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  • Kushager Relhan

Arbitrability: An International and Comparative Roadmap

INTRODUCTION


A. WHAT IS ARBITRABILITY?


The notion and rationale of arbitrability have been the subject of many scholarly debates since the last century. Some of the hotly debated concepts w.r.t to arbitrability have been public policy, the jurisdiction of the arbitral tribunal and the validity of arbitration a cote de arbitrability.


“Internationally, arbitrability refers to whether specific classes of disputes are barred from arbitration either because of public policy or because they are outside the scope of the arbitration agreement … arbitrability refers to whether the specific claims raised are of [a] subject matter capable of settlement by arbitration, and are not subject to the exclusive jurisdiction of … courts.… the term in the U.S. further includes the jurisdictional question that asks whether an arbitrator or a court should decide if a given dispute should be submitted to arbitration.”[1] Arbitrability is also categorized into “objective arbitrability” and “subjective arbitrability”. The former refers to ‘which’ matters can be referred to arbitration while the latter refers to ‘who’ can resort to arbitration.


B. RELEVANCE OF PUBLIC POLICY


Article V(2)(b) of the New York Convention deals with the issue of arbitrability, giving the national courts power to deny the enforcement of awards using public policy as a defence. This right is an acknowledgement “of the right of the State and its courts to exercise ultimate control over the arbitral process.”[2] Due to the element of dynamicity, public policy can crystallize into any classification as needed by the state to stop the enforcement of an award. But due to the vagueness in providing clear guidance and a pro-arbitration regime flourishing, public policy seems to have outlived its usefulness in providing clear-cult determinative classification on what is arbitrable and not and the focus has been on developing different criteria for determination of arbitrability. This viewpoint is also supported by Brekoulakis as he states “…the relevance of public policy to the discussion of arbitrability is essentially very limited, and therefore, the scope of inarbitrability should not be determined by reference to public policy.[3] He goes on to state that since arbitration rarely affects persons other than contractual parties to arbitration, public policy may act as a bad determinative of arbitrability and hence, efficiency i.e., the ability of the arbitral tribunal to dispose of the matter effectively should be the basis of determination.


There exist three main objections against the arbitrability of public policy disputes which are as follows,


1. Arbitration proceedings are said to have due process implications. There are certain characteristics which makes arbitration unfit to be the appropriate forum for such disputes such as less intensive fact-finding or less rigorous evidence rules or a dearth of proper cross-examination, discovery, testimony etc. This view has also been preferred by the U.S. Supreme Court in Alexander v. Gardner-Denver[4]. Limited/lack of reasoning in awards (stated by Justice Douglas in his dissent in Scherk v. Alberto-Culver[5]), stringent appeal process with limited reviewability (stated by Justice Stevens in his dissent in Mitsubushi Motor Corp v. Soler Chrysler Plymouth Inc.[6]) and private and confidential nature of arbitration are other due-process implications.


2. Arbitrator's ability to deal with public policy disputes as decision-makers as compared to judges is also been a hotly debated topic and this view has been preferred in a plethora of judgements such as American Safety Equipment Corp. v. J.P. Maguire & Co.[7] and University Life Insurance Co. v. Unimarc Ltd[8]. However, this argument may be questionable as it entails that national judges will have a better predisposition than arbitrators without taking into account the arbitrator’s technical and educational qualifications coupled with his area of expertise.


3. Whether the arbitrators will actually apply the necessary provisions rather than them being fit to apply. This argument may be the most valid one, especially in international arbitration, as the dispute related to public policy may take place in some different country and hence gives parties a way to escape such implementation. However, even this argument may be rejected as such national courts will have the option to check whether the principles of public policy were upheld before enforcement, known as ‘second-look’, advanced in Mitsubushi vs Soler.


