June 17, 2015

Arbitration and Consumer Protection

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It is time to reform the Consumer Protection Act to respect consumers when it comes to arbitration.

How do the Arbitration Act, 1991 and the Consumer Protection Act, 2002 interact?

Unlike a business agreement where arbitration of all future business disputes can be mandatory, a consumer agreement cannot include a clause that mandates arbitration for future consumer disputes. However, a consumer can opt for arbitration once the dispute is known.

What is a consumer agreement? Section 1 of the Consumer Protection Act defines a consumer agreement as an agreement between a supplier providing goods and services to an individual for personal, family or household purposes excluding an individual who is acting for business purposes.

Subsection 7(2) of the Consumer Protection Act invalidates any clause that prevents going to Court but subsection 7(3) permits consumer arbitration agreements once a consumer dispute arises. The policy rationale here is based on an assumption that consumers are unsophisticated and not able to understand the implications of an arbitration clause as well as businesses and therefore should be allowed to keep their options open.

Ironically, this policy assumption that consumers are unsophisticated is condescending towards consumers, the very group the Consumer Protection Act is supposed to protect. It diminishes consumer rights by preventing consumers from entering into arbitration agreements to solve consumer disputes, something that consumers may actually want as opposed to going to Court.

A better policy would be that arbitration can be mandatory for consumer disputes but cannot eliminate any consumer rights that could otherwise be advanced in Court without the agreement of the parties after a consumer dispute arises. Such a policy would serve the dual purpose of protecting consumer rights and at the same time respecting party autonomy by letting suppliers and consumers resolve their disputes their own way.

What does all of this mean? Agreements to arbitrate consumer disputes are valid if they are made after the dispute arises. Agreements to arbitrate business disputes can be made before or after a business dispute arises.

Given all the advantages of arbitration versus Court, the Consumer Protection Act needs to be updated to respect consumers and give them back their rights to arbitration.

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