Arbitrable and Non-arbitrable disputes

Introduction

Arbitration is governed by Arbitration and Conciliation Act, 1996 (A&C, 1996, hereinafter the Act). The Act has not clearly defined the scope disputes that can be referred to arbitration. Section 2(3) of the Act provides that it shall not affect any other law for the time being in force by virtue of which certain disputes may not be submitted to arbitration. The Court has also been given the power under Section 34 to set aside an arbitral award if it finds that the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force. Further, the Court has also been bestowed with the discretionary power to not enforce foreign awards under Section 48(2) if in its opinion the subject matter of the difference is not capable of settlement by arbitration under Indian law.

What kinds of disputes are arbitrable or non-arbitrable?

An attempt was made in the case of Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. & Others (2011) by the Supreme Court to give an answer for the question of arbitrability in India. It was deduced that arbitrability of a dispute depends upon the ‘nature of rights’ involved in the dispute. So, if the dispute involved a right in personam, i.e., right against specific individuals then it is arbitrable (eg. Contracts) but if it involves a right in rem, i.e., right against the world at large then dispute is not arbitrable (eg. Criminal offences). The Supreme Court identified this principle and carved out the following disputes which fall beyond the scope of arbitration-

1. Disputes arising out of criminal offences;
2. Matrimonial disputes;
3. Guardianship matter;
4. Insolvency and winding up matters;
5. Testamentary matters;
6. Eviction or tenancy matters.

Thereafter, subsequent judicial decision brought about more clarity to the nature of arbitrable issues. In the case of Sukanya Holdings Pvt. Ltd. v. Jayesh H Pandya and Anr., Supreme Court noted that in cases where the claim cannot be bifurcated into arbitrable and non-arbitrable claims so the arbitrable claim cannot be eligible for arbitration as well.

In case the jurisdiction of ordinary civil court is excluded by the conferment of exclusive jurisdiction on a specified/special court or tribunal then such a dispute would not be capable of resolution by arbitration as a matter of policy. This was pointed out by the Supreme Court in A. Ayyasamy v. A. Paramasivam and Others. Further, it noted in case of mere allegations of fraud which touches upon the internal affairs of the party and doesn’t impinges on the public domain can be subjected to arbitration but in case there are serious allegations of fraud then the dispute is non-arbitrable which can be adjudicated by court only.

In the case of Shri Vimal Kishor Shah v. Jayesh Dinesh Shah & Others, Supreme Court noted that disputes arising out of trust deed under the Indian Trust Act, 1882 is not arbitrable as the Trust Acts functions like a complete code in itself with sufficient legal remedies available to the author, trustees and beneficiaries specifically conferred upon a principal civil court of original jurisdiction.

It was in the case of Himangani Enterprises v. Kamaljeet Singh Ahluwalia that Justice AM Sapre, a single judge bench gave the decision that disputes of landlord-tenant are not arbitrable as it opposes the public policy.

In the Himangani case, suit had been filed to seek eviction of the appellant and for recovery of unpaid arrears of rent and grant of permanent injunction. It was contended that the lease agreement said that all disputes will be referred to arbitration and hence the suit is not maintainable. However, the court rejected this contention and said that disputes of such nature cant be referred to arbitration.  

Similar question came before the court in the case of Vidya Drolia v. Durga Trading Corporation, the question before the Supreme Court was whether landlord-tenant disputes governed by Transfer of Property Act, 1882 are arbitrable or not. In this case to bring about more clarity around the question of what arbitrable disputes constitute of a four fold test was propounded. So, a dispute is not arbitrable when the cause of action and/or subject matter of the dispute:

1. Relates to actions in rem, and when it doesn’t include a subordinate right in personam arising from rights in rem.
2. Affects the third party rights and has erga omnes effect (towards everyone), require centralized adjudication and mutual adjudication would not be appropriate.
3. Relates to inalienable sovereign and public interest functions of the state.
4. Is expressly or by necessary implication non-arbitrable under a specific statute.

By this judgment the Supreme Court overruled its following earlier judgments:

1. N. Radhakrishnan v. Maestro Engineers (2010)- pursuant to which now allegations of fraud in a civil dispute are arbitrable.
2. HDFC Bank Ltd. v. Satpal Singh Bakshi– holding that disputes falling under the jurisdiction of the Debt Recovery Tribunal (DRT) created under the Recovery of Debts due to Banks and Financial Institutions Act, 1993 are not arbitrable.
3. Himangani Enterprises v. Kamaljeet Singh Ahluwalia- tenancy disputes are arbitrable unless they are subjected to jurisdiction vested in another specific forum to determine rights and liabilities of the party.
4. Suresh Singh v. Hipad Technology India Private Limited, it was noted that arbitral tribunal’s jurisdiction is limited to disputes concerning or arising from the terms and conditions of a lease agreement. So, a tenancy dispute in respect of a property that is subject to rent control legislation is not-arbitrable.
5. In Olympus Superstructures Pvt. Ltd v. Meena Vijay Khetan and Others, it was held that there is no prohibition in the Specific Relief Act, 1963 for referring disputes relating to specific performance of contracts to arbitration.

At what stages can the issue of arbitrability be discussed?

Parties can raise the question of arbitrability-

1. Before initiating arbitration by approaching the court under Section 8 for reference to arbitration or under Section 11 for appointment of arbitrator.
2. Before arbitral tribunal during the course of the arbitral proceedings.
3. Before court under Section 34 for setting aside an award or/and Section 48 for enforcement of foreign awards.

Who decides whether the dispute is arbitrable?

This conundrum was considered in the Vidya Drolia case, wherein question was- who decides whether the court at the reference stage or the arbitral tribunal in arbitration proceedings would decide the question of non-arbitrability. The Court noted that at the referral stage under Section 11(6A) the Court has to only examine the ‘existence of an arbitration agreement’. In the case of Duro Felgura SA v. Ganagavaram port Limited, J. Kurian Joseph noted that the scope of Section 11(6A) is only to see whether an arbitration agreement exists-nothing more, nothing less. This is as the legislative intent is to reduce judicial intervention as much as possible.

The Arbitration Act is based upon the UNCITRAL Model Law which was introduced with the objective to promote arbitration in commercial and economic matters as an alternative dispute resolution mechanism that is fair, responsive and efficient to contemporary requirements. And one of the primary objectives of the Arbitration Act is to reduce and minimize the supervisory role of Courts. Post the enactment of Act 33 of 2019 with effect from 9^th August, 2019, there is a clear intent to promote institutionalized arbitration rather than ad-hoc arbitration.

What happens if a non-arbitrable dispute is referred to the arbitral tribunal?

In the case of M/s Emaar India Ltd. v. Tarun Aggarwal LLP, 2022, the SC noted that in case a non-arbitrable dispute is referred to an arbitrator and even if an issue is framed by the arbitrator in relation to such a dispute then still there cannot be a presumption or a conclusion to the effect that the parties had agreed to refer the issue to the Arbitrator.

Conclusion

The current legal framework in India promotes arbitrability as a norm and non-arbitrability as an exception. Non-arbitrability is not defined in the Act.  The Vidya Drolia case has taken over the Booz Allen case as the most comprehensive decision by the Supreme Court on this topic.