ALTERNATIVE DISPUTE RESOLUTION AND THE LAW OF INTELLECTUAL PROPERTY

ALTERNATIVE DISPUTE RESOLUTION AND THE LAW OF INTELLECTUAL PROPERTY

Introduction

Disputes relating to intellectual property protection are gradually escalating in the Indian legal setting. Intellectual property protection is available for a limited period for the intellectual property creator who has to enforce it in an effective manner. Because of the excessive delays in the judicial system, there is a need to look for other solutions and mechanisms for sharing the burden of the judiciary. This is particularly relevant because the aggrieved person enjoys limited rights and the only remedy available is that which is prescribed under substantive legislations. Alternative dispute resolution measures are gaining prominence for enforcing the protection of intellectual property. This article explores the use of alternative legal mechanisms for the protection of intellectual property rights in India.

Need for Alternative Mode of Dispute Resolution in Intellectual Property Disputes

The intellectual efforts of the creators of intellectual property are valued on the basis of the sign of the rights affixed to ‘intellectual output’. Intellectual property protection provides a pointer to the creator to exert his powers over third parties, who, without his permission, try to use the fruits of his labour. The rationale for the creation of rights gets defeated if they cannot be enforced. The owners of intellectual property have to be their own watchdogs and take recourse to the Courts for the infringement of their rights. Indian Courts have taken a giant leap towards the development of an intellectual property regime in India; however, the available resources could be put to better and proper use by the Courts in India if the alternate dispute resolution is deployed. Matters related to patent law and copyright law, which involve intersection with science and an understanding of technology, need special adjudicating officers, who can comprehend the interdisciplinary nature of the case at hand with sufficient ease. The limited nature of protection given to the owner of intellectual property rights, calls for developing mechanisms to execute immediate and swift justice. While evaluating the performance shown by the Indian judiciary in cases related to intellectual property rights, the Supreme Court of India has in the case of Shree Vardhman Rice & Gen Mills v. Amar Singh Chawalwala1 held that “…Without going into the merits of the controversy, we are of the opinion that the matters relating to trademarks, copyrights and patents should be finally decided expeditiously by the Trial Court instead of merely granting or refusing to grant injunction. In the matters of trademarks, copyrights and patents, litigation is mainly fought between the parties about the temporary injunction and that goes on for years and years and the result is that the suit is hardly decided finally. This is not proper…In our opinion, in matters relating to trademarks, copyright and patents, the proviso to Order XVII Rule 1(2) C.P.C. should be strictly complied with by all the Courts, and the hearing of the suit in such matters should proceed on a day to day basis and the final judgment should be given normally within four months from the date of the filing of the suit.”

Reiterating its stance in Bajaj Auto Ltd. v. TVS Motor Company Ltd2., the Supreme Court of India held that “experience has shown that in our country, suits relating to the matters of patents, trademarks and copyrights are pending for many years and litigation is mainly fought between the parties over temporary injunction. This is a very unsatisfactory state of affairs, and hence, we had passed the above quoted order in the above-mentioned case to serve the ends of justice. We direct that the directions in the aforesaid order be carried out by all courts and tribunals in this country punctually and faithfully.” It is evident that due to unwarranted delay in the disposal of cases and the costly litigation which could prolong the protection accorded to the work, rather than promoting the progress of intellectually protected work, the aggrieved parties are opting for alternate dispute resolution mechanisms for the advancement of intellectual property rights in India. Moreover, the commercial nature of the transactions involved in majority of intellectual property based litigations, solicits such an approach.

Alternate Dispute Resolution Machinery

Alternate dispute resolution embodies within its garb different modes of resolving a dispute, other than that provided by the traditional model of litigation. Arbitration, mediation, settlement and conciliation are some of the models which are the alternatives to court based litigation. The Arbitration and Conciliation Act, 1996 has been the main statute in India dealing with the two cited alternate forms of dispute resolution.3 The Civil Procedure Code, 1908 also provides for the adoption of different models for the expeditious determination of disputes.4 The merits of the modes of alternate dispute resolution are not only limited to speedy remedy, but also, to the flexibility, cost effectiveness, confidentiality and business oriented results. The Indian judiciary has effectively tried to bring mediation and settlement for intellectual property disputes in the traditional model of litigation, through the reading of section 89 of the Civil Procedure Code, 1908. Even where the alternative dispute resolution methods fail to be the effective choice for the determination of disputes related to intellectual property rights, they can be used for narrowing down the issues for contestability in a traditional model of litigation

