Conference on Consumer Redress Mechanism
26 April 2000

"CRITERIA FOR APPRAISING EFFICACY "
by
Prof. Dr. Sothi RACHAGAN
Faculty of Law, University of Malaya
Deputy President, International Association for Consumer Law

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1. INTRODUCTION

Consumer law developed exponentially in the last quarter of the 20th century bequeathing a host of substantive rights to consumers. It however became painfully obvious that the creation of new substantive rights is a meaningless gesture unless the recipients are realistically in a position to enforce them when necessary. Substantive rights depend on procedural rights.

The legal systems in most countries have not been able to cope adequately with the task of enforcement. Professor Ewoud H. Hondius describes succinctly the obstacles consumers' face when seeking redress before the courts:

First, going to the court may be (1) expensive. There are (a) court fees to be paid; (b) the citizen has to bear his own costs: taking a day off to attend the process, travelling to court, etc; (c) there are the costs of retaining counsel; (d) there is a risk of losing the case and having to pay the other party's (and one's own attorney's) costs; (e) there also are the costs of expert testimony or witnesses. This is aggravated by the fact that many consumer complaints are of minor financial importance. In such cases the risks involved do not warrant instituting proceedings. Secondly, going to court is (2) time consuming. This is due mainly to the (a) overload courts; and (b) written procedures, which in many jurisdictions may drag on and on. The (c) possibility of appeal threatens to prolong the procedure still longer. A third drawback of traditional court procedure is of (3) a psychological nature. Elements such as a court being also competent in criminal matters, sitting in robes and wigs, using archaic language and customs, may be brought together under this heading. The fourth drawback is (4) the individual nature of civil procedure. Traditional procedure simply is not geared to the institution of mass procedures in case of mass disasters. Finally, it is argued (5) that in court adjudication rather than mediation or conciliation is arrived at.[1]

This paper briefly describes the efforts made for consumer redress, and suggests a set of criteria for appraising the efficacy of the redress mechanisms that have been established. The final part of the paper raises some important considerations in relation to the creation of these special mechanisms.

2. FACILITATING CONSUMER REDRESS

The methods employed to overcome the problems experienced by consumers in dealing with the legal system may be classified into two categories. The first involves measures directed at facilitating access to the ordinary courts and the second, measures that seek to by-pass these through the creation of court substitutes.

2.1 Access to the Court

Measures to ensure access to the courts take a variety of forms. Many of these reforms are not designed to cater for consumer cases only. They are often part of the general concern to make the courts more efficient and accessible to all citizens, and consumers qua consumers also become beneficiaries of the changes. Reforms have been in such matters as:

* The structure of the court
* The nature and form of the proceedings
* The role of the judge
* The representation of the parties
* The rules governing limitation periods
* The conduct of cases and the rules governing evidence
* The right to appeal

In many countries, the changes were provided for in smaller claims through what came to be known as small claims procedure (or courts).

A variety of ways have been employed in different countries to handle the cost factor - legal aid for the needy, a contingent fee system, legal expense insurance operated by commercial insurance companies and by permitting para-legal professionals to perform routine functions previously performed by lawyers at prices in keeping with their own "professional" status.

A major obstacle to public interest litigation is the requirement that the plaintiff must have standing to sue, that the plaintiff have a direct and personal interest in the matter to be litigated. The resistance to any relaxation of the rules governing standing is that the court may be required to rule at large on public interest issues and thus encroach on the legislative and executive function. This concern is countered by the argument that standing is required to invoke the jurisdiction of the court, not to extend what is justiciable, the nature of the action will still remain the same but a wider range of persons will be permitted to sue.

In an increasing number of countries, the law on standing has been substantially modified by legislation. Consumer associations have been given the required standing and are permitted to bring public interest litigation, or even attempt substituted actions on behalf of a consumer. The Consumer Protection Acts of Thailand and India may be cited as examples.

