The Supreme Court of Indiain M. Hemalatha Devi & Ors v B. Udaysri, Civil Appeal No. 6500-6501 of 2023 (“Hemalatha Devi”), has held that consumer disputes are non-arbitrable in nature and that the Consumer forum is not excluded from adjudicating such disputes. The Supreme Court has held that a party cannot be compelled into arbitration merely because they are signatories to an arbitration agreement. In doing so, the Supreme Court reaffirmed its views in Emaar MGF Land Ltd. v. Aftab Singh(2019) 12 SCC 751 (“Emaar”) and various other decisions.
The general principles of arbitrability were first discussed elaborately by the Supreme Court in Booz Allen and Hamilton Inc. v. SBI Home Finance Limited & Ors, 2011 5 SCC 532 (“Booz Allen”).The Supreme Court in that instance held that there is a presumption in favour of arbitrability of any civil or commercial dispute which is capable of being decided by a Court, except certain categories which are reserved by the legislature exclusively for public fora as a matter of public policy. As an illustration, the Supreme Court categorized (i) criminal disputes, (ii) matrimonial disputes, (iii) insolvency/winding up matters (iv) testamentary matters and (v) eviction or tenancy matters governed by special statutes. It was held that generally and traditionally disputes in relation to rights in personam are arbitrable and disputes in relation to rights in rem are required to be adjudicated by courts and public tribunals.
The law and tests on arbitrability of disputes was comprehensively discussed, analysed and affirmed in the more recent landmark decision of Vidya Drolia& Ors v. Durga Trading Corporation, (2021) 2 SCC 1 (“Vidya Drolia”).
Applying the above principles, the Supreme Court in Hemalatha Devi held that the arbitrability of a dispute has to be examined when one of the parties seeks redressal under a welfare legislation, in spite of being a signatory to an arbitration agreement. The Consumer Protection Act is a piece of welfare legislation with the primary purpose of protecting the interest of a consumer. Consumer disputes are assigned by the legislature to public fora, as a measure of public policy. Therefore, by necessary implication such disputes will fall in the category of nonarbitrable disputes, and these disputes should be kept away from a private fora such as arbitration, unless both the parties willingly opt for arbitration over the remedy before public fora.
While there can be no qualms with the principle laid down above on arbitrability of consumer disputes (initiated by a consumer), the Supreme Court in Hemalatha Devi has erred in the facts of that case. The entire judgment analyses the special right of a consumer and seeks to protect that through adjudication in a forum that the consumer elects. However, in the facts of that case, the Appellant/builder had terminated the Agreement of Sale executed with the Respondent/home buyer on the ground that the home buyer failed to sign a Construction Agreement with the builder. Therefore, the builder issued a notice invoking arbitration and moved a petition under Section 11 of the Arbitration and Conciliation Act, 1996 (“Act”)for appointment of an arbitrator. The buyer subsequently moved a complaint before the Consumer forum. Since the complaint before the Consumer forum was pending at the time of consideration of the petition under Section 11 of the Act, the Telengana High Court held that the builder ought to approach the Consumer forum and file an application under Section 8 of the Act and dismissed the petition under Section 11 on this ground. This order was in challenge before the Supreme Court.
The Supreme Court has misguided itself in applying the principles of non-arbitrability of consumer disputes laid down in Emaar and other judgements. In all those cases, a dispute before a Consumer forum was sought to be mandatorily referred to arbitration. In the instant case, it is most pertinent that the builder had at the first instance invoked the arbitration clause in relation to disputes it had against the home-buyer prior to the filing of the consumer case. This is an independent cause of action from that of the home-buyer. The builder, is not a consumer as contemplated under the Consumer Protection Act and therefore, if relegated to the Consumer forum, cannot agitate its claim before a Consumer forum. The builder will only be able to defend the claim made against it and cannot agitate its own claims. There is no consideration given whatsoever to the claim and rights of the builder whatsoever in this case.
Therefore, on a conspectus of the above, it is important to note that consumer disputes are not disputes that are inherently non-arbitrable, but are non-arbitrable at the option of the consumer. Keeping this in mind, Courts while deciding whether to refer a dispute to arbitration, have to assess the nature of the dispute, weighing the claims and interests of both parties. Disputes filed by a consumer before a Consumer forum without any counter claim must only be referred to arbitration at the option of the consumer. However, in a case where the opposite party has an independent and genuine claim against the consumer, the Courts must refer the dispute to arbitration to avoid multiplicity of proceedings and ensure effective adjudication of the dispute between the parties.
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