PANDORA’S BOX OF CONSUMER DISPUTE ARBITRATION: REVISITING LEGALITY IN THE DYNAMIC LANDSCAPE
Author: Prateek, B.A.,LL.B from Army Institute of Law, Mohali.
With the exponential growth of arbitration as an alternative dispute resolution mechanism, Indian Legislature and Judiciary have manifested a seemingly high propensity to rule in favour of this mechanism. Optically, this has been in the form of legislative amendments that streamline the arbitration procedure, such as the amendment to s.34 of the Arbitration and Conciliation Act, 1996 (“A&C Act”). On the judicial end, this manifestation has been in the form of precedents that widen the horizon of arbitrability. This prioritization of arbitration, along with the adoption of principles like that of “Kompetenz-Kompetenz”, has paved the way for strengthening mandatory arbitration through enforcement of pre-dispute arbitration agreements.
Mandatory arbitration through standard form contracts is primarily unilateral, with little to no scope for negotiation. Courts have held that once the statutory requirements under s.8 have been satisfied, the court must refer the dispute to arbitration. Yet, this process is not as straightjacket as it may seem, since it has also been established that certain disputes are non-arbitrable by virtue of the dispute’s nature.
Such discourse by the Supreme Court resulted in the creation of a new regime with respect to arbitrability of consumer disputes, whereby the court upheld party autonomy by stipulating that consumer may opt into arbitration if so desired, but also provided a safeguarding mechanism by upholding a consumer’s right to approach Consumer Courts regardless of the existence of pre-dispute arbitration agreements. Yet, where party autonomy is held to be one of the pillars of arbitration law, this principle of autonomy may be vitiated in the case of certain unequitable relationships and hence there is a need for state intervention under the banner of public policy.
Mandatory Arbitration Agreements in Unequal Contractual Relationships
With this increasing adoption of standard-form contracts in the Business-2-Consumer world, some use-cases of such agreements have created a space for jurisprudential discourse from a safeguarding perspective. This issue largely revolves around contracts finding their genesis in a paradigm of unequal power dynamics between parties to a contract. Manifestation of such unequal power dynamics is usually in the form of unilateral standard form-contracts, harming the claim of party autonomy that arbitration otherwise champions. Two such power-dynamics include the employer-employee relationship, and the business-consumer relationship.
A Parallel: Employer-Employee Relationships:
Prima facie, employer-employee relationships provide a manifestation of unequal relationships in terms of power dynamics. Recognition of this inequality enables state to undertake the drafting of protective labour legislations. In countries like France, Germany and United Kingdom, one can observe this protective perspective manifesting in a limitation on, or even outright refusal to, enforce pre-dispute arbitration agreements with respect to disputes over wrongful dismissal of an employee. Such an approach is relatively absent from US Jurisprudence where not only do courts enforce pre-dispute arbitration, but have also upheld derogation of worker rights like the right to collective action in favour of arbitration clauses excluding class action suits.
Indian perspective on the subject differs to a large extent, and provides an exceptional solution to the discourse on arbitrability of consumer disputes. With respect to arbitrability of labour disputes under the Industrial Disputes Act, 1947, courts have held that these are not arbitrable under the A&C Act. Scheme of the Industrial Disputes Act, 1947 was deeply analysed by the court to conclude that the statute provides for a unique and specialised mechanism for the resolution of labour disputes, and if any dispute was to be adjudicated on outside the courts and tribunals established under the Act, these proceedings must still be governed by the Industrial Disputes Act, 1947. It has also been held that there are compelling reasons evolving from public policy that necessitate the resolution of labour disputes through such a specialised statutory mechanism. Hence, even if arbitration is to be undertaken in consumer disputes, it must be under the mechanisms established by the Industrial Disputes Act itself, and cannot be governed by the A&C Act.
Mandatory Arbitration Agreements in Consumer Disputes:
Jurisprudential discourse on the subject is ample and widespread in foreign jurisdictions. In terms of susceptibility of the subject of arbitrability to challenges and limitations on the grounds of nature of dispute, stark contrast can be drawn between views followed in US v EU.
United States of America:
American law on arbitration has seen immense impact through judicial interpretation of the Federal Arbitration Act, 1925 (“The FAA”). The FAA provides that once the presence of an arbitration clause has been proved, the court is necessitated to refer the dispute to arbitration. While the initial sentiment was to view the Act as a limited legislation governing a narrow range of commercial disputes, the courts later leaned towards an interpretation where any doubts regarding scope of applicability of the arbitration clause on the dispute was resolved through favouring arbitration as the way out. Objection to arbitration under the FAA is largely limited to unconscionability of the arbitration agreement. Such test has been held to be affected on a case-to-case basis, with due regard being given to the oppressive conduct of the parties.