Alternative Dispute Resolution Measures for Intellectual Property: Need of the Hour

The solution lies in the introduction of alternative dispute resolution mechanisms, for the redressal of grievances related to infringement of protected rights of an intellectual property holder. Alternative dispute resolution mechanisms are less time consuming, efficient and provide flexibility to the right holder. It is important to note that in all the commercial transactions, the route of alternate dispute resolution has already shown its majority over the traditional modes of litigation. Nowadays, contracts related to transfer of intellectual property mostly include the “arbitration-mediation” clause.5 This highlights the weight of arbitration in commercial intellectual property transactions.6 In a landmark judgment in the case of Bawa Masala Co. vs. Bawa Masala Co. Pvt. Ltd. and Anr.7, where a number of legal disputes were already resolved through a process of alternate dispute resolution, the Delhi High Court passed orders for adoption of a process known as early neutral evaluation, in an intellectual property based litigation suit. The Court in this case, under the umbrella of section 89 of the Civil Procedure Code, 1908 mooted for the inclusion of such procedures for amicable settlement of disputes. The Court further said that the early neutral evaluation procedure shares the “same features as a mediation process…the difference is that in case of mediation the solutions normally emerge from the parties and the mediator makes an endeavor to find the most acceptable solution” whereas “in case of early neutral evaluation, the evaluator acts as a neutral person to assess the strengths and weaknesses of each of the parties.” The Court further made a distinction between early neutral evaluation and arbitration by stating that in early neutral evaluation “there is no testimony or oath or examination and such neutral evaluation is not recorded.” The Court also held that early neutral evaluation is “confidential and cannot be used by any of the parties against the other. There is no award or result filed.” This stands as a seminal case, where, Indian Courts have tried to bring alternative dispute resolution machinery for solving intellectual property infringement related matters. This case also highlights the inclination, which Indian Courts have started sharing, towards involvement of alternate dispute resolution measures in resolving of such disputes.
However, use of alternative modes of dispute resolution for determination of intellectual property related disputes, may face some problems. Firstly, since the protection of intellectual property is territorial in nature, the public policy consideration as set down by the Supreme Court of India in the case of O.N.G.C v. Saw Pipes8, can pose a hurdle towards enforceability of arbitral awards, if made on the mandate of intellectual property related disputes. Secondly, the issue of validity of intellectual property points towards determination of right against everyone. This might pose another roadblock for the use of alternative dispute resolution machinery in intellectual property related disputes. However, the determination of infringement of intellectual property, as it determines the rights between two parties, can certainly be adjudicated by the use of alternative dispute resolution machinery.

Patent Law and Alternative Dispute Resolution

Law related to patent channelizes the field of technology with law. As the patent disputes involve an understanding of technical knowledge related to the dispute in question, the biggest hurdle, which the Indian Courts face, is with respect to streamlining the trial of the dispute in a cost effective and prompt manner. Every dispute in the domain of patent law in India has revolved around the nitty-gritty of interim injunctions and the appeals related to those injunctions. Infact many countries have endorsed the inclusion of arbitration as a model for the resolution of patent disputes.9 The Patent Act, 1970 particularly under section 103 of the Act makes use of arbitration as a procedure for resolution of disputes. Closer integration of alternate dispute resolution mechanisms in patent infringement suits could be the way forward for appropriate dispensation of justice.

Trademarks and Alternative Dispute Resolution

In India, trademark litigation covers an overwhelming landscape in the intellectual property related litigation. The trademark litigation is an inter partes adjudication. That being the case, the modes of alternative dispute resolution can certainly provide an appropriate recourse to the ailing judiciary. Moreover, it is germane to note that in cases of cybersquatting, arbitration plays an eminent role in the streamlined procedure outlined under the Uniform Domain Name Dispute Resolution Policy, 199910 and the Indian Domain Name Dispute Resolution Policy11 for the adjudication of disputes. This brings to fore the importance of arbitration and the use of other alternate dispute resolution measures for reconciliation of the interests of the trademark owner and the impugned party.

Conclusion

Statutory rights, which are limited in nature, solicit a different approach for their effective enforcement. The jurisprudence related to the establishment of various quasi-judicial bodies under different intellectual property laws, points out that these bodies were formed to share the load and to render an expert testimony towards the determination of validity of intellectual property. The infringement of intellectual property rights, since it pertains to an inter partes dispute, can be very well adjudicated by using alternative dispute resolution measures.

