The rapid growth of e-commerce has revolutionised how businesses operate and consumers shop. However, it has also brought in concerns regarding consumer protection, especially in cases related to product defects, counterfeit goods or inadequate services. To prioritise and safeguard consumers’ interests, in July 2020, the Ministry of Consumer Affairs notified the Consumer Protection (E-Commerce) Rules, 2020 under the Consumer Protection Act, 2019. Thereafter, in June 2021, the Government suggested several changes to the E-Commerce Rules, which included specific flash sales, mis-selling of goods and services, the appointment of grievance redress mechanisms, and more.

The said Rules also introduced the concept of ‘fallback liability’. However, it is contentious and must be analysed to understand its whole impact. Fallback liability intends to make e-commerce platforms responsible for any negligence or wrongdoings of sellers in relation to product delivery or sale of defective products, which may result in losses to the end-user. However, the clause on fallback liability is likely to do more harm than good and can significantly impact the growth of the e-commerce sector, leading to direct impact on the micro, small and medium enterprise (MSME) sector which has benefited immensely operating on these e-commerce platforms.

In traditional commerce, the liability primarily lies with the manufacturer or the seller of the products and not the physical market they operate in. E-commerce marketplaces act purely as intermediaries, facilitating transactions between sellers and consumers and do not have control over products being sold by the sellers registered on their platform. But if fallback liability comes into force, it will imply that even if the registered seller is at fault, the onus of liability will fall on e-commerce marketplaces in case of any losses incurred by the consumers. Additionally, e-commerce entities will also be liable for any fault in the logistics services, such as failure of delivery of goods and services. This clause has been highly criticised, citing unfair treatment toward e-retailers.

Impact on MSMEs

The fallback liability clause adds regulatory burden and compliance costs on e-commerce marketplaces. This will impact the growth of online retail and significantly affect MSMEs and local sellers, which will face the following challenges:

Increased compliance cost: While fallback liability aims to ensure consumer protection, it also increases the regulatory burden. This will potentially disincentivise MSMEs and local sellers to participate in e-commerce platforms due to increased compliance costs and legal risks.

Quality control: If fallback liability comes into force, online marketplaces will have to implement stringent quality control measures to avoid any liability claims. This will create additional compliance requirements and related costs for MSMEs participating in the online platforms, such as product certifications, documentation, audit, etc. Now small businesses may struggle to meet this requirement for various reasons, which may lead to limited participation, further reducing the competitiveness on online platforms.

Legal and financial implication: Fallback liability can expose online marketplaces to legal battles and potential financial losses. And to avoid that, they may introduce strict terms and conditions on sellers, such as higher commission fees, product insurance, etc. These measures will burden MSMEs financially, leading to limited participation.

Furthermore, fallback liability may or may not provide a robust system for consumer protection, especially in the case of bad actors. With fallback liability, fraudulent sellers on online platforms get immunity which might embolden them to sell counterfeits or engage in other fraud, giving them an unfair advantage over the small and honest sellers.

Regulators must strike a balance between consumer protection and supporting the growth of MSMEs while promoting a sustainable and robust e-commerce ecosystem.

The writer is a public policy analyst