Arbitration issues in Real Estate Development by Manoj K Singh Founding Partner Singh & Associates

Arbitration Issues in Real Estate Development by Manoj K Singh Founding Partner Singh & Associates

The Parliament enacted the Real Estate (Regulation and Development) Act, 2016 (hereinafter to be referred as, “RERDA” to regulate the real estate sector, protect innocent buyers and provide speedy redressal mechanism. This Act fills a large lacuna as real estate as a sector was hitherto unregulated. The Act seeks to provide respite to frustrated and helpless buyers who have so far been at the mercy of unscrupulous builders and years of litigation. To protect the rights of the buyers, the RERDA establishes a specialized body for its enforcement and also creates a dedicated forum for seeking compensation, which was earlier being awarded by consumer forums which used to take up a lot of time.

Arbitration/Legal issues in Real Estate Development by Manoj K Singh Founding Partner Singh & Associates
Manoj K Singh, Founding Partner, Singh & Associates

Before the enactment of the RERDA, the buyers had to avail the remedies from consumer forums under the Consumer Protection Act, 1986 (hereinafter to be referred as ‘CPA’).  Despite this, it was being observed that the builders were able to delay the litigation for years. In other cases, builders had included arbitration clauses in their standard agreements, effectively leaving the buyers remediless, either due to the costs of arbitration or due to a complete lack of understanding of arbitration. The Government of India, observing the unscrupulous extortion of buyers, passed the RERDA with three primary objectives: first, regulation and promotion of the real estate sector; second, protection of consumer interest in the real estate sector; and third, the establishment of an adjudicating mechanism for speedy dispute redressal. Thus, apart from the regulation of the Real Estate sector, the primary objective of the RERDA is to secure the rights of buyers and to provide them with a speedy dispute redressal. In furtherance of this objective, the RERDA has established two forums, i.e., the Real Estate Regulation Authority (hereinafter to be referred as ‘RERA’) and the Adjudicating Officer (hereinafter to be referred as the ‘AO’. Real estate agreements, more often than not, also contain arbitration clauses providing for all disputes to be referred to arbitration. Given the presence of these clauses in most agreements, a conflict arose with respect to the method of dispute resolution which should be followed because of the choice between the mechanism under the RERDA and that laid down in the Arbitration and Conciliation Act, 1996 (hereinafter to be known as the ‘Arbitration Act’).

In this backdrop, a very interesting question arose that whether an arbitration clause contained in such agreement can oust the remedies available to the consumers under the RERA or the CPA? The National Consumer Disputes Redressal Commission (hereinafter to be referred as the “NCDRC”) in the case of, “Aftab Singh vs. Emaar MGF Land Limited” looked into the same and had come to the conclusion that parties cannot be given the freedom to contract out of statutory remedies. The NCDRC had observed that if parties were to be permitted to contract out of statutory remedies, especially in cases where legislation has been enacted to remedy a specific social problem, such an action would defeat the purpose of such legislation. The Hon’ble Supreme Court vide its order dated 13.02.2018 refused to interfere into the judgment given by the NCDRC. The NCDRC logic of not ousting the jurisdiction of other fora due to arbitration clauses present in such agreements closely follow the reasoning laid down in the case of, “Natraj Studios vs. Navrang Studios wherein the Hon’ble Supreme Court had observed that “Public policy requires that contracts to the contrary which nullify the rights conferred on tenants by the Act cannot be permitted. Therefore, public policy requires that parties cannot also be permitted to contract out of the legislative mandate which requires certain kind of disputes to be settled by special courts constituted by the Act.”  In view of the above, the current legal position is that buyers cannot be forced to go for arbitration in view of the fact that statutory remedies under RERDA cannot be contracted out due to the presence of the arbitration clauses in such agreements however this does not take away the remedy provided by arbitration.

Apart from the above, even the Insolvency and the Bankruptcy Code, 2016 (hereinafter to be referred as the , “CODE”) has also emerged as a possible solution to the various problems that the infrastructure sector suffers from especially with regards to the issue of the homebuyers who are left high and dry due to the exploitative practices of the builders. This has happened due to the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 which got the Presidential Assent on 6 June 2018 by which the home buyers have been recognized as financial creditors.  This would give them due representation in the Committee of Creditors and make them an integral part of the decision making process.  It will also enable home buyers to invoke Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016 against errant developers and initiate the CIRP against such developers.

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