C. ARBITRABILITY VIS-À-VIS VALIDITY OF ARBITRATION AGREEMENT AND JURISDICTION OF ARBITRAL TRIBUNAL


In many jurisdictions, the prevailing view has been that non-arbitrability of the subject matter of the dispute renders the whole arbitration agreement null and void.[9] However, invalidity and non-arbitrability are understood to be distinct from each other which, for example, it can be seen in the New York Convention (Art. V(1)(a) contains provisions relating to invalidity of arbitration agreement while Art. V(2)(b) contains non-arbitrability as a ground), German ZPO (arbitration agreement governed by s. 1029 while arbitrability by s. 1030) and Swiss PILA (Art. 178 governs arbitration agreement while Art. 177 governs arbitrability). Moreover, arbitration agreements can be understood to be sui generis contracts which have both, contractual as well as jurisdictional (bestows jurisdiction upon arbitral tribunal) features but the validity of such agreement ought to be the same as a substantive contract as any additional requirements will hinder its contractual nature and put it in a disadvantageous position.


It will be right to state that validity of the arbitration agreement and the arbitral tribunal’s jurisdiction are interlinked but the latter has a wider scope as jurisdiction over a claim will depend on various additional factors not related to the arbitration agreement (and such additional factors should contain arbitrability). Hence, it may be said that “Arbitrability is a condition precedent for the tribunal to assume jurisdiction over a particular dispute (a jurisdictional requirement), rather than a condition of validity of an arbitration agreement (contractual requirement)”[10].


This takes us to the next question, which forum should be given priority when determining arbitrability, national courts or the arbitral tribunals? Although, the general view is that both are given concurrent power to deal with the issue of arbitrability since it’s stated above that arbitrability is related to jurisdiction and not validity of arbitration agreements, it will be right to state that courts shouldn’t be given preference at a pre-award stage. The courts, at the pre-award stage, should be limited to checking whether there exists a valid arbitration agreement upon which the baton is handed over to the arbitral tribunal.[11]


D. ARBITRABILITY UNDER NYC


Article II(1) of NYC requires each contracting State to recognize an agreement in writing concerning a subject matter capable of settlement by arbitration. Arbitrability finds its place in Article V(2)(a) and V(2(b) which provide two broad grounds for refusal of enforcement and recognition of a foreign award, that subject-matter of the dispute isn’t capable of settlement by arbitration under the national laws and recognition or enforcement will be contrary to the public policy of that jurisdiction.

Mr. Gary B. Born notes, “together, these provisions permit the assertion of ‘nonarbitrability’ defenses to the recognition and enforcement of otherwise valid and binding international arbitration agreements and awards under the Convention”.[12]


It should also be noted that Article II(3) states that a national court should refer the parties to arbitration upon ascertaining the existence of a valid arbitration agreement, however, such referral can be refused if the agreement is found to be “null and void, inoperative or incapable of being performed.” The language of the provision has created confusion as it is silent about the applicability of lex fori or lex arbitri unlike Article V(2)(a) & (b) which states that lex fori will be applicable when carrying out recognition or enforcement of an award. Moreover, this provision is also against the view taken in the section above that arbitral tribunals should have exclusive jurisdiction at a pre-award stage as the words ‘inoperative’ and ‘incapable’ include arbitrability under their broad meaning.


E. ARBITRABILITY UNDER UNCITRAL MODEL LAW AND ARBITRATION AND CONCILIATION ACT, 1996


Model Law doesn’t list the specific categories of non-arbitrable disputes but does recognise arbitrability within its scope. Article 1(5) of Model Law recognises the superiority of state laws as per which certain disputes are non-arbitrable or arbitrable subject to state laws and not model law.


Article 8(1), along the same lines as NYC, bestows upon courts the power to refuse referral to arbitration if the arbitration agreement is deemed to be “null and void, inoperative or incapable of being performed”. Contrastingly, Section 8 of ACA which is similar to its model law counterpart doesn’t include the above-mentioned language i.e., “null and void, inoperative or incapable of being performed”. After the 2015 Amendments, however, the court has been given the power to refuse referral to arbitration if prima facie no valid arbitration agreement exists.


