Whether landowners are consumers under Consumer Protection Act in builders’ collaboration agreements

incomplete-building

The present article seeks to discuss the problems faced by landowners, who enter into agreements mostly called “Collaboration Agreements”, with builders, whereby in lieu of constructing building as per specifications of the landowner on the landowner’s vacant land, the builders promise to retain a “builder’s share” and give back to the owner an “owner’s share”. Further, this article shall also analyze whether landowners are consumers as per the Consumer Protection Act, 1986 (“Act”) and as such whether they can approach the consumer forums, which ensure speedy justice, in light of various judgments of the Supreme Court.

In today’s world, many landowners enter into agreements, which may be, albeit incorrectly, called Collaboration Agreements, Development Agreements or Joint Venture Agreements (“Collaboration Agreement”). Landowners mostly opt for such Collaboration Agreements, since it is cost-effective – in lieu of getting a roof over their head, the landowners do not have to pay anything to the builders. Instead, the builder merely takes an undivided share in the land and a builder’s share in the constructed property.

However, the execution of the said Collaboration Agreements have often led to disputes between landowners and builders. After the builder starts the construction, the landowner is at the mercy of the builder, since the landowner has to incur and bear overheads and expenses on a daily basis till the construction of the building is complete. As such, midway between construction disputes inter alia for the reasons like the owner’s share is not as per the specifications agreed, or that the builder, after the building is constructed takes away more area than agreed, etc crop up. As such, the intention of the landowners to make the construction of the building cost effective is defeated, since the constructed premises are entwined and fraught with expensive and time-consuming litigation. So options does a landowner has when he finds himself in such a predicament? The first option is to peruse the Collaboration Agreement and check if the agreement has an arbitration clause. If the Collaboration Agreement has an arbitration clause, the landowner can pursue arbitration proceedings. Secondly, the landowner can consider filing a civil suit in a civil court of appropriate jurisdiction. However, seeking redressal in the aforesaid two forms can be expensive and/ or time consuming. Arbitrations generally are expensive, because the sitting fees of the Arbitrator/s can be a little steep and hence prohibitive for an individual. The civil courts on the other hand are plagued with delays and latches. It is a well known fact how time-consuming proceedings before a civil courts can be, leading to drain of the litigant’s time, effort and resources over a period of time. So what resort does a hapless landowner faced with such a situation have?

In some cases in the past, the landowners approached consumer forums to gain access to speedy and effective justice, contending that they are consumers as per the Act and therefore entitled to protection by an appropriate for a under the Act. The builders, however contend that the landowners are not consumers but partners, since there is a Collaboration Agreement in place, which is in the nature of a joint venture agreement. The builders contend that when the parties have a commercial relationship in the nature of a joint venture, they cannot be subject to proceedings before a consumer forum, which exist only for the protection of consumers. The courts have also read and interpreted the clauses of Collaboration Agreements differently thereby delivering conflicting judgments leading to confusion. Recently, the Supreme Court has laid the confusion to rest in it’s judgment in Bunga Daniel Babu v. M/s Sri Vasudeva Constructions & Ors[1]. The Supreme Court has held that since the landowners, when they enter into Collaboration Agreement, have no control over construction, do not participate in the business and are only entitled to a share in the constructed area, the landowners are consumers under the Act. This is a welcome decision of the Supreme Court for the victimized landowners, because it will ensure that the landowners are benefitted by the speedy and cost effective justice delivery system of the consumer forums.

The facts leading to the aforesaid case are that a landowner entered into a Collaboration Agreement with a builder. The builder failed to fulfill its obligations. The landowner approached the State Consumer Forum (“State Commission”) for redressal of his grievance. The State Commission refused to entertain the complaint on the ground that since there was a Collaboration Agreement, which is in the nature of a Joint Venture agreement between the landowner and the builder, the landowner is not a consumer as the per the Act. Aggrieved, the landowner approached the National Consumer Disputes Redressal Commission (“NCDRC”) by way of a Revision Petition, which was also dismissed. The Complainant ultimately invoked the special jurisdiction of the Supreme Court of India by filing a Special Leave Petition, being SLP (C) No. 1633 of 2015. This was later admitted and converted to Civil Appeal No. 944 of 2016, titled Bunga Daniel Babu v. Sri Vasudeva Constructions, which as aforesaid, held that landowners are consumers under the Act and as such can invoke the jurisdiction of the consumer forum for speedy and effective redresal. The Supreme Court held that the consideration in the agreement between the landowner and builder is that the landowner gives ownership on a part of his land and the builder gets to sell/ dispose off the units constructed thereon in which ever manner the builder wishes to. Therefore, the Supreme Court correctly interpreted the nature of relationship between the landowner and builder instead of being merely carried away by the nomenclature of the instrument governing their relationship.

