NAVIGATING CONSUMER ARBITRATION IN INDIA: LEGAL FRAMEWORK AND JUDICIAL PERSPECTIVES

ABSTRACT

Consumer arbitration in India has garnered attention due to the rising prevalence of arbitration clauses in consumer contracts. This article aims to examine the validity of consumer arbitration in India, considering the legal framework, relevant statutes, judicial precedents, and the impact on consumer rights.

INTRODUCTION

Consumer Arbitration is a procedure whereby disputes between business and its consumer are submitted to an impartial third party for resolution.[1]

It specifically refers to the use of arbitration to resolve disputes between consumers and businesses. Often stipulated in contracts, consumer arbitration aims to provide a private, efficient resolution to conflicts over purchases, services, or terms of service. While it can be quicker and less expensive than court proceedings, it has faced criticism for potentially favouring businesses and limiting consumers’ legal recourse.

Some of the key aspects of consumer arbitration are:

• Arbitration Agreement: Usually, the consumer agrees to arbitration when entering into a contract with a business. This agreement is often found in the terms and conditions or a separate arbitration clause.
• Arbitrator: A neutral individual or panel selected by both parties or appointed by an arbitration service provider. Arbitrators are experts in the related field of the dispute.
• Process: The arbitration process is less formal than court proceedings. It involves submitting written statements, presenting evidence, and sometimes participating in hearings.
• Binding Decision: The arbitrator’s decision, known as an award, is typically binding on both parties. This means that the decision is final and enforceable in court, with very limited grounds for appeal.
• Confidentiality: Arbitration proceedings are usually private, unlike court cases which are public. This can be beneficial for both parties who prefer to keep the dispute confidential.
• Speed and Cost: Arbitration is often faster and less expensive than litigation. The streamlined process and fewer formalities can reduce the time and cost involved in resolving the dispute.
• Mandatory Arbitration Clauses: Many consumer contracts include mandatory arbitration clauses that require consumers to waive their right to sue in court, instead of resolving any disputes through arbitration. This has been a subject of debate, as it may limit consumers’ access to justice and favour businesses.

LEGAL FRAMEWORK

In India, the legal framework for consumer arbitration is primarily governed by two key statutes: the Arbitration and Conciliation Act, 1996, and the Consumer Protection Act, 2019. The Arbitration and Conciliation Act, 1996 provides the legal framework for arbitration agreements and proceedings, which is crucial for resolving consumer disputes through arbitration while The Consumer Protection Act, 2019 ensures that consumer rights are safeguarded and provides definitions and provisions that are essential for understanding and handling consumer disputes within the arbitration framework.

1. The Arbitration and Conciliation Act, 1996:

The Arbitration and Conciliation Act, 1996, improved upon previous Indian arbitration laws, specifically the Arbitration Act, 1940, the Arbitration Act, 1937, and The Foreign Awards Act, 1961. Drawing authority from the UNCITRAL Model Law on International Commercial Arbitration and the UNCITRAL Rules on Conciliation, this Act consolidates and regulates the laws concerning domestic arbitration, international commercial arbitration, and the enforcement of foreign arbitral awards. It also establishes the legal framework for conciliation.[2]

According to section 7 of the act[3] defines an Arbitration Agreement as an agreement between parties to resolve any disputes that exist or might exist between them through arbitration, rather than going to court. This applies to disputes related to a specific legal relationship, which could be based on a contract or other legal matters.

Section 8 of the act states referral to Arbitration when there is an agreement[4]. If a case is brought to court that should be settled by arbitration (according to an arbitration agreement), the court must refer the parties to arbitration. This applies if one of the parties involved in the agreement requests it, as long as they do so before making their first main argument in the case. The court will do this unless it is clear that the arbitration agreement is not valid. This rule applies despite any decisions made by the Supreme Court or any other court.

2. Consumer Protection Act , 2019

This act replaced the Consumer Protection Act, 1986. It aims to provide better protection of consumer interests and includes provisions for alternative dispute resolution mechanisms.

