This article is written by Vaibhav Sachde, pursuing a Certificate Course in Introduction to Legal Drafting: Contracts, Petitions, Opinions & Articles from Lawsikho.com.
The Indian judicial system has a history of a large backlog of cases and the pandemic has further affected it negatively. As of March 2021, creating new records, the backlog of cases in the Supreme Court, High Courts, and district and subordinate courts have increased by at least 19 per cent with a total of 4.4 crore cases pending now. Also, over 5.47 lakh cases are pending under the consumer court of all three levels in India. Seeing this one would always be discouraged in bringing a consumer case to the court. This created a demand for alternatives and therefore, the alternate dispute resolution (ADR) came as a saviour and arbitration are one of the most important and useful mechanisms under ADR governed by the Arbitration and Conciliation Act, 1996. This method is evolving and more and more consumer contracts are including arbitration as a mode of dispute resolution. But this is not it, arbitration has to be drafted in a very clear and crisp manner. Especially for a consumer contract, it must be drafted in a very specific manner and not be biased against the consumer to avoid disputes on the validity of arbitration clauses.
In this article, we shall try to understand the method to draft an arbitration clause under a consumer contract and ensure its validity and enforceability.
Why do companies opt for arbitration?
In case of a dispute related to a consumer contract; companies with a commercial interest and a brand image would prefer a confidential, swift, and effective method to resolve. Consumers too would prefer to not fight on legality against companies with large resources. They would rather opt for a quick, mutually acceptable, and cooperative resolution where their interests are retained. This made a trend of arbitration in almost every consumer contract.
Arbitration is of great benefit as it allows disputes to be resolved outside court confidentially and also is a cost-effective and time-saving method. It allows parties to select arbitrators, work cooperatively and is quite flexible to the ease of both parties. The process makes both the parties work together rather than creating hostility towards each other to win the dispute.
Why is it necessary to draft a structured arbitration clause?
A consumer contract is a legally enforceable agreement between the seller and the customer that covers the sale of products or digital material, as well as the provision of services (with or without goods). These contracts take place in day-to-day situations. These contracts are mentioned in form of terms and conditions, company policy, etc.
Recently there has been a trend of arbitration clauses in all consumer contracts. It is frequently seen that consumers may unknowingly agree to arbitrate disputes by signing contracts for a new electronic card; a car rent and insurance; a property rental; home modification agreements and in many more cases. This is because companies have the policy as “By enrolling in, using, or paying for the services, you agree to the prices, charges, terms, and conditions of this agreement. If you do not agree to these prices, charges, terms, and conditions, do not use the services, and cancel the services immediately.” These are hidden under long texts which go unnoticed. Consumers just agree and get legally bound by it. In many cases, it is wholly biased towards the company.
So, for the protection of consumers against unfair trade practices and to ensure consumer rights there has been established a Consumer Rights Act, 2015 in India. Under the act, three-tier consumer courts are established for enforcement of the rights of a consumer. We also have an important judgment on this point of law. the case of M/s Emaar MGF Land Limited v Aftab Singh (Review Petition (C) Nos 2629-2630 of 2018 in Civil Appeal Nos 23512-23513 of 2017), the Supreme Court held that the arbitration clause cannot be invoked when the consumer opts to file consumer complaint in contrary because consumer disputes are also a subject matter which pertains to rights in rem (public rights). But it did not bar against carrying out consumer disputes through arbitration. Also, the frequently used mandatory arbitration clause in consumer contracts does not prevent it from judicial review. It may restrict judicial interference. But the consumer can approach the court to challenge the validity of the arbitration clause and to compel discovery to support their claim. Thus, it is necessary to draft an effective arbitration clause that is unambiguous, remarkable, and unbiased. Drafting of such clauses helps in swift redressal under arbitration in case of a dispute.
In a consumer contract, the arbitration clause includes all the general ingredients of a customary arbitration clause and also needs to have some specifications like taking consumers approval, informing them of the process etc to ensure its effectiveness.
The arbitration clause and arbitration agreement are the same. the agreement becomes a clause when it is provided within the contract.
Essentials of drafting a consumer contract
1. Conspicuous agreement to the consumer
It is very important for an arbitration clause to be accepted by both parties. It is problematic when the clause is hidden under terms and conditions, is not readily available, and just seems out of the blue for the consumer. Also, in the case of browsewrap, certain issues may arise. So, to avoid this and have a clear upfront arbitration clause. A notice at or near the beginning of the consumer terms and conditions should say that the terms of the contract include an arbitration clause and other related provisions that will be carried out in case of any dispute resolution. It should also further inform consumers about what they are choosing and its outcomes.
Also, the customer should be enforced to take an affirmative act (such as clicking “I agree”) to signal agreement so that further no dispute arises about acceptance of the clause.
Example: “The above contract includes an arbitration clause foreclosing class action waiver that will impact any dispute resolution, the dispute will not include any court proceedings, will instead have a neutral arbitrator, it will be subject to different rules with very limited court review of any results.”