At this juncture, it is relevant to analyse and delve into the distinction between traditional Joint Venture agreements and Collaboration Agreements, subject matter of the present discussion. In a Joint Venture agreement, there is a common intent between the parties to start a venture to earn profits. As per the Black’s Law Dictionary, Tenth Edition, a joint venture is –

“A business undertaking by two or more persons engaged in a single defined project. The necessary elements are (1) an express or implied agreement; (2) a common purpose that the group intends to carry out; (3) shared profits and losses; and (4) each member’s equal voice in controlling the project”

(Emphasis Supplied)

A bare perusal of the aforementioned definition brings to the fore that a JV presupposes a common purpose and an intention to share the profits and/ or losses between the constituents of the joint venture. In Collaboration Agreements, inter alia, the aforementioned two attributes are absent. The landowner gives his land to the builder merely to get an agreed share in the constructed building. The builder on the other hand enters into a Collaboration Agreement for commercial gains, since the builder gets to sell the balance units remaining after the landowner’s share. The Collaboration Agreement also sans the element of sharing the profits and/ or losses from the sale of constructed units. The parties themselves bear the losses or earn profits from such a sale.

From the aforesaid it is clear that the builder and landowner do not constitute a jont venture. At this juncture, it is pertinent to analyse whether the builder is a service-provider to the landowner. As per section 2 (o) of the Act –

“service” means service of any description which is made available to potential users and includes, but not limited to, the provision of facilities in connection with banking, financing insurance, transport, processing, supply of electrical or other energy, board or lodging or both,  housing construction, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service”

(Emphasis Supplied)

What is pertinent to note in the aforesaid definition of “service” is that “housing construction” is also included within the ambit of service. The same was inserted vide Ordinance No. 24 of 1993. However, the Supreme Court in Lucknow Development Authority v. M. K Gupta[2] held that “service” included within its scope “housing construction” even before the same was specifically included vide the said ordinance. The observation of the Supreme Court in that parlance is worth noting and is being reproduced herein for ease of reference:

4.     What is the meaning of the word ‘service’? Does it extend to deficiency in the building of a house or flat? Can a complaint be filed under the Act against the statutory authority or a builder or contractor for any deficiency in respect of such property. The answer to all this shall depend on understanding of the word ‘service’. The term has variety of meanings. It may mean any benefit or any act resulting in promoting interest or happiness. It may be contractual, professional, public, domestic, legal, statutory, etc. The concept of service thus is very wide. How it should be understood and what it means depends on the context in which it has been used in an enactment. …

  1. 6. What remains to be examined is if housing construction or building activity carried on by a private or statutory body was service within meaning of clause (o) of Section 2 of the Act as it stood prior to inclusion of the expression ‘housing construction’ in the definition of ‘service’ by Ordinance No. 24 of 1993. As pointed out earlier the entire purpose of widening the definition is to include in it not only day to day buying and selling activity undertaken by a common man but even such activities which are otherwise not commercial in nature yet they partake of a character in which some benefit is conferred on the consumer. Construction of a house or flat is for the benefit of person for whom it is constructed. He may do it himself or hire services of a builder or contractor. The latter being for consideration is service as defined in the Act. … If the service is defective or it is not what was represented then it would be unfair trade practice as defined in the Act. Any defect in construction activity would be denial of comfort and service to a consumer. When possession of property is not delivered within stipulated period the delay so caused is denial of service. Such disputes or claims are not in respect of immovable property as argued but deficiency in rendering of service of particular standard, quality or grade. Such deficiencies or omissions are defined in sub-clause (ii) of clause (r) of Section 2 as unfair trade practice. If a builder of a house uses substandard material in construction of a building or makes false or misleading representation about the condition of the house then it is denial of the facility or benefit to which a consumer is entitled to claim value under the Act. When the contractor or builder undertakes to erect a house or flat then it is inherent in it that he shall perform his obligation as agreed to. A flat with a leaking roof, or cracking wall or substandard floor is denial of service. … A person who applies for allotment of a building site or for a flat constructed by the development authority or enters into an agreement with a builder or a contractor is a potential user and nature of transaction is covered in the expression ‘service of any description’. It further indicates that the definition is not exhaustive. The inclusive clause succeeded in widening its scope but not exhausting the services which could be covered in earlier part. So any service except when it is free of charge or under a constraint of personal service is included in it. Since housing activity is a service it was covered in the clause as it stood before 1993.”

