Consumer Arbitration: Arbitration in Consumer-Related Disputes, Arbitrability and Its Impact on Consumers

The rise in the use of arbitration as one of the most popular modes of alternate dispute resolution methods has also led to a significant increase in the uncertainty of its efficacy. This research article aims to critically analyze consumer disputes by evaluating the concept of arbitrability of such disputes under the Arbitration and Conciliation Act and studying the implications of recent Supreme Court judgments on the execution and enforcement of arbitral awards. Further, a comparison is made between the Consumer Protection Act (CPA) and the Arbitration and Conciliation Act (ACA) and analyzing critical judgments by the Supreme Court that have taken place, shaping perspectives. Moreover, The Law Commission Reports published by the Law Commission of India, such as the 176^th and 246th Reports, provide additional context and recommendations relevant to this discussion. The article concludes with reflections on the future of consumer dispute resolution and the balance between consumer protection and arbitration.

Introduction

Arbitration: Meaning

According to the World Intellectual Property Organization (WIPO), arbitration is “a procedure in which a dispute is submitted, by agreement of the parties, to one or more arbitrators who make a binding decision on the dispute. In choosing arbitration, the parties opt for a private dispute resolution procedure instead of going to court.”

Section 2(1)(a) of the Arbitration and Conciliation Act, 1996 defines arbitration as: “means any arbitration whether or not administered by permanent arbitral institution.”[1]

In simple words, arbitration is the settlement of disputes outside the court. Rather than going to the court and undergoing the time-consuming and lengthy judicial process of dispute settlement between the two parties, a more accessible, cost-effective, efficient, and faster mode of dispute resolution is made use of, where there are one or more persons appointed as an arbitrator, who deals with the process of dispute settlement. It is a form of a simplified trial with simplified rules, and there is no need for discoveries to be made. The process is designed to be faster, less formal, and more flexible than traditional litigation. Arbitration is increasingly becoming popular in commercial disputes due to its confidentiality and the power of parties to choose arbitrators at their own discretion.

Arbitration has become a widely accepted alternative dispute resolution mechanism due to its advantages. However, questions on its application, appropriateness, and efficiency in arbitration processes in cases of consumer disputes have become a bone of contention. In many consumer dispute cases, consumers are left powerless as they have significantly less bargaining power than service providers, raising concerns about fairness and access to justice. The Indian judiciary, particularly the Supreme Court, has made several pronouncements impacting the arbitrability of consumer disputes, attempting to balance the interests of consumers and service providers.

Arbitrability

The New York Law Journal defines arbitrability as “whether specific classes of disputes are barred from arbitration because of national legislation or judicial authority.”[2] Not all disputes can be arbitrated; there are specific types of disputes that are non-arbitrable in nature as they involve public interest or statutory rights, which require intervention by the judicial systems of a country. Arbitrability refers to the capability of a dispute to be resolved through arbitration.

Factors determining arbitrability include the nature of the dispute, the subject matter, and the impact on public policy. The concept of arbitrability ensures that issues of significant public importance or those requiring specialized adjudication remain within the purview of judicial authorities.

Factors that play a pivotal role in the determination of the arbitrability of any dispute are- [3]

the nature of the dispute in question
the subject matter of the dispute
governing law
terms and conditions in arbitral agreements
its impact on public policy.

The scope of arbitrability, however, has not been particularly specified in the context of any Indian legislation, such as the Arbitration and Conciliation Act of 1996. There is no mention of the same in international texts, such as the UNCITRAL Model Law on International Commercial Arbitration 1985.

However, this has been dealt with by the courts and landmark judgments, interpreting statutes, and framing guidelines, as they gradually recognized that not all disputes are arbitrable in nature and that a limit on the scope of arbitrability is a must. These involve public interest disputes or requiring statutory protection and intervention by courts.

Case Laws that Changed the Perspective of Arbitration of Consumer Disputes

One such judgment that changed the trajectory of disputes being arbitrable in nature is Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. & Ors. This landmark case differentiated the arbitrability of disputes upon the nature of the parties’ rights: right in rem and right in personam. It was held that rights in rem, i.e., rights that are enforceable against the whole world, are non-arbitrable in nature and cannot be referred for arbitration. Accordingly, the case will be transferred to the courts to decide the case. Hence, only enforceable disputes against specific individuals or parties can be arbitrated.[4]

Another landmark case of A. Ayyasamy v. A. Paramasivam & Ors. implicitly bars the remedy to arbitration in cases involving public interest or fraud-like crimes. The Supreme Court held disputes that are serious allegations, such as fraud, are non-arbitrable, as well as disputes involving public interest are non-arbitrable, reinforcing the need for judicial oversight in such matters.[5] This ruling has emphasized the importance of protecting consumers from potential injustices in arbitration proceedings.

