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BW Businessworld

Blatant Builder Contracts

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If you believe that half of our ruling elites are culpably criminal while the other half are indefensibly abdicating their sovereign responsibilities, perhaps it’s time to take heart that it is not just the judiciary that is trying to keep this country from the heart of darkness. Notwithstanding all the stick that they get - notably the Telecom Regulatory Authority of India (Trai) - I believe that our regulators continue to play a stellar role in keeping us this side of the sanity divide. Case in point: the recent actions of the Competition Commission in restoring sanity in the fine print of construction contracts. Let’s review the facts.

In May 2010, the owners of Belaire apartments in Gurgaon went to the Competition Commission of India seeking its protection. They claimed that India’s premier builder DLF was abusing its dominant position to impose highly arbitrary, unfair and unreasonable conditions on buyers. Truly, if you don’t know your builder contracts, these conditions read like an encyclopaedia of inventive ruthlessness. The project was launched without approvals exposing buyers to unnecessary and unknown construction risk. The property was sold as a 19 storey one and then increased to 29 storeys without the consent of the existing buyers. No construction period was specified. The contract between builder and owner was presented to owners months after all payments had been made where for the first time, a litany of harsh clauses were thrust down the owner’s throat. Under these terms, DLF could unilaterally change the usage of designated areas and could add more buildings in the complex. Naturally, such buildings would belong to DLF even though they were built on land belonging to the buyers. DLF could change the layout plan, could increase the area of the building, decrease the underlying area of the land owned by the buyers, link one project with another, increase external development charges, all without demur from the buyers. It could charge whatever it wanted for services. DLF was entitled to mortgage land belonging to these owners! It could even abandon the project without liability. DLF retained 10 per cent of the purchase cost as security and could forfeit these sums for all sorts of good and indifferent reasons. As a general proposition, buyer defaults generated extortionist penalties while DLF defaults generated pips and pennies.

For my part, I can add that it is patently unfair to paint DLF out as the villain of the real estate piece. Every builder whose agreements have ever passed through my hands in recent years – and more than a few have – carry similar terms. A great many projects are ‘pre launched’ to benefit regular clients who then exit in months, and projects are formally launched without approvals so that booking money can be used to pay for approvals. Payments are unfairly frontloaded, instalments can be claimed without corresponding construction on the ground and moneys can be appropriated from one project to another without buyer consent. Clearly, it doesn’t take a dominant position to be a rapacious builder, or the writer of unconscionable contracts. I would say DLF contracts were marked to market, and their buildings are certainly better than some others!

So far, given how the law works, DLF’s defence of the case has been based largely on legalistic jurisdiction type arguments. DLF has claimed that it is not in a dominant position in Gurgaon which is the ‘relevant market’. It has argued that apartment owners are not consumers. The Competition Commission has not been persuaded.  In August 2011, it directed DLF to cease and desist from imposing such onerous conditions and imposed a penalty of Rs 630 crore. DLF appealed the order. The appellate authority was not particularly sympathetic, asking only that the substance of the modifications be determined before it heard the appeal.

This is still a work in progress. The case will come up again in October 2012 and the battle no doubt will run and run. Nevertheless, four points need to be made because they are clear enough.

First, the real estate business is amongst the largest generators of political funds in India. Everybody and his illegitimate country bumpkin cousin thrice removed knows that large tracts of land in fast expanding suburbs of metros are owned or controlled by the political classes. In India, politicians consolidate the land on which private projects are built. Sometimes, these consolidators retain an interest in the project after selling the land to builders. For anyone – legislature, bureaucrat, judge or regulator – to meddle with this ‘robber baron’ happy hunting ground is to bite into something indigestible and unpredictable. The real estate business is a holy cow if ever there was one and for anyone to take pot shots at this business is a huge risk because you never knows who sits behind which project and takes the bullet.

Second, DLF is simply not another large listed company. DLF is this country’s premier builder who practically invented private sector real estate development in India. The mutuality of interest between politicians and builders, as I have said, runs deep. DLF is an ocean with a complex web of relationships and ‘lihaaz’ that stretches to the grand fathers of the current ruling politicians. To take on such a business house is to take on all these relationships, not just the house. No one treads thoughtlessly on such power. And a regulator has. You have to stop dead in your tracks and ponder this paradigm shift.

Third, unless the regulator does a double back flip for reasons we may never know, no matter what legal stratagem is unveiled by DLF or any other builder now, the current state of the template Flat Buyer Agreement is simply unsustainable. The Competition Commission will find against the builders and the appeal courts will agree with the Competition Commission. It’s a question of when, not if. In truth, “when” is here already. As this litigation reaches culmination, the rules by which builder contracts are written will have been determined and those who are still writing old school contracts in 2012 are going to get it in the neck. Builders will do well to immediately change their “attitudes” so to speak. When you have onerous arbitrary clauses which are ultimately not implementable in one pan and Rs 630 crore cash out in the other, to say nothing of legal fees, the scale of justice is truly loaded and good sense favours being reasonable in the first place.

This brings up the fourth point. From where I am sitting, this last point has probably been the greater overall long-term significance. If you are currently engaging in a heart rending lament about the paralysed state of the nation, the lost opportunity of a spluttering economy, a society slowly decaying away as all institutions slowly eat their own tails, and so forth, it is time to pause and take stock. That India is not in the summer of its rosy future is a fact. But that said, we do need to recognise that the absolute proportion of bullshit in any society is a constant. The Bullshit Quotient of this train of thought is that while the political piece of the governance structure may be buried under the load of coalition compulsions, more than one regulator has stepped in to pick up the gauntlet and carry the country forward to its ultimately destiny.

(The author is managing partner of the Gurgaon-based corporate law firm N South and can be contacted at [email protected] Many of the views expressed in this column are amplified in his book “Bullshit Quotient: Decoding India’s corporate, social and legal Fine Print” which releases this month)