What is Arbitrability
-Shashank Mehrotra*
In simple terms, arbitrability refers to the determination of whether a legal dispute should be resolved by the process of arbitration.
Arbitration is a process in which a dispute is submitted, by agreement of the parties, to one or more arbitrators who make a binding decision on the dispute. In choosing arbitration, the parties opt for a private dispute resolution procedure instead of going to court.
The concept of Arbitrability could be seen to stem from Article II of the New York Convention[i], which provides for each state to have a written document signifying the “subject matter capable of settlement by arbitration.” Article V of the same convention reinforces the concept of arbitrability by laying down that a court can set aside an arbitral award if it finds that the subject matter of the arbitration was not capable of being arbitrated upon by the state’s municipal laws.
Such non-arbitrability of a dispute renders the entire agreement invalid, which puts the dispute beyond the jurisdiction of the arbitral tribunal, and the award unrecognizable and unenforceable.
Importantly, Arbitrability may refer to three questions-
- “Whether there is an arbitration agreement?
- Whether the dispute is beyond the scope of the agreement?
- Whether the subject matter is arbitrable?”[ii]
The Statutes
Although the question of arbitrability has largely been left for the courts to determine, sections of the Indian Arbitration Act do have some references to Arbitrability giving courts broad contours to operate within while adjudicating upon the same.
Section 2(3) of The Arbitration and Conciliation Act, 1996 recognizes non-arbitrability by laying down that if certain disputes by virtue of laws applicable must be referred to a particular court, they may not be referred to Arbitration.
Section 34(2)(b) and 48(2) of the Act further lay down that courts are empowered to set aside the award granted on the grounds that the subject matter of the dispute is not arbitrable.
Critically, the Act does not specifically demarcate those subject matters which would not be arbitrable, and this was left to the courts wisdom to decide ex visceribus act. We shall now look at how the Courts have approached this problem over time.
I. The Booz Allen Case
The question of arbitrability is one, which according to the Booz Allen[iii] case, revolves around the determination of three factors. Firstly, whether claims made in certain scenarios that the subject matter of the dispute is one which cannot be determined by a private tribunal but a public tribunal such as a court of law. Secondly, whether the dispute is one which is covered by the arbitration agreement, or if it falls under the “excepted matters”, hence taking it out of the purview of arbitration. Thirdly, the dispute must be one which has the capability of being adjudicated upon and settled by arbitration.
The Court importantly noted here that the “nature of rights” was a key element in the determination of arbitrability as well. Only disputes arising out of claims of violation of rights in personam could be arbitrable, and not those concerning rights in rem. However, the court also held, taking note of a statement given by Mustill and Boyd[iv], that subordinate rights originating from rights in rem would remain arbitrable.
The Court further noted that though some issues highlighted in the mortgage suit filed were arbitrable, their mere presence in the suit would not render the whole suit arbitrable. Those issues in the suit though capable of being arbitrable in themselves, could not be divided from the mortgage suit. The Court borrowed the reasoning from its earlier decision in Sukanya Holdings (P) Ltd. v. Jayesh H.Pandya[v] to back its decision, and rule that bifurcation of claims of arbitration was not possible.
II. Vidya Drolia Case
Recently, the Supreme Court in Vidya Drolia[vi]case made further observations, giving four concise principles.
The Court importantly re-affirmed that bifurcation of claims for arbitration was not possible. Bifurcation here refers to having only some claims to be decided by the tribunal and others by a court. This, the court observed, would defeat the purpose of the Arbitration Act itself as it would lead to an increase in litigation costs and time consumed. The Court further differentiated between non-arbitrable claims and non-arbitrable subject matter. It described the former as those claims which are outside the purview of the arbitration agreement, as well as those which are not capable of being resolved through arbitration. Non- arbitrability of subject matter on the other hand implies that the dispute is one which cannot be legally referred for arbitration because of a law to the contrary.
The court further clarified the ‘nature of rights’ issue as analyzed by Booz Allen. The Court here asserted that the rights approach may be fallacious keeping in mind the interplay of the rights in rem and personam. The court instead laid down that the distinction which must be noted is one between the judgements in rem and the judgements in personam. Importantly, the judgements in rem would operate against the whole world, and those in personam would only operate with respect to the contesting parties. Therefore, arbitration awards only acting as the latter would be legal and not those having an erg omnes effect.
The court also held that the disputes involving sovereign functions of the state cannot be held to be arbitrable and must be decided by a judicial forum. Moreover, matters concerning divorce, patents, and citizenships cannot be arbitrable unless expressly allowed by a legislation. This is an affirmation of the principle of subjective arbitrability originating from the UK according to which the State may not enter into the arbitration process because of its status or a particular function.[vii]
Subjective Arbitrability, also known as “arbitrability ratione personae”, is defined as the ability of individuals and entities to submit their disputes for arbitration. It covers the capacity of the parties to contract and submit disputes for arbitration, and finds recognition in Article V(1)(a) of the New York Convention. Across the world, it mostly finds application in acting as a bar for the state or a state functionary preventing it from submitting a dispute involving a sovereign function to arbitration.
The court also analyzed the question of implied non-arbitrability, or arbitration excluded by an implied legislative intention. The court here reasoned that dispute coming under the purview of acts wherein special tribunals have been set up to enforce certain special rights, arbitration cannot be used. The Court held that in case of a mandatory law providing so, the person filing the claim must file it only in the concerned fora and not in any other tribunal. The court did so by delving into the doctrine of election, an oft evoked principle to defend the use of arbitration. This doctrine has three elements to it, existence of two or more remedies; inconsistency in the remedies; the choice to go ahead with one. However, once the scope of remedy by arbitration stands extinguished by the law, only one remedy actually remains. The right to choose arbitration stands extinguished if that right is inconsistent with an existing law. The Court promulgated a test here to determine inconsistency. The test requires analyzing the text of the law, its legislative history and the “inherent contradiction” in arbitration and the statute.
The Court further concisely put forward four principles for determining non-arbitrability They were-
“(1) when cause of action and subject matter of the dispute relates to actions in rem, that do not pertain to subordinate 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; 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).”
III. Conclusion
The nature of Arbitration is such that there will always be a party dissatisfied with the outcome and in hopes of reversing their fortunes challenges the award in court, often on the grounds of it being non arbitrable in nature. Though the court is meant to be limited to decide merely upon the jurisdiction of the tribunal, Indian courts in the past have been kept to interfere in the subject matter of the dispute as well. This makes the process time consuming, defeating the purpose of the Arbitration Act itself.
The Vidya Drolia case is a step in the right direction as India attempts to rebrand its image as a “pro-arbitration” country. It has defined strict contours and procedures for judicial bodies to navigate within, without spending resources with the substantive part of the decision.
[i] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 330 UNTS 38
[ii] Homayoon Arfazadeh, Arbitrability under the New York Convention, 17 ARBITRATION INTERNATIONAL 73(2001).
[iii] Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532
[iv] MICHAEL J MUSTILL & STEWART C BOYD, Commercial Arbitration(1st ed 2001).
[v] (2003) 5 SCC 531
[vi] Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1
[vii] Julian D. M Lew, Arbitration In England (1st ed. 2013).
* Shashank Mehrotra is a Second year student at the National Law University, New Delhi