American prioritization of arbitration shows signs of overreaching harms of the application of consent principle when dealing with question of arbitrability. Although the unconscionability mechanism normatively allows courts to undertake interpretations with a protective view, the unfazed prioritization of arbitration by American Courts led to expansion of the Doctrine of Severability in ways that resulted in elimination of various challenges under the ground of unconscionability. And while there has been recognition of the prohibitive effect that costs may have on consumer tendency to bring disputes to arbitration, certain precedents still push the burden of proving this prohibitive nature of arbitration onto the already disgruntled and possibly incapacitated consumer.
Arguably, the European Union provides for one of the most equitable and fair standards for implementation and execution of mandatory arbitration agreements pertaining to consumer disputes. The law excludes application of arbitration clauses that have not been individually negotiated, thereby guaranteeing meaningful consent. This safeguard becomes evident with the EU Directive deeming pre-dispute arbitral clauses presumptively unfair in B2C Disputes. Where objections inherent to arbitration (like exorbitant costs) would still remain unresolved to a certain extent, the principal justification of express and ensured consent drastically reduces the propensity of companies exploiting consumers through mandatory arbitration agreements.
Stand taken by Indian Courts on the subject can be summarised as the “characterisation of pre-dispute arbitration clauses in B2C relationships as non-binding dispute resolution”. The Supreme Court, in M/s. Emaar MGF Land Limited v. Aftab Singh, stipulated this position by positing that where arbitrability and party consent must be respected, the same must not be in a straight-jacket formula. The regime thereby established states that a pre-dispute arbitration agreement in any B2C relationship can be the basis for a consumer to undertake arbitration, but the choice of approaching the Consumer Court is not automatically derogated just by the presence of such an agreement. Hence, court granted consumers with agency over choice of forum, albeit a right exercisable within a limited time frame, with initiation of arbitral proceedings placing an embargo on later seeking protection from Consumer Courts. This approach seems to be a middle ground between the American and the European stance to a large extent.
Court also upheld the protective nature of the Consumer Protection Act, 1986 (“CoPRA, 1986”) and extrapolated the extraordinary power of consumer forums that overrides provisions for mechanical reference of disputes to arbitration, from such nature. This protective nature has been upheld earlier on the basis of the Act’s scheme and language of the Preamble. Application of this interpretation can be made to the new Consumer Protection Act, 2019 (“CoPRA, 2019”) as well, owing to the similarity it has with its predecessor in terms of the importance given to protection of consumer rights, made evident through the stark similarities in terms of the Preamble in both Acts.
Among other precedents, Supreme Court in the Emaar MFG Case relied on the principle of arbitrability established under Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd (“Booz Allen Case”), where the court stipulated that, disputes involving adjudication over rights in rem must usually be kept under exclusive jurisdiction of the public court system. Yet an important clarification was made by the court where it was held that such rule is not a rigid or inflexible one, since disputes involving adjudication of subordinate rights arising out of rights in rem would be arbitrable in nature. This widened scope allows disputes arising out of private contractual B2C relationships to be considered arbitrable as well.
Need-Analysis Under the New Consumer Protection Regime:
Post judgment in the Emaar MFG case, India’s consumer and arbitration jurisprudences have seen major changes. Where the above-mentioned dichotomy poses a contentious trade-off, the same seems to have been made infructuous due to these alterations. This is largely due to the incorporation of party autonomy, state safeguarding through affordable and expeditious public forums, and integration of means for alternative dispute resolution into the legislative structure of consumer protection.
Implications of the Judgment in Vidya Drolia and Ors. v Durga Trading Company on Arbitrability of Consumer Disputes:
Indian jurisprudence on arbitrability of disputes witnessed a major addition post the Emaar MFG Case and Booz Allen Case, through the Supreme Court’s verdict in the Vidya Drolia Case. The most valuable contribution of this case was in the form of a four-fold test for determining arbitrability which the court laid down. As per this test, a dispute over the following subject matter would be non-arbitrable:
Subject matter involving determination of rights in rem.
Having erga omnes effect, whereby central adjudication is deemed necessary over mutual adjudication.
Is related to sovereign and/or public interest functions of State.
Subject matter has, expressly or impliedly, been rendered non-arbitrable under a statute.
