India: Enforceability Of Provisions In Contracts Restricting The Right To File Class Action Suits In India*

With the advent of technological advancement and entry of various multinational companies in India for providing goods & services to the Indian citizens, various legal issues arise with regard to the contracts between the parties. There have been various companies which insist on having a provision in its agreement with the consumer / individual that restricts / prohibits the consumer / customer from initiating any class, consolidated or representative claim against the company. However, enforceability of such a clause maybe questionable owing to certain Indian law requirements. This article attempts to discuss the validity and enforceability of such provisions.

  1. Relevant statutory provisions for filing class action suits in India

Under Indian law, various statutes enable a party / parties to approach the competent court (s) through a representative or class action. In this regard:

  • Order 1 Rule 8 of the Code of Civil Procedure, 1908 ("CPC") allows one or more persons to initiate action on behalf of numerous persons with the permission of the court. Courts have held that the said provision is intended to avoid multiplicity of litigation and is to further public interest1nbsp;            
  • Section 12 (1) (c) of the Consumer Protection Act, 1986 ("CPA") also allows parties to approach the District / State / National Consumer Redressal Commissions through a collective action where the interests of the concerned consumers in the action is the same. The principles applicable to Section 12 of the CPA are similar to those applicable to Order 1 Rule 8 of the CPC.2
  • Similarly, Section 245 of the Companies Act, 2013 allows shareholders or creditors to file a class action against the company if they are of the opinion that the management or affairs of the company are being conducted in a prejudicial manner.

The above analysis indicates that several legislations have provided for allowing class or representative actions to be initiated and courts have interpreted such provisions to have an underlying objective of public interest. A restriction / prohibition on the right to initiate class action / representative action may fall foul of these provisions.

  1. Analysis of the provisions of Indian Contract Act, 1872 ("ICA")

For analysing whether a restraint on class action will be valid under Indian law, 2 provisions under the ICA become relevant:

  • Section 28 of the ICA states that an agreement by which a party is "restricted absolutely" from enforcing his legal rights under a contract shall be void. While we have not come across any cases relating to restraint on class action, in the context of jurisdiction of multiple forums, courts in India have held that Section 28 of the ICA will get attracted when there is an ouster of jurisdiction of all courts such that a party is rendered remediless3;
  • Section 23 of the ICA states that the object of an agreement would be unlawful if it would defeat the provision of law or be against public policy. While there is no definition, courts in India have given a very wide meaning to 'public policy'.4
  1. Analysis

In light of the above provisions, a provision restraining any form of class action may not fall foul of Section 28 of the ICA as it does not 'absolutely' restrict a party from enforcing his rights. This is because the customer / individual can still approach the courts in an individual capacity in case of a dispute. However, under Section 23 of the ICA, Indian courts have held that unfair and unconscionable clauses in a contract entered into between parties who are not equal in bargaining power may be struck down as void ab initio.5 A clause may be unfair or unconscionable if it is deemed to be opposing public policy. Given the importance of public interest highlighted by courts in cases relating to class action litigation, such clauses in the contract may also be interpreted as being against public policy.

Additionally, since the right to initiate class / representative action has been codified in the above mentioned statutes, a clause restricting the same may amount to 'defeating the provision of law' as prohibited under Section 23 of the ICA.

It may be worth noting that in the United States of America, there has been substantial litigation on this issue. The US Supreme Court in AT&T Mobility LLC v Concepcion, 563 U.S. 333 held that waivers to class action arbitrations in consumer contracts shall be valid. The Court cited the Federal Arbitration Act, 1925 to reason that since arbitration process is based on freedom of the parties to contract, such clauses in relation to arbitration, should be given effect to. However, courts in California have deemed similar provisions which prevent the consumer to initiate class action arbitrations to be unfair and unconscionable and thus, struck them down.

While there is no precedent in India on this issue, it will be interesting to see the way Indian courts deal with such provisions which restrict / prohibit customers / consumers from initiating class action / representative actions. 

Footnotes

* The Chairman, Tamil Nadu Housing Board, Madras vs. T.N. Ganapathy (1990) 1 SCC 608, para 7.

2 Ambrish Kumar Shukla and Ors. vs. Ferrous Infrastructure Pvt. Ltd, National Consumer Disputes Redressal Commission decided on 07.10.2016.

3 A.B.C. Laminart Pvt. Ltd. and Anr. vs. A.P. Agencies, Salem (1989) 2 SCC 163.

4 Central Inland Water Transport Corporation Limited and Anr. vs. Brojo Nath Ganguly and Anr (1986) 3 SCC 156.

5 Central Inland Water Transport Corporation Limited and Anr. vs. Brojo Nath Ganguly and Anr (1986) 3 SCC 156.

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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