Supreme Court of India: Whether the Consumer Disputes are non-arbitrable?

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In M/S Emaar Mgf Land Limited vs Aftab Singh Civil Appeal Nos.23512-23513 of 2017 decided on 10 December 2018, the Supreme Court of India dealt with the issue of whether a remedy under the Indian Consumer Protection Act, 1986 (‘CPA’) being a special remedy can be initiated and continued despite there being any arbitration agreement between the parties. The Appellant prayed before the Court to refer the parties to arbitration relying heavily on the amended Section 8 of the Arbitration and Conciliation Act, 1996 of India (‘Act’) which mandates a judicial authority to refer the dispute to arbitration, if such judicial authority is of the opinion that prima facie the arbitration agreement exists. Detailed case analysis given below:

Factual Matrix

The Appellant builder purchased a land to construct township. The Respondent buyer submitted application to purchase a villa in the said township. The Parties entered into an Agreement containing an arbitration Clause (‘Clause 43’) providing for settlement of disputes between parties under Act. Dispute arose amongst the Parties and the Respondent filed a complaint against the Appellant in the National Consumer Disputes Redressal Commission (‘NCDRC’) to direct the Appellant to deliver the possession of villa along with other prayers. NCDRC is a forum established by the Central Government of India under Section 9(c) of CPA. It exercises jurisdiction envisaged in Section 21 of CPA wherein it may, inter alia, entertain complaints where the value of the goods or services and compensation, if any, claimed exceeds rupees one crore. In response to the Complaint filed by the Respondent, the Appellant filed an application under Section 8 of the Act before the NCDRC praying to refer the matter to arbitration.

It is important to mention that Section 8 of the Act mandates that the ‘judicial authority’ before which an action has been brought in respect of a matter, which is subject matter of an arbitration agreement, shall refer the parties to arbitration, if a party to such an agreement applies not later than when submitting his first statement.

The Single Member of NCDRC referred the matter to a Larger Bench of NCDRC (Three Member) considering the vital importance and far reaching consequence of the legal issue involved in the application filed by the Respondent. The Larger Bench observed that the disputes which are to be adjudicated and governed by statutory enactments, established for specific public purpose to sub-serve a particular public policy are not arbitrable. Therefore, the Larger Bench held that Section 8 of the Act cannot be construed as a mandate to the Consumer Forums to refer the parties to arbitration in terms of the arbitration agreement. This order was challenged by the Appellant in the High Court under Section 37 of the Act which provides categories of appeals from orders passed by the court and arbitration tribunal.

It is worth mentioning that the orders passed by NCDRC in exercise of its jurisdiction under Section 21 of CPA are subject to appeal before the Supreme Court of India. Therefore, the High Court refused to entertain the appeals and returned to be presented before the appropriate Appellate Court. Thereafter, the Appellant filed an appeal in the Supreme Court against the Order passed by the Larger Bench which were also dismissed. Resultantly, the Appellant filed a review petition which was decided in the present case before the Supreme Court.

Applicable Legal Principles

Section 8(1) of the Act (as amended)

“Section 8 – Power to refer parties to arbitration where there is an arbitration agreement

(1) A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.”

Section 2(3) of the Act

“Section 2 – Definitions

(3) This Part shall not affect any other law for the time being in force by virtue of which certain disputes may not be submitted to arbitration.”

Section 5 of the Act

“Section 5 – Extent of judicial intervention

Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.”

Parties Contentions

The Appellant argued as under:

  • That after amendment of Section 8 of the Act by the Arbitration and Conciliation (Amendment) Act, 2015 (‘2015 Act’), the ‘judicial authority’ is mandated to refer a dispute for arbitration if there is a valid arbitration agreement and parties apply not later than the date of submitting his first statement on the substance of the dispute.
  • That NCDRC has wrongly termed consumer disputes as non-arbitrable, which is contrary to the decision of the Supreme Court in National Seeds Corporation Limited v. M. Madhusudhan Reddy and Anr. , (2012) 2 SCC 506.

The Respondent contended as under:

  • That the ripples of the amendment to Section 8(1) of the Act cannot be so large as to inundate the domains of other legislations and jurisprudence, painstakingly built by the Legislators and Courts, especially without any engagement, debate and critique with the foundations of these related laws.
  • That Section 2(3) of the Act restricts the overriding effect apparent in Section 5 of the Act

Section 2(3) of the Act saves those disputes from the applicability of Part – I (domestic arbitration) of the Act which are covered by any law for the time being in force by virtue of which, they may not be submitted to arbitration. It operates in the context of the mandate of Section 5 of the Act according to which, in matters governed by Part – I of the Act, no judicial authority shall intervene except where so provided in Part – I, notwithstanding any other law for the time being in force. The non obstance in Section 5 would imply that the Act will override any law providing for the procedure for resolution of a dispute covered by it, as long as there is an arbitration agreement.

