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Impact of New Consumer Protection Regime on E-Commerce Entities

Contributed by: Samvad Partners

There is only one boss… The Customer. – Sam Walton

In the 25 years since July 1995 when the first mobile phone call was made in India, the country has gone through a digital transformation and today has over 1.06 billion mobile phone connections and 688 million internet users. Internet penetration is increasing at the rate of over 128 million people per year which is the equivalent of adding Mexico’s population to our internet base every year. Add to this the fact that India has one of the lowest data costs anywhere in the world and it is easy to see why ‘online shopping’ has become one of the greatest consumer trends of the decade, with people across regions and economic strata boarding the e-commerce bandwagon. Everyone from telecom companies and tech giants to logistics startups and payment gateways have come together to create a vast B2C network which has amplified business and consumer convenience to unprecedented levels. Buyers and sellers are no longer constrained by geographical location and consumer access is no longer the prerogative of the deep-pocketed corporation.

Recognizing the changing landscape and dynamics of the marketplace for goods and services through e-commerce transactions, the Central Government enacted the Consumer Protection Act, 2019 (“New Act”) in August, 2019 to replace the Consumer Protection Act, 1986 in an effort to institutionalize a revised set of guardrails to shield consumers from the risks of transacting in this new B2C environment. On July 20, 2020, several key provisions of the New Act were notified, and shortly thereafter, on July 23, 2020, the notification of the Consumer Protection (E-Commerce) Rules, 2020 (“E-Commerce Rules”) followed. The New Act seeks to equip consumers with a simpler grievance redressal procedure and widen the consumer base that can approach consumer forums for relief by inter alia increasing the pecuniary jurisdiction of the district commissions. Significantly, and as anticipated, the New Act expressly brings e-commerce entities within the ambit of the consumer protection regime in order to protect consumers against any unfair or unethical trade practices in e-commerce transactions.

In this article, we examine the key provisions of the New Act and the E-Commerce Rules that are likely to have a significant impact on the manner in which e-commerce entities in India conduct their business.

Statutory Expression to ‘Product Liability’

Historically rooted in the common law, the Indian legal system has long been guided by principles established under tort and contract law when it comes to product liability. However, until the enactment of the New Act, there was no legislation in India, which clearly defined or gave expression to the concept of ‘product liability’. The New Act remedies this lacuna and clearly defines ‘product liability’ as the responsibility of the manufacturer or the seller of any product or service, to compensate for any harm caused due to a defect in the product or deficiency in the service. The New Act makes it clear that while the primary responsibility for product liability action would be that of the product manufacturer or seller, a ‘product service provider’ could also be held liable for a product liability action. ‘Service’ and ‘product service provider’ have been defined broadly and would include e-commerce entities and services provided by them within their ambit, if such services are provided for a fee.

It follows that an e-commerce entity being a ‘service provider’ could be held liable for a product liability action, in certain circumstances, illustratively, where there was an act of omission or commission or negligence or withholding of information by the e-commerce entity, resulting in harm; or where it did not issue instructions or warnings to prevent harm; or where the service provided by it was deficient or did not conform to the terms and conditions of the contract. E-commerce entities must therefore, take due care and diligence in connection with the products proposed to be listed on the platform as well as the sellers permitted to sell on the platform. They must also ensure that all information relevant to the product is provided on the platform, such that the customer can make an informed decision regarding the purchase.

In addition to being classified as a ‘product service provider’ an e-commerce entity could also be classified as a ‘product seller’, by virtue of its marketing or distribution activities for commercial purposes. As a ‘product seller’, an e-commerce entity can be held liable for a product liability action generally if the entity exercised control over the actual product. However, a liability action can also be brought if a product has been sold by the e-commerce entity and the identity of product manufacturer of such product is not known, or if known, the service of notice or process or warrant cannot be effected on the manufacturer, or the manufacturer is not subject to Indian law or the order. It follows that, in an instance where the product manufacturer is a foreign entity and the manufacturer is not subject to the laws of India, the e-commerce entity may be held liable for such default in the product on account of the manufacturer.

E-Commerce Rules

The E-Commerce Rules issued under the New Act have been enacted to prevent unfair trade practices in e-commerce and direct selling, and are applicable to all e-commerce entities systematically offering goods and services in India; including e-commerce entities which are not based in India, but offering goods or services to consumers in India. The E-Commerce Rules do not however, purport to cover any activity of a natural person carried out in a personal capacity not being part of any systemic professional or commercial activity.

An ‘e-commerce entity’ is defined as person who “owns, operates or manages a digital or electronic facility or platform for e-commerce” marking a clear distinction from a ‘seller’ who sells products on the platform. The E-Commerce Rules also differentiate between marketplace and inventory e-commerce entities, interestingly imposing certain obligations on the ‘sellers’ in the marketplace model, which are otherwise requirements that the e-commerce entity needs to comply with in an inventory model.

