LEGAL UPDATE | CONSUMER PROTECTION BILL 2018

Introduction

The Lok Sabha recently passed the Consumer Protection Bill 2018 (Bill) on 20 December 2018. This Bill once promulgated would replace the Consumer Protection Act 1986 (Act). The Bill is yet to be passed by the Rajya Sabha and receive the assent of the President. Changes to the Bill can, therefore, not be ruled out. This update seeks to broadly set out the important changes proposed by the Bill when compared to the Act.

Objectives of the Bill:

The Bill seeks to address:

• several shortcomings noticed in administering the provisions of the Act;

• new forms of unfair trade and unethical business practices brought upon by the emergence of global supply chains, rise in international trade and the rapid development of e-commerce that could make consumers vulnerable due to the challenges posed by misleading advertisements, tele-marketing, multi-level marketing and direct selling.

Key Highlights of the Bill:

• Establishment of the CCPA: A Central Consumer Protection Authority (CCPA) is to be constituted by the Central Government pursuant to the Bill. The CCPA would regulate matters relating to violation of rights of consumers, unfair trade practices and false or misleading advertisements which are prejudicial to the interests of the public and consumers and promote, protect and enforce the rights of consumers as a class. The CCPA is given the power of investigation, search and seizure. In addition the CCPA may issue directions and impose penalties based on its investigation. Appeals from the decision of the CCPA lie to the National Commission.
  
  
• Misleading Advertisements: The Bill has introduced a concept of ‘misleading advertisements which has been defined, in relation to a product or service, as an advertisement: (a) which falsely describes a product or service; or (b) gives false guarantees that mislead consumers as to the nature, substance, quantity or quality of such product or service; or (c) conveys an express or implied representation which if made by the manufacturer, seller or service provider would an constitute unfair trade practices; or (d) deliberately conceals important information. If CCPA is satisfied after an investigation that any advertisement is false or misleading, they can issue directions to discontinue or modify the advertisement. Further, the CCPA can impose a penalty of up to Rs 10,00,000 (Rupees Ten Lakhs only) on the manufacturer or endorser which can be increased to upto Rs 50,00,000 (Rupees Fifty Lakhs only) for any subsequent contravention. In addition, any manufacturer or service provider who causes a false or misleading advertisement which is prejudicial to the interest of consumers is liable to imprisonment of up to 2 (two) years and, for any subsequent contravention, an imprisonment of up to 5 (five) years.
  
  
• Endorsements: The Bill makes `endorsers` liable for false or misleading advertisements as noted above. `Endorsement` has been defined in relation to an advertisement as “(i) any message, verbal statement, demonstration; or (ii) depiction of the name, signature, likeness or other identifiable personal characteristics of an individual; or (iii) depiction of the name or seal of any institution or organisation, which makes the consumer to believe that it reflects the opinion, finding or experience of the person making such endorsement.” CCPA has also been given the authority to prohibit the endorser from making endorsements for a period of up to one year and for a period of up to 3 (three) years for any subsequent contravention.
  
  
• Product Liability: The Bill introduces ``product liability`` which was absent in the Act. Manufacturers, product sellers and service providers would now be liable for harm caused to a consumer because of deficient products or services. Harm has been defined to include (a) damage to any property, other than the product itself; (b) personal injury, illness or death; (c) mental agony or emotional distress; (d) any loss of consortium or services or other loss resulting from harm mentioned in (a), (b) or (c) but does not include any harm caused to a product itself or any damage to the property on account of breach of warranty or any commercial or economic loss. Deficiency now includes (i) any act of negligence, omission or commission by a person which causes loss or injury to the consumer; and (ii) any deliberate withholding of relevant information by such person to the consumer.
  
  
• Unfair Contract: The Bill introduces the concept of ``unfair contract`` which was absent in the Act. An ``unfair contract`` is defined as a contract between a manufacturer or trader or service provider on the one hand and a consumer on the other, having such terms which cause significant change in the rights of such consumer, including (a) requiring manifestly excessive security deposits; or (b) imposing any disproportionate penalty on the consumer for the breach of contract; or (c) refusing to accept early repayment of debts on payment of applicable penalty; or (d) entitling a party to terminate such contract unilaterally without reasonable cause; or (e) permitting one party to assign the contract to the detriment of the other party who is a consumer, without his consent; (f) imposing on the consumer any unreasonable charge/obligation/condition which puts such consumer at a disadvantage. An aggrieved consumer can file a complaint on an `unfair contract` with the relevant adjudicatory Commission under the Bill.
  