2. Stamping of the arbitration clause
To enforce an arbitration clause, it is mandatory to pay an appropriate amount of stamp duty. As per the judgment dated April 10, 2019, in Garware wall ropes Ltd. v Coastal Marine Construction and Engineering Ltd. The Honorable Supreme court held that an arbitration clause won’t be enforced until it is stamped.
3. Administration and supervision
Arbitration can be administered and supervised in an institutional or ad hoc manner. In institutional arbitration, the supervision and administration are taken place by an appointed institute agreed upon by both parties. It is conducted with the institution’s arbitration rules and appointment of an arbitrator and conducting the redressal process is done by an institution for a fee.
In the case of ad hoc, arbitration parties can create their own rules or follow institutional rules with cooperation. It has flexibility in conducting the process.
4. Requirements for the clause
The clause must compulsorily be in writing as per Section 7(3) of the Arbitration and Conciliation Act, 1996. It doesn’t necessarily need to be signed by both parties.
As provided in the judgment dated October 29, 2018, in Caravel Shipping Services Private Limited v Premier Sea Food Exim Private Limited. the Honorable Supreme Court declared that the mere act of not signing arbitration does not affect its validity because it can be deduced by the court from the performance of the contracts by the parties.
Ingredients in the arbitration clause of consumer contracts
1. Nomination of an arbitrator
The number of arbitrators should be specified in the clause and also the process of their appointment must be decided.
It is necessary to comply with Section 10 of the Arbitration and Conciliation Act, 1996, which states that the number of arbitrators shall not be even. In case there is no provision of the number of arbitrators in the clause then, it shall be deemed that a sole arbitrator is to be appointed.
Thus, the parties have an option to choose any odd number of arbitrators and also specify the procedure of their appointment. The companies can also provide some options of arbitrators out of which consumers may select one. It is advisable to appoint one arbitrator in case of a small and medium monetary amount dispute and three arbitrators in case of a large monetary amount dispute as it is to be considered that the cost of the arbitrator is to be borne by both parties. Usually, in the appointment procedure in the case of a single arbitrator, the company appoints the person and in the case of three arbitrators both parties appoint a person and they both further appoint a third arbitrator. The arbitrator appointed is usually not related to the legal field and is not an interested party and an outsider.
Also, it is advisable and important to mention the timeline within which parties shall comply with the rules. Because if not mentioned parties will take undue advantage and take a very long time and the basic benefit of arbitration will be sacrificed.
Sample clause- “In case a dispute arises, the parties mutually consent to appoint a sole arbitrator from the list of arbitrators mentioned in part __of the agreement within ____days from the date of the dispute.” (For sole arbitrator)
“In case a dispute arises, the parties will individually appoint one arbitrator each within ____days from the date of the dispute, and the two arbitrators will further appoint the third arbitrator within ____days from their date of appointment. The arbitrators appointed must comply with all categories mentioned under __part of the agreement”. (For three arbitrators)
It is necessary to decide the language in which arbitration is to be conducted. This will help to prevent disputes, cost of translation and help in the smooth working of proceedings. It is advisable to decide the language according to the area where business is carried out.
Sample clause- “All the arbitration proceedings shall be conducted in __.”
3. Applicable law and jurisdiction
One of the most important requirements to be mentioned in the clause is the applicable law governing the arbitration and its jurisdiction.
The applicable laws would be some international arbitration standards, the Indian Arbitration and Conciliation Act, 1996, etc.
The governing law is applied and the courts that would have exclusive jurisdiction over the arbitration proceedings will be determined by the seat of an arbitration proceeding. The venue is used to determine the place of proceedings. When there is no mention of a seat, the venue will be used as a seat. If both are mentioned, the venue will determine the place of proceeding for the ease of the parties.
An advisable provision in a consumer contract would be to let companies specify their venue, but also authorize the arbitrator to select another one if that one is unreasonably burdensome to the customer.
Sample clause- “The arbitration proceedings shall be governed by the ___and the seat shall be ____.” (Only the seat is mentioned)
“The arbitration proceedings shall be governed by the ___and the venue shall be ____.” (Only the venue is mentioned)
“The arbitration proceedings shall be governed by the ___and the seat shall be ____. The arbitral tribunal shall meet, examine witnesses and hear the proceedings at ___.” (Seat and venue both are mentioned)
4. To whom is it applicable?
To protect against any class, collective, or representative action, including any action in the capacity of a private attorney general, and not combine the individual proceeding with any other proceeding, the clause should clearly state this and make a provision for it. This is important to be included because a class arbitration is subject to considerably less judicial review and if a class action waiver is overturned then the company will demand the whole arbitration clause and claims decided in the court to be invalidated.
Sample clause- “The arbitrator shall have no power to conduct class, consolidated, or representative action, including any action in the capacity of a private attorney general, and not combine the individual proceeding with any other proceeding, without the consent of both the parties. Relief can be granted only on the behalf of individual parties and only to the extent of their claims”
5. Arbitration cost
It is advisable to mention the division of costs for the smooth functioning of the proceedings. Usually, costs are equally distributed by both parties and in case of special requirements, the individual party bears the cost.
