Consumer Protection Act, 1986

A corporate Auditor has a statutory standard form of contract. If he fails to perform his contractual obligation he is liable to his employer, i.e. the company. Contractual liability arises also on account of lack of proper care and due diligence. Of course a corporate auditor in such cases is liable under the statute itself.

The question of auditor’s liability for negligence has been tried more in the English courts rather than in India. In a suit for negligence it would be up to the plaintiff to prove that the professional had some duty to him and a breach of such duty has resulted in an injury.

Some of the cases wherein this Principle has been enumerated is in one of the earliest decision on auditor’s liability was given in In Re London and General Bank [(1895) 2 ch 673 (No.2)]. In this case Lord Justice Lindley said "An auditor however is not bound to do more than exercising reasonable care and skill in making enquires and investigations. What is reasonable care in any particular case must depend on the circumstances of that case". This decision became the precedent in several other subsequent cases.

In the case of In Re Kingston Cotton Mill Co. [(1896) 2 ch 279 (No 2) Lord Justice Lindley stated that the auditors should not be suspicious but only be reasonably careful. Lord Justice Lopes, in the same case stated "In determining whether any misfeasance or breach of duty has been committed, it is essential to consider what the duties of an auditor are? An auditor is not bound to be detective or, as was said, to approach his work with suspicion or with a foregone conclusion that there is something wrong. He is watch dog not a blood hound. He is justified in believing true servants of the company in whom confidence is placed by the company. Auditors must not be made liable for not tracing out ingenious and carefully laid schemes of fraud when there is nothing to arouse their suspicion.

However the legal standards of reasonable care have been critically examined in recent times more particularly in the decision of the House of Lords in Fomento Sterling Area Ltd., V. Selsdon Fountain Pen Co. ltd [(1958) 1 WLR 45]. Lord Dening said "the vital task of an auditor is to take care to see that errors are not made, be they errors of computation, or errors of omission or commission or down right untruth. I would not have it thought that the Kingston Mill’s Case relieved an auditor of his responsibility of making a proper check. It is part of his duty to use reasonable care to see that none have been omitted which ought to be included.

AUDITOR’S LIABILITY

Civil Liability: Auditor has civil liability for misfeasance. Several sections of the Companies Act attach such liability on the Auditor. For example, sections. 57, 58, 59, 62(3), 62(4), 70(50), 233, 477, 488, 543, 545, 621, 625, 633 provide civil liability on an Auditor.

Criminal Liability: Under Sec 197 of the Indian Penal code, whosoever issues or signs any certificate required by law to be given or signed or relating to any fact which such certificate by law is admissible by evidence, knowing or believing that such certificate is false in any material point shall be punishable in the same manner as if he gives a false evidence.

Example: Sec 233 of Companies Act gives PENALTY FOR NON-COMPLIANCE BY AUDITOR WITH SECTIONS 227 AND 229

If any auditor’s report is made, or any document of the company is signed or authenticated, otherwise than in conformity with the requirements of section 227 and 229, the auditor concerned, and the person, if any, other than the auditor who signs the report or signs or authenticates the document, shall, if the default is wilful, be punishable with fine which may extend to [ 1118 ten thousand rupees. 1118 ]

LIABILITY TO THIRD PARTIES

The annual account of a company as certified by the Auditor is the standard disclosure required from the company under the corporate law. As such investors, creditors, bankers, tax authorities and all other parties having any relation with the company take a decision in the basis of Auditor’s certificate. An author takes the analogy of a physician’s relation with the clients with the Auditor’s position in so far as relation between him and third parties are concerned based on his certificate.

The physician in primarily responsible to his client and secondarily to other members of the family for the injury from the negligence of his duty of care and issue of certificate. Auditor’s position is perhaps more intricate than a physician. It is for this reason that the issue gets its importance in such litigation in several countries.

The age old principle in law of tort as enunciated in 1893 in Le livre & Dennes V. Gould[(1922) IK.B. 688] is that the " question of liability for negligence cannot arise at all until it is established that the man who has been negligent owe some duty to the person who seeks to make him liable for his negligence". In 1889 it was held in Derry V. Peek[(1889)14 App.Cas 337] that to make an Auditor liable to third parties the following four grounds must be satisfied:

the statement made by the Auditor was untrue in fact;
the Auditor making it, knew that it is untrue or he was negligent to find out the truth;
the statement was made with an intent that the identified third party should act on it with sound belief; and
the identified third party suffered loss by placing reliance on it.