  
• Change in pecuniary jurisdiction: The Bill raises the pecuniary jurisdiction of the various Commissions as follows:
  
  
  • District Commission: Claims upto Rs 1 Crore;
  • State Commission: Claims upto Rs 10 Crores;
  • National Commission: Claims above Rs 10 Crores.
• Mediation:The Bill introduces provisions on mediation by providing for a consumer mediation cell to be attached to each of the Commissions under the Bill. A complaint may be referred to mediation with the consent of the parties if the relevant Commission decides that there exists an element of settlement between the parties.
  
  
• E-commerce: The Bill makes provision for e-commerce and electronic communications. The Central Government is empowered to take measures to prevent unfair trade practices in this regard in a manner that may be prescribed.

MHCO Comments: The provisions of the Bill confer a wide ambit of rights to consumers which is in line with the changing modes of doing business. The Bill, therefore, attempts to modernise the law relating to consumer protection. Concerns have however been expressed on the constitution of the Commissions under the Bill, which is now within the authority of the executive / Government and, as a result, may not include any judicial members as was the case under the Act.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance.
 

LEGAL UPDATE | SUPREME COURT RULES ON “VENUE” AND “SEAT” OF ARBITRATION

INTRODUCTION

In a recent case of Union of India v. Hardy Exploration and Production (India) INC, a 3 Judge Bench of the Supreme Court of India was called upon to determine the “seat” of an arbitration in order to determine the law that would govern post-award enforcement proceedings. The Supreme Court held that where the parties to an arbitration agreement have agreed to the “venue” and not the “seat” of arbitration, the surrounding circumstances must be examined to determine the “seat” of arbitration.

FACTS OF THE CASE

• The Union of India (Appellant) and Hardy Exploration and Production (India) INC (Respondent) had entered into a production sharing contract in November 1996 (Agreement) for the extraction, development and production of hydrocarbons in a geographic block in India. Disputes arose between the parties when the Appellant cancelled the rights of the Respondent under the Agreement. The Agreement was governed by Indian laws and contained an arbitration clause which provided inter alia that:
  
  
  • arbitration proceedings would be conducted in accordance with UNCITRAL Model Law on International Commercial Arbitration, 1985 (UNCITRAL Model Law);
  • the venue of the arbitration proceedings would be Kuala Lumpur, unless otherwise agreed by the Parties.
• The Respondent referred the disputes to arbitration and the arbitral tribunal ruled in its favour by an award that was signed and declared in Kuala Lumpur (Award). The Appellants challenged the Award under Section 34, Part I of the Arbitration and Conciliation Act, 1996 (Act) before the Delhi High Court. The Respondents opposed the challenge on the ground that the Award was a foreign award since the “seat” of arbitration was Kuala Lumpur and as a result Part I of the Act would not applyThe Single Judge and Division Bench of the Delhi High Court (on appeal) dismissed the case on the grounds pleaded by the Respondent. The Appellants then appealed to the Supreme Court.

DECISION OF SUPREME COURT

The Supreme Court examined the arbitration clause, the provisions of the UNCITRAL Model Law and inter alia relied on the ruling of the Supreme Court in Harmony Innovation Shipping Limited v. Gupta Coal India Limited where the seat of arbitration was held to be London since the contract was governed by English Law, the arbitration clause provided that the arbitration was to be conducted in London by members of the London Arbitration Association and small claims were to be decided in accordance with the procedure of the London Maritime Arbitration Association) to hold that:

• the place of arbitration (place and seat can be used interchangeably) was to be agreed between the parties and absent such agreement it was to be determined by the arbitral tribunal. Determination requires a positive act signified by an adjudication and expression of opinion and merely because the arbitration was held at Kuala Lumpur and the Award signed there, this would not amount to a determination of the place / seat of arbitration by the arbitral tribunal;
  
  
• a venue can become a seat only if something else is added to it as a concomitant as was the case in the Harmony Case;
  
  
• in view of the above, the Courts in India have jurisdiction to consider the Appellants challenge under Section 34 of the Act .
  

MHCO Comment: The Supreme Court’s decision in this case illustrates the importance of carefully wording an arbitration clause in a contract to ensure that there is no confusion on the “place” or “seat” of arbitration to determine the law that would govern post-award proceedings. However, the Supreme Court did not examine whether India was the seat of arbitration to conclude that Part I of the Act would be applicable. This seems to be a departure from the earlier decisions of the Supreme Court that laid great emphasis on determining the seat of arbitration before deciding which law would govern the arbitration proceedings.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance.

