In an effort to bring India's Consumer Rights framework up to speed, the Consumer Protection Bill, 2018 is contemplated and in public domain. In this article, we examine the overall bill and what it means for businesses that are engaged in the manufacture and sale of consumer goods and provide consumer services.
Consumer Protection Watchdog Under the scheme of the Consumer Protection Act, 1986, businesses were accustomed to defending claims from consumers alone. The definition of a consumer which excluded transactions availed for commercial purposes, raised jurisdictional issues which itself led to frequent dismissals of complaints.
What the earlier Act did not have was an agency to proactively screen the market for prospective consumer rights violations and respond before a consumer suffered an injury due to defective goods or deficiencies in services.
The proposed bill, vide Section 2 (4) contemplates a Central Consumer Protection Authority whose functions will now include, among other things, regulating matters relating to violation of rights of consumers, unfair trade practices and false or misleading advertisements which are prejudicial to the interests of public and consumers and to promote, protect and enforce the rights of consumers as a class. As a natural corollary, the definition of a "Complainant" has been introduced which now not only includes a consumer or a consumer welfare organisation, but even the central and state government and the central authority specified in Section 2 (4).
Unfair Contracts The present Act of 1986 largely addresses three principal kinds of consumer rights offences, namely, deficiency in services, defective goods and unfair trade practices. Yet, a common theme in most defences against consumer complaints involved taking shelter under contracts entered into with consumers that disclaimed liability through elaborate and overarching disclaimers. For example, a consistent pattern emerged in construction agreements where a builder could seek shelter under "Acts of Force Majeure", whose definition included even labour shortage. Considering that Acts of Force Majeure refer to factors beyond a party's power or control, the aforesaid expanded definition of force majeure events which included a builder's failure to keep adequate labour, seemed patently untenable. Yet, consumers disabled by disproportionate bargaining powers in such contracts, often agreed to such clauses which, though ultimately assailable before a consumer forum, nevertheless deterred a consumer from even contemplating legal recourse.
In order to ensure that the lopsided power dynamic between a consumer and the manufacturer/seller/service provider is addressed, the Act seeks to discourage and appropriately penalise "unfair contracts", which is defined as a contract between a manufacturer or trader or service provider on one hand, and a consumer on the other, having such terms which cause significant change in the rights of such consumer, including the following, namely:— (i) requiring manifestly excessive security deposits to be given by a consumer for the performance of contractual obligations; or (ii) imposing any penalty on the consumer, for the breach of contract thereof which is wholly disproportionate to the loss occurred due to such breach to the other party to the contract; or (iii) refusing to accept early repayment of debts on payment of applicable penalty; or (iv) entitling a party to the contract to terminate such contract unilaterally, without reasonable cause; or (v) permitting or has the effect of permitting one party to assign the contract to the detriment of the other party who is a consumer, without his consent; or (vi) imposing on the consumer any unreasonable charge, obligation or condition which puts such consumer to disadvantage.
This definition of unfair contract has wide ramifications for businesses. Banks and Financial Institutions must now refrain from the unhealthy habit of pre-closure penalties. Hospitality organisations must now review and rationalise their standard disclaimer about right to admission, considering they may no longer unilaterally terminate the contract. Builders cannot introduce unreasonable penalties disproportionate to the nature of default on the part of the consumers.
For start ups who are keen on hiving off their business as a whole, the ban on unilateral assignment of contracts would have to be suitably addressed in their agreements with the consumers.
While the ban on concepts like pre-closure penalties is admirable, considering it penalises borrowers who perform ahead of schedule in repaying their dues, the concept of second guessing a contract which is the product of voluntary consent does raise legitimate concerns about ease of doing business.
It also fundamentally challenges the decades of jurisprudence emanating out of the maxim, "Caveat Emptor". The buyer, if this bill does go through, need not be aware and can always challenge contractual obligations on the ground that it was an "unfair contract".
The wisdom of such a provision is debatable. Take for example the ban against unilateral termination. Section 14 of the Specific Relief Act, 1963 already contemplates "determinable contracts" and thanks to centuries of litigation, common law has an adequate understanding of contracts which are inherently not terminable and which by their nature, are in fact terminable. Greater utility would have been served by summarising the jurisprudence of determinable and terminable contracts, than by seeking to introduce an altogether new concept called "unfair contract". In addition, even the caution against unilateral assignment challenges conventional jurisprudence. As held in the case of Benode Behary Roy v. The General Assurance Society Ltd., reported in AIR 1950 Cal 232 and Kanpur Development Authority v. Sheela Devi, reported in AIR 2004 SC 400, when parties enter into a contract and one party agrees that, within the contractual framework, one or both of them will have some unilateral powers, such powers are valid. We would assume that when unfair contracts are litigated, the challenge before the consumer courts of the country will be to try to harmonise conventional jurisprudence around contracts and the novel concept of unfair contracts.
