Arbitrability in Consumer Disputes: Forum Shopping, Unequal Bargaining Power and an Alternate Way Ahead

Introduction

There has been a consistent line of judgments addressing the conflict between the Consumer Protection Act, 2019 and the Arbitration and Conciliation Act, 1996, especially where both the dispute resolution mechanism may be available to a party. Despite a significant Amendment in 2015 intended at strengthening the power of arbitration agreements, courts have largely upheld consumer’s freedom to choose between arbitration and consumer forums. This blog will firstly, criticise the judicial position by examining the reasoning in Emaar MGF Land Ltd. v. Aftab Singh, secondly, raise the issue of forum shopping, thirdly, address concerns about unequal bargaining power, and fourthly, provide an alternative approach and advocate for the application of established arbitrability tests to bring greater clarity to the scope of the “choice”.

Problems with precedents in consumer arbitration jurisprudence

The Arbitral Tribunal was intended to facilitate speedy conflict resolution with mutual consent, avoiding the delays associated with traditional court proceedings.¹ However, numerous judicial interventions have compromised its effectiveness and autonomy. To address this, Section 5 of the Act clearly limits judicial intervention, stating that, “no judicial authority shall intervene except where so provided in this part”. This overarching provision enhances the Arbitral Tribunal’s independence. When read in conjunction with Section 8, it requires a judicial authority to refer parties to arbitration when there is a valid agreement. The 2015 Amendment further focused on this by stating that the parties should be directed to arbitrate “notwithstanding any judgment, decree, or order” unless the court finds that prima facie no valid arbitration agreement exists. Together, these provisions demonstrate the legislature’s intent to limit judicial intervention and maintain the Arbitral Tribunal as the primary forum for resolving such issues, unless where the Act expressly allows for court involvement.

Despite the legislative framework outlined above, there has been an ongoing and unsettled debate about whether a consumer who is a party to a valid arbitration agreement should be compelled to go to arbitration or can instead go to the Consumer Commission. The Supreme Court appears to have answered this issue in the Emaar MGF case² ruling that even if an arbitration clause is valid, a consumer has the right to choose between an Arbitral Tribunal and the Consumer Commission. This perspective was reiterated in the recent Citicorp Finance (India) Ltd. v. Snehasis Nanda³, in which the Court stated unequivocally that the consumer has the right to choose the forum.

The Emaar MGF case⁴, which enabled consumers to select between arbitration and the Consumer Commission, appears to have made a significant error. Firstly, to begin with, the Court relied on previous rulings such as A. Ayyasamy v. A. Paramasivam⁵ and Vimal Kishor Shah v. Jayesh Dinesh Shah⁶, which dealt with issues involving matters that come exclusively under the jurisdiction of special forums established by legislation, where civil courts have no jurisdiction and disputes are deemed non-arbitrable. However, this rationale is not applicable to consumer complaints.⁷ In fact, consumer matters are not exclusively handled by consumer forums. Section 3, Consumer Protection Act says explicitly that procedures before Consumer Commissions are in addition to, not in derogation of civil court jurisdiction. As a result, reliance on those previous cases was erroneous because they addressed instances vastly different from consumer disputes. Secondly, the decision establishes a dangerous precedent by defining a new type of dispute, those that are arbitrable for one party but not the other. This approach does not comply with the Act and appears unlikely to fall within Section 2(3) of the Act. As a result, the Court’s reasoning is questionable.

The Court’s remedy of having to select between institutions further raises the question of forum shopping. When a valid arbitration agreement exists, the legal position is that the parties must arbitrate. Allowing one party to select an alternate forum contradicts this concept and facilitates forum shopping, in which a party chooses the forum with the highest likelihood of receiving favourable judgment. In Vijay Kumar Ghai v. State of W.B.⁸, the Court cited the Merriam-Webster Dictionary, which defined forum shopping as choosing between courts with jurisdiction based on which one is likely to provide the best outcome. Furthermore, the courts have failed to offer clear guidance on whether a consumer who loses in a consumer forum can then pursue arbitration. Given that the Consumer Protection Act has been construed as giving an additional remedy rather than an exclusive one, it appears that consumers may still be able to pursue arbitration even after receiving an adverse ruling in the consumer forum.

In Union of India v. Cipla Ltd.⁹, the Supreme Court established a functional test to evaluate whether a plaintiff engaged in forum shopping. The test examines if there is a functional similarity between proceedings in different forums or whether the litigant engaged in any subterfuge. If either is found, the court may rule that forum shopping existed. Applying this test to the abovementioned case where there is no bar on the consumer approaching an Arbitral Tribunal after losing in the consumer forum, could be viewed as forum shopping according to the Cipla Ltd. case¹⁰. Such practice undermines the principles of finality and certainty in the judicial process. It also upsets the orderly administration of justice by allowing a party to pursue the same matter in a different forum, potentially leading to different outcomes. In the case of Vijay Kumar Ghai¹¹, the Supreme Court explicitly criticised forum shopping, citing it as an abuse of the judicial system. The Court not only disapproved of the conduct, but also identified distinct forms of forum shopping, calling it a “disreputable practice” with no basis in law.