  (Emphasis Supplied)

The Apex Court has, like a benevolent custodian and a watchful guardian of the rights of the people, taken judicial note of the difficulty faced by the landowners after giving away their lands to builders, and observed in Friends Colony Development Committee v. State of Orissa[3]:

“20.   … Builders violate with impunity the sanctioned building plans and indulge in deviations much to the prejudice of the planned development of the city and at the peril of the occupants of the premises constructed or of the inhabitants of the city at large. Serious threat is posed to ecology and environment and, at the same time, the infrastructure consisting of water supply, sewerage and traffic movement facilities suffer unbearable burden and is often thrown out of gear. Unwary purchasers in search of roof over their heads and purchasing flats/apartments from builders, find themselves having fallen prey and become victims to the designs of unscrupulous builders. The builder conveniently walks away having pocketed the money leaving behind the unfortunate occupants to face the music in the event of unauthorised constructions being detected or exposed and threatened with demolition. Though the local authorities have the staff consisting of engineers and inspectors whose duty is to keep a watch on building activities and to promptly stop the illegal constructions or deviations coming up, they often fail in discharging their duty. Either they don’t act or do not act promptly or do connive at such activities apparently for illegitimate considerations. If such activities are to stop some stringent actions are required to be taken by ruthlessly demolishing the illegal constructions and non-compoundable deviations. The unwary purchasers who shall be the sufferers must be adequately compensated by the builder. The arms of the law must stretch to catch hold of such unscrupulous builders. At the same time, in order to secure vigilant performance of duties, responsibility should be fixed on the officials whose duty it was to prevent unauthorised constructions, but who failed in doing so either by negligence or connivance.”

(Emphasis Supplied)

Further in Faqir Chand Gulati v. Uppal Agencies (P) Ltd.[4], the Supreme Court, while holding that landowner is a consumer under the Act also held that if the construction is a part of a building which in law requires a Completion Certificate, the builder is bound to provide the same. The builder cannot shy away by contending that he has constructed a ground floor and has delivered it and has therefore fulfilled his obligations. The builder also cannot escape on the count that he is not bound to produce the Completion Certificate but only to apply for the Completion Certificate. The obligation on the part of the builder to secure a sanctioned plan and construct a building, carries with it an implied obligation to comply with the requirements of municipal and building laws and secure the mandatory permits and/ or certificates.

The approach of the Supreme Court has been to extend the benefit of the Consumer Protection Act, 1986 to the landowners, who are the intended recipients of the said benefit. The observations of the Supreme Court in Lucknow Development Authority v. M. K Gupta (supra) are noteworthy, and hence are being reproduced, for ease of reference:

“2.     … To begin with the Preamble of the Act, which can afford useful assistance to ascertain the legislative intention, it was enacted, ‘to provide for the protection of the interest of consumers’. Use of the word ‘protection’ furnishes key to the minds of makers of the Act. Various definitions and provisions which elaborately attempt to achieve this objective have to be construed in this light without departing from the settled view that a Preamble cannot control otherwise plain meaning of a provision. In fact the law meets long felt necessity of protecting the common man from such wrongs for which the remedy under ordinary law for various reasons has become illusory. Various legislations and regulations permitting the State to intervene and protect interest of the consumers have become a haven for unscrupulous ones and the enforcement machinery either does not move or it moves ineffectively, inefficiently and for reasons which are not necessary to be stated. The importance of the Act lies in promoting welfare of the society by enabling the consumer to participate directly in the market economy. It attempts to remove the helplessness of a consumer which he faces against powerful business, described as, ‘a network of rackets’ or a society in which, ‘producers have secured power’ to ‘rob the rest’ and the might of public bodies which are degenerating into storehouses of inaction where papers do not move from one desk to another as a matter of duty and responsibility but for extraneous consideration leaving the common man helpless, bewildered and shocked. The malady is becoming so rampant, widespread and deep that the society instead of bothering, complaining and fighting against it, is accepting it as part of life. The enactment in these unbelievable yet harsh realities appears to be a silver lining, which may in course of time succeed in checking the rot. A scrutiny of various definitions such as ‘consumer’, ‘service’, ‘trader’, ‘unfair trade practice’ indicates that legislature has attempted to widen the reach of the Act. Each of these definitions are in two parts, one, explanatory and the other expandatory. The explanatory or the main part itself uses expressions of wide amplitude indicating clearly its wide sweep then its ambit is widened to such things which otherwise would have been beyond its natural import.”

From the aforesaid, it is unequivocally clear that the Supreme Court has put into effect the intention of the legislature, which is to widen the reach of the Act. This is evident by the willingness of the Supreme Court to travel beyond the nomenclature, being Collaboration Agreement, Joint Venture agreement, etc. to extend the benefit of the Act to its intended recipients. This will ensure that the hapless landowners who are harassed, victimized and pushed around by the builders and made to run from pillar to post, will have easy access to justice, instead of being kept in waiting in the corridors of justice in the lower judiciary, which is plagued by delays and latches. This will also ensure that the builders are mindful of their activities and will ensure good practices in executing the projects that they take up.

—————-

 

[1] Civil Appeal No. 944 of 2006

[2] (1994) 1 SCC 243

[3] (2004) 8 SCC 733

[4] (2008) 10 SCC 345

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About kawaljit

Kawaljit Singh Bhatia is a Lawyer and appears regularly at the Supreme Court of India and Delhi High Court. He has handled various high-stake matters in the filed of arbitration, telecom and broadcasting laws, labour matters, corporate matters, etc. He is passionate about legal issues that affect the society. He can be reached at kawaljitbhatia@gmail.com
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