Will an arbitration clause exclude a consumer forum?

By Trinath Tadakamalla and Manvi Adlakha, Phoenix Legal

Persons and companies who claim to be “consumers” of goods or services (such as real estate, insurance, etc.) can approach the National Consumer Disputes Redressal Commission (NCDRC). Indian courts have held that companies can do so even where their contract contains an arbitration clause, as the NCDRC provides a parallel remedy. In a recent decision of the NCDRC, upheld by the Supreme Court, it has been held that this position will hold even in light of far-reaching amendments to the Arbitration and Conciliation Act, 1996 (arbitration act).

Trinath TadakamallaPartnerPhoenix Legal
Trinath Tadakamalla
Phoenix Legal

In the case of Aftab Singh v Emaar MGF Land, the NCDRC was hearing a matter related to amendments made to section 8(1) of the arbitration act. Home buyers approached the NCDRC after the builder failed to deliver possession. The builder relied on arbitration clauses in the buyers’ agreement to seek reference to arbitration. The question that arose was whether the legislature’s intention was to relegate the consumer disputes in that case only to arbitration notwithstanding the existence of the Consumer Protection Act, 1986 (COPRA), and its social welfare purpose. The NCDRC, by way of an order of 13 July 2017, held that the NCDRC continued to offer a parallel remedy (in keeping with an earlier line of judgments).

Section 8(1) mandates that a judicial authority “shall” refer the parties to arbitration, “notwithstanding any judgment, decree or order of the Supreme Court … unless it finds that prima facie no valid arbitration agreement exists”. The buyers argued that irrespective of an arbitration clause, consumer forums could hear cases. The builder argued that the arbitration act was amended to oust the jurisdiction of courts.

The NCDRC referred to several judgments to find that disputes are not characterized as arbitrable and non-arbitrable at the whim of the legislature. The classification is guided by an objective of public policy. Certain categories of proceedings are reserved by the legislature exclusively for public forums as a matter of public policy, and certain categories of cases stand excluded from the purview of private forums by necessary implication. Therefore, where a specific remedy is provided in a special statute, there exists an implied exclusion of the applicability of the arbitration act.

Manvi AdlakhaAssociatePhoenix Legal
Manvi Adlakha
Phoenix Legal

The NCDRC held that the legislature could not undo jurisprudence under the framework of the COPRA by amending section 8(1) of the arbitration act. The NCDRC referred to (pre-amendment) cases to hold that an arbitration clause will not be a bar to maintaining a consumer complaint. The NCDRC also discussed some post-amendment cases and came to the view that the Supreme Court had affirmed the protection from private resolution granted to consumers.

The NCDRC’s view derives from the COPRA being a special social statute meant to protect consumer rights. On this basis (pre-amendment) court decisions have held that consumer forums were not bound to refer disputes to arbitration. The NCDRC’s order in the Emaar case seeks to settle the same position post-amendment. However, the NCDRC has overlooked the purpose of the COPRA, which is to protect consumers and not commercial entities such as companies operating for profit, which usually have sufficient resources at their disposal. Cases filed by companies before consumer forums defeat the purpose of the COPRA and also delay the disposal of cases filed by the real “consumer” whom the COPRA was meant to protect.

Dismissing an appeal by Emaar and upholding the NCDRC order on 13 February 2018, the Supreme Court held that an arbitration clause in the agreement cannot circumscribe the consumer forums’ jurisdiction despite the amendments to the arbitration act. The Supreme Court’s order states that the judges “do not find any ground to interfere with the impugned order”, without saying what factors were considered. However the decision dilutes the purpose of the amendments to section 8(1) – which is to encourage arbitration – and the overall objective of the COPRA, instead of holding that where an agreement includes an arbitration clause, parties have to be referred to arbitration, in line with the court’s pro-arbitration outlook.

If parties consciously decide (by agreeing an arbitration clause) to approach an arbitral tribunal instead of a consumer forum, why should they be allowed to negate that when a dispute arises? That question remains unaddressed. With more cases of a commercial nature, which should have ended up in arbitration, being brought to consumer forums, the consumer forums are facing issues with case delays and those who should have got justice are being made to wait for years on end.

Trinath Tadakamalla is a partner and Manvi Adlakha is an associate at the New Delhi office of Phoenix Legal.


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