While the clarification discussed under the Booz Allen Case excludes application of the first test, the other three are seemingly applicable over consumer disputes.
To begin with, the CoPRA, 2019 includes, within the scope of a consumer complaint, allegations of acts having a wider public implication such as unfair or restrictive trade practice, price gauging, or sale of hazardous goods. Adjudication over such complaints must be made without limiting of the scope of investigation through the privity of contract between the complainant and the producer/seller. Conclusive evidence in this regard is the inability of an arbitral tribunal to give effect to certain remedies like recalling of products en masse, something that Consumer Protection Forums under the CoPRA, 2019 are empowered to order.
Furthermore, in Natraj Studios (P) Ltd. v. Navrang Studios, the Court underlined that public policy requires certain kinds of disputes to be determined by special public forums provisioned for by legislative action, and that parties cannot contract out of the same. Recognition of this principle in consonance with the test laid down in the Vidya Drolia Case would create an interpretation of arbitrability in consumer disputes that is answered in the negative. Except, this conundrum was resolved by the court earlier, where the general principle was held to be that disputes capable of being adjudicated upon by a public forum, may also be capable of adjudication by an arbitral tribunal, and hence the test of public fora may be inadequate to oust arbitrability.
Hence, to conclusively understand the issue, there is a need to analyse the nature of public fora through the optics of the new statute which revamped the sphere of consumer dispute resolution.
Implications of the Consumer Protection Act, 2019:
There is a further need to revisit the concept of arbitrability of consumer disputes owing to a change in legislative regime covering the subject. As discussed above, the succeeding Act passed in 2019 revamped the state policy on consumer protection to a large extent, and might have even impliedly assailed the reasoning provided in the Emaar MFG Case. A major point of difference between the CoPRA, 1986 and its successor is that the latter can be seen as a legislative attempt to establish a whole system of dispute resolution, as compared to the predecessor, which largely operated as an effective alternative.
Forum jurisdiction for Consumer Disputes:
In Union of India v Competition Commission of India, the Delhi High Court undertook discourse on the subject of the validity of CCI’s jurisdiction over disputes where parties to the dispute had a pre-existing arbitration agreement. The court upheld CCI’s public function by underlining its special focus as a forum which undertakes investigation from a public perspective, rather than a private one. This, in principle, is concurrent with already established precedents whereby certain disputes are not arbitrable due to the nature of inquiry required to be undertaken falls under the exclusive domain for a specialised public forum.
The court’s approach is commendable in its understanding of nuanced differences in scope of investigations undertaken by private and public forums. Expansion of this principle to consumer disputes is essential since a similar nuance to scope of investigation is present under CoPRA, 2019. This has been done with a view of empowering bodies that undertake pre-emptive protection of consumer interests, like the Central Consumer Protection Authority. As a general rule under English Jurisprudence, arbitrability may also be determined by ascertaining whether the arbitral tribunal is empowered to grant the remedy required in the specific case. This principle plays an inherent role in the judgment under Union of India v Competition Commission of India whereby nature of adjudication by a forum was deliberated upon.
Confidentiality of arbitration proceedings vis-à-vis class action consumer suit
Striking need for exclusion of arbitration as an alternative means of consumer dispute resolution further becomes necessary with the recent Amendment to the A&C Act, which introduced the concept of mandatory confidentiality. The provision requires confidentiality to be maintained with respect to the arbitral proceedings by all parties who are a member to the proceedings, with the sole exception to the rule being the usage of this information for the purposes of execution of the arbitral award. Implications of this provision are immeasurable in nature when placing it in the context of consumer disputes. It is already noted that arbitral proceedings are preferred due to the proceedings being conducted in private. This is because it will incentivise producers and sellers to induce consumers to undergo arbitration at any cost, if it is over disputes that may have affected multiple unknowing consumers. Where CoPRA, 2019 envisions the protection of consumers as a class, implications of the confidentiality provision will only make information of misdeeds inaccessible to the general public, thereby reducing propensity of consumers to undertake class-actions.
CoPRA, 2019 expressly allows mediation but no mention of arbitration
The principal justification behind arbitration has always been considered as effective and expeditious resolution of disputes. Yet, although the courts have upheld online arbitration agreements, and consequently, the validity of online arbitral proceedings, the impact of this format on cost cannot be considered comparative to the state-provided alternatives which are present already.