In India the issue came before the court in CIT v. GM Dandekar [(1952) 22 Comp.Cas 256] where the issue was brought by the Income Tax officer holding the Auditor for negligence and therefore liable to compensate. The court held that the Auditor did not owe a duty to care to third parties.

The reason why professionals are held responsible for the deficiency in service is due to Professional Ethics. Every profession builds up a code of professional conduct which its members undertake to observe. The code of professional conduct is based upon the principle of morality and ethics. It distinguishes the professional men from others and ensures public confidence. Though the law does not prescribe a clear code of conduct for the auditors, the corporate auditors are covered by the code of conduct legislated by the Institute of Chartered Accountants of India. Similarly the code of conduct has been negatively identified as professional misconduct. The definition of professional misconduct is given in sec. 22 of the Chartered Accountants Act 1949.

UNDER CONSUMER PROTECTION ACT, 1986

(g) "deficiency" means any fault, imperfection, shortcoming or inadequacy in the quality, nature and manner of performance which is required to be maintained by or under any law for the time being in force or has been undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service;

(o) "service" means service of any description which is made available to potential [users and includes, but not limited to, the provision of] facilities in connection with banking, financing insurance, transport, processing, supply of electrical or other energy, board or lodging or both, [housing construction,] entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service;

While the Companies Act recognises the responsibility of the Auditor, there is no express provision under the Consumer Protection Act to hold a Chartered Accountant guilty of deficiency in service. Deficiency in Service of a professional has come to be interpreted in a vast sense through the following judgements, wherein the services provided by a professional has come to be included under the purview of the Consumer Protection Act.:-

Earlier view taken by the Courts in 2005-(CT3)-GJX -0382 –SC, Jacob Mathew V. State Of Punjab And Another.

20. In the law of negligence, professionals such as lawyers, doctors, accountants, engineers and architects and others are included in the category of persons professing some special skill or skilled persons generally. Any task which is required to be performed with a special skill would generally be admitted or undertaken to be performed only if the person possesses the requisite skill for performing that task. Any reasonable man entering into a profession which requires a particular level of learning to be called a professional of that branch, impliedly assures the person dealing with him that the skill which he professes to possess shall be exercised and exercised with reasonable degree of care and caution. He does not assure his client of the result. A lawyer does not tell his client that the client shall win the case in all circumstances. A physician would not assure the patient of full recovery in every case. A surgeon cannot and does not guarantee that the result of surgery would invariably be beneficial, much less to the extent of 100% for the person operated on. The only assurance which such a professional can give or can be understood to have given by implication is that he is possessed of the requisite skill in that branch of profession which he is practising and while undertaking the performance of the task entrusted to him he would be exercising his skill with reasonable competence. This is all what the person approaching the professional can expect. Judged by this standard, a professional may be held liable for negligence on one of two findings: either he was not possessed of the requisite skill which he professed to have possessed, or, he did not exercise, with reasonable competence in the given case, the skill which he did possess. The standard to be applied for judging, whether the person charged has been negligent or not, would be that of an ordinary competent person exercising ordinary skill in that profession. It is not necessary for every professional to possess the highest level of expertise in that branch which he practices. In Michael Hyde and Associates v. J.D. Williams & Co. Ltd., [2001] P.N.L.R. 233, CA, Sedley L.J.said that where a profession embraces a range of views as to what is an acceptable standard of conduct, the competence of the defendant is to be judged by the lowest standard that would be regarded as acceptable. (Charlesworth & Percy, ibid, Para 8.03)

2. 1992-(CT2)-GJX -0011 –NCDRC

Cosmopolitan Hospitals & Anr. V. Smt. Vasantha P. Nair. Cosmopolitan Hospitals & Anr. V. Smt. V.P. Santha And Ors.