The obligations which have been imposed on e-commerce entities under the E-Commerce Rules have three main threads running through them. These are:

  • Transparency and disclosure;

  • No unethical, manipulative or arbitrarily discriminative trade practices; and

  • Prompt and effective grievance redressal for consumers.

Transparency and Disclosure

E-commerce entities are now bound to provide all relevant information to the customer to enable the customer to make an informed decision regarding the purchase. Rather than taking on the role of a mere facilitator between buyers and sellers, e-commerce entities will be responsible to ensure that information relating to the product and the purchase is displayed prominently in an appropriate place on the platform, including information relating to details of the seller, importer (if applicable), return, refund, exchange, warranty, guarantee, delivery and shipment. Marketplace e-commerce entities will also need to obtain appropriate undertakings from sellers to ensure that the descriptions, images and other displayed content relating to the goods and services is accurate. Further, if there are any advertisements for marketing of the goods and services, the e-commerce entity will need to ensure that the descriptions in the advertisement are consistent with the actual goods and services. In order to ensure there is absolute transparency in connection with payments, information on the available payment methods, the security of such methods, additional charges applicable if any and contact details of the relevant payment service provider is also required to be displayed.

Fair Trade Practice

The E-commerce Rules expressly prohibit e-commerce entities from adopting any unfair trade practice, whether in the course of business or otherwise. Specifically, e-commerce entities should not manipulate the price of goods or services offered on the platform so as to gain unreasonable profit, or discriminate between consumers of the same class or make any arbitrary classification of consumers affecting their rights. E-commerce entities are further prohibited from imposing any cancellation charges on consumers unless they are willing to pay cancellation charges upon any unilateral cancellation by themselves.

Grievance Redressal

Both marketplace and inventory e-commerce entities, whether or not based in India, are required to establish an adequate grievance redressal mechanism having regard to the number of grievances ordinarily received by such entity from India. They are also required to appoint a grievance officer for handling of grievances by any consumer, whose details must be prominently displayed on the website. In order to make the grievance redressal process prompt and more effective, the E-Commerce Rules have stipulated a strict timeline for addressal of any complaints that are received, with the grievance officer being required to acknowledge a complaint within 48 hours and redressing it within 1 month from the date of receipt of the complaint. While e-commerce entities may have existing customer redressal procedures in place, they should ensure that such procedures are in compliance with the requirements prescribed under the E-Commerce Rules, or make necessary alterations in order to be compliant. It is interesting that in case of a marketplace entity, even the sellers listed on such marketplace are required to establish a grievance redressal mechanism and comply with the timelines set out under the E-Commerce Rules. This may prove to be too onerous for small enterprise sellers and there’s a danger of this becoming a mere lip service.

Effective Consumer Protection?

With over 68% of internet users between the ages of 16 to 64 shopping regularly online, the fast paced transition from brick and mortar to e-commerce has exposed the shortcomings of the current regulatory framework to protect consumer interests in the digital marketplace. The New Act read with the E-Commerce Rules are timely and much needed in the evolving e-commerce landscape, particularly in the absence of a comprehensive e-commerce policy that is yet to be formulated and notified. The legislation is tough and makes it clear that e-commerce entities, as intermediaries, must be answerable to consumers and pro-actively work towards protecting consumer interests rather than disclaiming responsibility by virtue of them being mere platforms to facilitate e-commerce transactions.

The clear distinction that the E-Commerce Rules make between different kinds of e-commerce models and the sellers selling through digital platforms is also welcome and this clarity in rules will make it easier for different players to identify and implement measures that are required of them, albeit at what is bound to be a significant cost. Non-compliance with the E-Commerce Rules will attract penal action under the New Act, which prescribes fines as well as imprisonment of up to two years.

Having said that, the effectiveness of the E-Commerce Rules in protecting consumer interest will depend largely on the implementation and the powers vested with the implementing authority. An important aspect to consider is the steep hike in the pecuniary jurisdiction of the district commissions. These forums are already severely burdened and infamous for significant delays. Widening the consumer base eligible to approach these forums without an accompanying augmentation in required infrastructure is only going to worsen the situation and make consumer redressal ineffective.

As the ‘Digital India’ program gathers speed and Indians come online at an unprecedented pace, e-commerce becomes the proverbial pot of gold at the end of the digital rainbow. Recent investments by the likes of Google and Facebook in the Jio platform highlight the scale of the opportunity unfolding in India. While the E-Commerce Rules go a long way in addressing some of the potential concerns that impact consumers, these rules must be supported by appropriate data protection, anti-competitive measures and an effective regulatory authority to ensure that consumer confidence in e-commence is reinforced. A comprehensive legislation appropriately addressing the varied and unique aspects of transacting goods and services in a digital first economy is the need of the hour and the Government would do well to take immediate steps to finalise the draft e-commerce policy.

Contributed by Samvad Partners

The above article has been authored by Ms. Natasha Mahajan(Partner) and Ms. Surabhi Rao(Senior Associate)

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