Recent Trends

In recent times, judgments like Rakesh Kumar Malhotra v Rajinder Kumar Malhotra protected shareholders and their claims against the company.[6] Similarly, in Eros International Media Ltd. v. Telemax Links India (P) Ltd[7] and Lifestyle Equities CV v. Q.D. Seatoman Designs Pvt. Ltd. and Ors.[8], disputes dealing with subject matter relating to copyright and rights of copyright holders were held as arbitrable in nature. Such judicial pronouncements have focused on protecting consumers by emphasizing the nature of such disputes being non-arbitrable.

This highlights the importance and accessibility of statutory and public law remedies as provided under the Consumer Protection Act. This act protects and safeguards the consumers to a greater extent as compared to arbitration, as its main focus is the protection of consumer and their rights, which is not the case in the provisions of the Arbitration and Conciliation Act.

Consumer Protection Act, 2019

The Consumer Protection Act (CPA) is designed to address this imbalance and offer practical, accessible remedies for consumers. In contrast, while arbitration is efficient in commercial disputes, it may not always serve the best interests of consumers. Safeguards available under CPA can also be availed, especially in case of consumer disputes, as they provide greater remedies than those in cases of arbitration proceedings.

Consumer disputes often involve individuals or consumer parties with lesser bargaining power compared to service providers. Service providers frequently exploit arbitration clauses inserted in contracts to avoid liability should consumers seek redress through the courts. These arbitration clauses can hinder consumers from accessing the broader public law remedies provided under the Consumer Protection Act, leading to their exploitation. This research article highlights the safeguards available under the Consumer Protection Act, which offer greater remedies than those typically available through arbitration proceedings.

Here are a few reasons why the Consumer Protection Act provides for greater remedies than the Arbitration and Conciliation Act in cases of settlement of consumer disputes:

Consumer Friendly Mechanisms– aid in making the complaint or redressal system easier for consumers by establishing Consumer Disputes Redressal Commissions at the district, state, and national levels.
Low costs– mechanisms under CPA are more cost-effective for consumers from all economic backgrounds than arbitration. The latter includes extra costs such as arbitrator fees, administrative fees, and legal representation, which may act as a barrier for particular consumers considering their financial positions.
More Specialized– arbitrators may not always have specialized knowledge to deal with the subject matter of consumer law in consumer disputes, which may lead to more discrepancies in handling such cases.
Judicial Oversight and Consumer-Centric– the Consumer Protection Act is specifically designed to protect consumers. Consumer Commissions dealing with such disputes are under the aegis of the government, ensuring impartiality and adherence to laws and dedicated legislation. Arbitrations, conversely, are distinct from court proceedings for the same reasons: to provide more flexibility to parties to control arbitration proceedings on their own. This exclusive feature of arbitration proceedings is often misused.
Setting Precedents– by addressing disputes relating to public interests, the CPA provides for broader social impacts and formulation of guidelines and framework to be followed by service providers subsequently, such as ordering a vendor to withdraw hazardous or faulty goods from the market.
Enforcement and Compliance– orders given by Consumer Commissions are enforceable as decrees of court and provide for penalties for non-compliance by vendors for the same. On the contrary, arbitral awards are subject to being challenged in court and may also be appealed. Arbitrators do not have the power to impose penalties for non-compliance as well.
Increase in Consumer Awareness- establishing Consumer Protection Councils at the central and state levels helps promote consumer awareness and education, empowering consumers to exercise their rights effectively. Unlike CPA, arbitration is a private proceeding; hence, no one except the parties and the arbitrator is aware of the nature or consequences of such disputes, as well as the arbitration process or the implications of arbitration clauses in contracts. The private nature of arbitration proceedings may not always serve the best interests of consumers due to issues such as power imbalances and limited recourse for appeal.