Section 2 (6) of the act defines complaints as a written allegation made by a complainant seeking relief under this Act, which can include the following situation:

1. Adoption of unfair or restrictive trade practices by a trader or service provider.
2. Goods bought or agreed to be bought have defects.
3. Services hired or agreed to be hired are deficient.
4. Overcharging for goods or services beyond the legally fixed price, displayed price, or agreed price.
5. Sale of hazardous goods that do not comply with safety standards or are known to be unsafe.
6. Provision of hazardous services that are known to be harmful to life and safety.
7. Claims for product liability against manufacturers, sellers, or service providers.[5]

According to Section 2 (8) of the act a “consumer dispute” occurs when the person against whom a complaint has been filed denies or challenges the allegations in the complaint.[6]

ARBITRALITY OF CONSUMER DISPUTES

In a significant judgment, the Supreme Court of India in M. Hemalatha Devi & Ors. v. B. Udayasri[7] (“Hemalatha”) addressed the arbitrability of consumer disputes. The Court held that consumer disputes could only be subject to arbitration if the consumer opts for it after the dispute arises, notwithstanding any pre-existing arbitration agreements. This decision follows the precedent set in Emaar MGF Land Ltd. v. Aftab Singh[8] (“Emaar”), which established that consumers are not mandatorily referred to arbitration under Section 8(1) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) if they seek redress through consumer courts instead.

Factual Background

The dispute in Hemalatha arose from a Construction Agreement that included an arbitration clause. The builder failed to complete the construction of a residential property within the stipulated period, leading to the consumer filing a complaint with the District Consumer Forum. Concurrently, the builder sought the appointment of an arbitrator under Section 11 of the Arbitration Act before the Telangana High Court, which denied the application, allowing the consumer to proceed with the consumer forum. The builder’s subsequent application under Section 8 of the Arbitration Act was also dismissed by the District Consumer Forum.

Legal Issues and Judgment

The Supreme Court was tasked with determining whether consumer courts are bound to refer parties to arbitration upon an application made under Section 8 of the Arbitration Act and whether the High Court should have referred the parties to arbitration under Section 11(6A) of the Arbitration Act. The Court dismissed the builder’s challenge, emphasizing that consumer disputes are protected by welfare legislation (the Consumer Protection Act, 2019) and are non-arbitrable unless the consumer opts for arbitration.

Key Precedents :

1. Emaar MGF Land Ltd. v. Aftab Singh[9]:

The Appellant, a company developing an integrated township in Mohali, Punjab, entered into a Buyer’s Agreement with the Respondent on May 6, 2008, for the allotment of a villa. The Agreement included an arbitration clause under the Arbitration and Conciliation Act, 1996. Due to the Appellant’s failure to deliver the villa, the Respondent filed with the National Consumer Disputes Redressal Commission (NCDRC).

The Appellant sought to have the matter referred to arbitration under Section 8 of the Act. Recognizing the significant legal implications of the issue, a Single Member of the NCDRC referred it to a larger bench. On July 13, 2017, the three-member bench, led by the President of the NCDRC, ruled that the arbitration clause could not limit the jurisdiction of the Consumer Fora, even after amendments to Section 8 of the Arbitration Act.

Following this decision, the Single Judge of the NCDRC heard Complaint and other applications, ultimately rejecting the Appellant’s Section 8 application on August 28, 2017. The Appellant then challenged these decisions by filing F.A.O. No. 395 of 2017 with the Delhi High Court, which refused to hear the appeals on November 7, 2017, directing them to the appropriate Appellate Court.

The Appellant subsequently filed Civil Appeal with the Supreme Court, challenging the NCDRC’s decisions from July 13, 2017, and August 28, 2017. The Supreme Court dismissed these appeals on February 13, 2018. The Appellant then filed a review petition, seeking to overturn the February 13, 2018 judgment and the earlier NCDRC orders.

The Supreme Court held that consumers could not be compelled to arbitrate under Section 8(1) of the Arbitration Act if they choose to seek redress through consumer courts. This case highlighted the protection afforded to consumers under the Consumer Protection Act, which provides for special remedies otherwise unavailable in arbitration.

