The commission found DLF guilty of abuse of its dominant position in its other Gurgaon projects and issued a cease and desist order against DLF.
Comment
The decision is the first time in India that competition law has covered the exploitative nature of abuse of a dominant position. Previously, jurisprudence on abuse of a dominant position centred mainly on exclusionary abuses (eg, predatory pricing or refusal to deal), which have the effect of excluding competitors. The decision also overlaps with the well-defined concepts of 'unfair trade practice', which have hitherto been reserved for consumer disputes, and has exposed the common industry practice of builders appropriating the funds raised from buyers for other projects.
Finally, the decision shows that the commission continues to rely on international case law when making its decisions, particularly that of the United States and the European Union. However, there remains some ambiguity in the methodology used by the commission for the computation of the penalty. Unlike in other jurisdictions, there are no well-defined guidelines for the imposition of such heavy monetary fines in India. Given the complex definition of what constitutes a 'dominant position' under Section 4 of the act, which is not only dependent on market share, builders in India must be careful when drafting flat buyer agreements.