Another area of development has been to focus on enabling class actions [2]. Class actions do not confer substantive rights nor do they expand the scope of what is justiciable. They are a mere change in the rules governing procedure. Class actions can serve many functions. In the context of consumer redress, they permit the resolution of disputes where each member's stake is so small that there is no incentive for each member to litigate separately. By consolidating the individual claims, class actions raise the amount at stake to a level that outweighs the risks involved in the court action. It also eases the psychological barriers to litigation. Importantly, class actions bring to the courts, cases that the courts would otherwise not have an opportunity to rule on, and thus serve as a deterrent to those producers who make substantial gains by defrauding large numbers of consumers, each by a little, but in total, by a substantial sum.

2.2 Court Substitutes

Court substitutes, or to use the term now very much in vogue, Alternative Dispute Resolution (ADR) involve a range of permutations with only one factor in common - they each do not involve court-based litigation. Each scheme has its own peculiarities, strengths and weaknesses, and consequently, generalisation is difficult. For convenience, they are here considered under four categories: statute-based tribunals, arbitration, statutory ombudsman scheme and voluntary ombudsman scheme.

2.2.1 Statute-based Tribunal

The distinguishing feature is that such tribunals are governed by statute and in most cases, the matters dealt with by these tribunals are required by statute to be referred to it. There is no recourse to the court in these cases and the decisions of these bodies are binding on both parties. Frequently, no appeal against the decisions is possible except by way of prerogative writ. This, in itself, has been considered a weakness. Consequently, variations of these schemes provide for a hierarchy of tribunals to which appeals lie. Commonly, disputes are heard and determined by a mixture of experts and lay representatives; the lay representatives may be required to be "capable of representing the consumer interest".

The advantages of such schemes are that they address the cost factor, provide for simplified procedures and generally involve less formal proceedings. They have been held to be more speedy avenues for redress but where appeals are provided for, this has not always been the case.

Several countries have established such tribunals and they have had remarkable impact in providing redress at low cost and great speed. The Swedish National Board for Consumer Complaints [3] and the recently established Tribunal for Consumer Complaints of Malaysia[4] are examples of such. Perhaps the most revolutionary of such schemes is the consumer disputes redress bodies established under the Consumer Protection Act 1986, of India. The Act established a hierarchy of adjudicating bodies - a district forum in each district, a State Commission in each state, and a National Commission. Jurisdiction is determined by the value of the claim. Appeals are provided for.

The composition of these adjudicating bodies is novel. Only the President is required to have a background in law - a judge or person qualified to be one. The other members need not have any training in law. These adjudicating bodies remain under the ultimate supervision of the courts; any person aggrieved by an order of the National Commission may appeal against the order, to the Supreme Court.

2.2.2 Arbitration

This involves the reference of a dispute to an impartial third party, usually an expert in the field, chosen by the parties to the dispute, who agree in advance to abide by the arbitrator's award issued after a hearing at which both parties have an opportunity to be heard. Arbitration can be by mutual and free consent of the parties and the parties can choose and agree on the procedure to be observed in arbitration.

Arbitration in consumer disputes often arises as a result of an arbitration clause in contracts (e.g. insurance contracts) providing for compulsory arbitration in case of a dispute as to rights or liabilities under such a contract. Though not yet in the case of consumer disputes, arbitration can be provided for by way of statute (as in the case in many countries with labour disputes involving public employees). Commonly parties cannot be forced to agree that disputes will be referred to arbitration, but once arbitration is agreed upon, a relevant dispute can be arbitrated even if one of the parties refuses to co-operate.

In consumer contracts, the arbitration process is often presented as a condition precedent to litigation in the courts. Compulsory arbitration clauses come in various forms; the more odious ones even attempt to oust the jurisdiction of the courts. An important aspect is the scope of the arbitration provided for, and it is necessary to distinguish between interest and grievance arbitration. Interest arbitration involves settlement of terms of a contract as contrasted with grievance arbitration, which concerns the violation or interpretation of an existing contract. Consumer complaints usually involve grievance arbitration.