SECTION 8 OF THE ARBITRATION AND CONCILIATION ACT, 1996: A SAVING BEACON

SECTION 8 OF THE ARBITRATION AND CONCILIATION ACT, 1996: A SAVING BEACON

The Arbitration and Conciliation Act, 1996 (hereinafter the “1996 Act”) supplants the Arbitration Act, 1940. In the 1996 Act, intervention by Courts was limited so that the object behind speedy justice could be well achieved. To further the aforesaid objective, the 1996 Act harbours many provisions. Section 8 of the 1996 Act denotes one such provision which provides for limited judicial intervention and furthers the objective by directing the parties to get involved in arbitration on the basis of the arbitration agreement. In domestic arbitrations , the uses of Section 8 applications in the Courts have spiraled over the years. This piece provides an indepth analysis of Section 8 of the 1996 Act by focusing on the judicial precedents.

Section 8: The Golden Eagle:

A. Condition Precedent Stipulated under Section 8

Section 8 of the Arbitration and Conciliation Act, 1996 is peremptory in nature. It provides that a judicial authority shall, on the basis of the arbitration agreement between the parties, direct the parties to go for arbitration. It also enlists conditions precedent, which need fulfillment before a reference can be made as per the terms of the 1996 Act.[1] In P. Anand Gajapathi Raju & Ors. v. P.V.G. Raju (Died) & Ors[2]., while iterating the periphery of Section 8 of the 1996 Act, the Supreme Court said that “The conditions which are required to be satisfied under Sub-sections (1) and (2) of Section 8 before the Court can exercise its powers are (1) there is an arbitration agreement; (2) a party to the agreement brings an action in the Court against the other party; (3) subject matter of the action is the same as the subject matter of the arbitration agreement; (4) the other party moves the Court for referring the parties to arbitration before it submits his first statement on the substance of the dispute. …. The language of Section 8 is per-emptory.”

The following factors are to be considered before entertaining an application under Section 8 of the 1996 Act:

First question to be analyzed is whether it can be made applicable to a civil dispute. The Supreme Court while answering the aforesaid question in H. Srinivas Pai and Anr. v. H.V. Pai (D) thr. L.Rs. and Ors.[3], said that “The Act applies to domestic arbitrations, international commercial arbitrations and conciliations. The applicability of the Act does not depend upon the dispute being a commercial dispute. Reference to arbitration and arbitability depends upon the existence of an arbitration agreement, and not upon the question whether it is a civil dispute or commercial dispute. There can be arbitration agreements in non-commercial civil disputes also.”

The presence of arbitration agreement is another pre-requisite for seeking a reference under Section 8.[4] Section 7 of the 1996 Act provides the diameter of the term “arbitration agreement”. The importance of arbitration agreement, for seeking a reference under Section 8, was emphasized by the Supreme Court in Smt. Kalpana Kothari v. Smt. Sudha Yadav and ors.[5] wherein the Court said that “As long as the Arbitration clause exists, having recourse to Civil Court for adjudication of disputes envisaged to be resolved through arbitral process or getting any orders of the nature from Civil Court for appointment of Receiver or prohibitory orders without evincing any intention to have recourse to arbitration in terms of the agreement may not arise.”

Next question which might arise in the step wise analysis of Section 8 is whether the validity of the arbitration clause can be disputed before the Court, in front of which an application for reference is made. The answer to the question was laid in the negative by the Supreme Court in Hindustan Petroleum Corpn. Ltd. v. Pinkcity Midway Petroleums[6]. The Court in this case held that if the existence of the arbitration clause is admitted, in view of the mandatory language of Section 8 of the Act, the courts ought to refer the dispute to arbitration. The Supreme Court, while raising a presumption for the validity of an arbitration clause in an agreement, in India Household and Healthcare Ltd. v. LG Household and Healthcare Ltd.[7], said that the Courts would construe the agreement in such a manner so as to uphold the arbitration agreement.

Section 8 further mandates that the subject matter of the dispute is the same as the subject matter of the arbitration agreement. While articulating on this pre-requisite, the Supreme Court in Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya and Anr.[8], said that “The relevant language used in Section 8 is-“in a matter which is the subject matter of an arbitration agreement”. Court is required to refer the parties to arbitration. Therefore, the suit should be in respect of ‘a matter’ which the parties have agreed to refer and which comes within the ambit of arbitration agreement.”