Nonetheless, the author acknowledges concerns regarding standard form contracts and unequal bargaining power among the parties. While these concerns are genuine, the next section of this paper suggests an alternate approach to addressing the challenges mentioned in the Emaar MGF case¹². At this point, it is important to consider Central Organisation for Railway Electrification v. ECI SPIC SMO MCML (JV)¹³ in which the Court cited earlier decisions such as S.K. Jain v. State of Haryana¹⁴ and Central Inland Water Transport Corpn. Ltd. v. Brojo Nath Ganguly¹⁵ to establish that the principle of unequal bargaining power does not apply to commercial contracts. The only exception established was the doctrine of unconscionability,¹⁶ which empowers courts to refuse to enforce contracts that are so unfair that they shock the conscience. This occurs when the weaker party has no real choice but to accept a standard-form contract. However, the Court has repeatedly ruled that this approach does not apply to commercial contracts, particularly arbitration agreements.¹⁷

The next part of this blog will propose an alternative approach that the Court could have used in cases like Emaar MGF¹⁸, one that protects both the integrity of the arbitration process, and the interests of the consumers.

Rethinking the current jurisprudence: An alternative path forward

The core issue with the precedents is that they repeatedly hold that a consumer has the freedom to choose the forum, and thereby, they undermine the fundamental concept of arbitration, that is, consent. Once a valid consent is given and an enforceable arbitration agreement exists, the parties should be referred to arbitration. However, as previously stated, this becomes problematic in cases involving consumers, who frequently have little to no negotiating power, and are not in a position to discuss the terms of the contract. In such cases, tying the customer to an arbitration clause could be unjust. The author, therefore, argues that disputes in such situations should be classified as non-arbitrable. This stance was reiterated in the case of Emaar MGF¹⁹, where the Court stated that consumer disputes are not arbitrable. However, in an attempt to protect the agreement’s sanctity while also addressing fairness issues, the court proposed a solution, allowing consumers to arbitrate as well as have the choice of going to a consumer forum, thereby making the dispute arbitrable only at the instance of the consumer. However, this decision muddles the waters and gives space for concerns such as forum shopping. A straightforward and principled way would have been to declare such disputes non-arbitrable outright, especially in light of the concerns specific to consumer protection. Alternatively, the Court could have followed the reasoning in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. and Vidya Drolia v. Durga Trading Corpn., which provide clearer guidelines on arbitrability and public policy considerations.

The Booz Allen case²⁰, serves as a foundation for any discussion on issues of arbitrability, wherein it was held that issues of arbitrability must be decided on the basis of “nature of rights” involved. If the issues affect the rights of public at large (right in rem), they are not arbitrable; however, matters affecting private parties (right in personam) are arbitrable. In the case of Ayyasamy²¹, it was held that the disputes involving serious allegations of fraud are not arbitrable as they relate to rights in rem.

In Vidya Drolia v. Durga Trading Corpn.²², the Court decided that tenancy disputes under the Transfer of Property Act, 1882, are arbitrable. The rationale underlying this judgment could also be extended to address consumer disputes. The Court laid down a four-factor test to determine whether the dispute is arbitrable or not. According to this test, subject-matter would not be regarded as being capable of arbitration when, first, it concerns rights in rem and not rights in personam, second, where disputes have an erga omnes effect, affecting the rights of third parties, third, issues related to sovereign functions of the State, and fourth, where a statute expressly or impliedly prohibits the jurisdiction of Arbitration Tribunal. The Vidya Drolia test is based on the nature of rights and is more nuanced compared to the precedents.

Furthermore, the Consumer Protection Act allows consumers to file complaints in two different categories. First category relates to individual complaints under Section 47(1)(a), which may be filed regarding goods or services rendered, or agreed to be rendered. Second category, can be filed in situations where multiple consumers have a cause of action or interest in the same matter; in such cases, consumers or government may file a representative suit under Sections 35(1)(c) and (d), Consumer Protection Act. While the first category of disputes relates to rights in personam, which are capable of arbitration, the second category relates to rights in rem, hence is unlikely to come within the purview of the first category. To ensure the appropriate course of action is taken, it is also important to assess whether the dispute affects any third-party rights as held in the case of Vidya Drolia²³. If it does, it should not be considered arbitrable and must instead be directed to the appropriate consumer forum.

This approach ensures that courts respect the principle of consent underlying arbitration agreements while also maintaining a clear boundary that prevents undue flexibility. By avoiding an open-ended choice to consumers, the risk of forum shopping is minimised, and the integrity of both arbitration and consumer protection frameworks is preserved.

Conclusion

In the view of promoting India as an arbitration friendly jurisdiction, courts must maintain the sanctity of arbitration agreements and refrain from any sort of judicial interference unless strictly envisaged by the Act. Consumer conflicts, like as those in the case of Emaar MGF²⁴, usually involve rights in personam, which are arbitrable as per the established precedents. Allowing consumers to make unguided choices undermines consent, encourages forum shopping, and reduces the effectiveness of arbitration. To maintain consistency and integrity of the arbitration process, the courts should apply arbitrability tests and limit the open-ended “choice” of consumers to switch between forums or deem consumer disputes to be not arbitrable instead of trying to reconcile everything and causing confusion and uncertainty.