Arbitrability of Disputes

Arbitrability asks whether the law permits a particular dispute to be resolved by a private tribunal at all. The Arbitration and Conciliation Act, 1996 nowhere lists the subjects that are excluded; Section 2(3) merely saves any other law by virtue of which certain disputes may not be submitted to arbitration. The content of the doctrine is therefore judicial. It rests on the distinction between rights in rem and rights in personam drawn in Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532, and on the four-fold test stated in Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1.

1. Three Questions Called Arbitrability

The word is used in three different senses, and confusing them is the commonest error in answering a question on this subject.

Subject-matter arbitrability. Whether the law permits a dispute of this kind to be arbitrated at all. This is the doctrine proper, and the answer does not depend on what the parties agreed.
Scope. Whether this particular dispute falls within the words of the arbitration clause. This is a question of construction of the agreement, decided by the tribunal under Section 16.
Jurisdiction. Whether the tribunal has been validly constituted and the claim properly brought before it. This too is for the tribunal in the first instance under Section 16.

Only the first is arbitrability in the strict sense, and only the first cannot be cured by agreement. Parties cannot confer on a private tribunal the power to decide a matter which the law has reserved to a court or to a statutory forum, however clearly they may have agreed to do so.

2. The Foundational Statement

📖 Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532

Held: Disputes relating to rights in personam are considered amenable to arbitration, while disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited to private arbitration. A subordinate right in personam arising from a right in rem is nevertheless arbitrable. Six categories were listed as generally non-arbitrable: disputes relating to rights and liabilities which give rise to or arise out of criminal offences; matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights and child custody; guardianship matters; insolvency and winding up matters; testamentary matters such as the grant of probate and letters of administration; and eviction or tenancy matters governed by special statutes conferring jurisdiction on designated courts. A suit for enforcement of a mortgage by sale was held to be an action in rem and therefore not arbitrable.

Significance: The rights in rem test and the six categories remain the standard starting point, and the later formulation supplements rather than displaces them.

A right in rem is a right available against the world at large; its determination affects persons who are not before the tribunal and cannot be left to a proceeding to which they are strangers. A right in personam is available against a determinate person and is within the disposition of the parties, who may compromise it. The refinement about subordinate rights explains most of the modern case law: a claim for damages for breach of a licence of a patented invention is arbitrable although the validity of the patent is not, because the former is a right in personam arising out of the latter.

3. The Four-Fold Test

📖 Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1

Held: A dispute is not arbitrable when the cause of action and the subject matter relate to an action in rem that does not pertain to a subordinate right in personam arising from a right in rem; when they affect third party rights, have an erga omnes effect and require centralised adjudication where mutual adjudication would be inappropriate; when they relate to the inalienable sovereign and public interest functions of the State; or when the subject matter is expressly or by necessary implication made non-arbitrable by a statute. Landlord and tenant disputes governed by the Transfer of Property Act, 1882 are arbitrable, while those governed by rent control legislation conferring jurisdiction on a designated forum are not. The view that any allegation of fraud renders a dispute non-arbitrable was overruled.

Significance: The test is now the governing formulation. It is a set of four disqualifications, so a dispute falling within any one of them is outside arbitration, and a dispute falling within none of them is arbitrable.

The present position by subject matter, with the authority for each

4. The Categories Applied

4.1 Fraud

The law moved in three stages. An early view treated serious allegations of fraud as requiring trial by a court, on the footing that they involved elaborate evidence and reflected on reputation. That distinction between simple and serious fraud proved unworkable.

📖 Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd., (2021) 4 SCC 713

Held: Allegations of fraud are arbitrable, and only two situations take a dispute outside arbitration on this ground: where the arbitration clause itself cannot be said to exist, as where the agreement is vitiated by fraud, and where the allegations of arbitrary, fraudulent or malafide conduct are made against the State or its instrumentalities, raising questions of public law rather than contractual disputes between the parties.

Significance: Read with Vidya Drolia, this settles that ordinary allegations of fraud in the performance of a contract, however serious, go to the tribunal.

