February 13 2018
A division bench of the Supreme Court has decided to examine the correctness of a judgment by the National Consumer Disputes Redressal Commission (NCDRC), New Delhi in Aftab Singh v Emaar MGF Land Limited.(1) The NCDRC had held that, among other things, consumer disputes cannot be settled by arbitration. The batch of matters is expected to be taken up for final disposal on February 7 2018. This update explores whether the line of reasoning preferred by the NCDRC is likely to invite more critical scrutiny by the Supreme Court.
The matters arose out of certain complaints filed before the NCDRC by individual allottees of villas, flats and plots in a residential project in Gurugram and Mohali. The complainants alleged that the builder (the appellant before the Supreme Court) had failed to deliver possession of the villas, flats and plots by the dates committed in the flat buyers' agreements. As such, they sought delivery of possession, or in lieu thereof, refund of the amounts deposited by them along with compensation. In response, the builder referred to the existence of an arbitration agreement in the agreements with the individual allottees and sought reference to arbitration, relying on the amended Section 8(1) of the Arbitration and Conciliation Act 1996.(2)
The batch matters were referred by a single member of the NCDRC to a three member bench. The larger bench framed the issue for adjudication as:
"Whether the Arbitration Act mandates Consumer Forums, constituted under the Consumer Protection Act, 1986 ('the Consumer Act'), to refer parties to arbitration in terms of a valid arbitration agreement, notwithstanding other provisions of the Arbitration Act and the Consumer Act?"
Answering the reference, the larger bench held as follows:
Although the conclusions reached by the NCDRC appear to be justified at face value, the Supreme Court will likely examine the NCDRC's reasoning critically for the following reasons.
As was noted by a two-judge bench of the Supreme Court in A Ayyasamy v A Paramasivam,(4) the Arbitration Act makes no specific provision excluding any category of disputes and treating them as non-arbitrable. In fact, in his judgment in the case, Justice A K Sikri noted that even though Sections 34(2)(b) and 48(2) of the Arbitration Act, among others, provide that an arbitral award may be set aside if the court finds that the "subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force", the necessary pre-requisite is that there is a law which makes the subject matter of the dispute incapable of settlement by arbitration. It is difficult to point to any provision in the Consumer Act which would suggest a legislative intention that every consumer dispute(5) is incapable of settlement by arbitration.
This view also finds support from Section 2(3) of the Arbitration Act, which states that "Part [I] shall not affect any other law for the time being in force by virtue of which certain disputes may not be referred to arbitration". While the NCDRC has dealt with, and indeed drawn support from, the said provision in its judgment to hold that consumer disputes are inherently non-arbitrable, it is difficult to reconcile such a conclusion with the mandate of Section 3 of the Consumer Act, which states that the provisions of the said act must be in addition to and not in derogation of the provisions of any other law presently in force. Even the Supreme Court has held in countless judgments that the import of this provision in the Consumer Act is only to provide a remedy for certain classes of consumer actions in addition to the conventional courts.(6)
The conclusion drawn by the NCDRC with respect to consumer disputes being non-arbitrable is beset with serious difficulty. In fact, in its seminal judgment in Booz Allen and Hamilton Inc v SBI Home Finance Limited,(7) the Supreme Court observed that every civil or commercial dispute, either contractual or non-contractual, which can be decided by a court is in principle capable of being adjudicated and resolved by arbitration unless the jurisdiction of the arbitral tribunals is excluded either expressly or by necessary implication. The Supreme Court further observed that adjudication of certain categories of proceeding are reserved by the legislature exclusively for public fora as a matter of public policy. It was further observed that certain other categories of case – though not expressly reserved for adjudication by public fora (courts and tribunals) – may, by necessary implication, stand excluded from the purview of private fora. Clarifying its point further, the court listed certain examples of non-arbitrable disputes – namely:
In Vimal Kishor Shah v Jayesh Dinesh Shah(8) the Supreme Court added a seventh type of case to the non-arbitrable dispute category: cases arising out of trust deeds and the Trusts Act, 1882 which cannot be decided by an arbitrator. More recently, in Ayyasamy(9) the Supreme Court held that where serious and complicated allegations of fraud are raised, the matter cannot be referred to arbitration.
The broad reasoning provided by the Supreme Court for carving out these exceptions was that these relate to actions in rem, which refer to actions determining the right to property and the rights of the parties, not merely among themselves but also against all persons at any time claiming an interest in that property. By contrast, an action in personam refers to actions determining the rights and interests of the parties themselves in the subject matter of the case (as distinguished from a judgment against a thing, right or status). It was further held that generally and traditionally, all disputes relating to rights in personam are considered amenable to arbitration, whereas all disputes relating to rights in rem must be adjudicated by the courts and public tribunals, being unsuited for private arbitration.
Further scrutiny of the Consumer Act reveals that two broad categories of case are envisaged thereunder. The first category is complaints filed under Section 12(1)(a) by a consumer in relation to any goods sold or delivered, or agreed to be sold or delivered, or any service provided or agreed to be provided. It would be difficult to propound a sweeping proposition that even in such cases brought by an individual consumer, the matter would necessarily involve determination of a right in rem.
On the other hand, Section 12(1)(c) envisages the filing of a complaint by one or more consumers, with the permission of the District Forum, as a representative of numerous consumers having the same interest. Similarly Section 12(1)(d) empowers the central government or the state government, among other things, to file a complaint as a representative of the interests of the consumers in general. Arguably, in this second category of cases, issues could arise for adjudication involving rights in rem.
Arguably, the Supreme Court should attempt to reconcile the seemingly divergent mandates of the two statutes by requiring the consumer forum to examine, in light of principles as may be laid down, whether a given consumer dispute brought before it ought to be referred to arbitration(10) when an application under Section 8(1) of the Arbitration Act is moved seeking reference to arbitration. In other words, while determining whether a consumer dispute ought to be referred to arbitration, the consumer forum should focus on the nature of the dispute brought before it, as opposed to the mere circumstance of filing of a consumer complaint before it. That will, to a great extent, obviate the difficulties presented by the conclusion of the NCDRC that a consumer dispute cannot be settled by arbitration.
Such a harmonious construction will also help to ensure that a fine balancing act is achieved between the legislative philosophy and social objective behind the enactment of such a special law for consumers and the legislative mandate of the law governing arbitrations.
For further information on this topic please contact Ajit Warrier at Shardul Amarchand Mangaldas & Co by telephone (+91 11 4159 0700) or email (firstname.lastname@example.org). The Shardul Amarchand Mangaldas & Co website can be accessed at www.amsshardul.com.
(5) The term 'consumer dispute' is defined under Section 2(e) of the Consumer Act to mean a dispute where the person, against whom a complaint (alleging commission of certain objectionable practices as outlined in Section 2(c) thereof) has been made, denies or disputes the allegations in the complaint.
An early version of this article first appeared in Bar & Bench.
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