An application under Section 8(1) cannot be entertained unless accompanied by original arbitration agreement or a certified copy thereof. Laying emphasis on section 8(2) for the grant of reference, the Supreme Court in The Branch Manager, Magma Leasing and Finance Limited and Anr. v. Potluri Madhavilata and Anr.[9] said that “An analysis of Section 8 would show that for its applicability, the following conditions must be satisfied: (e) that along with the application the other party tenders the original arbitration agreement or duly certified copy thereof.”

B. Implied Inclusion under Section 8

Though not implicit in the reading of Section 8 of the Act, the Court in the case of Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd.[10] brought in the competence of the arbitral tribunal as one of the grounds for the grant of reference. The proposition that Section 8, despite providing the explicit grounds on which reference can be made, also lays down the implicit ground of competence of the Arbitral Tribunal, was also read in the affirmative by the Court in the case of Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. [11] wherein it was held that where the cause/dispute is inarbitrable, the court where a suit is pending, will refuse to refer the parties to arbitration, under Section 8 of the Act.

On 23rd October, 2015, the President promulgated the Arbitration and Conciliation (Amendment) Ordinance, 2015. The said Ordinance amended Section 8 by stipulating that joinder of non-signatories to an arbitration agreement was not permissible. Further amendment to Section 8 requires that the judicial authority compulsorily refer parties to arbitration irrespective of any decision by the Supreme Court or any other court, if the judicial authority finds that a valid arbitration clause prima-facie exists. The amendment essentially nullifies the judgment of the Supreme Court in Booz Allen Hamilton v. SBI Home finance[12], where it had ruled that serious allegations of fraud are not arbitrable.Effect of the Arbitration and Conciliation (Amendment) Ordinance, 2015:

Conclusion:

Section 8 of the 1996 Act denotes a provision which limits judicial intervention in the process of arbitration. However, the judiciary has drawn exception to the extent of intervention on the basis of the arbitrability of the subject matter and the competence of the arbitral tribunal to deal with it. Though, the Amendment to Section 8 under the Arbitration and Conciliation (Amendment) Ordinance, 2015 nullify the exceptions drawn by the Judiciary, however, the effect of amendments are still to be seen. This said, Section 8 of the 1996 Act still acts as a saving beacon for arbitration and forms the basis for forcing the parties in cases of domestic arbitrations to adopt the model of arbitration where there exists an arbitration agreement.

[1] See Rashtriya Ispat Nigam Limited and Anr. v. Verma Transport Company, 2006 (7) SCC 275; see also Agri Gold Exims Ltd. v. Sri Lakshmi Knits and Wovens and Ors., (2007) 3 SCC 686.[2] (2000)4SCC539.[3] (2010) 12 SCC 521.[4] See Atul Singh and Ors. v. Sunil Kumar Singh and Ors., (2008)2SCC602.[5] (2002)1SCC203.[6] (2003)6SCC503.[7] (2007)5SCC510.[8] (2003)5SCC531.[9] (2009)10SCC103.[10] (1999) 5 SCC 688.[11] (2011) 5 SCC 53.[12] (2011) 5 SCC 53.

GOVERNMENT APPOINTED ARBITRATOR: LAW OF BIAS

GOVERNMENT APPOINTED ARBITRATOR: LAW OF BIAS

It has been a common norm that Government while contracting resorts to arbitration agreements wherein Government nominated persons are majorly given the role to adjudicate as arbitrators. Inclusion of such arbitrators has been looked with an apprehension of bias in the recent past. The present article focuses on the Law of bias, highlighting the test of bias particularly in case of Government nominated arbitrators.

Law of Bias:

The Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “1996 Act”) supplants the Arbitration Act, 1940.[1] It is seeded on the UNCITRAL Model Law for International Commercial Arbitration[2], which was drafted in 1985 after years of deliberation on a system of uniform code for harmoniously dealing with arbitration on international scale.[3] UNCITRAL Model Law for International Commercial Arbitration, 1985 which forms part and parcel of Part I of the 1996 Act provides for the grounds on which an arbitrator can be challenged under Article 12. It particularly stipulates independence and impartiality of arbitrator as grounds for challenging the arbitrators, besides qualification of the arbitrators as agreed to by the parties. Section 12[4] of the 1996 Act is a copy of the Model Law. Article 13 of the Model Law is similar to Section 13[5] of the 1996 Act in as much as it provides the procedure for challenging the arbitrator. Article 13 states that the Courts can intervene if the challenge to an arbitrator gets rejected by the arbitral tribunal. However, the 1996 Act does not provide any such remedy to approach the Courts in such cases. Section 13 does not empower the Court to interfere with the findings on the arbitral tribunal on its own independence and impartiality. It only prescribes recourse under section 34 of the 1996 Act after the award has been made by the tribunal.[6] A perusal of Section 34 of the 1996 Act provides that it is only under the consideration of public policy that an award be challenged after it is made under section 13(4).

