India: Consumer Rights And Arbitration Agreements - A Balancing Act

Last Updated: 6 February 2018
Article by Ajit Warrier

A Division Bench of the Supreme Court of India has decided to examine the correctness of a judgment of the National Consumer Disputes Redressal Commission, New Delhi ("NCDRC") in Aftab Singh and others vs. Emaar MGF Land Limited and others1, which has inter alia held that consumer disputes are not capable of being settled by arbitration.

The batch of matters is expected to be taken up for final disposal on February 7, 2018. This article explores whether the line of reasoning preferred by the NCDRC is likely to invite a more critical scrutiny by the Supreme Court.

The matters arose out of certain complaints filed before the NCDRC by individual allottees of villas/flats/plots in a residential project in Gurugram/Mohali. The complainants alleged that the Builder (the appellant before the Supreme Court) had failed to deliver possession of the villas/flats/plots by the dates committed in the Flat Buyers Agreement and had sought delivery of possession, or in lieu thereof, refund of the amounts deposited by them along with compensation. The Builder, in response, referred to the existence of an arbitration agreement in the Flat Buyers Agreements with the individual allottees and sought reference to arbitration, relying upon the amended sub-Section (1) of Section 8 of the Arbitration and Conciliation Act, 1996 ("the Arbitration Act")2.

The batch matters were referred by a Single Member of the NCDRC to a three member Bench. The larger Bench framed the issue for adjudication as under:

"Whether the Arbitration Act mandates Consumer Forums, constituted under the Consumer Protection Act, 1986 ("the Consumer Act"), to refer parties to arbitration in terms of a valid arbitration agreement, notwithstanding other provisions of the Arbitration Act and the Consumer Act?"

Answering the reference, the larger Bench held that

  1. the Consumer Act is a special social legislation enacted to protect consumer rights, which establishes a level-playing field between unequal players, i.e. consumers and large Corporations, and is quite unlike other legislations that create dispute resolution mechanisms between level players3.
  2. by virtue of Section 2(3) thereof, the Arbitration Act itself excludes from its purview certain disputes which fall within the public law regime and with respect to which statutory remedies are put into place to subserve a public policy. Since consumer disputes would fall within the umbrella of the said provision, they were not intended to be covered by the amendment to Section 8 of the Arbitration Act.
  3. the jurisdiction of the Consumer Forums to adjudicate upon consumer disputes is not affected by either Section 8 (as amended) of the Arbitration Act or by any other provision thereof.
  4. to accept the plea of the Builder would be to set at naught the entire purpose and object of the Consumer Act, viz. to ensure speedy, just and expeditious resolution and disposal of consumer disputes.

Although the conclusions reached by the NCDRC appear, at face value, to be justified, the author believes that the Supreme Court will likely examine the reasoning of the NCDRC critically for the following reasons.

Firstly, as has been noted by a two Judges Bench of the Supreme Court in A. Ayyasamy vs. A. Paramasivam and others4, the Arbitration Act does not make any specific provision excluding any category of disputes treating them as non-arbitrable. In fact, Justice (Dr.) A.K. Sikri notes, in his pithy judgment in the said case, that even while Sections 34(2)(b) and 48(2) of the Arbitration Act, inter alia, provide that an arbitral award may be set aside if the Court finds that the "subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force", the necessary pre-requisite is that there should be a law which makes subject matter of a dispute incapable of settlement by arbitration. It is difficult to point to any provision in the Consumer Act which would suggest a legislative intention that every consumer dispute5 is incapable of settlement by arbitration.

This view also finds support from Section 2(3) of the Arbitration Act, which states that 'This Part (referring to Part I) shall not affect any other law for the time being in force by virtue of which certain disputes may not be referred to arbitration'. While the NCDRC has dealt with, and indeed drawn support from, the said provision in its judgment to hold that consumer disputes are inherently non-arbitrable, it is difficult to reconcile such a conclusion with the mandate of Section 3 of the Consumer Act which states that the provisions of the said Act shall be in addition to and not in derogation of the provisions of any other law for the time being in force. Even the Supreme Court had held in umpteen judgments that the import of this provision in the Consumer Act is only to provide a remedy for certain classes of consumer actions in addition to the conventional courts6.