Section 45 of ACA which deals with NYC Convention Awards, is in line with the NYC Article II(3), and states that referral to arbitration can be refused if prima facie (added by 2019 Amendment) the agreement is found to be “null and void, inoperative or incapable of being performed”.


Section 34(2)(b)(i) and 32(2)(b)(ii) of Model Law states that the court can set aside an arbitral award if the subject matter of the dispute is not capable of settlement by arbitration under the state law or the award is in contrast to the public policy of the state. Section 34 of ACA has similar wordings with an explanation as to what would constitute a breach in public policy and the test followed to ascertain such a breach shouldn’t entail a review on the merits of the dispute (added by the 2015 Amendment).

Section 11 of the ACA deals with the appointment of arbitrators. After the 2015 Amendment, the scope of enquiry of the courts when appointing arbitrators was limited to ascertaining the existence of an arbitration agreement under the newly added sub-clause 6A and other preliminary questions were to be ascertained by the arbitral tribunal u/s 16 of ACA. Before the amendment, the courts could look into several preliminary questions besides the existence of an arbitration agreement and this position was strengthened in National Insurance Co. Ltd. v Boghara Polyfab Pvt. Ltd.[13] However, even after the 2015 Amendment, courts seem to have taken contradictory views at the time (see for example, United India Insurance Company Ltd. vs. Antique Art Exports Pvt. Ltd.[14]). The courts seem to have taken the word “validity” and “existence” to go hand-in-hand citing the 246th Law Commission Report. However, the 2019 Amendment removed sub-clause 6A in lieu of institutionalization of the appointment procedure. The 2019 amendment was discussed in Mayavati Trading Pvt. Ltd. vs. Pradyuat Deb Burman[15] and the court’s reasoning is since the arbitrators will be appointed by an arbitral institution and not by the courts, the position prior to the 2015 amendment is legislatively overruled. However, the fortification of this viewpoint is still debated.


ARBITRABILITY AND ROLE OF INDIAN JUDICIARY (NOTE: This section only discusses cases before 2020)


Due to the ACA not containing any provision dealing with the classification of non-arbitrable disputes, it is the Judiciary which has been tasked with settling the correct position. The most contentious issue has been “subject-matter arbitrability” as Indian Courts have, time after time, considered several disputes ‘non-arbitrable’ due to any specific Indian Law not allowing the settling of such disputes via arbitration.

Booz Allen and Hamilaton v. SBI Home Finance Limited & Ors.[16] was the foremost case which dealt with the issue of “subject-matter arbitrability”. The bench categorized the issue laying down the “Test of arbitrability” as per which rights in rem were to be adjudicated exclusively by the civil courts and public tribunals while rights in personam could be adjudicated through arbitration. However, it was observed in N. Radhakrishnan v. Maestro Engineers & Ors.[17]. that a party, with a motive to escape arbitration, may try to frustrate the arbitration process by bringing the dispute under the exclusive purview of the courts by exploiting the test of arbitrability and bringing their personal rights into the domain of rights in rem.


Although the ratio set in Booz Allen may not be called pro-arbitration, the seeds for the pro-arbitration regime materialized in this case as the bench when laying down the test also stressed upon the test not being “a rigid or inflexible rule”.


A. FRAUDS

It was in A Ayyasamy v. A Paramasivam & Ors[18]. when the Apex court delivered a judgement on the issue of arbitrability of fraud with a pro-arbitration approach ending the conundrum created by N. Radhakrishnan. The court in the latter-mentioned judgement relied heavily on Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak[19] which was dealt with under the 1940 Act and offered wider discretion to the courts to decide upon jurisdiction, a position which has been since changed u/s 8 of the ACA. However, it should be noted that the court didn’t stray away completely from the reasoning in N. Radhakrishnan as it held that serious allegations of fraud which require detailed and extensive evidence evaluation will still not come under the ambit of arbitration while simple allegations of fraud can be tried by the arbitral tribunal upon proving the existence of valid arbitration agreement. The bench, to focus on arbitration’s valuable feature of party intent, also cited UK Judgments[20] explaining that the chances of a businessman engaging in two separate forums to deal with two issues relating to one dispute are negligible and inconceivable. This judgement is considered seminal due to the obiter upholding the ideals as stated u/s 8, u/s 16 (kompetenz kompetenz), party autonomy and doctrine of separability.