Arbitration procedures are meant to be less formal than those of the courts are. A case may be determined on the basis of written evidence alone or might involve a hearing. The determination of the arbitrator is binding on both parties and only a very limited right of appeal is available, by way of prerogative writ.

The arbitration model has been employed in relation to consumer disputes in two ways. The first is by already existing association of arbitrators extending their services to the area of consumer disputes resolution. Such an example is the service provided by the UK Chartered Institute of Arbitrators. Associations of arbitrators often produce Codes of Ethics and Procedural Standards for use and guidance of arbitrators. Such codes will be enriched by a meaningful participation of consumer representatives.

The second of the approaches using arbitration for consumer redress involves the establishment of specialised consumer arbitration centres with the co-operation of consumer associations. An interesting and apparently successful example of this is to be found in Portugal where an Arbitration Centre for Consumer Conflicts has been established as an autonomous non-profit private association. The founding partners of the centre are the municipality of Lisbon, the Portuguese Association for the Defense of Consumers (DECO), and the Union of Associations of Traders of the District of Lisbon.[5]

2.2.3 Statutory Ombudsman

The Ombudsman concept is of Nordic origin. Originally, it was a public office to which people could bring grievances connected with the government - the ombudsman stood between and represented the citizen before the government. In the 1970s, the institution of the Consumer Ombudsman was established in the four Nordic countries - Denmark, Finland, Norway and Sweden. The consumer ombudsman is a supervisory body with the task of ensuring that marketing methods used by a business when selling goods or providing services conform to the law.[6]

The statutory ombudsman does not act in a judicial capacity and usually has wide powers not only to weigh the merits of each party's case but also to investigate the matter. The decision arrived at is not purely on legal points but also on "good industry practice" and the need for change. Proceedings are usually informal and can include oral as well as written submissions. Legal representation is not usual and the service is often free to consumers. The consumer is not required to refer the case to the ombudsman and awards are not binding on the consumer though they often are on the other party. The United Kingdom is introducing by statute a Financial Services Ombudsman to encompass all services and activities that require authorisation by the Financial Services authority (broadly investment, deposit taking and insurance activities).[7]

The 1991 Consumer Act of the Philippines[8] introduces a permutation of statutory ombudsman incorporating aspects of arbitration. Consumer arbitration officers are empowered to mediate, conciliate, hear and adjudicate all consumer complaints. The Consumer Arbitration Officers are required to first ensure that the contending parties come to a settlement of the case and in the event that a settlement has not been effected the officer may proceed to formally investigate and decide the case. Their powers include cease and desist orders, directions to recall, replace, repair or refund the money value of products and or services, restitution or rescission of the contract and the imposition of fines between Pesos 500 to 300,000 depending on the gravity of the offence. Any order, not interlocutory, becomes final and executory unless appealed to the relevant Department Secretary within 30 days. The decision of the Department Secretary becomes final after 15 days from receipt of it unless a petition for certiorari is filed with the Court of Appeal.

2.2.4 Voluntary Ombudsman Scheme

Voluntary Ombudsman Schemes are not governed by statute but are usually voluntary schemes set up as incorporated bodies with the participating companies as members. The Ombudsman in such schemes is governed by the Articles of Incorporation of the Scheme and is frequently answerable to a council that may or may not include consumer representatives. The members of the scheme are usually required to accept the decisions of the Ombudsman but consumers are not similarly bound.

In the UK ombudsmen are well established both in the public and private sector and a tapestry of differently constituted ombudsmen covering a wide area of services such as financial services, estate agency and even funeral services exist. The UK models have been emulated in several other countries[9], including Malaysia[10]. The role of the ombudsman is to act as an independent counsellor, conciliator, adjudicator or arbitrator in cases referred to her. There often is a specified monetary limit on jurisdiction.

One of the principal weaknesses of such schemes is that membership is not compulsory but this can be overcome if the regulating authority can bring "pressure" to bear to effect membership by all eligible companies.

3. CRITERIA FOR APPRAISING EFFICACY

Given the various approaches to enhancing the consumer's right to redress, it is necessary to evolve a set of criteria to assess their efficacy. We have to agree on the requirements of an ideal system.[11]  The paper will now briefly address this issue.