9. Dealing with the objection raised that the service rendered by the opposite parties was "personal service", the opposite parties was "personal service", the State Commission held that like the service of a lawyer, the service rendered by the hospital and its doctors was basically professional service and hence "it will be incorrect, infelicitous and even crude" to call the sophisticated high class professional service as ‘personal service’.

13. Learned Counsel appearing for the appellants as well as for the interveners reiterated before us the contentions which had been urged before the State Commission on behalf of the opposite parties in the two complaint petitions. Reference was made by them to the statement of objects and reasons of the Consumer Protection Bill, 1986 and it was contended that when the objects and reasons set out therein are read alongwith the speech made in Parliament by the then Hon’ble Minister of Parliamentary Affairs and Food and Civil Supplies while introducing the Bill in Parliament, it would be clear that the only purpose sought to be achieved by the various provisions contained in the Bill was to safeguard and protect the interests of consumers against unscrupulous traders selling defective goods or indulging in unfair trade practices and against deficiency in services stating to "commercial transactions" alone. On this basis it was contended that the services rendered to a patient by a medical practitioner which is a professional service has absolutely no connection with the definition of the expression ‘service’ contained in Section 2(1)(o) of the Act. According to the appellants and interveners, the expression ‘service’ in the Act relates only to goods purchased by a consumer. It was further submitted that the legislation that governs the medical practitioners is only the Medical Council Act, 1956 and it is only this law, which has been left unamended by the Consumer Protection Act, that governs the field as far as the professional services of the medical practitioners and those rendered in hospitals are concerned. It was urged by the Counsel for the appellants and the interveners, the expressions ‘consumer’, ‘service’, ‘hires any service’, ‘consumer dispute’, ‘defect’ and ‘deficiency’ have to be understood in a commercial sense only. They submitted that the Consumer Protection Act, 1986 has no application to the medical profession at all or to the services rendered in hospitals whether they are run by Government or by private agencies; and that it is wholly incorrect to say that a patient treated by a doctor in a hospital is a "consumer" coming within the definition of the Act.

10. In Oxford Companion to Law (Page 1134) contract for services has been defined as follows:

"In Roman Law Locatio operis faciendi, the contract whereby one party undertakes to render services e.g. professional or technical services, to or for another in the performance of which he is not subject to detailed direction and control but exercises professional or technical skill and uses his own knowledge and discretion. There are two major groups of such services, professional services of lawyers, accountants, surgeons and the like and technical services of building and engineering contractors, builders, garages and many more."

In Strouds Judicial Dictionary (Page 540, 5th Edn.) it is mentioned: "A contract to render services is not the same as a ‘contract of service’; semble, the latter implies some relationship of master and servant and involves an obligation to obey orders in the work to be performed and as to its mode and manner of performance."

We may also quoted here the following passage occurring at page 268 of the report of the case of Dharangadhra Chemicals Works Ltd. (supra):

"The principle which emerges from these authorities is that the prima facie test for the determination of the relationship between master and servant is the existence of the right in master to supervise and control the work done by the servant not only in the matter of directing what work the servant is to do but also the manner in which he shall do his work."

It was further remarked in the above case (page 268 of the report):

The correct method of approach, therefore, would be to consider whether having regard to the nature of the work there was due control and supervision by the employer or to use the words of Fletcher Moulton, L.J., page 549 in Simmons v. Health Laundry Company, (1910) 1 KB 543 at pp. 549, 550 :

"In my opinion it is impossible to lay down any rule of law distinguishing the one from the other. It is a question of fact to be decided by all the circumstances of the case. The greater amount of direct control exercised over the person rendering the services by the person contracting for them the stronger the grounds for holding it to be a contract of service, and similarly the greater the degree of independence of such control the greater the probability that the services rendered are of the nature of professional services and that the contract is not one of service."

The following passage from the judgment in Executive Committee of Vaish Degree College v. Laxmi Narain and Ors. (AIR 1976 SC 888 at p. 902) will also be useful for further discussions in the case:

"It must be noted that all these doctrines of contract of service as personal, non assignable, unenforceable and so on grew in an age when contract of service was still frequently a ‘personal relation’ between the owner of a small workshop or trade or business and his servant.