Sample clause–”All the costs arising of the arbitration proceedings (including the arbitrator’s fee and court reporter’s fee), shall be equally split among the parties unless the Arbitrator’s award specifies otherwise.”
6. Bilateral agreement
An arbitration proceeding cannot be unilateral like such a case emerges when companies appoint either their employee as an arbitrator or only one party gets to appoint a sole arbitrator of their choice.
This was also provided in the judgment of 2017 in TRF Ltd. v. Energo Engineering Projects Ltd. Here the Supreme Court declared that the arbitration clause which provides for the appointment of a sole arbitrator would be invalid if the arbitrator appointed by a party might have some interest in the outcome of the disputes. Also, such interested parties can not only become arbitrators but also cannot appoint a person in his/her replacement.
In one of the landmark judgments of the supreme court in Perkins Eastman Architects DPC v. HSCC (India) Ltd, dated November 26, 2019. It was provided that a sole arbitrator cannot be appointed even by a person who is one of the interested parties in the outcome of a dispute. This changed the scenario for consumer contracts where it was common for companies to have one-sided arbitration clauses which allowed companies to appoint an arbitrator of their choice. But now companies need to take consent from consumers and also allow them to choose.
So, the clause should state that arbitration proceedings are applied bilaterally. It is applied to claims brought by both sides.
Sample clause- “Both the parties agree that all the disputes, including but not exhaustive to disputes related to our relationship, terms and conditions, and our transactions shall be resolved in binding individual arbitration.”
7. Applicability in case of changes
An arbitration clause is a separate agreement that becomes a clause when added to the contract so even in the case of a contract being declared null and void, the arbitration clause survives as it is considered to be an independent and separate contract.
To let the arbitration clause be applicable even after changes in a part of the clause there needs to be a provision of survival of the remainder of the clause in case of any portion being invalidated or changed.
Sample clause- “In case of any change in part of the arbitration clause, the remainder of the clause stands valid and applicable.”
It should be mentioned in the clause if there is a requirement to exclude anything from arbitration proceedings. Sometimes companies would not think to arbitrate on some specific or petty issues and would like to exclude all small claims, intellectual property claims, and claims solely for injunctive relief. This should be drafted with utmost care.
Sample clause- “Arbitration proceedings will not apply to ____”
9. Results are binding
The clause shall include that the award passed by the arbitrator is final and binding so that it clears away further chances of a dispute.
Sample clause- “The award passed by the arbitrator shall be final and binding on all the Parties to the Agreement.”
Sample arbitration clause
After seeing the ingredients and essentials of the clause a simple arbitration clause for consumer contract would be as follows:
The following contract includes an arbitration clause foreclosing class action waiver that will impact any dispute resolution, the dispute will not include any court proceedings, will instead have a neutral arbitrator, it will be subject to different rules with very limited court review of any results.
- In case a dispute arises, the parties mutually consent to appoint a sole arbitrator from the list of arbitrators mentioned in part __of the agreement within ____days from the date of the dispute.
- All the arbitration proceedings shall be conducted in (language).
- The arbitration proceedings shall be governed by the ___and the seat shall be ____. The arbitral tribunal shall meet, examine witnesses and hear the proceedings at ___.
- The arbitrator shall have no power to conduct class, consolidated, or representative action, including any action in the capacity of a private attorney general, and not combine the individual proceeding with any other proceeding, without the consent of both the parties. Relief can be granted only on the behalf of individual parties and only to the extent of their claims
- All the costs arising from the arbitration proceedings (including the arbitrator’s fee and court reporter’s fee), shall be equally split among the parties unless the arbitrator’s award specifies otherwise.
- Both the parties agree that all the disputes, including but not exhaustive to disputes related to our relationship, terms and conditions, and our transactions shall be resolved in binding individual arbitration.
- In case of any change in part of the arbitration clause, the remainder of the clause stands valid and applicable
- Arbitration proceedings will not apply to ____ transactions.
- The award passed by the arbitrator shall be final and binding on all the parties to the agreement.
Arbitration is one of the growing forms of alternative dispute resolution in the country. The arbitration clauses are being added in more and more contracts. Previously consumers were not willing to actively go against the companies in the court. Arbitration led to an effective redressal process for them. For the sellers, arbitration is of the greatest benefit as it is a very quick and confidential redressal mechanism.
In India previously, consumers were vulnerable to arbitration clauses hidden in the agreements. They were extremely biased against them. But now there is awareness spread and as well legal backing about consumer rights and also arbitration is growing day by day. So today those terms won’t be enforced by any arbitrator or courts. So there needs to be properly effective drafting of the clause to be enforceable in society.
Proper drafting is the primary and most important part of a contract. To avoid litigation against the enforceability of a clause requires effective drafting which will go against the purpose and will create unnecessary inconvenience. Thus, drafting a clear, crisp, unambiguous, and inclusive clause is very important.
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