What India Can Learn from Europe about Protecting Online Buyers

A Flipkart package. Credit: Nadir Hashmi/Flickr CC 2.0

A Flipkart package. Credit: Nadir Hashmi/Flickr CC 2.0

After some initial reluctance, Indians have vigorously taken to buying goods online. If data is needed to confirm the general sense, online sales have grown from $0.7 billion in 2012 to $7 billion in 2015 and are expected to cross $12 billion in 2016. It is the rule of the social, that alongside business opportunities, business malpractices too – ranging from the ingenious to the mundane – would develop. It is no surprise that a buyer was delivered bricks for his smart phone and another buyer, wooden pieces. It is claimed that the Consumer Protection Bill, 2015 addresses this.

While we are only now getting ready to regulate online sales, European countries have had regulations in place for more than a decade now. The most significant consumer right is ‘cooling-off’ – the right of the buyer to cancel the contract at will, within a specified period of time. For example, the United Kingdom first gave the right of ‘cooling-off’ in 2000, in the Consumer Protection (Distance Selling) Regulations, 2000 (Regulations). It is instructive to draw from experiences in other jurisdictions.

Why distance selling needs regulations

The British regulations govern online sales but the legal principles and the details of the law were developed well before online sale was born. The electronic medium only provided a new means of communication for the parties to form a contract while being at a distance. Mail order was the first form where the buyer and seller were at a distance and formed a contract through the postal system. Mail order started as early as 1855 and developed rapidly to come to have a significant economic, social and cultural presence. For example, by the mid-1970s, the mail order share was 5% of total retail sales in the UK. In the mail order system, the seller widely disseminated his product catalogue to the public. Customers requested products through the mail and their purchases were delivered by the postal system. Payment was done by cheque or at the time of delivery.

In the 1980s, with the proliferation of newer modes of communication like television and telephone, distance contracting expanded significantly. With this, malpractices resulting from the consumer contracting ‘in the dark’ proliferated. Many European countries, by the end of the 1980s, made laws to protect consumers in such situations. The promise of a ‘money back guarantee’ had been around since the beginning of mail order under which the buyer could return the goods and get his money back without giving any reason or justification. This assurance must have been first introduced by some traders to expand their customer base. Other traders would have had to adopt it to stay in competition. A remedy for the consumer was already there in practice. But it got adopted as a remedy in the laws on distance contracting.

The European Union, which is mandated to develop common practices among member states to facilitate trade and commerce across the Union, noted the problem of ‘contracting in the dark’ and, in 1992, prepared a draft directive on consumer rights in distance contracts. It picked up the remedy of cooling-off from the practices and the laws of member states. Much deliberation and consultation followed. Finally, in 1997, the European Parliament enacted directives on the protection of consumers in respect of distance contracts. In subsequent years, the member states gave force to these directives in their domestic laws. The United Kingdom did it with its 2000 regulations. By then, the shape of things had further changed. Online sales had emerged and was poised to become the dominant form of distance contracting.

Cooling-off as a consumer right

The basis for ‘cooling-off’ is that a buyer in a distance contract is at a disadvantage. He does not get to see or examine the goods, or get a demonstration of the goods in action. The principle in ordinary contracts is that a sale is final on the parties. Courts and law are cautious in disturbing it, as it leads to commercial uncertainty. But the consumer in a distance contract is given the right of cooling-off to bring parity with an ordinary consumer. From this meta principle, other supporting principles and details get derived. The buyer must return the goods at his own cost and the seller, the money without delay. The buyer must return the goods in the same condition as he got it from the seller. This is the most contentious part of the deal between the seller and the consumer.

The buyer opens the package and takes the goods out of its wrapping. The seller cannot complain about this. The buyer then handles and examines the goods. This is too is unobjectionable. The seller proceeds further and puts the goods to use. At what stage should the buyer be required to stop using the product? The principle is to put a buyer in a distance contract in as good a situation as a buyer in a shop, and no more. Thus, a buyer should handle the goods only as much as he would get to handle similar goods in a shop. Any handling beyond this is excessive and unwarranted. The consumer must pay to the seller for any lowering of the value of the goods caused by excessive handling. Consistent with this, the British regulations allow the trader to deduct, while returning the customer’s money, a penalty for any diminution in the value of goods caused by excessive handling.

Lacunae in Indian draft law

India’s Consumer Protection Bill, 2015, makes it an unfair trade practice for a trader to refuse to ‘take back’ the goods or services or ‘refund’ the price on the ‘request’ of the buyer within 30 days of making of the contract. This is an indirect way of giving the right of cooling-off to the consumer. Unfortunately, this is all the bill provides on cooling-off. Vital details are missing. When and how should the consumer communicate his decision to cancel the contract? Should the consumer return the goods to the seller or is the seller obliged to arrange to collect the goods? Who will pay for the delivery of the goods to the seller? What if the goods get lost or damaged in transit? When would the seller return the customer’s money? The seller will always allege that the goods are not in the condition in which he gave it to the buyer and refuse to return the money or make arbitrary deductions. On what basis should the seller be allowed to make deductions? The right of cooling-off is incomplete without these details. The bill should provide these details.

There is an additional problem with the draft Indian law. Where European Union consumer directives give provide buyers the right of cooling-off in distance contracts to remedy the disadvantage of the consumer not being face-to-face with the seller, the Indian bill extends this right to all consumer contracts, including in-shop purchases. What could be the basis for this? The question is important because a right without a clear basis – a foundation to rest on – is likely to eventually be challenged. The bill has been referred to a standing committee. It is essential that it emerges strengthened rather than diluted.

The author is Professor at IIM, Ahmedabad. The theme of this article is further explored in a research report: E-Retailing and the Consumer Protection Bill, 2015: Drawing from the European Union Consumer Directives

The views expressed are of the author and not the institution.

  • Budd Margolis

    Indian eComm and TV Shop channels should organize and create an entity to self regulate. It is vital that strict standards are developed to protect the consumer and industry otherwise the Govwernment will intercede and we risk draconian and possibly inappropriate backlash regulation. Some in the field are not reputable and this will cost billions in the future. A good example is China for those unfamiliar with what could happen.

  • N Motwani

    Good ideas! But considering India is always the last to make best trade practices, doubt it will happen soon. Also, Modi should think of this issue too before speaking of ‘digital india’.

  • Anjan K Basu

    I have mixed experience: I got full refund from two ecommerce companies. But, another just gave me ₹90/- for their failure of giving promised gift valued ₹ 600/- . Very recently, an internationally reputed company charged me more than the MRP of a product. Absence of rigid control will definitely cause growing incidents of such behavior.