Of course in a narrow sense there is personal element in practically all services such as a servant’s or aya’s service. However, it will be incorrect and even crude to call the professional or technical service as personal service.

PRESENT VIEW OF THE CONSUMER DISPUTES REDRESSAL COMMISSION

The present view of including Advocates and other professionals has come to be incorporated after a series of judgements, one of which is as under.

3 1996-(CT2)-GJX-0075-MAD

Srimathi And Others V. Union of India And Others.

Writ Petition Nos. 21557 & 21560 of 1994 & Writ Petition Nos. 2109, 2110 & 4233 of 1995 decided on March 6, 1996.

In these writ petitions, a common question is raised regarding the constitutional validity of Section 3 of the Consumer Protection Act, 1986. The prayer in all the writ petitions is for a declaration that Section 3 of the said Act is unconstitutional, being opposed to the object of the Act. The petitioners in these cases are practising advocates. Claims have been made against them by certain persons who are impleaded as respondents in the respective cases before the Consumer Disputes Redressal Forum. In some cases it is before the District Forum and in some cases it is before the State Forum.

2. The contention of the petitioners is that advocates are governed by the Advocates Act and they shall not be made to answer the claims under the Consumer Protection Act. It is contended that the objects of the Act do not contain any provision which will bring in the services rendered by an advocate to his client within the scope of the Consumer Protection Act. It is also argued that the definition of ‘consumer’ will not include a client, who was availed of the services of an advocate. It is further contended that an advocate should not be made liable to face claims under different statutes. According to the petitioners, an advocate in a particular case, can be made to defend a proceeding (1) under the Advocates Act before the Bar Council, (2) under the Criminal Law before the Criminal Courts, (3) before Civil Court under the Civil Law, and (4) before the Consumer Redressal Forum under the Consumer Protection Act. It is argued that when there is a special enactment governing the advocates, viz., Advocates Act, he shall not be made to face claims under the different Acts, referred to above. In particular, it is stated that the provision contained in Section 3 of the Consumer Protection Act, by which, the provisions of the said Act are declared to be in addition to and not in derogation of the provisions of any other law for the time being runs counter to the objects of the Act. According to the petitioner, if that Section is struck down as unconstitutional, it will not be possible for any person to drag the advocate before the Consumer Redressal Forum as the claim will be outside the scope of the said Act. It is also submitted that in a proceeding before the Consumer Redressal Forum, no Court-fee is payable and it may be possible for any person to file a frivolous action against the advocate in that Forum and even if that person fails ultimately, and if the advocate wants to make a claim for damages, it cannot be made without payment of Court-fee by the advocate in a Civil Court. Such provisions cause undue hardship and place and advocate in a hazardous situation thereby making his profession worthless.

We are unable to appreciate the second limb of the arguments that, if the section is struck down as unconstitutional, no person can institute any proceeding before Consumer Redressal Forum against an advocate. Even if the section is declared to be unconstitutional the other sections of the Act will continue to be intact and if the services of the advocate fall within the definition of service under Section 2(o) of the Act, then, it will be certainly open to a client to proceed against the advocate before the Consumer Redressal Forum. Hence, the object of the petitioners in these writ petitions to exclude the advocates from the purview of the Consumer Redressal Forum cannot be achieved by the grant of the prayer made in these writ petitions. We are at a loss to understand the reason for the petitioners making such a prayer in these petitions.

7. The ruling cannot help the petitioners herein as it is a question of interpretation of the relevant provisions of the Act. It is seen that there is a specific section in the Railway Claims Tribunal Act barring the jurisdiction of other Courts and authorities. But, there is no such provision in the Advocates Act to bar the jurisdiction of other Courts and authorities or Tribunals in relation to matters connected with the advocates or disputes arising between the clients and their advocates. Section 6 of the Advocates Act sets out the functions of State Bar Council. There is no provision in the Advocates Act to enable the Bar Council to deal with the dispute between the client and the advocate if the clients seeks to remedy of damages or refund of money paid to the advocates or sums on monetary claim. The Bar Council can deal with only disciplinary matters and consider whether the advocate is guilty of misconduct which will fall under Section 6(1) of the Advocates Act. Hence, there is no substance in the contention that the Advocates Act will prevail over the Consumer Protection Act and Consumer Redressal Forum will have no jurisdiction to deal with claims against the advocates.

