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14 March 2019
On 10 December 2018 the Supreme Court ruled in M/s Emaar MGF Land Limited v Aftab Singh(1) that consumer disputes are incapable of being submitted to arbitration. This judgment places consumer disputes in the infamous category of 'non-arbitrable' subjects in India, alongside disputes relating to:
However, the Supreme Court also stated that where an elected consumer fails to file a consumer complaint, the parties are not barred from submitting the dispute to arbitration. This article analyses whether such a statement could have far-reaching implications for arbitrability as a ground for challenging an award or whether consumer disputes are an exception to the rule.
Prior to this, the Supreme Court maintained that a consumer dispute which arises out of a contract with an arbitration clause may still be placed before a consumer forum, at the behest of the consumer.(6) The rationale behind this was that the provisions of the Consumer Protection Act 1986 are in addition to and not in derogation of other laws. However, with respect to the 2015 amendments to the Arbitration and Conciliation Act 1996, under Section 8(1), while referring a dispute to arbitration, a judicial authority must take into account only one parameter: the prima facie validity of the arbitration agreement.
The appellant used Section 8(1) of the Arbitration and Conciliation Act to argue that the law had changed and that even consumer disputes must now be submitted to arbitration if the party wishing to make such reference can prove the prima facie validity of the arbitration agreement.
The Supreme Court disagreed with this argument, but not vide the rationale of earlier judgments regarding consumer disputes and arbitration. Instead, it fell back on the logic of landmark judgments like Booz Allen Hamilton Inc v SBI Home Finance Limited and A Ayyasamy v A Paramasivam, in which the court had held that certain subjects, by virtue of their nexus with rights in rem (rights against the world at large or public rights) are incapable of being resolved by arbitration. Ayyasamy even went one step further and stated that the metric for deciding arbitrability is whether the subject matter is covered by a special legislation. Consumer disputes always involve a service provider and a consumer, the latter of which does not have equal bargaining power and consequently needs special protection and access to expeditious and affordable remedies (ie, those envisioned under the Consumer Protection Act). This was sufficient for the court to conclude that consumer disputes involve rights in rem which are protected by a special legislation.
However, at the end of the judgment, the court made the observation that:
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.
In terms of legislative provisions regarding arbitrability in India, Section 34(2)(b)(i) of the Arbitration and Conciliation Act clearly states that an award may be challenged if the "subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force". In furtherance of this, the court, vide its judgment in M/s MSP Infrastructure Ltd v Madhya Pradesh Road Development Corporation(7) ruled that arbitrability may be raised as a ground for challenging an award, even if this was not done at an earlier stage.
Section 2(3) of the Arbitration and Conciliation Act also says that its provisions "will not affect any other law for the time being in force by virtue of which certain disputes may not be submitted to arbitration". This leads to the obvious inference that arbitrability is a ground for challenge of an award, and nothing within the act can override other laws which make a subject "non-arbitrable". Indeed, the court in Emaar MGF also interpreted Section 2(3) so as to conclude that matters of arbitrability can be a ground to refuse to refer a dispute to arbitration, despite the language of Section 8(1). The law as set out in Booz Allen, Ayyasamy and many other judgments is that disputes relating to IP, criminal, insolvency and family law matters – and now consumer disputes – cannot be the subject of an arbitration and nothing in the act can override that.
On the other hand, Emaar MGF's disclaimer, interpreted literally, creates a situation where, at the inception of dispute, parties have a choice between arbitration and an alternate remedy (in this case a consumer forum), despite the dispute itself being inherently non-arbitrable in nature. Ironically, a vast majority of the operative portions of the judgment discusses how consumer disputes delves into the realm of rights in rem and pertain to a beneficial legislation with specialised remedies as had been the settled position set out in Booz Allen, Ayyasamy and other judgments.
The prima facie contradiction created by Emaar MGF's disclaimer may be interpreted in two ways.
The more extreme interpretation, keeping in mind the broad wording of the Supreme Court in its disclaimer, would be that the court has unknowingly created a situation where the arbitrability of a subject is determined by the will of the parties to the dispute, as opposed to its relation to a right in rem.
If such an interpretation were taken further, it could also be in the nature of an estoppel, where a failure to raise an objection regarding arbitrability at the first instance, such as Sections 8 or 11(6A) of the Arbitration and Conciliation Act, may estop a party from raising it at the challenge stage. This would imply that a subject matter is non-arbitrable only if parties effectively choose to pursue their remedies under special statutes, and not as a matter of course. If so, Emaar MGF would be a direct contradiction of Section 34(2)(b)(i) of the act, which allows arbitrability to be raised as a ground at the challenge stage, without any condition precedents regarding earlier attempts to assert the same.
Arguably, such an interpretation could not have been the true intent of the judiciary. The categories of dispute that were referenced in earlier judgments were inherently incapable of being submitted to arbitration, such as criminal matters which necessarily involve the state or matters such as insolvency or IP rights, which involve the rights of parties outside the contract being disputed.
However, with consumer disputes, despite the legislation being special or beneficial, the dispute remains inter se parties. Therefore, the true meaning of the court's disclaimer could be that in the specific situation of an inter se consumer dispute, as was the case in Emaar MGF, while a party is entitled to its remedies under special legislations in public law, the option of arbitration remains open. This could also imply that if the parties opt to submit to arbitration, they are estopped from raising the issue of arbitrability either as a preliminary objection before a tribunal or in the challenge to the award.
The possible underlying logic of the disclaimer in Emaar MGF appears to be echoed in the distinction that was drawn between the arbitrability of serious allegations of fraud and fraud per se in Ayyasamy. In that situation, fraud simpliciter was held to be arbitrable, but serious allegations of fraud were not, at least within the realm of domestic arbitrations. Notwithstanding the differentiation that Ayyasamy established for arbitrability of fraud in foreign-seated arbitrations and domestic arbitrations, the situation is analogous to that of Emaar MGF's disclaimer. Fraud simpliciter, like a consumer dispute, probably involves only the parties in the dispute, whereas serious cases of fraud probably also affect the rights of others, consequently making them inherently incapable of being the subject of an arbitration.
This harmonious reading of the provisions of the Arbitration and Conciliation Act with Emaar MGF seems to be the only interpretation that can be attributed to the Supreme Court. However, even with the same, it still does not resolve the creation of a possible estoppel. Disputes with a nexus with a special legislation should be allowed to be the subject of a challenge on grounds of arbitrability under Section 34(2)(b)(i) of the act. However, a situation where a party may actively opt for arbitration and not raise any issues with respect to Sections 8 and 16 of the act, but still be able to raise a challenge on grounds of arbitrability of a consumer dispute, makes little sense. It remains to be seen whether the court will fix this apparent loophole.
For further information on this topic please contact Chakrapani Misra, Sairam Subramanian or Rajeswari Mukherjee at Khaitan & Co by telephone (+91 11 4151 5454) or email (email@example.com, firstname.lastname@example.org or email@example.com). The Khaitan & Co website can be accessed at www.khaitanco.com.
(2) Booz Allen Hamilton Inc v SBI Home Finance Limited, (2011) 5 SCC 532.
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