This is where the safeguarding nature of dispute resolution mechanisms under the state gain the upper hand. Courts have professed the nature of CoPRA, 1986 to be one that aims to provide better redressal to consumer disputes, through mechanisms which are accessible, cheaper and expeditious. This mechanisation has been drastically revamped to increase effective dispute resolution through the successive Act. Not only does CoPRA, 2019 improve pre-existing Consumer Forums, it also grants legislative recognition to mediation as an alternative mode of consumer dispute resolution, thus increasing party autonomy and providing agency to consumers through creation of scope for determining resolution on terms deemed effective and sufficient by both parties.
This consideration is not just essential for speedy resolution of disputes, and has much wider implications. With the legislative assent to mediation being given expressly under CoPRA, 2019, attention must be paid to the fourth test provided under the Vidya Drolia Case, where the court stipulated that express or implied bar can be placed on arbitrability of a dispute through a statute. Legislative intent to regulate alternate resolution of consumer becomes evident with s.101(2)(r) of CoPRA, 2019 providing Central Government with the power to bar mediation of certain cases. This feature seems to be missing from the Act’s predecessor, making the change in legislative intent fairly evident. Exclusion of any provisions regulating arbitration thereafter, sets out the legislature’s intent to not include it as an alternative means of consumer dispute resolution.
Need for judicial precedents in Consumer Disputes
Lastly, in the ever-dynamic world of consumer rights jurisprudence, there is a need for the law to maintain a similar pace to ensure effectiveness. Judicial activism through precedent is an especially effective way to ensure the same. Yet, opportunity to exercise judicial activism is undermined when consumer disputes are resolved in alternative forums. Where mediation still provides for consumers to have agency over the final settlement and is thereby justified, arbitration lacks that excuse. Growth of precedents is not possible through arbitration since arbitral tribunals lack the power to set judicial precedents. This justifies the need for public forum intervention, especially in a field which is still developing, and dealing with adjudication of rights for a vulnerable class.
Consumer Contracts are inherently unequal in terms of power-dynamics, and increasing consumerism has only led to the creation of fast-paced business models that burden their customers with unilateral standard-form contracts. Combined with low awareness among the public in India, there is a necessity for state to protect this vulnerable class. The CoPRA, 2019 is a welcome step in that direction, with its strengthening of public forums, as well as space for mediation as an alternative dispute resolution system.
Yet, it is also important to recognise that all consumer disputes are not of a similar nature. Where some, like losses due to sale of damaged goods, are disputes which are usually exclusively private in nature, others like restrictive trade practices have a wider public implication, and hence require involvement of a public forum. The CoPRA, 2019 already envisions a solution to this conundrum through s.101 of the Act, where Central Government has been granted the power to bar certain disputes from being referred to mediation. If the legislative intent is to allow for arbitration in consumer disputes at the consumer’s choice, this choice must be restricted on grounds of the nature of dispute, through a similar legislative provision. Necessity for this express action is also paramount due to the principle of quilibet potest renunciare juri pro se introducto, (i.e., anyone may renounce a law introduced for his own benefit) only being applicable in the cases of laws made for securing private benefits, and not provisions that impact larger public interest.
Further, if space is to be made for arbitration, there needs to be statutory regulation of the process to deal with the threats to equity posed by facets inherent to arbitral procedures. Arbitration is inherently and systematically lopsided, and there is a high chance of costs being prohibitive on consumers who may already be lacking awareness and resources to undertake actions against comparatively well-positioned companies. This manifests in the form of a disincentive for consumers to bring forward any action, since costs of the proceedings may outweigh the claims set out. Lack of awareness and unequitable position may also result in imposition of costs under loser-pays clauses, further creating a need for policing of the arbitration procedures. Solution to this could be in the form of regulations been laid down statutorily under the CoPRA, 2019, to ensure that certain ground-rules are complied with. This could include rules governing decisions over the venue of arbitration and cost-sharing metrics for arbitral proceedings.
Lastly, these changes are essential to uphold the vital position held by Consumer Protection Laws as state action to protect a vulnerable class. Legitimacy of the statue consequently relies on its ability to uphold consumer rights efficaciously, and any lapse in the same would be catastrophic to the larger public interest, and would result in the state’s public function becoming infructuous to that extent.
If necessity to allow arbitration as an alternative is deemed overwhelmingly important, then the same must be statutorily regulated for preserving the ethos built by the Consumer Rights Movement. Solution to this can be derived out of the approach taken by Indian Courts while dealing with the issue of arbitrability of labour disputes, which upholds the statutory protections granted to the vulnerable class through special statutes.