Judgement

The Court first analysed the position of law post the 2015 Act in relation to proceedings under CPS in reference to arbitration agreement under the Act.

Position Pre 2015 Act

With regard to this period, the Court observed as under:

  • That as per Section 3 of CPA the provisions of CPA are in addition to and not in derogation of the provisions of any other law for the time being in force;
  • That that it would be appropriate that the Consumer forums created under CPA are at liberty to proceed with the matters in accordance with the provisions of CPA rather than relegating the parties to an arbitration proceeding pursuant to a contract entered into between the parties. (Relying on Fair Air Engineering Pvt. Ltd. and Anr. v. N.K. Modi, (1996) 6 SCC 385);
  • That even if there exists an arbitration Clause in an agreement and a complaint is made by the consumer, in relation to a certain deficiency of service, then the existence of an arbitration Clause will not be a bar to the entertainment of the complaint by the Redressal Agency, constituted under the CPA, since the remedy provided under CPA is in addition to the provisions of any other law for the time being in force. (Relying on Skypak Couriers Ltd. v. Tata Chemicals, (2000) 5 SCC 294);
  • That the remedy available in CPA is in addition to and not in derogation of the provisions of any other law for the time being in force (Relying on National Seeds Corporation Limited v. M. Madhusudhan Reddy and Anr. (2012) 2 SCC 506)
  • That held that the consumer forums constituted under the CPA are not bound to refer the dispute raised in the complaint to an arbitral tribunal in terms of the arbitration Clause contained in the agreement entered into between the parties. (Relying on Rosedale Developers Private Limited v. Aghore Bhattacharya and Ors. (2018) 11 SCC 337)

The Court after considering the above judgements and the provisions of CPA as well as the Act laid down that the complaints filed under the CPA can also be proceeded with despite there being any arbitration agreement between the parties.

Position Post 2015 Act

The Court noticed that the Act contains two Parts – Part I “Arbitration” and Part II “Enforcement of Certain Foreign Awards”. Chapter I of Part I is “General Provisions”, in which Section 2 deals with definitions but it is covered by general heading of Chapter I “General Provisions”. Section 2(3) does not contain any definition but contain a general provision which clarifies that “[t]his Part shall not affect any other law for the time being in force by virtue of which certain disputes may not be submitted to arbitration”. Thus, Section 2(3) of the Act gives predominance of any other law for the time being in force by virtue of which certain disputes may not be submitted to arbitration i.e. they are not arbitrable.

After considering the legislative intent and object in bringing the amendment to Section 8 in 2015 Act taking into consideration the 246th Law Commission Report (2014), 176th Report of the Law Commission on the “Arbitration and Conciliation (Amendment) Bill, (2001) and 2015 Act held that the words “notwithstanding any judgment, decree or order of the Supreme Court or any Court” were meant only to those precedents where it was laid down that the judicial authority while making reference under Section 8 shall entitle to look into various facets of the arbitration agreement, subject matter of the arbitration whether the claim is alive or dead, whether the arbitration agreement is null and void. The words added in Section 8 of the Act cannot be meant for any other meaning.

Further, the Court also held that 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. 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.

My Comments

The language of Section 8 of the Act is peremptory and it is, therefore, obligatory for the Court to refer the parties to arbitration in terms of their arbitration agreement. (P. Anand Gajapathi Raju and Ors. v. P.V.G. Raju (Dead) and Ors,(2000) 4 SCC 539. Further, under Section 8 of the Act, the scope of examination by the judicial authority is restricted to a finding whether “no valid arbitration agreement exists” and the nature of examination by the judicial authority is clarified to be on a “prima facie” (Ameet Lalchand Shah and Ors. v. Rishabh Enterprises and Anr. AIR 2018 SC 3041). But does that mean that an arbitration agreement for a non-arbitrable dispute can be referred to arbitration under Section 8 of the Act just because it complies with all the essentials of a valid arbitration agreement as stipulated under Section 8?

In the instant case, the Supreme Court answered this loophole. It is noteworthy that in the instant case, the Court, while deciding the subject matter arbitrability of a consumer dispute under Section 8 of the Act, went ahead of merely taking a prima facie view regarding the existence of a valid arbitration agreement. Instead, the court decided the arbitrability of a dispute which academically is against the explicit language of Section 8 of the Act.