9. Learned counsel for the petitioners referred to Section 2(d) of the Act wherein ‘consumer’ is defined. According to him, the definition of Consumer will not take in a client who engaged the advocate for professional services. We cannot accept this contention. The language in Clause 2 of Section 2(d) of the Act is very wide. It uses the expression "avails of any service for a consideration." That will not certainly exclude the services rendered by advocate. Further, the matter is made clear by the definition of "service" in Section 2(d) of the Act. The section read as follows:

"Service" means service of any description which is made available to potential users and includes the provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, boarding or lodging or both, (housing construction), entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of persona service."

10. It is not necessary for us to labour much on this aspect of the matter in view of the fact that the Supreme Court has recently considered the definition of "service" in two cases. First of that is in Lucknow Development Authority v. M.K. Gupta, (1993) 1 CTJ 929 (Supreme Court) (CP) = (1994 (I) MLJ (SC) 55).Referring to the word "service"" the Court said:

"The term has variety of meanings. It may mean any benefit or any act resulting in promoting interest or happiness. It may be contractual, professional, public, domestic, legal, statutory etc. The concept of service thus is very wide."

11. Referring to the definition in Section 2(o) of the Act, the Court said:

"It is in three parts. The main part is followed by inclusive clause and ends by exclusionary clause. The main clause itself is very wide. It applies to any service made available to potential users. The words ‘any’ and ‘potential’ are significant. Both are of wide amplitude. The word ‘any’ dictionarily means ‘one or some or all’. In Black’s Law Dictionary it is explained thus, "word ‘any’ has a diversity of meaning and may be employed to indicate ‘all’ or ‘every’ as well as ‘some’ or ‘one’ and its meaning in a given statute depends upon the context and the subject-matter of the statute. The use of the word ‘any’ in the context it has been used in clause (d) indicates from one to all."

12. When the question was raised whether the medical profession will be covered by the provisions of the Consumer Protection Act, the Supreme Court answered the same in the affirmative. While doing so, the Supreme Court reversed the judgment of this Court. In Indian Medical Association v. V.P. Shantha, (1994) 2 CTJ 969 (Supreme Court) (CP) = (1995(6) SC 651) the Supreme Court has held that the applicability of the Consumer Protection Act cannot be questioned on the ground that the medical practitioners are subject of disciplinary control under Medical Council Act, 1956. The contention similar to the one, put forward before us, was urged before the Supreme Court and negatived. It is useful to refer to the following passages in the judgment of the Supreme Court which are relevant for the purpose of this case:

"It has been urged that medical practitioners are governed by the provisions of the Indian Medical Council Act, 1956 and the code of Medical Ethics made by the Medical Council of India, as approved by the Government of India under Section 3 of the Indian Medical Council Act, 1956 which regulates their conduct as members of the medical profession and provides for disciplinary action by the Medical Council of India and/or State Medical Council against a person for professional misconduct."

the nature of the work which is skilled and specialised and a substantial part is mental rather than manual;
commitment to moral principles which go beyond the general duty of honesty and a wider duty to community which may transcend the duty to a particular client or patient;
Professional association which regulates admission and seeks to uphold the standards of the profession through professional codes on matters of conduct and ethics; and
high status in the community.

The learned authors have stated that during the twentieth century, an increasing number of occupations have been seeking and achieving ‘professional’ status and that this has led inevitably to some blurring of the features which traditionally distinguish the professions from other occupations. In the context of the law relating to ‘Professional’ Negligence, the learned authors have accorded professional status to seven specific occupations, namely, (i) architects, engineers and quantity surveyors, (ii) surveyors, (iii) accountants, (iv) solicitors, (v) barristers, (vi) medical practitioners, and (vii) insurance brokers. (Jackson & Powell on Professional Negligence, paras 1.01 and 1.03, 3rd Edn.")

We are, therefore, unable to subscribe to the view that merely because medical practitioners belong to the medical profession they are outside the purview of the provisions of the Act and the services rendered by medical practitioners are not covered by Section 2(1)(o) of the Act.