Test of Bias

Bias is to be adjudged from the perspective of a reasonable intelligent man and its determination can differ on case to case basis.[7] Catena of cases has held that there must be real likelihood of bias and not merely a suspicion of bias.[8] The standard of proof to prove bias is based on availability of cogent evidence.[9] Mere imagination of a ground cannot be an excuse for apprehending bias.[10] Though it is difficult to prove actual bias, if proved, actual bias would lead to an automatic disqualification. Actual bias denotes an arbitrator who allows a decision to be influenced by partiality or prejudice and thereby deprives the litigant of the fundamental right to a fair trial by an impartial tribunal.[11]

Government Appointed Arbitrators: Real Likelihood of Bias

The 1996 Act casts a duty on the Courts to appoint arbitrators who are impartial and independent in their demeanour if the parties fail in the appointment of arbitrators.[12] Such being the case, the Apex Court has held that in appointing an arbitrator it can deviate from the mandate of the arbitration agreement.

Earlier, the Apex Court has not dithered to hold that if the named arbitrator is a government employee, it is not ipso facto a ground to raise presumption of bias.[13]The Apex Court in various decisions including Union of India v. M.P. Gupta[14] and Ace Pipeline Contract v. Bharat Petroleum[15] has taken the view that in contracts with a Government corporation/statutory body/ Government company, the practice of incorporating a named arbitrator who is an employee of the corporation, is not ipso facto a ground to raise a presumption of bias, or partiality, or lack of independence on his part.

Deviating from the stand taken formerly, the Apex Court in the case of Denel Proprietary Ltd. v. Bharat Electronics Ltd. and anr.[16] held where arbitrator named in the clause is Managing Director of a party, he may not be in a position to act independently and so cannot be appointed by the Courts, even if that implies deviation from the terms of the arbitration agreement. The Apex Court in this case placed reliance on para 45 of Indian Oil Corpn. Ltd. v. Raja Transport (P) Ltd., wherein it was held that “ignoring the named arbitrator/arbitral tribunal and nominating an independent arbitrator shall be the exception to the rule, to be resorted for valid reasons”. This stand was again reiterated in the case of Bipromasz Bipron Trading Sa v. Bharat Electronics Ltd.[17], wherein the Apex Court held that “Court can deviate from agreed procedure where there is reasonable apprehension of bias”.

The legal position discussed above was again reiterated in the case of Denel Proprietary Ltd. v. Govt. of India, Ministry of Defence[18], wherein the Apex Court again sat to adjudicate on the issue that whether the appointment of Government nominated arbitrator leads to apprehension of bias. The Apex Court held that “it is true that in normal circumstances while exercising jurisdiction under Section 11(6), the Court would adhere to the terms of the agreement as closely as possible. But if the circumstances warrant, the Chief Justice or the nominee of the Chief Justice is not debarred from appointing an independent arbitrator other than the named arbitrator”. The Apex Court, thereafter, appointed an independent arbitrator by holding that “I have examined the facts pleaded in this case. I am of the opinion that in the peculiar facts and circumstances of this case, it would be necessary and advisable to appoint an independent arbitrator. In this case, the contract is with Ministry of Defence. The arbitrator Mr. Satyanarayana has been nominated by DGOF, who is bound to accept the directions issued by the Union of India. Mr. Satyanarayana is an employee within the same organization. The attitude of the Respondents towards the proceeding is not indicative of an impartial approach. In fact, the mandate of the earlier arbitrator was terminated on the material produced before the Court, which indicated that the arbitrator was biased in favour of the Union of India. In the present case also, Mr. Naphade has made a reference to various notices issued by the arbitrator, none of which were received by the Petitioner within time. Therefore, the Petitioner was effectively denied the opportunity to present his case before the Sole Arbitrator. Therefore, the apprehensions of the Petitioner can not be said to be without any basis”.

