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An Arbitration Clause Will Not Oust Consumer Court Jurisdiction: Aftab Singh v. Emaar MGF Land Limit

[This article is authored by M. Koshy Mammen, Associate at Shardul Amarchand Mangaldas & Co.]

Keywords: Arbitration Agreement, COPRA, NCDRC, RERA.

The Supreme Court the previous month reiterated the well-established law that valid arbitration agreements do not bar the jurisdiction of the National Consumer Disputes Redressal Commission (“NCDRC”) and other consumer forums. The Court made this observation while dismissing the review petition (dated 12th December 2018) filed in the case Aftab Singh v. Emaar MGF Land Limited & Anr.

In Aftab Singh v. Emaar MGF, the dispute was between a group of homeowners (“Buyers”) and Emaar MGF Land Private Limited (“Builder”), who failed to complete the construction and deliver the villas within the timeline stipulated in the agreement between the parties. The Builder filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 (the “Arbitration Act”) to refer the case for arbitration as the agreement contained a valid arbitration clause. The Buyers, on the other hand, contended that the jurisdiction of consumer forums available to them through the Consumer Protection Act, 1986 (“COPRA”) is not barred by the presence of an arbitration clause.

After hearing the contentions, the NCDRC made the following observation:

In view of the afore-going discussion, we arrive at the following conclusions: (i) 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; (ii) there are vast domains of the legal universe that are non-arbitrable and kept at a distance from private dispute resolution; (iii) the subject amendment was meant for a completely different purpose, leaving status quo ante unaltered and subsequently reaffirmed and restated by the Hon’ble Supreme Court; (iv) Section 2(3) of the Arbitration Act recognizes schemes under other legislations that make disputes non-arbitrable and (iv) in light of the overall architecture of the Consumer Act and Court-evolved jurisprudence, amended sub-section (1) of Section 8 cannot be construed as a mandate to the Consumer Forums, constituted under the Act, to refer the parties to Arbitration in terms of the Arbitration Agreement.”

This decision that that arbitration clause in the agreements cannot circumscribe the jurisdiction of a consumer fora was challenged before the Supreme Court twice, by way of an appeal and a review petition. The Supreme Court heard the appeal on 13th February, 2018 and dismissed it, stating that it does not find any ground to interfere with the NCDRC order. The review petition, which was heard last month, also upheld the decision of the NCDRC. Senior Advocate Fali S. Nariman appeared on behalf of the Builder in the review petition contended that with the enactment of the Arbitration and Conciliation (Amendment) Act, 2015 (“Amendment Act, 2015”), consumer forums fall under the ambit of judicial authority, and consequently, they are mandated to refer a dispute for arbitration if there exists a valid arbitration agreement between the parties.

This contention was rejected by the Supreme Court, and it ruled that the Amendment Act, 2015 did not bar the jurisdiction of the Consumer Courts and upheld the decision of the NCDRC. The NCDRC gave the decision that the jurisdiction of consumer court is not ousted relying on A. Ayyasamy v. A Paramasivam, where it was held that if the jurisdiction of an ordinary civil court is excluded by the conferment of exclusive jurisdiction on a specified court or tribunal as a matter of public policy, such a dispute would not then be capable of resolution by arbitration. This was precisely the issue when it comes to Consumer Courts.

While rejecting the review petition, the Supreme Court discusses the entire jurisprudence of cases which states the categories of disputes that are non-arbitrable. The court refers to Booz Allen Hamilton Inc v. SBI Home Finance Ltd., which lays down the 7 categories of non-arbitrable disputes. The court also mentions Vimal Kishore Shah v. Jayesh Dinesh Shah, which laid down that disputes under the Trust Act, 1982 are considered non-arbitrable.

The Supreme Court then considers the object and purpose of COPRA in detail which is to provide for better protection of the interests of consumers. The court stated that the amendment to Section 8 could not be given such expansive meaning and intent so as to inundate the entire regime of special legislation where such disputes were held to be not arbitrable. Something which legislation never intended cannot be accepted as side wind to override the settled law.

Regarding the interpretation of Section 8, the court observed: “The words “notwithstanding any judgment, decree or order of the Supreme Court or any Court” added by amendment in Section 8 were with intent to minimize the intervention of judicial authority in the context of arbitration agreement. As per the amended Section 8(1), the judicial authority has only to consider the question whether the parties have a valid arbitration agreement? The Court cannot refuse to refer the parties to arbitration “unless it finds that prima facie no valid arbitration agreement exists.” The amended provision, thus, limits the intervention by judicial authority to only one aspect, i.e., refusal by judicial authority to refer is confined to only one aspect, which is when it finds that prima facie no valid arbitration agreement exists.

The apex court also stated that certain disputes are not mandated to be referred to arbitration under Section 8. “Can it be said that after amendment under Section 8(1), the law laid down by this Court in reference to Section 2(3), where large number of categories have been held to be non-arbitrable has been reversed or set at naught. Neither any such Legislature intendment was there nor any such consequence was contemplated that law laid down by this Court in context of Section 2(3) has to be ignored or reversed.”

While dismissing the review petition, the Court also clarified that if the aggrieved person does not opt for the special remedy and they are party to an arbitration agreement, there is no bar to the dispute being arbitrated. But in case the aggrieved party opts for the special remedies, the judicial authority can refuse to refer the parties to the arbitration.

This judgment that arbitration clauses do not oust the jurisdiction of the consumer courts is favorable to the consumers as a whole. The decision is aimed at levelling the playing field between ordinary consumers and big companies. It has created a legal environment where irrespective of size or financial strength, the parties have the equal bargaining power to resolve the dispute. With this ruling, the consumers have the right to approach consumer forums, even if they have signed an agreement with an arbitration clause with the service providers or sellers.

Although, this case specifically deals with the COPRA, several commentators perceive that this decision can be extended to Real Estate (Regulation and Development) Act, 2016 (“RERA”) as well, which creates a specialized forum to protect innocent buyers in the real estate sector. This decision can be interpreted to ouster of the jurisdiction of the arbitral tribunals in the presence of a specialized forum under the RERA, despite the fact that a valid arbitration agreement was signed by the parties.

While this decision by the Apex Court is favorable to the consumers, it dilutes the legislative intent behind the Amendment Act, 2015, i.e., to promote arbitrations and reduce the burden on other judicial authorities. When the consumers have voluntarily signed the agreement and decided to arbitrate when a dispute arises, the judgement does not give a convincing reason as to why the consumers should be allowed to deviate from the arbitration clause when the dispute becomes apparent. With this decision, more and more cases, which could be arbitrated, will be redirected to consumer forums. This will, in turn, result in backlog of cases and delayed judgements in such specialized forums.

To conclude, 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 a consumer complaint before it. Such a harmonious construction will achieve a balance between the rights of the consumers and the object behind the Amendment Act, 2015, which is to encourage arbitration.

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