India: Arbitration Clauses Cannot Oust The Jurisdiction Of The Consumer Courts

Last Updated: 19 July 2017
Article by Naval Sharma and Aditya Gupte

It is well settled that arbitration agreements do not bar the jurisdiction of the National Consumer Disputes Redressal Commission ('NCDRC') and other consumer forums. The issue was, however, reconsidered at length by a Full Bench of the NCDRC, in Aftab Singh v Emaar MGF Land Limited & Anr [Consumer Case No 701 of 2015]  in view of the amendments to the Arbitration and Conciliation Act 1996 ('the Amended Act'). The Full Bench was constituted pursuant to a referral by the Single Bench on 31 August 2016. In its decision of 13 July 2017, the NCDRC has once again reiterated that since the Consumer Courts are special courts constituted to serve a social purpose, the Amended Act does not apply to them.

Facts:

The dispute before the NCDRC was between real estate buyers ('Buyers') and a property developer ('Builder').  The grievance of the Buyers was that the Builder failed to deliver possession of the real estate within the time stipulated by the agreement between them. The Builder filed an application under §8 of the Amended Act praying for reference to arbitration as the agreement contained a valid arbitration clause.

Contentions of the Parties: 

The Buyers contended that the remedies provided by the Consumer Protection Act 1986 ('Consumer Act') are in addition to and not in exclusion of other laws in force.  Even under the Amended Act, the intent of the legislature is not to bar the jurisdiction of the Consumer Courts, where an arbitration clause exists. The existing interplay between the Consumer Act and the Amended Act remains unaffected.  The decision of the Supreme Court in National Seeds Corporation Limited v M Madhusudhan Reddy [(2012) 2 SCC 506] where the court had ruled that consumer disputes cannot be referred to arbitration, continued to apply.   It was also argued that the Consumer Act is a beneficial legislation and, therefore, the intention behind its enactment ought to be advanced.

The Builder on the other hand submitted that the Consumer Courts are 'judicial authority' within the meaning of §8 of the Amended Act. Therefore, they are required to refer parties to arbitration if a valid clause exists. Further, under the Amended Act, the judicial authority was required to refer disputes to arbitration, irrespective of any decisions of the High Court or the Supreme Court of India, as such Article 141 of the Constitution would also be of no assistance to the parties. Emphasis was also laid on §5 of the Amended Act, which requires a judicial authority to refer parties to arbitration, irrespective of anything contained in any other law.

Decision of the Court:

While ruling that the Amended Act did not bar the jurisdiction of the Consumer Courts, the Full Bench of the NCDRC, relied on judgments of the Supreme Court which have laid down categories of disputes that are considered non-arbitrable. The court referred to Booz Allen Hamilton Inc v SBI Home Finance Ltd [(2011) 5 SCC 532], where the Supreme Court had laid down 7 categories of non-arbitrable disputes. Reference was also made to Vimal Kishore Shah v Jayesh Dinesh Shah [(2016) 8 SCC 788], which states that cases under the Trust Act 1882 are non-arbitrable.

The NCDRC also relied on the Supreme Court judgment in A. Ayyasamy v A Paramasivam [(2016) 10 SCC 386], where the Supreme Court had observed that if the jurisdiction of the ordinary civil court is excluded by conferring exclusive jurisdiction on a special court or tribunal as a matter of public policy, then the dispute would not be arbitrable. This was exactly the case with Consumer Act.

The Consumer Courts were setup to create a mechanism for disputes between unequal players, namely the consumers and large corporations and, as such, there was public policy involved. The NCDRC noted that disputes are not characterized as non-arbitrable on the whims and fancies of the legislature but based on jurisprudence built by the Supreme Court in harmony with the legislature and keeping in mind the public policy objective. By the Amended Act, particularly §8(1), the legislature could not have intended to undo this entire jurisprudence.

The NCDRC then proceeded to examine the 246th Law Commission Report to establish the objective behind the Amended Act. The NCDRC ruled that the Report was dedicated to curtailing the scope and nature of pre-arbitral judicial intervention. The issue of non-arbitrability of consumer disputes was not considered by the Law Commission while making its report. 

Lastly, the NCDRC also referred to §2(3) of the Amended Act which protects certain categories of disputes from being referred to arbitration. The Full Bench ruled that consumer disputes were protected under this provision. The NCDRC concluded its judgment by stating that if the contention of the Builder is accepted, it would defeat the entire purpose and object of the Consumer Act and no legal amendments can be intended to reduce a harmonized and established legal framework to a dead letter.

Concluding Remarks:

The NCDRC judgment is amongst the first rulings to examine the impact of §8 of the Amended Act. The ruling that certain categories of disputes are not arbitrable based on a public policy framework and further that the Amended Act could not be interpreted to overrule this entire jurisprudence will have an important bearing on cases where parties even under the Amended Act continue to argue that certain categories of disputes are non-arbitrable.  

This is particularly relevant to the question of whether disputes involving serious allegations of fraud continue to be non-arbitrable under the Amended Act. This issue is once again pending before the Supreme Court of India and it will be worth examining how the Supreme Court interprets §8 of the Amended Act, particularly whether the legal reasoning applied by the NCDRC is reiterated.

For further information on this topic please contact Tuli & Co 

Tel T +91 22 6725 5421, fax F +91 22 6725 5422 or email lawyers@tuli.co.in

www.tuli.co.in

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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