Was the Supreme Court’s Approach in Declaring Consumer Disputes as Non-Arbitrable Outcome-Driven?

[Ganesh A Khemka is a lawyer who graduated in 2019 with a B.A. LL.B.(Hons.) from the National Law School of India University, Bangalore]

In 2018 the Supreme Court of India in Emaar MGF Land Ltd v. Aftab Singh considered the question of whether consumer disputes should be referred to arbitration under section 8(1) of the Arbitration Act (“Act”) if there existed a mandatory arbitration clause or whether they could be tried by the specialised consumer forum. Aftab Singh had approached the National Consumer Disputes Redressal Commission (“NCDRC”) being aggrieved by late delivery of possession of property by the appellant builder. In the complaint before the NCDRC he sought delivery and possession of the property and, in the alternative, refund of deposit and compensation. The buyers’ agreement had a standard mandatory arbitration clause for all disputes between the builder (Emaar) and the customer (Aftab). Emaar therefore made an application under section 8(1) of the Act contending that there was a valid and mandatory arbitration clause between the parties and hence the NCDRC must refer the parties to arbitration.

In doing so, Emaar placed emphasis on the Arbitration and Conciliation (Amendment) Act, 2015 (the “2015 Amendment”). Following the 2015 Amendment, section 8(1) of the Act mandates reference by judicial authorities of disputes with valid arbitration clauses to arbitration, “notwithstanding any judgment, decree or order of the Supreme Court or any court”. Emaar argued that the non obstante clause of the 2015 Amendment rendered some prior judgements redundant which had a twofold impact. First, Emaar contended that cases such as A. Ayyasamy and Booz Allen, where it was held that some subject matters involving an element of public policy would not be arbitrable, were rendered redundant because of the non obstante clause. Relying on Duro Felguera, Emaar argued that the 2015 Amendment had further narrowed the powers of the court such that it could now only look at the existence of a valid arbitration agreement and not at subject matter arbitrability. Second, in the cases of Fair Air Engineers and Madhusudhan Reddy the Supreme Court held that the relief under the Consumer Protection Act, 1986 being a special type of relief could not be precluded by the existence of a mandatory arbitration agreement. Emaar argued that this line of cases had also become inapplicable because of the non obstante clause.

The Supreme Court noted that section 2(3) of the Act states that Part I of the Act “shall not affect any other law for the time being in force, by virtue of which certain disputes may not be submitted to arbitration.” Hence the intention of the 2015 Amendments were never to make such expansive changes and that ‘non-arbitrability’ of subject matter involving public policy element would continue to be a ground for denial of a section 8 application. Having concluded this, the Court went on to examine whether consumer disputes would be non-arbitrable according to the test laid down in Booz Allen. In Booz Allen, the Supreme Court drew a distinction between disputes involving rights-in-rem, which result in creation of a legal status and are non-arbitrable, as opposed to rights-in-personam, which are against a person. Here the court relied on a plethora of judgments to determine the nature and mandate of the Consumer Protection Act, 1986 to infer that it provided a public law remedy before a specialised forum and hence such special remedy could not be precluded by the existence of an arbitration clause. Because the remedies under Consumer Protection Act were special remedies and therefore proceedings before consumer forum was not precluded, the Court concluded that section 2(3) would apply which would override the non-obstante introduced by the 2015 Amendment and would render infructuous a recourse to section 8(1).

The judgement of the Supreme Court in Emaar suffers from three glaring infirmities.

Erroneous Reliance on Vimal Kishor Shah

In the Aiyyasamy case, Chandrachud J. noted that there are certain classes of disputes which are appropriate for decision by public fora, and others “which fall within the exclusive domain of special fora under legislation which confers exclusive jurisdiction to the exclusion of an ordinarily civil court”. The latter category, i.e., disputes which can be tried only by a special fora and not a civil court, would be non-arbitrable. In addition to the above the Court also noted the judgement in Vimal Kishor Shah v. Jayesh Dinesh Shah where it was held that matters falling under the Trusts Act, 1882 are not arbitrable because it provides for special remedies which bar a civil suit and therefore also bar the application of the Act. The principle emerging from these two cases is that where disputes fall exclusively under a special forum then arbitration would be barred. However, the Supreme Court in Emaar holds the ratio to be applicable here too, and finds consumer disputes to be non-arbitrable. However, it is clear that the Court committed a grave error in coming to such a conclusion since consumer disputes are not exclusively triable by a special forum (Consumer Commission in this case). On the contrary section 3 of the Consumer Protection Act specifically provides that proceedings before the NCDRC or other consumer fora are not in derogation of and do not oust the jurisdiction of civil courts. Therefore, reliance of the Supreme Court on Vimal Shah was clearly misplaced.