Discussion of the 176th and 246th Law Commission Reports

176th Law Commission Report

The 176th Law Commission Report (2001) suggested amending the Arbitration and Conciliation Act, 1996 to make arbitration more effective. It highlighted multiple issues relating to arbitrability and the need for a clear framework to differentiate disputes into arbitrable and non-arbitrable. The report further recommended that certain disputes, such as those involving consumer rights, should be explicitly declared non-arbitrable to protect the weaker parties in such transactions. This recommendation aligns with the need to safeguard consumer interests and ensure that they have access to public law remedies.[9]

246th Law Commission Report

The ACA has been scrutinized in the 246th Law Commission Report (2014), which emphasized the significance of boosting the effectiveness and accessibility of arbitration. It recommended changing several provisions, such as Section 11 of the Arbitration and Conciliation Act, in order to expedite the selection of arbitrators and cut down on unnecessary bureaucracy. The research recognized the need to strike a balance between consumer protection and arbitration’s increased efficacy. It is noted that consumer disputes often include notable power imbalances, and it is recommended that these be taken into account when deciding whether or not such issues can be arbitrated. This report also emphasizes the necessity of maintaining judicial supervision and ensuring that arbitration never undermines consumer rights.[10]

Conclusion

A key aspect of consumer protection is the arbitrability of consumer disputes, which guarantees that consumers won’t be forced to use arbitration when effective public law remedies are available. The judgments of the Indian Supreme Court highlight how crucial it is for the Consumer Protection Act’s dispute settlement procedures to be easily accessible and equitable.
The Consumer Protection Act (CPA) addresses the inherent power disparities between customers and service providers by offering a solid framework for consumer protection. In order to protect consumer rights, the CPA’s provisions ensure that consumers have access to specialized forums, cost-effective remedies, and judicial scrutiny.

On the contrary, despite its efficacy for commercial dispute resolution, arbitration might not always work in the best interests of consumers because of the possibility of arbitrators being inept in their field, the possibility of misusing arbitral provisions, and the arbitrators’ limited enforcement authority. Through significant rulings in cases like Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. and A. Ayyasamy v. A. Paramasivam, the Supreme Court of India has emphasized the necessity of public law remedies by reinforcing the non-arbitrability of particular consumer disputes.

In the long run, arbitration continues to be an effective technique for resolving conflicts, although it does have limitations that should be recognized when it pertains to consumer disputes. To ensure that arbitration agreements have no adverse effects on consumers and that their rights are adequately safeguarded, the legal environment keeps evolving. It is crucial to strike a balance between promoting arbitration as a viable method of resolving disputes and protecting consumers’ fundamental rights as the regulatory environment evolves.

Bibliography

Case laws

Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532
Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386
Rakesh Kumar Malhotra v Rajinder Kumar Malhotra(2015) 2 SCC 100
Eros International Media Ltd. v. Telemax Links India (P) Ltd (2016) 6 SCC 228′
Lifestyle Equities CV v. Q.D. Seatoman Designs Pvt. Ltd. and Ors (2017) 5 SCC 755

Statutes

Arbitration and Conciliation Act, 1996
Consumer Protection Act, 1986 / 2019

Law Commission Reports

176th Law Commission Report on the Arbitration and Conciliation Act, 1996.
246th Law Commission Report on Amendments to the Arbitration and Conciliation Act, 1996.

Articles and Blogs

[1] Arbitration and Conciliation Act, 1996, § 2(1)(a), Act No. 26 of 1996

[2] Shore, L. (2009) “Defining ‘arbitrability,’” New York Law Journal, Ed. 2009

[3] Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., (2012) 9 SCC 552

[4] (2011) 5 SCC 532

[5] (2016) 10 SCC 386

[6] (2015) 2 SCC 100

[7] (2016) 6 SCC 228

[8] (2017) 5 SCC 755

[9] Law Commission of India, 176th Report on Arbitration and Conciliation Act, 1996 (2001)

[10] Law Commission of India, 246th Report on Amendments to the Arbitration and Conciliation Act, 1996 (2014)

Authored By: Sanya Suman

Symbiosis Law School, Pune

Abstract

Introduction

Case Laws that Changed the Perspective of Arbitration of Consumer Disputes

Consumer Protection Act, 2019

Discussion of the 176th and 246th Law Commission Reports

Conclusion

Bibliography

Related Posts

Leave a Comment Cancel Reply

Table of Contents