RERA vs. The Clause: Mapping Regulatory Arbitrage and Governance Implications in Using Arbitration to Bypass Statutory Real Estate Adjudication

~By Harshwardha Sharma, Gujarat National Law University

The story of the real estate business in India is that of a fast but a complicated transformation of institutions. Although, technological advancements and PropTech were introducing efficiency and greater information symmetry to a highly fragmented market, the fundamental transition of governance has been inspired by the Real Estate (Regulation and Development) Act, 2016 (RERA). RERA was created as a special law that would bring transparency, accountability, and standardization to the home-buying process.

However, the statutory mandate of RERA has frequently conflicted with the recurring feature of developer-seller contracts: the arbitration clause. The statutory obligation of RERA versus the contractual freedom of arbitration is a serious dilemma in the field of corporate governance because it casts doubts on matters of accountability, safeguarding of the stakeholders and effectiveness of the legislation based on the consumer.

 The arbitrage where RERA Authority and a private arbitral tribunal are the two involved parties is a type of regulatory arbitrage in which one side (usually the developer) would like the resolution to be brought before a court that is seen to offer more advantage, even by circumventing the statutory protection that is designed to protect the consumer. This line concerning jurisdiction fault can help identify some underlying facts about the purpose of the modern regulation of real estate and the presumed limits of private contract law in cases of  necessity to ensure the interests of persons.

RERA: A Special Statute with a Public Interest Mandate

Before RERA, homebuyers used to be consigned to lengthy and expensive civil proceedings or, to the extent permitted by the contract, to a private arbitration. This situation evolved with the RERA Act setting up specialized adjudicating authorities and tribunals with duties to promote speedy and effective relief. The Act particularly focuses on the major aspects of governance failures, which include delayed possession, compensation of losses brought about by false statements in advertisements which are run in relation to projects and correcting structural defects.

The legislative intent is emphasized by two strong statutory clauses:

1. Application of Other Laws (Section 88): This section, in plain words, states that the provisions contained in RERA are "in addition to and not in derogation of the provisions of any other law". It implies that RERA is an added solution; it does not extinguish the already existing  contractual and statutory right of parties to refer disputes to arbitration under Arbitration and Conciliation (A&C) Act

2. Overriding Effect (Section 89): RERA is considered to acquire an overriding effect upon conflicting clauses of other laws as well. The primary source of the jurisdictional tension is this provision.
   

The structural elements of the system create a fundamental tension which exists beyond procedural matters. Section 88 preserves coexistence, while Section 89 asserts supremacy. The two texts create an interpretive conflict of whether RERA functions as a supplement to arbitration or arbitration is replacement for statutory rights. the conflict creates challenges for interpreting statutory laws.

The legal principle generalia specialibus non derogant establishes that when a special statute conflicts with a general statute, the special statute becomes the dominant law. RERA functions as a consumer-protection law which applies to specific sectors because it was created to address the widespread governance failures that exist in the real estate industry.

The jurisdictional tension exists between two parties who want to select different judicial venues because it creates a battle between private contract rights and public regulations which force promoters to follow mandatory rules. The practice of allowing arbitration clauses to eliminate RERA jurisdiction would turn the statutory system for accountability into a contractual clause which parties can choose to ignore which would destroy the fundamental intention behind the RERA legislation.

The Allure of The Clause: Why Developers Seek Arbitration

 Arbitration, regulated by the A&C Act, is typically a desirable tool in any commercial transaction due to its most significant characteristics:

• Confidentiality and Privacy: The case is settled out of court, benefiting the business image and secrets.

• Procedural Flexibility: Essentially, the parties are able to select their tribunal and customize procedural rules, resulting in procedural autonomy.

• Minimal judicial Intervention: The judicial interference is usually restricted to the reasons which are listed in Section 34 of the A&C Act.

• Arbitration functions as a business-to-business (B2B) dispute resolution system which requires equal power between negotiating partners to reach their business agreements. The real estate industry developer-buyer contracts demonstrate that B2B arbitration advantages become disadvantages for homebuyers who need to navigate their contractual agreements as the weaker party.

• Lack of a specified timeline - Unlike in RERA, where the statutory deadline is fixed to 60 days, arbitration can take any amount of time depending on the arbiter and the disputants.

• Lack of Specialized Protections: Arbitration does not offer the type of consumer protections and time-limited solutions that are provided under RERA which is developed in the interest of the people.