It also raises a larger question around ease of enforcing contracts in India. If "unfair contract(s)" are considered a violation of consumer rights and even amounts to an injury warranting compensation under the proposed bill, then are those clauses which constitute unfair contracts incapable of enforcement on the premise that they are contrary to the law of the land? On one hand, the bill really bats for the underdog and intents to provide a level playing field to consumers transacting with big businesses, but the inherent scope for mischief in the said definition could potentially frustrate the larger efforts at improving India's scores in the ease of enforcing contract's index.
Enhanced liability Liability in a consumer dispute rapidly evolving in a world where e-commerce has come to challenge brick and mortar based models of product and service delivery.
To begin with, the proposed bill calls for a fundamental review of warranties being provided by manufacturers and sellers alike. The definition of product liability, among other things, calls for an examination of the "express warranty" being offered alongside the product. Section 2 (20) defines express warranty as any material statement, affirmation of fact, promise or description relating to a product or service warranting that it conforms to such material statement, affirmation, promise or description and includes any sample or model of a product warranting that the whole of such product conforms to such sample or model. Clearly, this provision is intended to address a whole range of misleading products in the market, ranging from spurious pharmaceutical goods which promise instantaneous weight loss to mass produced and tele marketed totems that promise to bring wealth in the place of poverty. This also fundamentally challenges ethically debated products like fairness creams. The liability contemplated appears to be strict in nature and therefore independent of the burden to establish negligence or fraud on the part of the manufacturer or seller.
But where the bill could be a cause of concern, is in its understanding of the term "product seller". Under the Act of 1986, a consumer, to qualify for protection under the Act would have to establish the passing of consideration for the purchase of goods or services or at least a promise to pass such consideration. This often translated to the requirement of producing a purchase invoice or a purchase order. Thus, online marketplace providers like Amazon, who merely provided virtual space and supply chain support to enable seller-buyer transactions, would largely avoid liability under the 1986 Act. After all, the invoice for the purchase was issued by the seller to the purchaser and not by the e-commerce platform provider. This bill on the other hand, defines a product seller as not only someone who sells goods but also someone who markets or otherwise places such products for commercial purpose. Further Section II (37) (c) (II) excludes from the definition of a product seller, a person who is "not a electronic service provider". The confusing use of the double negative seems to suggest that electronic service providers are now placed on par with product sellers, as far as consumer rights in the country is concerned.
For e-commerce platform providers, the new bill represents an unprecedented obligation to verify sellers, verify products and ensure a process is put in place where intelligence can be collected real time on complaints and remedial action is initiated to safeguard consumer rights.
Also, the seller agreements and agreements with manufacturers and distributors will have to ensure adequate representations, warranties and indemnities to safeguard against the particularly vulnerable exposure to liability under the new law.
What next? The Bill is a fantastic beginning to what could be a comprehensive legislation for the consumer rights movement in India. That, being said, the bill must make an effort to also ensure honest traders, sellers and manufacturers don't find themselves frequently before consumer forums. It is great to see that endorsement of products or services by making impractical promises through advertisements, which cannot be fulfilled, can attract exorbitant penalty and imprisonment. Under this provision, not only the manufacturers, sellers or service providers but also the endorsers such as celebrity endorsers can be held accountable for making misleading endorsements. Placing responsibility on the endorsers to do their homework and choose their brands would perhaps greatly curb the patently false representations being pushed through advertisements.
Lastly, we hope to see the bill clarify the issue of jurisdiction in consumer disputes, particularly where the transaction is done online. For startups in the e-commerce domain, this would greatly assist the cause for resource planning to defend such claims or even respond earlier in order to prevent escalation to a consumer court.
Though the final shape of the bill will be known to us only in time, the bill itself is a wake up call for businesses and consumers alike. We suggest businesses to take the following steps in anticipation of the bill,
- Review the science leading to express warranties and ensure adequate documentation to justify the statement contained in the express warranty. From the "best before" details to the anticipated utility of the product, ensure evidence is collated to justify the science behind the statement or warranty itself.
- The general rule of good drafting mandates fairness in a contract. It is time to put that principle into practice. But also ensure that correspondences with consumers, especially those in writing, adequately reflect a democratic process leading to the contract. For a consumer contract, it is no longer sufficient to document consent. Effort must be made to document informed consent for the contract itself.
- For banks and financial institutions, it is time to carefully review pre- closure penalties. They may be on their way out and ensuring the absence of such clauses would greatly undo the damage of the contract itself being challenged as contrary to law.
- For builders- offer realistic deadlines for completion, ensure fair penalties for failure to meet deadlines either for payment or for completion and avoid creative definitions of force majeure which may defy common sense.
- E-Commerce operators must introduce representations and indemnities in their agreements with sellers and even secure insurance considering the large ecosystem that they work with often makes verification of individual sellers and products untenable. Furthermore, e-commerce operators must introduce pro-forma declarations for sellers that their products are compliant with the express warranties contained therein.
Originally published February 2, 2018.
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