Thirdly, the conclusion drawn by the NCDRC with respect to consumer disputes being non-arbitrable is beset with serious difficulty. In fact, in its seminal judgment in Booz Allen and Hamilton Inc. vs. SBI Home Finance Limited and others7, the Supreme Court observed that every civil or commercial dispute, either contractual or non-contractual, which can be decided by a court, is in principle capable of being adjudicated and resolved by arbitration unless the jurisdiction of the Arbitral Tribunals is excluded either expressly or by necessary implication. The Supreme Court further observed that adjudication of certain categories of proceedings are reserved by the legislature exclusively for public fora as a matter of public policy. It was further observed that certain other categories of cases though not expressly reserved for adjudication by public fora (courts and tribunals) may, by necessary implication, stand excluded from the purview of private fora. Clarifying further, it listed certain examples of non-arbitrable disputes, namely

  • disputes relating to rights and liabilities which give rise to or arise out of criminal offences,
  • matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody,
  • Guardianship matters,
  • Insolvency and winding-up matters,
  • Testamentary matters (grant of probate, letters of administration and succession certificate), and
  • Eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.

To this category of non-arbitrable disputes, the Supreme Court, in Vimal Kishor Shah and others vs. Jayesh Dinesh Shah and others8, added a seventh category of cases, namely cases arising out of trust deeds and the Trusts Act, 1882 which cannot be decided by an Arbitrator. More recently, in A. Ayyasamy9, the Supreme Court held that where serious and complicated allegations of fraud are raised, the matter cannot be referred to arbitration.

The broad reasoning provided by the Supreme Court for carving out these exceptions was that these relate to actions in rem, which refer to actions determining the right to property and the rights of the parties, not merely among themselves but also against all persons at any time claiming an interest in that property. In contrast, an action in personam refers to actions determining the rights and interests of the parties themselves in the subject matter of the case (as distinguished from a judgment against a thing, right or status). It was further held that generally and traditionally, all disputes relating to rights in personam are considered to be amenable to arbitration, whereas all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration.

A scrutiny of the Consumer Act reveals that two broad categories of cases are envisaged thereunder. The first category of cases are complaints filed under Section 12(1)(a) by a consumer in relation to any goods sold or delivered or agreed to be sold or delivered or any service provided or agreed to be provided. It would be rather difficult to propound a sweeping proposition that even in such cases brought by an individual consumer the matter would necessarily involve determination of a right in rem.

On the other hand, Section 12(1)(c) envisages the filing of a complaint by one or more consumers, with the permission of the District Forum, as a representative of numerous consumers having the same interest. Similarly Section 12(1)(d) empowers the Central Government or the State Government to inter alia file a complaint as a representative of interests of the consumers in general. Arguably, in this second category of cases, issues could arise for adjudication involving rights in rem.

In the author's opinion, the Supreme Court should attempt to reconcile the seemingly divergent mandates of the two statutes by requiring the Consumer Forum to examine, in light of principles as may be laid down, whether a given consumer dispute brought before it ought to be referred to arbitration10 when an application under Section 8(1) of the Arbitration Act is moved seeking reference to arbitration. In other words, while determining whether a consumer dispute ought to be referred to arbitration, the Consumer Forum would have to focus on the nature of dispute brought before it, as opposed to the mere circumstance of filing of a consumer complaint before it. That will, to a great extent, obviate the difficulties presented by the conclusion of the NCDRC that a consumer dispute is not capable of settlement by arbitration.

Such a harmonious construction will also help ensure that a fine balancing act is achieved between the legislative philosophy and social objective behind the enactment of such a special law for consumers and the legislative mandate of the law governing arbitrations.

Originally published by Bar & Bench.

Footnotes

[1] Reported as MANU/CF/0480/2017, decided on 13 July 2017.

[2] As amended by the Arbitration & Conciliation (Amendment) Act, 2015, with effect from 23 October 2015.

[3] Reliance was placed by the NCDRC on the Supreme Court judgment in Lucknow Development Authority vs. M.K. Gupta, (1994) 1 SCC 243.

[4] (2016) 10 SCC 386

[5]The term 'consumer dispute' is defined under Section 2(e) of the Consumer Act to mean a dispute where the person, against whom a complaint (alleging commission of certain objectionable practices as outlined in Section 2(c) thereof) has been made, denies or disputes the allegations in the complaint.

[6] Fair Air Engineers Pvt. Ltd. and another vs. N.K. Modi (1996) 6 SCC 385; CCI Chambers Coop. HSG. Society Ltd. vs Development Credit Bank Ltd. (2003) 7 SCC 233

[7] (2011) 5 SCC 532

[8] (2016) 8 SCC 788.

[9] Supra.

[10] Mustill and Boyd in their Law and Practice of Commercial Arbitration in England (2nd Edn., 1989), cited in Booz Allen & Hamilton Inc. (supra).

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