It cannot, therefore, be said that since the members of the Consumer Disputes Redressal Agencies are not required to have knowledge and experience in medicine, they are not in a position to deal with issues which may arise before them in proceedings arising out of complaints about the deficiency in service rendered by medical practitioners."

In complaints involving complicated issues requiring, recording of evidence of experts, the complainant can be asked to approach the Civil Court for appropriate relief. Section 3 of the Act which prescribes that the provisions of the Act shall be in addition to and not in derogation of the provisions of any other law for the time being in force, preserves the right of the consumer to approach the Civil Court for necessary relief. We are, therefore, unable to hold that on the ground of composition of the Consumer Disputes Redressal Agencies or on the ground of the procedure which is followed by the said Agencies for determining the issues arising before them, the service rendered by the medical practitioners are not intended to be included in the expression ‘service’ as defined in Section 2(1)(o) of the Act."

13. The above decision of the Supreme Court is a complete answer to the question raised by the petitioners in these matters. It is not necessary for us to add anything thereto in order to reject the contentions of the petitioners. It may also be pointed out that the validity of several provisions of the Act has been upheld by a Division Bench of this Court in the Registrar, University of Madras v. The Union of India (1995) 3 CTJ 100(Madras High Court) (CP) = (1995) 2 MLJ 367) to which one of us (Srinivasan, J.) was a party. Learned counsel for the petitioners submitted that the Act has been struck down as unconstitutional by the Calcutta High Court relying on a news paper report. But, it is seen from the subsequent reports in the newspapers that the said judgment has been appealed against and the appellate Bench has granted stay of operation of the order by which the single Judge struck down the provisions of the Act. But, it is unnecessary for us to take note of the same in view of the fact that a Division Bench of this Court has upheld the validity of the provisions of the Act. We are not bound by the judgment of the Calcutta High Court.

14. In the result, all the contentions urged by the petitioners are negatived and the writ petitions are dismissed. No costs. It is needless to point out that it is open to the Advocates, in all these petitions against whom proceedings have taken before the Consumer Redressal Forum, to raise all defenses available to them in law excepting the question that the Advocates are not covered by the provisions of the Consumer Redressal Act.

The Amendment in 2002 has changed the definition of Service under Sec. 2 (1)(o) completely. The new definition is not inclusive or exhaustive. The Amendment has added the words "but not limited to", which leaves the definition open for interpretation according to the circumstances of the particular case.

From the above interpretations of the Apex court, it is clear that the:

Professional Service is covered under the Consumer Protection Act, 1896
Professional Service is not Personal Service, hence it is not covered under the exception.
According to Sec. 3, the provision of this Act shall be in addition to and not in derogation of the provisions of any other law for the time being in force.

Hence all Professionals can be held liable under the Consumer Protection Act. But the point that has to be looked at is if there has been any deficiency in service. An auditor’s deficiency in service is very difficult to be established. Moreover, he would be held liable for deficiency even to third parties if interpreted. Considering the fact that Advocates are now made liable for the deficiency in service meted out to clients, it is now established that Professional Service would be covered under the purview of the Consumer Protection Act, 1986.

Taking a very divergent view from the earlier philosophy the Hon’ble Supreme Court is seized with a new line of argument, wherein the concept of the Advocate being an officer of the Court, is actually assisting the Court to do proper justice and hence he is not rendering service to the litigant for a consideration but to the Court of law and hence an Advocate would not come within the net of the Consumer Protection Act.

While the principle that the special law would override the general law, is being thrown to the winds by the Consumer Fora, which in one law is trying to bring under it’s preview the Co-operative Societies Laws, the Banking laws as well even the payment of wages and gratuity laws, on the other hand the Consumer Fora are trying to find an escape hole into wherever the situation demands, due to which there is no discipline being introduced in the system. Such a trend is disastrous to attain stability to a system where the whims and fancies of individuals who sit in the seat of this semi-judicial system of dispensing speedy justice under summary proceedings. How unfortunate it would be for any nation to have the justice delivery system in the hands of persons who are human beings and thus vulnerable to moods, personal preferences, prejudice and personal opinions.