As the Apex Court in A. Ayyaswamy didn’t shed light upon a clear distinction of serious and simple frauds, an attempt to categorize the same was made in Rashid Raza vs. Sadaf Akhtar[21], by laying down a twin test,


1. Does this plea permeate the entire contract and above all, the agreement of arbitration, rendering it null and void?

2. Whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain?

Hence, the position of law on the issue of arbitrability of simpliciter fraud can be interpreted to include these three grounds, allegations which do not (a) impact public domain, (b) vitiate the entire contract rendering it void, (c) nullify the arbitration agreement.


B. TENANCY

The courts have taken an anti-arbitration approach when it comes to tenancy disputes following along the same lines as Booz Allen, the position was cemented in Himangi Enterprises v. Kamaljeet Singh Ahluwalia[22] in which the Court held the civil courts will practice exclusive jurisdiction when a dispute falls under a special rent legislation.


C. INTELLECTUAL PROPERTY DISPUTES

The jurisprudence on arbitrability of disputes w.r.t IP disputes has not reached a conclusion yet. While in Eros International Media Limited v. Telemax Links India Pvt. Ltd. and Ors[23]., the Bombay High Court acknowledged the right to arbitration under IP disputes stating that contractual disputes over IP infringement come under the ambit of right of personam and are hence arbitrable. The overlying copyright, however, remains to be right in rem. But in Indian Performing Right Society Limited (IPRS) v. Entertainment Network[24], the High Court didn’t allow copyright infringement disputes to be arbitrable as various remedies such as injunctions, damages, etc. can only be awarded by a civil court. However, in Lifestyle Equities CV v. QD Seatoman Designs Pvt. Ltd[25], Madras High Court addressed the conundrum created by A. Ayyasamy (patents, copyrights and trademarks were held to be non-arbitrable in its obiter) by stating that the court’s opinion in A. Ayyasamy should be considered scholarly as it doesn’t form part of the ratio. Hence, the court held patent infringement to be right in personam.


D. EXCLUSIVE JURISDICTION UNDER SPECIAL STATUTES

There exists a conundrum related to exclusive jurisdiction bestowed upon a particular court/forum under a special statute. This position has also been accepted in seminal judgements such A. Ayyasamy and Himangi Enterprises. The Competition Commission of India is given exclusive jurisdiction which makes competition law disputes non-arbitrable, a position favoured in Union of India v. Competition Commission of India[26]. However, in various cases, the courts have allowed arbitration of disputes despite the existence of special courts/forums (for example see, HDFC Bank Limited v. Satpal Singh Baksh[27]).


ARBITRABILITY IN 2020


Several cases related to arbitrability were dealt with by the Judiciary in 2020 and brief insight into them will be provided in this section.


Madhya Pradesh H.C. in January reiterated certain judicial precedents in Narendra Singh vs Ashendra Mishra[28]. Firstly, the bench held that for an agreement to be considered an arbitration agreement, it has to have certain essential attributes as discussed in K.K. Modi v. K.N. Modi [29]which was missing in this case as the parties agreed to the decision of the arbitrator to not be binding and final. Moreover, the bench refers to A. Ayyasamy also stated that since the dispute involved trademark infringement and serious allegations of fraud relating to fabrication, the same cannot be held to be arbitrable and have to be tried in a civil court by leading evidence.


Similarly, in Pilakkandi Ajmal vs Pilakkandi Ajmal[30], Kerela H.C. held that even if there exists an arbitration clause for the dissolution of partnership and rendition of accounts, the existence of serious allegation of fraud puts such disputes outside the purview of arbitration.