IBC | CORPORATE GUARANTEE | CLAIM INVOKED AFTER MORATORIUM IS ALLOWED BY NCLAT

An interesting issue under the Insolvency and Bankruptcy Code, 2016 (IBC) that resulted in contrary decisions by the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) was whether a corporate guarantee issued by the corporate debtor that was invoked by the lender after commencement of the corporate insolvency resolution process and declaration of moratorium would entitle the lender to make a claim against the corporate debtor after admission of the insolvency petition. In Axis Bank v. Edu Smart Services Private Limited the NCLT answered the issue in the negative while the NCLAT on appeal allowed admission of the claim.

FACTS OF THE CASE:

• DBS Bank Limited filed an application as financial creditor of Edu Smart Services Private Limited (Corporate Debtor) to commence the corporate insolvency resolution process under the IBC against the Corporate Debtor. The application was admitted on 27 June 2017 and a moratorium declared by the NCLT.
  
  
• The interim resolution professional (IRP) appointed for the Corporate Debtor issued a public announcement seeking details of all claims against the Corporate Debtor on 30 June 2017. Axis Bank submitted its claim in Form ‘C’ to the IRP along with supporting documents on 11 July 2017. The claim of Axis Bank arose from a corporate guarantee issued by the Corporate Debtor for loans taken by Educom Solutions Limited (Borrower). IRP rejected the claim on the ground that since the corporate guarantee had not been invoked the claim could not be verified and was contingent. Thereafter, on 21 July 2017, Axis Bank invoked the corporate guarantee of the Corporate Debtor and notified the IRP. The IRP still refused to accept the claim of Axis Bank.
  
  
• Axis Bank approached the NCLT against the decision of the IRP. The NCLT rejected the application of Axis Bank on the following grounds:
  
  
  • The `corporate guarantee` had not been invoked prior to the initiation of the corporate insolvency resolution process and hence the liability under the guarantee had not crystallized as on the date on which the application seeking initiation of the insolvency process had been admitted. As a result, the claim of Axis Bank could not be verified on the insolvency commencement date;
  • Under the IBC only those claims should be considered which are due and payable as on the insolvency commencement date. The corporate guarantee, which was invoked after the insolvency commencement date, would not meet this requirement;
  • A right to claim any debt only arises when the creditor’s debt is due and payable. In case of a guarantee the debt becomes due only when a creditor invokes the guarantee, which in the present case occurred after the insolvency commencement date;
  • After the order of admission a moratorium is in effect which will bar any action to foreclose, recover or enforce any security interest created by the corporate debtor, thereby barring the invocation of the guarantee as well.
• This decision of the NCLT was challenged by Axis Bank before the NCLAT.

DECISION OF NCLAT

• After scrutinising the terms of the corporate guarantee, the NCLAT concluded that Axis Bank could be considered a lender of the Corporate Debtor since:
  
  
  • on a default by the borrower, the lenders could demand payment under the guarantee and the guarantor was required to make payment without demur or protest;
  • the lenders could act as if the guarantor was the principal debtor;
  • the guarantee was a continuing obligation till the borrower had repaid the loans.
• After considering the definitions of claim, debt and financial debt under the IBC, the NCLAT concluded that to initiate the corporate insolvency resolution process the financial creditor must show a default in relation to the financial debt. Such a requirement is not necessary for a claim, which is filed after commencement of the corporate insolvency resolution process, since it is defined as a right to payment whether disputed, undisputed, secured or unsecured or a right to payment arising from a breach of contract irrespective of whether the same is matured, unmatured, disputed or undisputed. Therefore, even an unmatured claim must be considered and verified by the IRP after commencement of the corporate insolvency resolution process. Thus, the appeal of Axis Bank was allowed.
  

MHCO Comment: While there appears to be merit in the stands taken by both the NCLT and the NCLAT, the view taken by the NCLAT appears to be more purposive and less technical. An interesting argument that was raised before the NCLAT was that Axis Bank had also filed a claim against the Borrower who was also part of a corporate insolvency resolution process and thus Axis Bank stood to gain from proceedings in relation to the Borrower and the Corporate Debtor. This argument was not dealt with by the NCLAT. It remains to be seen whether the Supreme Court would get involved in this matter to lay to rest the position of law in relation to guarantees that have not been invoked prior to commencement of the corporate insolvency resolution process.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance.