Arbitrability Of Disputes And Alternative Standard Of Tests
While the importance of Arbitration as an important avenue for resolution of dispute has consistently been emphasised by the Indian judiciary through various judicial pronouncements there still exists a considerable lacunae in the interpretation offered towards the advancement of this thought process. In more than a few instances, the intervention of judiciary has proved to be an unwanted thorn in ensuring the much-needed consistency within the discourse. The necessity for coherent and logical pronouncements, commensurate to the changing needs of time, cannot be emphasised any better. Yet, there exists several glaring voids within this discourse that requires immediate attention. One such important issue is the ‘arbitrability’ of disputes, which goes to the very root of arbitral process. The present issue does not concern itself with the arbitrability of those disputes which are specified in the contract. Rather the issue here is regarding the subject matter, i.e. areas of law, which can be arbitrated by a private forum through this process.
While it is axiomatic to state that not all disputes can be arbitrated, the question over species of subjects that falls under genus of non-arbitrability has given rise to unforeseen quandaries restricting the scope of arbitration at times.
Typically, the question over arbitration can arise at three stages in arbitration (Russel on Arbitration, 23rd Edition at Page 15).
- On an application to stay arbitration.
- When the opposing party questions the authority of the tribunal to entertain the subject matter of arbitration.
- On an application challenging the award.
In the Indian context, the above-mentioned situation arises under Section 9, Section 16 and Section 34 respectively.
The piquant question though came up for consideration several times before the judiciary, it was in the landmark decision of Booz Allen and Hamilton Vs. SBI Home Finance Limited and others (2011) 5 SCC 532 that an attempt was made to rationalise the issue, while analysing the true scope of the problem involved. The primary question that was considered by the bench in the case was to adjudicate the true scope and import of the term arbitrability of a subject matter. In other words, what are the subject matters that cannot be adjudicated through a private arbitration due to its inherent nature and what is the framework upon which the arbitrability of a subject matter can be tested.
Commenting on the ability of an arbitral tribunal to adjudicate certain disputes it states that ‘every civil or commercial dispute, either contractual or non-contractual, and which can be decided by a court, is in principle capable of being adjudicated and resolved by arbitration unless it is excluded either expressly or by necessary implication.’ The express or implied exclusion stated in the decision is based on the limitation imposed due to overarching public policy considerations. Furthermore, the decision enunciates several examples of non-arbitrable disputes, which are
- 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, child custody;
- guardianship matters;
- insolvency and winding up matters;
- testamentary matters (grant of probate, letters of administration and succession certificate); and
- eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.
The framework upon which the list is enunciated is the nature of rights that is sought to be enforced. The primary test prescribed is whether the subject matter of reference relates to action in rem, in case of which it would fall outside the scope of powers provided to an arbitral tribunal under the Arbitration Act. The test restricts those rights, adjudication of which shall affect the rights of third parties who are not privy to the arbitration agreement. The underlying principle for such a restriction is that such rights in rem come within the protection offered by a state as its duty towards its citizenry. The sovereign duty to enforce such rights cannot be delegated to a private adjudicatory forum, delegation of which would go against the public policy. Hence, applying this test, only in personam rights can be referred to arbitration.
While this may sound straight forward enough as a solution to determine the arbitrability of a subject matter, the subjective nature of the test makes it a tool which can be applied rather too liberally leaving much scope for restricting the subject matters which can be arbitrated. This can prove counter-productive for the whole arbitration eco-system. The ambiguity of this test is primarily due to its subjective nature, which provides much leeway to take away many subjects from the scope of arbitration. Going merely by this test, if, for an example, when a dispute involves enforcement of intellectual property rights at the first blush it can easily be rejected as a right in rem and hence incapable of being arbitrated, since all forms of intellectual property rights are recognised in rem. However, when one takes into consideration the nature of reliefs sought for, in most cases, it can easily be distinguished from the enforcement in rem IP rights. The observation made by Raveendran J. in the Booz Allen (Supra) case acquires significance here.
“Generally and traditionally all disputes relating to rights in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration. This is not however a rigid or inflexible rule. Disputes relating to sub-ordinate rights in personam arising from rights in rem have always been considered to be arbitrable.”
Problem arises when the distinguishing features of such subordinate rights which is sought to be enforced is not taken note of and a blanket assessment of test prescribed in Booz Allen is preferred, restricting the scope of arbitration clauses. It would be too broad a proposition to state that any dispute involving rights in rem due to its inherent nature are incapable of arbitration. Whenever such disputes arises it will be prudent to give widest possible interpretation to the arbitration clause to see whether the dispute falls within its scope or not, to further the cause. A recent decision of Eros International Media Limited Vs. Telemax Links India Pvt. Ltd. and Ors. (Suit No. 331 of 2013) by Bombay High Court articulates this in the best possible manner. Drawing analogy striking between the IP rights like Trademark et al and other property rights the judgement concludes that albeit all those rights are in a sense a protection conferred to an individuals’ right over a property against the whole world, the enforcement of such rights are still done against individuals, making it an in personam right subordinate to the in rem rights conferred upon them.
A contrary parochial interpretation with a blanket assessment has been offered by a recent pronouncement of Supreme Court in the case of Shri Vimal Kishor Shah & Ors. Vs. Mr. Jayesh Dinesh Shah & Ors. (Civil Appeal No.8164 of 2016). In this case, issue that arose for consideration was the arbitrability of an issue arising out of trust deed. In order to resolve such inconsistencies, as noted above, it is imperative that the standard of test prescribed in Booz Allen (Supra) should be modified to test the dispute involved upon the nature of reliefs sought rather than mechanically testing the subject as a whole in its widest ambit. Such moves ends up restricting the scope of arbitration act as a whole. The decision of Bombay High Court discussed above is a welcome move towards ensuring the achievement of real intent behind the Arbitration and Conciliation Act.