Introduction
Arbitrability is a fundamental concept in arbitration law that determines whether a specific dispute can be resolved through arbitration. As arbitration becomes an increasingly popular alternative to traditional litigation, understanding arbitrability is essential for parties considering this form of dispute resolution. This article provides a comprehensive overview of arbitrability, discussing its definition, relevant case law, factors influencing non-arbitrability, and the types of disputes that can or cannot be arbitrated.
What is Arbitrability?
Arbitrability refers to indicates whether a dispute is “arbitrable”, i.e. capable of being settled by arbitration. If a dispute is deemed non-arbitrable, it must be addressed in court instead. Traditionally, disputes involving rights in personam (personal rights) are considered arbitrable, while those concerning rights in rem (rights against the world) are generally not suitable for arbitration. However, this distinction is not absolute, and various exceptions exist based on the nature of the dispute. Disputes relating to subordinate rights in personam arising from rights in rem have always been considered to be arbitrable.
In Booz Allen & Hamilton Inc., elucidating on the question of non-arbitrability of a dispute, it has been observed:
“35. The Arbitral Tribunals are private fora chosen voluntarily by the parties to the dispute, to adjudicate their disputes in place of courts and tribunals which are public fora constituted under the laws of the country. Every civil or commercial dispute, either contractual or non-contractual, which can be decided by a court, is in principle capable of being adjudicated and resolved by arbitration unless the jurisdiction of the Arbitral Tribunals is excluded either expressly or by necessary implication.
Adjudication of certain categories of proceedings are reserved by the legislature exclusively for public fora as a matter of public policy. Certain other categories of cases, though not expressly reserved for adjudication by public fora (courts and tribunals), may by necessary implication stand excluded from the purview of private fora. Consequently, where the cause/dispute is inarbitrable, the court where a suit is pending, will refuse to refer the parties to arbitration, under Section 17 Section 34(2)(b)(i) of the Arbitration Act 8 of the Act, even if the parties might have agreed upon arbitration as the forum for settlement of such disputes.”
In the case of Vidya Drolia vs. Durga Trading Corporation on December 14, 2020, the court explored the concept of arbitrability—essentially whether certain disputes can be resolved through arbitration. Understanding non-arbitrability is crucial because it relates directly to the authority of the arbitral tribunal.
Facets of Non-Arbitrability
Non-arbitrability is basic for arbitration as it relates to the very jurisdiction of the arbitral tribunal. An arbitral tribunal may lack jurisdiction for several reasons. Non-arbitrability has multiple meanings. Booz Allen & Hamilton Inc. refers to three facets of non-arbitrability, namely: –
Can the Dispute Be Settled by Arbitration?
- This checks if the nature of the dispute is suitable for arbitration. Some disputes are meant to be resolved in public courts rather than private forums like arbitration.
Is the Dispute Covered by the Arbitration Agreement?
- Here, we look at whether the specific dispute is included in the arbitration agreement. If it’s not mentioned or if it falls under “excepted matters” that are excluded from arbitration, it cannot be arbitrated.
Have the Parties Actually Referred the Dispute to Arbitration?
- This involves verifying whether the parties have formally submitted the dispute to arbitration. Even if a dispute can be arbitrated and fits within the agreement, it won’t be considered “arbitrable” if it isn’t included in the list of disputes referred for arbitration or if it doesn’t appear in the claims made before the arbitral tribunal.
A four-fold test for determining when the subject matter of a dispute in an arbitration agreement is not arbitrable was laid down in Vidya Drolia’s Case :
- when cause of action and subject matter of the dispute relates to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem.
- when cause of action and subject matter of the dispute affects third party rights; have erga omnes effect; require centralized adjudication, and mutual adjudication would not be appropriate and enforceable;
- when cause of action and subject matter of the dispute relates to inalienable sovereign and public interest functions of the State and hence mutual adjudication would be unenforceable; and
- when the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s)
Determining Non-Arbitrability: Court vs. Arbitral Tribunal
The issue of non-arbitrability can be resolved by either the court or the arbitral tribunal, but the tribunal is generally preferred for this purpose. This preference is based on the tribunal’s authority to determine its own jurisdiction. Courts typically step in Referral Stage or during post-award proceedings under Section 34 of the Arbitration and Conciliation Act, 1996, focusing on clear cases where there is no valid arbitration agreement or the dispute is non-arbitrable.
