The Viewpoint: Arbitrability and non-arbitrability of disputes

Arbitration is one of the methods of private dispute resolution whereby two or more parties agree to resolve their disputes through an arbitral tribunal. It is an alternative to adjudication by the courts established by law. The Arbitration and Conciliation Act, 1996 governs the law related to domestic arbitration, international commercial arbitration, enforcement of foreign awards and conciliation.

Arbitration involves the creation of an agreement between contracting parties to appoint an arbitrator chosen voluntarily by the parties for resolution of their dispute.

It has become a preferred mode for companies and parties to resolve business disputes as the process of litigation takes a longer time. As per the 2019 amendment to the Arbitration and Conciliation Act, 1996, an award is to be made by the arbitral tribunal within 12 months from the date of completion of pleadings. Under Section 29A of the Act, the period of 12 months may be extended by the consent of the parties by another 6 months. By virtue of Section 23(4) of the Act, the filing of statement of claim and statement of defence shall be completed within a period of 6 months from the date the arbitrator(s) receives notice of their appointment. Recent legislative changes have been made to the Act with an object to speed up the arbitration process.

There are certain categories of proceedings which are reserved by the legislature for adjudication by public fora such as courts and tribunals. The Arbitration and Conciliation Act recognises that certain disputes are not capable of being resolved through arbitration. Section 34(2) (b)(i) and Section 48(2) of the Act provide that the court may set aside an award when it is found that the subject matter of the dispute is not capable of settlement by arbitration. However, the Act is silent insofar as specifically listing which matters are non-arbitrable.

The term ‘arbitrability’ has different meanings in different contexts. The following are three facets of arbitrability, relating to jurisdiction of the arbitral tribunal: (i) whether the disputes are capable of adjudication and settlement by arbitration having regard to their nature; (ii) whether the disputes are covered by the arbitration agreement or fall under the ‘excepted matters’ excluded from the scope of arbitration and (iii) whether the parties have referred disputes to arbitration.

Instances of non-arbitrable disputes include those relating to rights and liabilities arising out of criminal offences, matrimonial disputes (divorce, judicial separation, restitution of conjugal rights), testamentary matters (grant of probate, letters of administration and succession certificate), and tenancy matters governed by special statutes where tenants enjoy statutory protection. The above instances pertain to actions in rem.

It is to be noted that a right in rem is a right exercisable against the world at large. On the other hand, action in personam relates to action which determines the rights and interests of the parties themselves in the subject matter of the dispute. Generally, all disputes relating to rights in personam are amenable to arbitration. On the contrary, all disputes relating to rights in rem are adjudicated by public fora like courts or tribunals.

Some of the other instances of non-arbitrable disputes are (a) insolvency disputes, (b) internal company disputes which have to be addressed by a centralised forum, (c) grant and issue of patents and registration of trademarks being exclusive matters falling within sovereign or government function, (d) criminal cases, as they are offences against the State and not just against the victim.

Landlord-tenant disputes to be decided as per the Transfer of Property Act, 1882, are arbitrable, as they pertain to subordinate rights in personam arising from rights in rem, which do not normally affect third party rights. These do not require centralised adjudication, and are not excepted from resolution by arbitration by the provisions of the Transfer of Property Act.

Criminal offences and matrimonial disputes cannot be the subject matter of arbitration. However, it is recognised that matters incidental thereto may be referred to arbitration. It is well settled that if in respect of facts relating to a criminal matter, viz. physical injury, if there is a right to damages for personal injury, then such a dispute can be referred to arbitration. Similarly, a husband and a wife may refer to arbitration the terms on which they shall separate, because they can make a valid agreement between themselves on that matter.

An agreement to sell property does not involve any transfer of right in rem. It will only create a personal obligation. Therefore, the specific performance of an agreement to sell is arbitrable. On the other hand, a claim for sale, foreclosure or redemption of mortgaged property is an action in rem, and therefore, it cannot be decided by an arbitral tribunal.

The issues of non-arbitrability can be raised by a party at three different stages. First, before a court on an application for reference to arbitration under Section 11 of the Act or for stay of judicial proceedings on an application under Section 8 of the Act. Under Section 11 of the Act, the court needs to investigate whether an arbitration clause exists in an agreement or whether the arbitration agreement was contained in exchange of letters, communications etc. The intent of the court is to minimise its intervention at the stage of appointment of arbitrator(s).

Section 8 of the Act prompts the court to refer the parties to arbitration, if the action brought before the judicial authority is the subject of an arbitration agreement, unless the court finds that prima facie, there does not exist any arbitration agreement. The courts, while analysing a case under Section 8 of the Act, may choose to identify the issues that require adjudication pertaining to validity of an arbitration agreement. If the court cannot rule on the invalidity of the arbitration agreement on a prima facie basis, then it should stop any further analysis and simply refer all the issues to arbitration.

Secondly, issues of non-arbitrability can be raised before the arbitral tribunal itself during the arbitration proceedings by filing an application under Section 16 of the Act. If there is a disagreement as to whether the dispute falls within the realm of the arbitration agreement, the arbitrator is given jurisdiction to form a view in the matter. The arbitrator is empowered to rule on its own jurisdiction.

Thirdly, issues of non-arbitrability can be raised before the court at the stage of challenge to the award or its enforcement (under Section 34 or Section 48 of the Act, as the case may be). The issue of non-arbitrability can be decided by the court or the arbitral tribunal.

The nature of non-arbitrability could also ascertain the level and nature of scrutiny and examination required by the court. The court examines whether the party has approached the appropriate High Court, whether there is an arbitration agreement and whether the party who has applied for reference is a party to such agreement. The scope of examination by the court exercising jurisdiction under Section 8 or under Section 11 of the Act, is prima facie in nature.

The court is not to enter into the merits of the case between the parties. Its role is only to examine whether the dispute is prima facie arbitrable under a valid arbitration agreement. This prima facie examination is intended to weed out non-existent or invalid arbitration agreements or non-arbitrable disputes, in cases where the litigation cannot be permitted to proceed. The proceedings before the courts are summary in nature and no trial or mini trial is warranted. Unless there is a clear case of non-existence of a valid arbitration agreement, or of the dispute being ex facie non-arbitrable, tested on the above parameters, the court normally leaves these aspects (jurisdiction and non-arbitrability) to be decided by the arbitral tribunal.

It is evident that through significant developments by way of judicial pronouncements, the question pertaining to ascertaining or determining arbitrability of disputes has narrowed down. Still, the arbitral tribunal is the preferred authority to adjudicate and decide questions of non-arbitrability. Courts examine the issue of non-arbitrability post the award within the limited scope available under Section 34 of the Act. Efforts should be made to recognise and respect the intention of the contracting parties.

The author is a Senior Partner at Singh & Associates.