Taking a note on the aspect that majorly government contracts provide for selection of an arbitrator from amongst the employees, the Apex Court in the case of Union of India v. M/S Singh Builders Syndicate,[19] advised that the government and statutory bodies should try to phase out arbitration clauses which name employees as arbitrators.

Conclusion:

It is evident from the case laws that Government nominated arbitrators in Government contracts are seen with an apprehension of bias. Therefore, the Court has rightly objected to their appointment so that the dispensation of justice in the arbitration process can become a reality. In two such cases, where our firm was representing a foreign supplier, we got an independent arbitrator appointed from the Supreme Court on the ground that Government nominated arbitrators may not be in a position to act independently and so cannot be appointed by the Courts, even if that implies deviation from the terms of the arbitration agreement. The cases dealt by our firm have paved the way for mooting amendments in the Arbitration and Conciliation Act, 1996. In fact, in the proposed amendments to the Arbitration and Conciliation Act, 1996, the Law Commission while appreciating the stance taken by Courts has observed that “The concept of party autonomy cannot be stretched to a point where it negates the very basis of having impartial and independent adjudicators for resolution of disputes. In fact, when the party appointing an adjudicator is the State, the duty to appoint an impartial and independent adjudicator is that much more onerous – and the right to natural justice cannot be said to have been waived only on the basis of a “prior” agreement between the parties at the time of the contract and before arising of the disputes”.

[1] See generally, Section 85, Arbitration and Conciliation Act, 1996.

[2] See generally, Preamble, Arbitration and Conciliation Act, 1996.[3] Howard M. Holtzmann and Joseph E. Nuehaus, A Guide to the UNCITRAL Model Law on International Commercial Arbitration, 1989.[4] See generally, Section 12, Arbitration and Conciliation Act, 1996.
[5] See generally, Section 13, Arbitration and Conciliation Act, 1996.
[6] See generally, Section 13(5), Arbitration and Conciliation Act, 1996.[7] Halsbury’s Law of England, 4th Edition, vol.2, p. 282, para 551.[8] Mineral Development Ltd. v. State of Bihar, AIR 1960 SC 468.[9] Kumaon Mandal Vikas Nigam Ltd. v. Girja Shankar Pant, (2001) 1 SCC 182.[10] Ladli Construction Company Pvt. Ltd. v. Punjab Police Housing Corporation Ltd. and ors., (2012) 4 SCC 609.[11] Mineral Development v. Encon Builders (I)(P) Ltd., (2003) 7 SCC 418.[12] See generally, Section 11(8), Arbitration and Conciliation Act, 1996.[13] Indian Oil Corpn. Ltd. v. Raja Transport (P) Ltd., (2009) 8 SCC 520.[14] (2004) 10 SCC 504.[15] (2007) 5 SCC 304.[16] (2010) 6 SCC 394 (This case was fought by Rajani, Singhania and Partners).[17] (2012) 6 SCC 384.[18] (2012)2SCC759 (This case was fought by Rajani, Singhania and Partners).[19] (2009) 4 SCC 523.

NATIONAL CONSUMER COMMISSION GRANTS RELIEF TO RCI ON THE BASIS OF LACK OF PRIVITY OF CONTRACT

NATIONAL CONSUMER COMMISSION GRANTS RELIEF TO RCI ON THE BASIS OF LACK OF PRIVITY OF CONTRACT

Resort Condominiums International, popularly known as RCI, was dragged in a legal battle by a consumer[1] which concluded with the National Commission’s verdict in May, 2014. Singhania & Partners successfully represented RCI at the National Commission.

RCI is a holiday exchange club and facilitates its members only in the holiday exchange system. The RCI affiliates resorts worldwide and provides exchanges within its network to purchase of timeshare weeks of affiliated resorts provided they become members of RCI. RCI does not own any resort anywhere in the world. The RCI exchange programme and the products and services sold by or on behalf of the affiliated resorts including holiday ownerships are also separate and distinct.

In the year 2007, the Complainant raised a dispute with the District Consumer Forum, Hyderabad, India alleging deficiency in services against M/s Gemawat Resort Ltd., in which RCI was also made a party. The whole case of the Complainant was that it paid money to M/s Gemawat Resort Ltd. towards membership of the resort, “The Village”. M/s Gemawat Resort Ltd. failed in providing its services to the Complainant as the resort “Village” was not developed by them. The Complainant alleged in the complaint that it had paid an amount towards purchase of the membership of the resort to M/s Gemawat Resort Ltd. Since M/s Gemawat Resort Ltd was affiliated to RCI, the Complainant also alleged deficiency in service against RCI.

