Updated: Apr 17
- Madhav Ved
In a recent landmark judgement the Hon’ble Supreme Court laid down which disputes are Arbitrable. The issue has been a point of dispute before as well, and the Hon’ble Supreme Court has laid down principles in order to determine the disputes which may be referred to arbitration.
In Vidya Drolia the matter was referred to the three-judge bench from a civil appeal. It primarily examined the question of landlord-tenant disputes being Arbitrable.
The court was faced with the first challenge, i.e. who was the authority to decide the question of non-arbitrability. Before the Vidya Drolia case, there have been various other judgements determining the issue in question.
It must be noted that in the event of the existence of an arbitration agreement the jurisdiction of a civil court gets ousted. Hence, at the time of reference to the court disputing the arbitration agreement, only the existence of the agreement under 11(6A) is to be settled and nothing else.
The court commenced by defining the scope of ‘non-arbitrability’. The court then further delves into the Contract Act, stating S. 10, S. 2(g) & (h), of the Act would imply that an arbitration agreement must satisfy the objective mandates of the Act in order to qualify as an agreement. It also stated that a ‘matter’ as referred under section 8 cannot be bifurcated or separated and the subject matter must be taken as a whole. The court also referred to Booz Allen wherein Justice Raveendran held that the scope of judicial reference under section 8 is limited only to the existence of the agreement. The statute by itself does not define the disputes which are not Arbitrable. In the same judgement, it stated that disputes relating to right in personam are Arbitrable whereas actions arising from right in rem cannot be referred to arbitration. However, it also held that landlord-tenant disputes are not Arbitrable.
The court also drew a parallel between the Consumer Protection Act, Industrial Disputes Act, 1947, and Indian Trusts Act, 1882 stating that these statutes provided for specific mechanism and implementation with a different set of objectives hence the same have been kept outside the ambit of the Arbitration.
Sovereign functions of the state as well cannot be submitted to arbitration. It also held that the mere creation of a specific forum for a class of disputes cannot be laid as a test to determine the arbitrability of the dispute.
The court then expounded upon the doctrine of election wherein arbitration as a method of dispute resolution is available only if the law accepts arbitration as an alternate remedy. When in any case there is repugnancy and inconsistency, the right to choose an election is denied.
It overruled the ratio laid down in HDFC Bank Ltd. v. Satpal Singh Bakshi which held that disputes under the DRT Act, are Arbitrable. The court stated that in such a case it would deny and deprive the rights and remedies provided to the financial institutions under the Act.
The court then further examines the section 34(2)(b)(i) and (ii) where an award may be challenged if the matter is not capable of settlement by arbitration or it is in conflict with the public policy of India.
The court propounded a four-fold test for determining which disputes are not Arbitrable.
(1) 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.
(2) when cause of action and subject matter of the dispute affects third party rights; have erga omnes effect (i.e. towards all/ everyone) ; require centralized adjudication, and mutual adjudication would not be appropriate and enforceable;
(3) 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
(4) when the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s).
The tests however are not watertight compartments and can overlap and must be used pragmatically.
When determining the second question at hand i.e. who decides the arbitrability, the court held that this can be determined at three stages of the proceedings. (i) under section 8 or 11 when the reference is made, (ii) during the course of arbitration itself, (iii) under s. 34 when the award is challenged.
The court relied upon a number of authorities and papers to substantiate this part of the judgement. It then further relies on the principle of competence-competence which under S. 16(1) provides for the tribunal to settle the issue in question to its own jurisdiction. The court also interpreted the phrase ‘existence of agreement’ in section 11 to also include within its ambit its validity. An agreement can be said to exist only when it can become enforceable hence bringing along with it the validity of such agreement. It held that a limited intervention at the reference stage is required in order to provide for an effective arbitration process.
The principles of interpretation in arbitration agreements were also elucidated. There are predominantly three basic principles for interpretation of arbitration agreements. (i) wide approach, pro-arbitration where in case of doubts it is assumed that such a dispute will be covered by arbitration; (ii) narrow approach, restrictive interpretation wherein it is reasoned that arbitration is viewed as an exception to the judicial system and hence judicial authority shall prevail; and (iii) intention of the parties entering into the agreement is looked into and the scope of the agreement is determined. The approach can be determined depending upon the facts and circumstances of the case and the usage of words like ‘all’, ‘any’, ‘in respect of’, ‘arising out of’ etc. which expand the scope of the agreement.
Hence, it was held that section 11 ‘existence of arbitration agreement’ would also cover within its sphere the non-arbitrability of a dispute. The scope of whether the subject matter.
Madhav Ved is a fifth year student at Pravin Gandhi College of Law, Mumbai.
Vidya Drolia & Others v. Durga Trading Corporation, 2019 SCCOnLine SC 358. Booz Allen and Hamilton Inc v. SBI Home Finance Ltd. & Others, (2011) 5 SCC 532. Referred in case of Emaar MGF Land Limited v. Aftab Singh (2019) 12 SCC 751; Vimal Kishor Shah and Ors. v. Jayesh Dinesh Shah and Other (2016) 8 SCC 788; Transcore v. Union of India and Another (2008) 1 SCC 125. HDFC Bank Ltd. v. Satpal Singh Bakshi, 2012 SCC Online Del 4815. Pradeep Nayak, Vikas Mahendra Vidya Drolia: A dollop of nectar and a few poison darts, Bar and Bench - Indian Legal news, https://www.barandbench.com/columns/vidya-drolia-dollop-of-nectar-few-poison-darts. Arbitration - Supreme Court propounds test for non-arbitrability | Lexology“. Lexology.com, https://www.lexology.com/library/detail.aspx?g=a8e85bfb-0f86-4559-9c23-1c3098ce00f