2. Booz Allen and Hamilton Inc. v. SBI Home Finance Limited:[10]

In this case, Capstone Investment Co. Pvt. Ltd. and Real Value Appliance Pvt. Ltd. secured a loan from SBI Home Finance Ltd. by mortgaging their owned flats. Subsequently, these companies signed a lease and license agreement with Booz Allen and Hamilton Inc. The four parties also entered into a security deposit agreement, which included an arbitration clause. When a dispute arose, SBI initiated a suit seeking the recovery of funds through the sale of the mortgaged properties. The Court ruled that the presence of an arbitration agreement does not automatically make a dispute arbitrable. The arbitrability of the dispute must also be considered.

3. Vidya Drolia v. Durga Trading Corporation[11]:

The Supreme Court set out a four-fold test to determine the arbitrability of disputes, emphasizing that disputes involving rights in rem or significant public interest are non-arbitrable. The test is:

(i)when the cause of action and subject matter of the dispute relates to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem;

(ii) when the cause of action and subject matter of the dispute affects third party rights; have erga omnes effect; require centralised adjudication;

(iii) when the cause of action and subject matter of the dispute relates to inalienable sovereign and public interest functions of the State; and

(iv) when the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s).[12]

Conclusion

Consumer arbitration provides an alternative to court litigation, offering a faster and more cost-effective resolution to disputes between consumers and businesses. While it boasts advantages like efficiency, confidentiality, and reduced costs, it also raises concerns regarding fairness and access to justice, especially when mandatory arbitration clauses limit consumers’ legal recourse. The legal frameworks in India, particularly the Arbitration and Conciliation Act, 1996, and the Consumer Protection Act, 2019, establish guidelines and protections to navigate this complex landscape, aiming to balance the interests of both consumers and businesses while promoting efficient dispute resolution. The Supreme Court’s decision in Hemalatha reinforces the principle that consumer protection takes precedence over arbitration agreements. This approach ensures that consumers, often constrained by unequal bargaining power, are not compelled to arbitrate disputes, thereby preserving their access to specialized remedies under the Consumer Protection Act.

While arbitration offers several benefits, including efficiency and flexibility, its private nature may not be suitable for all consumer disputes, particularly those with broader public welfare implications. The discretion given to consumers to choose between arbitration and consumer courts ensures a balance between upholding arbitration agreements and protecting consumer rights.

The Hemalatha judgment marks a significant step in the evolution of consumer protection in India, aligning the country’s legal framework with international standards and emphasizing the importance of consumer choice in dispute resolution.

 

References

[1] ‘Arbitration of Consumer Complaints-A Casebook’  (U.S. Department of Justice, Office of Justice Programmes) https://ojp.gov/ncjrs/virtual-library/abstracts/arbitration-consumer-complaints-casebook accessed on 20 July 2024

[2] Arbitration and Conciliation Act, 1996 (Unacademy) < https://unacademy.com/content/upsc/study-material/law/arbitration-and-conciliation-act-1996/> last accessed on 20 July 2024.

[3] Section 7, The Arbitration and Conciliation Act, 1996

[4] Section 8, The Arbitration and Conciliation Act, 1996

[5] Section 2 (6) of Consumer Protection Act, 2019

[6] Section 2 (8) of Consumer Protection Act, 2019

[7] Civil Appeal Nos. 6500 6501OF 2023 (Arising out of SLP (C) OS.48494850 OF 2023)

[8] AIRONLINE 2018 SC 828

[9] Ibid

[10] CIVIL APPEAL NO.5440 OF 2002

[11] (2021) 2 SCC 1

[12] Abhisar Vidhyarti, ‘ Applying Vidya Drolias Four Fold  Arbitability Test to Anti-trust dispute in India’ ( Kluwer Arbitration Blog, February 10 2021) < https://arbitrationblog.kluwerarbitration.com/2021/02/10/applying-vidya-drolias-four-fold-arbitrability-test-to-antitrust-disputes-in-india/> accessed on 23 July 2024