3.1 Access

The consumer must be able to conveniently bring a complaint and this requires:

• Well-advertised and understood by consumers - there must be sufficient publicity for the scheme and guidelines for use in simple language must be readily available.
  
  
• Cost - the scheme must be free to the consumer or entail only moderate costs.
  
  
• Comprehensive - it must be possible for the complainant to resolve all aspects of his claims at one forum. For instance, in arbitration, both interest and grievance must be addressed. ADR schemes must apply to all eligible producers and not be confined to only some members of an industry.
  
  
• Directly Accessible - the consumer must be able to have direct access and not be required to go through other stages before being referred to such a scheme. For example, the requirement that a complaint be first referred to senior management of a company before being referred to the scheme serves to delay access to justice and deny access to those not persistent enough to pursue their claim.
  
  
• Availability - be available to all consumers and not only to those in the large urban centres.

3.2 Fairness

• Independent - the scheme must be truly independent and not subverted by industry. Even in a voluntary scheme funded by industry, the officials must be appointed by an independent body and the terms that govern their appointment and remuneration should not be at the pleasure of the industry. Any governing body must have a majority of independents and consumer representatives. Where there are no independents the governing body must be composed equally of consumer representatives and industry representatives. The European Commission has made recommendations on the principles applicable to the bodies responsible for out-of-court settlement of disputes and these are instructive in this aspect. The recommendations provide that where the number of decision makers is odd (1, 3, 5, etc) or if the equal composition of consumer representatives and industry representatives is not met, each of the persons on the decision making body must meet the following criteria:
  
  
  • possess the abilities, experience and competence, particularly in the field of law, required to carry out her functions;
    
    
  • be appointed for a sufficiently long period of time in order to ensure the independence of her action and she shall not be liable to be relieved of her duties without just cause;
    
    
  • if appointed or remunerated by a professional association or an enterprise, she must not, during three years prior to this present function, have worked for the professional association or for one of its members or for the enterprise concerned.

   

• Natural justice - the rules of natural justice must apply and the consumer must have the right to expert opinion and advice before submitting the complaint.

3.3 Transparency

• The following information must be provided, in writing or any other form, to any person requesting it:

   

  • Types of disputes - a precise description of the types of dispute which may be referred to the body concerned as well as any existing restrictions with regard to territorial coverage and the value of the dispute;
    
    
  • Rules governing referral - the rules governing the referral of the matter to the body, including any preliminary requirements that the consumer may have to meet, as well as other procedural rules, notably those concerning the written or oral nature of the procedure, attendance in person and languages of the procedure;
    
    
  • Rules governing decisions - the types of rules serving as the basis for the body's decisions (legal provisions, considerations of equity, codes of conduct, etc.) and the decision-making arrangements within the body;
    
    
  • Legal force of decisions - the legal force of the decision taken and whether it is binding on the professional or on both parties. If the decision is binding, then the penalties to be imposed in the event of non-compliance and the means of enforcing the decision.
    
    
  • Cost - the possible cost of the procedure for the parties, including rules on the award of costs at the end of the procedure
    
    
• Public Accountability - the scheme must be open and a reasoned explanation of the decision must be made public. Practice notes must be maintained and record non-binding precedents.
  
  
• Annual report - an annual report recording the decisions taken, and enabling the results to be assessed and the nature of disputes referred to be identified.

3.4 Effectiveness

The scheme must provide redress and to this end:

• Scope - the range of remedies provided must be comprehensive and the financial jurisdiction of the awarding body must be adequate to satisfy the claims submitted to it.
  
  
• Active role - the competent body must be given an active role, thus enabling it to take into consideration any factor conducive to a settlement of the dispute.
  
  
• Procedure - the procedure adopted must be simple and in any case procedural error should not serve to prejudice a claim. The procedure followed must allow all parties concerned to present their viewpoint before the competent body and to hear the arguments and facts put forward by the other party and any experts statements. (This does not necessarily necessitate oral hearings).
  