4.2 Consumer disputes

📖 Emaar MGF Land Ltd. v. Aftab Singh, (2019) 12 SCC 751

Held: A complaint under the consumer protection legislation is not liable to be referred to arbitration under Section 8 even after the amendment of 2015. The remedy before the consumer fora is a special remedy conferred by a beneficial statute in addition to other remedies, and an arbitration clause in a standard form contract does not oust it.

Significance: The bar operates at the instance of the consumer. A consumer who chooses to arbitrate may do so; the supplier cannot compel him to leave the consumer forum.

4.3 Trusts, companies and insolvency

Disputes between a trustee and beneficiaries under the Indian Trusts Act, 1882 were held non-arbitrable in Vimal Kishor Shah v. Jayesh Dinesh Shah, (2016) 8 SCC 788, on the ground that the Act provides a complete machinery and confers jurisdiction on the civil court by necessary implication. A petition for relief against oppression and mismanagement under Sections 241 and 242 of the Companies Act, 2013 is not arbitrable, because the reliefs the Tribunal may grant operate against the company and affect members and creditors who are not parties. Proceedings under the Insolvency and Bankruptcy Code, 2016 are proceedings in rem once admitted, and the moratorium under Section 14 then bars arbitration against the corporate debtor.

4.4 Property and specific relief

A suit for enforcement of a mortgage by sale is not arbitrable, following Booz Allen. An action for cancellation of a deed under Section 31 of the Specific Relief Act, 1963 has been held to be an action in personam between the parties to the instrument, and therefore arbitrable, notwithstanding the direction in that section for delivery of the instrument to be cancelled. A claim for specific performance of a contract for sale is arbitrable, since the right asserted is contractual.

5. Who Decides, and When

Arbitrability can be examined at five points in the life of a dispute, and the standard differs at each.

Stage	Provision	Standard applied
Reference by a judicial authority	Section 8	Prima facie only; the court refuses reference only where it is manifest that the subject matter cannot be arbitrated
Appointment by the court or institution	Section 11	Prima facie examination of the existence of the agreement; when in doubt, the matter goes to the tribunal
Before the tribunal	Section 16	Full examination; the tribunal rules on its own jurisdiction
Challenge to the award	Section 34(2)(b)(i)	The court may set aside an award if the subject matter is not capable of settlement by arbitration under the law for the time being in force
Enforcement of a foreign award	Section 48(2)(a)	Enforcement may be refused on the same ground

⚠ The referral court does not decide arbitrability

Vidya Drolia settles that at the stage of Section 8 or Section 11 the court examines only the existence and validity of the agreement, and does so prima facie. Non-arbitrability may be considered at that stage only where it is clear on the face of the record that the claim is ex facie non-arbitrable, so that referring it would waste time and cost. In every other case the question goes to the tribunal under Section 16, and the court's opportunity comes later under Section 34. The working formula is that when in doubt, the court refers.

6. Consequences of Getting It Wrong

An award on a non-arbitrable subject matter is liable to be set aside under Section 34(2)(b)(i), and the court may take the point of its own motion, since the ground does not depend on proof by a party. Enforcement of a foreign award may be refused under Section 48(2)(a) on the same ground. Non-arbitrability is therefore not waived by participation in the arbitration, which distinguishes it from the procedural objections covered by Section 4. A party who has taken part in an arbitration on a subject the law reserves to the courts may still resist the award.

7. Related Topics and Provisions

Topic or provision	Connection
The Arbitration Agreement and Reference: Sections 7 and 8	The agreement, the reference and the prima facie standard
Reference to Arbitration under Section 8	The conditions and the scope of examination
Sections 2(3), 16, 34(2)(b)(i) and 48(2)(a), A&C Act, 1996	The provisions through which arbitrability operates
Sections 241 and 242, Companies Act, 2013	Oppression and mismanagement as a reserved jurisdiction
Sections 7, 9 and 14, Insolvency and Bankruptcy Code, 2016	Admission, the moratorium and proceedings in rem
Consumer Protection Act, 2019	The special remedy that survives an arbitration clause