SUPERIOR COURTS HOLD LITIGANTS CAN APPROACH THE CONSUMER COURTS EVEN WHEN THERE IS AN ARBITRATION AGREEMENT

The Consumer Protection Act, of 2019 broadens the definition of “consumer” to encompass individuals who purchase or access goods or services online or through electronic means, a provision absent in the previous legislation. Furthermore, it introduces a comprehensive definition of “advertisement,” encompassing any audio or visual publicity, representation, endorsement, or pronouncement made through electronic media, the internet, or websites.

Additionally, the Guidelines for Prevention of Misleading Advertisements and Endorsements for Misleading Advertisements, 2022, on June 9, 2022 stipulate that if there exists a connection between the endorser and the trader, manufacturer, or advertiser of the endorsed product that could significantly impact the endorsement’s value or credibility, this connection must be fully disclosed to the audience if not reasonably expected.

Under the Consumer Protection Act 2019, e-commerce transactions are explicitly covered, defining e-commerce as the buying or selling of goods or services, including digital products, over a digital or electronic network. To regulate e-commerce and protect consumers from unfair trade practices, the Department of Consumer Affairs has introduced the Consumer Protection (E-commerce) Rules, 2020. These Rules delineate the responsibilities of e-commerce entities and specify the obligations of both marketplace and inventory e-commerce entities, including provisions for addressing customer grievances.

However, in certain cases, contracts may include arbitration as dispute resolution case. In such cases, the Courts have observed as follows:

(I) In M. Hemalatha Devi & Ors. v. B. Udayasri, Civil Appeal Nos. 6500 ­ 6501 of 2023, the Supreme Court (Two Judge Bench) observed as follows:

The recent judicial ruling emphasized that consumer disputes can only be subjected to arbitration if the consumer chooses this route by an Arbitration Agreement. Consequently, the Supreme Court upheld the Telangana High Court’s decision not to appoint an arbitrator for a dispute when the consumer opted to seek redress before the district consumer forum instead.

The dispute originated from a sale agreement containing an arbitration clause (“Construction Agreement”). Under this agreement, the builder was obligated to complete the construction of a residential property within three years and transfer possession to the consumer. Despite the consumer fulfilling payment obligations, the builder failed to deliver possession within the agreed timeframe. Instead, the builder unilaterally terminated the agreement, citing the consumer’s failure to sign as grounds for termination.

Subsequently, the builder applied Section 11 of the Arbitration Act before the Telangana High Court (“High Court”) seeking the appointment of an arbitrator (“Section 11 Application”). Simultaneously, the consumer lodged a complaint with the District Consumer Forum. The consumer contested the Section 11 Application, arguing that the builder had the option to approach the District Consumer Forum to seek an arbitration referral.

On May 19, 2022, the High Court denied the Section 11 Application and granted the builders the liberty to seek arbitration referral from the District Consumer Forum under Section 8 of the Arbitration Act (“First Order”). However, the District Consumer Forum rejected the subsequent application filed by the builder under Section 8.

Following the rejection, the builder approached the High Court for a review of the First Order. The High Court, vide Order dated November 25, 2022 (“Second Order”), dismissed this review application, stating that the builders were estopped from seeking a review since they had already acted as per the First Order.

Challenging the First and Second Orders before the Supreme Court, the builders argued that the High Court exceeded its jurisdiction. They contended that the High Court improperly considered factors beyond the existence of an arbitration agreement while assessing the Section 11 Application, violating Section 11(6A) of the Arbitration Act.

J U D G MENT

The Supreme Court dismissed the challenge to both Orders, basing its decision on the precedent set in Booz Allen and Hamilton Inc v. SBI Home Finance Limited. The Court emphasized that, contrary to the language of Section 8(1) of the Arbitration Act, a court must not only assess the existence of an arbitration agreement but also consider the arbitrability of the dispute at hand. This arises from the provision in Section 8(1) mandating that a judicial authority “shall” refer parties to arbitration unless it prima facie finds that “no valid arbitration agreement exists.”

The Court ruled that consumer disputes, being protected by welfare legislation such as the Consumer Protection Act, are generally non-arbitrable unless the consumer explicitly opts for arbitration over remedies available through public fora. This grants consumers the choice to seek redress under the Consumer Protection Act or pursue arbitration. Consequently, even with an existing arbitration agreement, consumers retain access to specialized remedies under the Consumer Protection Act if they elect to pursue them. This decision aligns with the reasoning in Secretary, Thirumurugan Cooperative Agricultural Credit Society v. M Lalitha, which highlights the unique remedies provided by the Consumer Protection Act, unavailable in arbitration. Additionally, consumer courts possess broader powers than arbitral tribunals, including the ability to impose penalties for non-compliance with their orders. The Court emphasized that the builder’s initial approach to the High Court does not strip consumer courts of jurisdiction.