  
• Evidence - the stringent requirements of court-based rules of evidence must be tempered with realism and the primary focus must be justice.
  
  
• Speed - the scheme must provide for the speedy resolution of the dispute - only short periods elapse between the referral of the matter.
  
  
• Decisions binding on industry - the decisions handed down must be binding on industry. However, where these schemes are voluntary schemes managed by industry, the consumer's right to reject the award and have recourse to the court must be ensured.

3.5 Address systemic problems

• Efforts to enhance consumer redress focus on two aspects: the protection of the collective interests of consumers and those designed to protect the interests of individual consumers. Most of the alternative redress mechanisms that have been established focus on providing redress to individual consumers and are incapable of addressing the collective interest of consumers. The schemes that are established must not only provide a solution for the disputes of individual consumers but must also address systemic problems. For this, the scheme must be given investigative powers and the power to make recommendations leading to changes in law and practice.

3.6 Periodic Independent Evaluation

• The rules for the establishment of redress mechanisms have to specify that independent experts subject the operation of the mechanism to periodic audit and evaluation. Of particular concern is whether the disadvantaged groups are accessing the new mechanism or whether it is being monopolised by those who already are beneficiaries of a disproportionate greater amount of the courts and other existing mechanisms.

4. CONCLUSION

Any redress mechanism is dependent upon substantive rights. Redress mechanisms cannot provide, except as charity, what is not a substantive right. There should, therefore, not be any trade-off between the granting of substantive rights and the creation of redress mechanisms. Redress must complement, not substitute the development of substantive rights.

Reform of the court system to ensure access must continue. Although the primary function of judicial power is to resolve disputes between the immediate litigants, the courts do have a secondary rule-making function. This, the courts achieve, inter alia by the doctrine of precedent and the power to award injunctive and declaratory relief. If certain classes of individuals, in this instance, consumers and especially the poorest amongst them, do not have realistic access to the courts, then the body of judge made rules will become increasingly distorted, to the detriment of consumers. The judicial system must remain sensitive to the consumer interest and judge-made rules must be consonant with this. The tax-funded legal system must not be monopolised by large corporations and the wealthy.

Though ADR mechanisms are very much touted, they must be critically appraised. Often these mechanisms hand out second-class justice, operate in favour of industry either intentionally or because consumers are unable to identify their statutory or contractual rights and the factors relevant to their position, present their case in a cogent and coherent manner, and determine whether they have obtained a reasonable settlement. Especially when justice is privatised through ombudsman schemes, systemic problems may be swept under the carpet and corporate compliance minimised. A comprehensive set of criteria needs to be established to appraise the efficacy of the various redress mechanisms that are being established. This paper suggested the kind of criteria that have to be considered.

The problem in meeting such criteria however is that they may result in the kind of formal protection which may be unwieldy or unduly costly and result in a replication of the court system which they are designed to replace. This is not to suggest that formal protection is not required. The question is rather as to "where the balance should be struck between, on the one hand, imposing the kind of formal protection for the consumer which have their origins in a judicialised forum and, on the other, accepting that for the out of court procedure to function as a cheap and accessible remedy then the formal procedural requirements must be relaxed.

Some of the privatised schemes have attempted to incorporate consumer representation in their governing councils. This has been rightly welcomed by consumerists. Yet, even this consumer representation is not always a positive factor for it may merely be nominal. Unless consumer representation is significant, unless consumer representatives are well informed and diligent, unless they resist the charm of the corporate purse and do not become seduced by their apparent power and influence of their appointments, consumer representation will become mere window dressing and a detriment to consumer interest.

Finally, and most importantly, efforts to obtain substantive and procedural rights must be directed to obtaining it for those who do not have, or are unable to exercise, these rights. Those who already enjoy a disproportionate share of rights and the state's resources must not hijack these efforts. Additional redress mechanisms must be sought not only as a luxurious alternative for those who already have access to justice but for those who are currently denied access to justice.