Unless such clear instances are present, courts usually defer to the tribunal to decide issues of jurisdiction and non-arbitrability. This approach respects the contracting parties’ intention to resolve disputes through arbitration, promoting a more efficient arbitration process.
Types of Disputes Suitable for Arbitration
While most civil disputes can be arbitrated, certain exceptions apply. Here’s a clearer breakdown:
- Civil Disputes:
Practically all civil disputes are eligible for arbitration, with notable exceptions such as Probate matters, Family court disputes etc.
- Rights in Personam:
- Most disputes involving rights in personam—those that affect the rights and obligations of specific individuals—are generally considered arbitrable. Examples include: Intellectual property rights, personal injury, product liabilities, professional liability, real estate securities etc.
Matters which cannot be referred to arbitration
The Supreme Court of India has identified several categories of disputes that are non-arbitrable, including:
- Criminal Offenses: Disputes arising from criminal activities cannot be resolved through arbitration.
- Family Law Matters: Issues such as guardianship, divorce, and child custody are generally outside the purview of arbitration.
- Insolvency and Winding Up: Such matters are reserved for public adjudication.
- Tenancy Issues: Disputes governed by specific tenancy laws fall under public jurisdiction and are not suitable for arbitration.
- Sovereign Functions of the State: Issues involving public interest or state functions are typically non-arbitrable.
Arbitrability of fraud in India
The arbitrability of fraud has long been a contentious issue in Indian jurisprudence, shaped primarily by case law rather than statutory provisions. A significant early case, Abdul Qadir Shamshuddin Bubere v. Madhav Prabhakar Oak, (1962 AIR 406), set a critical precedent. In this case, the Supreme Court ruled that if serious allegations of fraud were presented, a party could request that the matter be tried in open court, allowing the court to decline to refer the dispute to arbitration. This ruling, while grounded in the 1940 Arbitration Act, established a precedent that cast doubt on the arbitrability of fraud allegations, emphasizing a party’s right to defend their reputation in a public forum.
As the legal landscape evolved, the A Ayyasamy v. A Paramasivam & Ors, (2016) 10 SCC 386 case further refined the understanding of fraud in arbitration. The court determined that fraud disputes could only be arbitrated if the allegations were of such a serious nature that they amounted to a criminal offense or if the complexities of the allegations necessitated examination by a civil court. This judgment underscored the notion that not all fraud allegations are inherently non-arbitrable, but serious cases might require judicial intervention.
In Rashid Raza v. Sadaf Akhtar (2019) 8 SCC 710, the court introduced a “Two Working Test” to differentiate between serious and simple fraud allegations. This test aimed to assess whether the allegations of fraud permeate the entire contract and the arbitration agreement, potentially rendering them void, or if the allegations only pertain to the internal relations between the parties, lacking wider public implications. This distinction is crucial as it allows for a more nuanced approach to determining the arbitrability of fraud.
The trajectory of fraud’s arbitrability took a significant turn in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd, (2021), where the Supreme Court rejected the earlier notions that held fraud as non-arbitrable. The court emphasized that these outdated views were based on concerns about voluminous evidence, the perceived lack of expertise among arbitrators, and misconceptions about the adequacy of the arbitral regime and public policy considerations. By affirming the arbitrability of fraud, the court opened the door for a more flexible approach to handling such disputes in arbitration.
Conclusion
Understanding the concept of arbitrability is vital for effective dispute resolution through arbitration. While many civil disputes fall within the scope of arbitration, certain categories—especially those involving public interest or statutory exclusions—must be resolved in court. As arbitration law continues to evolve, staying informed about the intricacies of arbitrability will empower parties to navigate this important mechanism effectively, ensuring efficient and fair resolution of disputes. By recognizing which disputes are suitable for arbitration, parties can make informed decisions, ultimately leading to more effective and timely conflict resolution.