Referring to M/S. EMAAR MGF LAND LIMITED VS. AFTAB SINGH, (2019) 12 SCC 751, the Supreme Court maintained that its conclusions remain unaffected by the addition of subsection 6A to Section 11 of the Arbitration Act, aimed at reducing judicial interference in arbitration. Although the 2019 amendments technically removed subsection 6A, which remains unnotified and unimplemented, the Court clarified that Section 11(6A) cannot limit judicial interference to the extent of referring non-arbitrable disputes to arbitration. This stance is supported by Section 2(3) of the Arbitration Act, which states that Part I of the Act does not override laws designating certain disputes as non-arbitrable. While Emaar’s findings were made in the context of Section 8(1) of the Arbitration Act and the Consumer Protection Act of 1986, the Court held that Emaar’s rationale equally applies to Section 11 of the Arbitration Act and the Consumer Protection Act of 2019.

CONCLUSION

Under Indian law, it is now firmly established that an arbitration agreement does not automatically exclude the jurisdiction of consumer courts if a consumer chooses to seek redress through such forums after a dispute arises. In the case of Hemalatha (supra), the Supreme Court underscored that consumers are granted this discretion mainly because consumer courts possess broader powers compared to arbitral tribunals, allowing them to award specialized remedies and enforce compliance with their orders.

While it can be argued that arbitral tribunals have the authority to grant many of the remedies available under the Consumer Protection Act, such as compensation, refunds, or injunctions, and can penalize non-compliance with their awards, there are factors that may render arbitration unsuitable for resolving certain consumer disputes. For instance, cases involving potentially hazardous goods or services may have broader implications for public welfare. The inherently private nature of arbitration in India could also prevent such matters from becoming public knowledge, although arbitration proceedings are not automatically confidential.

Provisions like Section 42A of the Arbitration Act and confidentiality clauses in arbitral institution rules safeguard the confidentiality of arbitration proceedings and awards. However, the discretion afforded to consumers, as seen in cases like Emaar or Hemalatha, to choose arbitration may not adequately protect the public’s right to information about disputes with wider societal implications.

Instead, the stance taken in these cases primarily addresses situations where consumers, often with weaker bargaining power, are compelled to agree to arbitration clauses in standard-form contracts as a precondition for obtaining goods or services. By allowing consumers to approach consumer courts after a dispute has arisen, the courts aim to mitigate the inherent inequalities of such agreements. This ensures that consumers are not unilaterally bound by previous agreements to arbitrate, which they may have entered into under pressure or without the ability to negotiate fairer terms.

The Indian approach to the arbitrability of consumer disputes aligns with that of many other jurisdictions, where courts find pre-dispute arbitration agreements binding on consumers only if they are entered into independently, without conditioning the provision of goods or services on the consumer’s consent to arbitration.

Ansal API Megapolis Buyer’s Assn. v. Ansal Hi-Tech Townships Ltd., 2021 SCC OnLine NCDRC 330, decided on 8-11-2021

The National Consumer Disputes Redressal Commission (NCDRC), with Justice R.K. Agrawal (President) and Dr. S.M. Kantikar (Member) on the Bench, reaffirmed that the inclusion of an arbitration clause in an agreement does not exclude the jurisdiction of consumer forums.

Analysis, Law and Decision

In analyzing the matter and considering the argument regarding the arbitration clause, the Bench relied on the Supreme Court’s decision in Emaar MGF Land Ltd. v. Aftab Singh – I, (2015) CPJ 5 (SC), which established that the presence of an arbitration clause in an agreement does not prevent consumer forums from entertaining complaints. Therefore, the objection raised by the OP’s Counsel, asserting that the arbitration clause barred the commission from hearing the complaint, was deemed unsustainable.

The Counsel’s contention on behalf of the Developer, arguing that the complainants were not ‘Consumers’ and that the flats were booked for investment purposes, was also deemed unsustainable in light of the judgment in Kavita Ahuja v. Shipra Estates I (2016) CPJ 31. This judgment established the principle that the burden of proof shifts to the OP Developer to demonstrate that the complainants were engaged in real estate transactions for profit, which the Developer failed to do.

Additionally, Clause 4.5 of the Flat Buyer Agreement stipulated that in case of failure to deliver possession, the OP Developer was liable to refund the amounts paid by the allottees with simple interest of 10% per annum, without any other compensation. However, Clause 1.19 mandated that in case of late payment, the Buyer was liable to pay interest at 18% per annum. These terms were deemed one-sided and unfair by the Commission, absolving the complainants from being bound by the agreement.

Thus, the comprehensive analysis of the laws highlights that the Consumer Protection Act, 2019, does not differentiate between Indian citizens and foreign citizens regarding the definition of ‘consumer’. While this interpretation isn’t explicitly stated in the Act, it is reasonably implied. When a law doesn’t explicitly exclude a person from its scope, it is understood that such individuals are included. If the legislature intended otherwise, it would have been explicitly stated in the legislation.

 

Sakshi Raghuvanshi

Associate

The Indian Lawyer