M/s Gemawat Resort Ltd. chose not to contest the matter and was proceeded ex-parte. RCI contested the complaint on the ground that M/s Gemawat Resort Ltd and RCI are distinct and separate entities and that admittedly the money was paid by the Complainant to M/s Gemawat Resort Ltd towards the services to be provided by the resort only. The services provided by RCI were distinct and limited to exchange facilities to be provided to members of affiliated resort as and when requested by the member.

Before the District Consumer Forum, RCI pleaded that there was no privity of contract between RCI and the Complainant for the development of the resort. RCI carries its operations vide two agreements: Firstly, the is a resort affiliation agreement between RCI and each affiliated resort on payment of affiliation fee by the resort. Subsequently each affiliated resort submits enrollment application forms of their members to RCI alongwith membership fee for the member’s right to participate in the RCI holiday exchange program. Secondly, there is an agreement between the member and RCI termed as the ‘RCI terms of Membership’, which sets out the legally binding terms and conditions. The ‘RCI terms of Membership’ particularly provides that RCI is distinct from the affiliated resort, and the services provided by RCI stand separate from those which an affiliated resort is to provide to their respective member. Therefore, RCI does not have any obligation towards the development of the resort.

RCI further submitted that it had, in fact, disaffiliated the resort “Village” as per the contract between RCI and M/s Gemawat Resort Ltd. Inspite of disaffiliation of the resort, RCI had allowed the Complainant to continue its membership with RCI for availing benefits of bonus weeks. The Complainant had further availed the facilities of RCI even after the disaffiliation of its resort. Hence, RCI has not failed in providing its services to the Complainant in any manner.

The District Forum adjudicated in favour of the Complainant on the ground that both RCI and M/s Gemawat Resort Ltd. are jointly and severally liable to compensate the Complainant on account of deficiency in services. Since RCI has taken membership fee from the Complainant, it does not become a separate entity. The aforesaid decision was further affirmed by the State Forum. While dismissing the appeal, the State Commission held that RCI was to provide facilities in as much as it has received the membership fee from the Complainant. Hence, RCI is responsible for the deficiency in services to be provided to the Complainant.

Aggrieved by the decision of the lower forums, RCI preferred a revision petition before the National Commission. It was contended by RCI that it is only engaged in the business of timeshare exchange and is not involved in the development of resorts. The resorts can only get affiliated with RCI on fulfillment of certain condition precedent. RCI cannot be made guilty for charging membership fee, which is very nominal. There was no privity of contract between RCI and the Complainant for the development of the resort, and that the services provided by RCI are distinct from that provided by the resort. The Complainant was mischievously attempting to link the different contractual obligations between the parties in a single contract.

While arguing on the doctrine of privity of contract, RCI placed heavy reliance on the case of Utair Aviation v. Jagson Airlines Limited[2], wherein the Hon’ble Delhi High Court discussed about the doctrine of privity of contract and held that “the doctrine of privity, while in principle, at least it prevents a third party beneficiary from suing on a contract, operates with equal logic to forbid the contracting parties to enforce obligations against a stranger. It has long been an axiom of the common law that a contract between A and B cannot impose a liability upon C”. Reliance was also placed on the case of L. Shiv Dayal Kapoor and Ors. v. Union of India[3], wherein the Hon’ble Punjab and Haryana High Court held that “I may now consider the implications of the rule underlying the doctrine of privity of contract, which means the relationship subsisting between two contracting parties. ‘Privity’ in this context implies a mutuality of will and is an interaction of the parties and their successors. It creates a legal bond or tie or a vinculum juris. The rule of privity of contract is that no one but the parties to a contract can be bound by it. In the words of Pollock, a third person cannot become entitled by the contract itself to demand performance of any duty under the contract.”

The National Commission accepted the submission of RCI and held that the Complainant has failed to show privity of contract between RCI and itself and thus, RCI cannot be held liable for the deficiency in services rendered by M/s Gemawat Resort Ltd.

[1] (hereinafter referred to as the “Complainant”).[2] DRJ 129 (2012) 630.[3] AIR 1963 P&H 538.