But the Court clarified that the legislative intent behind amending Section 8 of the Act cannot be to affect the law with regard to disputes which are non-arbitrable as provided under Section 2(3) of the Act. In fact, after going through the historical events which reflected the legislative intent behind amending Section 8 of the Act, the Court observed that the statutes such as CPA providing additional remedies/special remedies were not in contemplation while carrying out amendment under Section 8(1) of the Act.

Thus, it means that a non-arbitrable dispute cannot be referred to arbitration under Section 8 of the Act despite existence of arbitration agreement to that effect between the parties. The Court also remarked that it would only be applicable in cases the case where specific/special remedies (such as CPA) are provided for and which are opted by an aggrieved person and not in cases where 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.

Position in Singapore

The approach adopted by the Supreme Court of India in deciding this issue is in line with the authorities from Singaporean Courts. The Concept of arbitrability of disputes that involves larger public interest is well settled in Singapore vide judgement of Larsen Oil and Gas Pte Ltd v Petroprod Ltd [2011] 3 SLR 414.  In that case, the Respondent, which was in liquidation, commenced proceedings against the Appellant, with whom it had a management agreement. Respondent sought to avoid, as unfair preferences or transactions at an undervalue, payments that it had made to Appellant under the management agreement. Relying on an arbitration clause in that agreement, Appellant applied for a stay of the court proceedings under Section 6(2) of the Arbitration Act of Singapore. The Respondent resisted the stay application on the grounds that the dispute did not fall within the scope of the arbitration clause, and that in any event, the dispute was not arbitrable. Respondent succeeded on the first point, which was sufficient to warrant the High Court’s dismissal of Appellant’s stay application; but, on appeal by Appellant, the Court of Appeal of Singapore nonetheless proceeded to consider whether claims made pursuant to the provisions of the Bankruptcy Act read with Companies Act of Singapore were arbitrable. The Court of Appeal affirmed the High Court’s decision that they such disputes are non-arbitrable and observed as under:

“44 The concept of non-arbitrability is a cornerstone of the process of arbitration. It allows the courts to refuse to enforce an otherwise valid arbitration agreement on policy grounds. That said, we accept that there is ordinarily a presumption of arbitrability where the words of an arbitration clause are wide enough to embrace a dispute, unless it is shown that parliament intended to preclude the use of arbitration for the particular type of dispute in question (as evidenced by the statute’s text or legislative history), or that there is an inherent conflict between arbitration and the public policy considerations involved in that particular type of dispute.”

Position in England & Wales

The English Arbitration Act, 1996 is completely silent on non-arbitrability. However, the English Courts have dealt with this issue in some cases. One of them was the case of Fulham Football Club (1987) Ltd v Richards & Anor [2010] EWHC 3111 (Ch) . In that case, the Appellant was a member of the Respondent (Football Association Premier League Ltd). The Respondent and its members were required to comply with the Respondent’s articles of association and rules, as well as with the rules of the English Football Association. The Appellant presented a petition pursuant to Section 994 of the UK Companies Act 2006 with allegation of unfair prejudice in the regulation of the Respondent’s affairs. Relying on arbitration clauses in the Respondent’s and the FA’s rules, one of the other Respondent applied for a stay of the court proceedings in favour of arbitration. Appellant resisted the stay application, arguing that a petition under s 994 of the UK Companies Act 2006 was non-arbitrable. The English Court of Appeal held that a dispute giving rise to a claim for relief under Section 994 of the Companies Act 2006 of the UK Companies Act 2006 was arbitrable and observed as under:

“72…As far as the matters there stated are relevant to the issues in this case: (a) the types of remedies which an arbitrator can award are limited by considerations of public policy; and (b) an arbitrator cannot make an award which is binding on third parties, or one that affects the public at large, or grant a judgment in rem”

Additionally, Section 1 of the English Arbitration Act includes the following principles:-

“(b) the parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest;

Further, pursuant to Section 91(1) of the English Arbitration Act, an arbitration agreement in a consumer contract is deemed unfair under the Unfair Terms in Contract Regulations 1999 if it relates to a claim for a pecuniary remedy that does not exceed the amount specified by order the Court for the purposes of this section. An arbitration agreement with a consumer may also be unenforceable under English Law pursuant to the Unfair Terms in Consumer Contracts Regulations 1999. For example in Mylcrist Builders Ltd v Buck [2008] EWHC 2172 (TCC) , the English High Court held that an arbitration clause in a building contract was unenforceable on the basis that it caused a significant imbalance between the parties by denying the consumer access to the courts.

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