Mapping the Jurisdictional Conflict: Judicial Trends

The dispute that an arbitration clause can supersede RERA has been hotly contested and, therefore, a consensus has been reached to the effect that the special statute takes precedence. Courts have always tried to avoid judicial precedents which may practically lead to the removal of a statutory remedy sought by a court on behalf of vulnerable parties.

• RERA prevails over arbitration: The Bombay High Court in Rashmi Realty Builders Pvt. Ltd. vs. Rahul Rajendrakumar Pagariya & Ors clarified the tenet, that real estate cases that are within RERA are under a specific statutory scheme regarding consumer protection and national interest. Therefore, arbitration clauses that are part of agreements do not give jurisdiction to arbitral tribunals where the RERA adjudication is required by law. This legal habit supports the legislative intention: the statutory safeguards of RERA for home buyers are inaccessible to be avoided through the non-legislative clauses of a contract.

• Special vs. General Statute: In the event of conflict, tribunals such as the Madhya Pradesh RERA in Anil Kumar Arya v. SVS Buildcon Private Limited has given a verdict that a special statute, such as the RERA Act, shall prevail over the general one, such as the Arbitration Act, which is the general dispute resolution statute. Likewise, the Maharashtra RERA in Ganesh Lonkar v. D S Kulkarni Developers found that  Section 89 of the RERA establishes a clear overriding effect of the Arbitration Act where RERA took exclusive jurisdiction  in such a case.

This jurisprudence goes a long way towards indicating that the vast number of cases brought forward by RERA, at least those which deal directly with the obligations of a promoter as provided by the Act, are virtually non-arbitrable, since their settlement implies the necessity to follow the specialized timelines, procedural protections and mechanisms of enforcement which are uniquely found within the RERA framework.

The Homebuyer’s Doctrine of Election

Most importantly, the use of arbitration has not been fully held invalid by the courts. As a substitute, they have applied the Doctrine of Election where the aggrieved party (the homebuyer) has the right to select their remedy where there is more than one fora although such selection should not contravene obligatory statutory considerations.

 Given that Section 88 of RERA does not take away further remedies, a homebuyer is free to use contractual arbitration even with the coinciding RERA scheme. But this is at the discretion of the consumer and not the developer, who is trying to use an arbitration clause to avoid RERA jurisdiction. The statutory exclusivity usually prevails in case the homebuyer opts to do so through RERA.

The Governance Implications of Arbitrage

The current judicial approach of considering the Real Estate (Regulation and Development) Act (RERA) as rules that override the arbitration clause in the conflict of a homebuyer carries with it the strong implication on corporate governance in the real estate industry:

• Accountability and Transparency: Transparency is a cornerstone of corporate governance. The statutory exclusivity of RERA provides accountability to the developer in matters of statutory violation, e.g. noncompliance of the projects through adjudication in a public and specialized forum with the power to impose sanctions. An effort to avoid RERA through the arbitration is a denial of the publicity of the open, public setting and, therefore, one that protects the breach of governance, instead of holding them accountable under the law.

• Risk Management: Developers and contractors must understand that nowadays, in disputes falling within the statutory domain of RERA, arbitration clauses contained in buyer-builder agreements may not be enforceable as held by various courts across India. It, in turn, alters the risk profile of the real-estate transactions, requiring the lawyers to carefully establish contracts that have considered both the legislative overlay and the common judicial bias towards the specialized jurisdiction of RERA. Arbitration should not be a major defense to the claims on RERA compliance as it is a poor government strategy.

• Investor and Consumer Confidence: The regulatory control through RERA and the supportive reforms have played a significant role in the maturity of the Indian real-estate investment environment. The rapid statutorily driven resolution methodologies by RERA instil the preference of homebuyers. Allowing developers to bypass such a framework by way of contractual arbitration would tend to diminish customer confidence and market liquidity stipulated by RERA.

Conclusion

The conflict of the Clause (arbitration) Vs RERA is centrally the problem of the conflict of private contractual autonomy and the law of public interest. The judicial system of India has used mostly the tension, which is based on; the specialized and consumer centric mandate of RERA.

The implication to the corporate boards and the structure of project governance is simple: accountability cannot be outsourced. Courts are increasingly restricting attempts at regulatory arbitrage in an effort to circumvent RERA as an attempt to recognize the intent of the Act to offer a non-derogable, specialised, and open process to dispute resolution. In order to truly adopt modern corporate governance in the real-estate industry, the need to comply with RERA cannot be seen as a negative external burden that has to be avoided, but as the fundamental building block to the trust of stakeholders and market integrity.