Confusion Regarding ‘Non-arbitrability’ of Consumer Disputes

The Court gave a very broad finding which was not just limited to consumer disputes. The revision bench in its concluding remarks noted the following:

“in the event a person entitled to seek an additional special remedy provided under the statutes does not opt for the additional/special remedy and he is a party to an arbitration agreement, there is no inhibition in disputes being proceeded in arbitration. It is only the case where specific/special remedies are provided for and which are opted by an aggrieved person that judicial authority can refuse to relegate the parties to the arbitration.”

[emphasis added]

This observation by the Court goes far beyond the issue which had been raised before it. Despite noting that the matters were ‘non-arbitrable’ earlier, the Court nevertheless held that it could be arbitrable at the instance of one party, i.e. the consumer. This is problematic for two accounts: first it effectively creates a third category of subject matter, which is non-arbitrable at the instance of one party and arbitrable at the instance of another. This goes beyond the framework of the Act and it seems extremely doubtful whether it would be covered under section 2(3). It hence throws the Court’s entire rationalisation into doubt. Second, it legitimises one-way arbitration clauses whose enforceability has remained disputed in India. A right with only one party to an arbitration agreement to initiate arbitration has earlier been held as being unequal and void, and at other times it has been held to be enforceable subject to “prior knowledge and consent of both parties”.

Finding of the Judgement Exceeds the Issue in Contention

The Court effectively held that wherever there exist special remedies, and one of the aggrieved parties seeks such special remedy, then the parties cannot be compelled to arbitrate the matter. Such a finding, which is not limited to consumer disputes, would have far-reaching consequences. Many disputes before specialised tribunals such as National Company Law Tribunal, the Telecom Disputes Settlement and Appellate Tribunal and Electricity Tribunal might involve agreements that have arbitration clauses and all these specialised forums provide for special remedies. The holding in Emaar when applied to these fora would mean that if a party seeks remedy before them then they will be compelled to take up the matter on merits and not send the parties to arbitration even if a valid arbitration clause exists. This excludes from the scope of arbitration disputes under the jurisdiction of Electricity Tribunals, the National Company Law Tribunal, the Telecom Disputes Settlement and Appellate Tribunal, or the dozens of other tribunals in India. This effectively has reduced permissible subject matters of arbitration to only those without specialised tribunal, which seems to be a dying class of subject matters.

Such a finding is at odds with the principle of party autonomy. Pro-consumer considerations weighed heavily on the mind of the Court while passing this judgement – considerations that special remedies which the arbitral tribunal could not have granted could be availed before the consumer forum lead the Court to reach this conclusion. However, such considerations might not be present in other specialised forum and very good reasons may exist for the specialised forum to send the dispute for arbitration. The Emaar judgement now has taken away this power of other specialised tribunals by rendering such a broad judgement.

Conclusion

Mandatory pre-dispute arbitration clauses have become very common in buyer agreements and many other consumer contracts. Often times enforcement of such mandatory arbitration clauses is used by businesses merely as a strategy to deny consumers access to forums in front of which they can otherwise seek recourse or which would be more consumer-friendly. Unlike arbitration in the context of other disputes which might be faster, efficient and cost-effective, for consumer disputes arbitration often becomes financially onerous for consumers. It might also result in denial of special remedies. In the Indian context using arbitration for consumer dispute resolution rather than the procedure provided under the Consumer Protection Act also amounts to a waiver of right to appeal since the arbitral award can only be challenged on very limited grounds under section 34 of the Act whereas the Consumer Protection Act provides for several stages of appeal. Even if the Court was guided by such policy arguments and believed that adjudication under the Consumer Protection Act was in the interest of consumers yet the judgement continues to be legally untenable. What is problematic in this judgement may not be the final outcome but the manner in which it was arrived as also the ramifications which such an overly broad finding of the Court would have on future cases before specialised tribunals.

Ganesh A Khemka

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