The Gujarat High Court in the case of Mohammadali Mohammadhusain vs. Universal Icon Builders[31] while upholding the decision passed by the civil court, held the dispute to be arbitrable. Relying on catena of judgments such as A. Ayyasamy, Ameet lalchand Shah and applying the Rashid Raza Test while examining the arbitrability of fraud, the court reiterated that a mere allegation of fraud which doesn’t relate to the execution of arbitration agreement will not vitiate such agreement and additionally, the case of fraud presented by the petitioner neither finds support in pleadings nor has been able to satisfy court of the serious and complex nature of allegations.

In one of the landmark judgements i.e., Avitel Post Studioz Ltd. v. HSBC PI Holdings[32], the bench provided an explanation of what exactly would constitute “serious allegations of fraud”. For a serious allegation of fraud to not be arbitrable, either of the two scenarios has to be met, known as ‘fraud exception’:


1. The arbitration agreement cannot be said to exist due to it being vitiated by fraud. However, section 16(1) states that an agreement to arbitrate is not vitiated by the invalidity of the underlying contract. Therefore, this test coupled with sec. 16(1) would minimise the court’s intervention. The bench, furthermore, cited the work[33] of Mr. Gary B. Born where he states that an arbitration agreement by the way of fraud would rarely arise even if there is a fraud committed under the garb of the underlying contract.

2. Allegations of arbitrariness, fraud or malafide conduct are made against the “state or its instrumentalities”. The rationale is that such matters will not only have implications on the parties but on the public in general and hence should be tried by writ courts.

One may say that the reasoning provided by the court, in this case, is more in line with Swiss Timing v. Organizing Committee, Commonwealth Games 2010[34] rather than A. Ayyasamy.


In Deccan Paper Mills Co. Ltd. v. Regency Mahavir Properties & Ors[35]., while extrapolating Avitel’s judgement (law on invoking “fraud exception”) also discussed whether a proceeding for cancellation of written instruments u/s 31(1) of the Specific Relief Act, 1963 will be considered rights in rem or personam. The court ruled such dispute to be a right in personam with the reasoning that when a written instrument is declared void/voidable, it is delivered up to the plaintiff and cancelled which is identical to the procedure followed u/s 29 of the Act for rescission of the contract and hence, is an action inter-parties. The bench declared the law set in Alien Developers Pvt. Ltd. Vs. M. Jamardhan Reddy[36] too bad and overruled it. While examining the issue of section 31, the Apex court cited catena of judgements, placing foremost reliance on Olympus Superstructures Vs. Meena Vijay Khetan[37], in which it was held that an agreement to arbitrate should relate to a justiciable issue triable civilly. Since specific performance can be termed as a justiciable issue triable civilly, the expression “court” under the act will have to be substituted with “the arbitrator” or “arbitral tribunal”.


In yet another seminal judgement, the precedents set by judgements such as Himangi Enterprises were overruled. In Vidya Drolia vs. Durga Trading Corp[38], the bench held that disputes which are governed by the Transfer of Property Act are arbitrable as they don’t create right in rem but subordinate right in personam which arises from right in rem. Th Act doesn’t bar arbitration nor do the landlord-tenant disputes relate to the sovereign functions of the state. But the bench also pointed out that if a dispute is covered and governed by a specific rent control legislation under which there exists a specific court or forum where such a dispute is to be dealt with, then such court or forum will have exclusive jurisdiction and the dispute will be non-arbitrable. While adjudicating upon landlord-tenant dispute arbitrability, the bench, in line with the Avitel judgement, also addressed the broader issue of subject-matter arbitrability. The four-fold test opined for when a dispute will be non-arbitrable is as follows,


1. The cause of action, as well as the of the dispute relating to actions in rem and such actions, shouldn’t have elements of subordinate rights in personam which arise from rights in rem;

2. The cause of action as well as the subject matter of the dispute has an erga omnes effect i.e., it affected third-party rights due to which centralised adjudication becomes more appropriate;

3. The 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;

4. The subject matter of the dispute cannot be arbitrated due to the bar imposed by a mandatory statute.


The bench, however, laid down this test as a guiding mechanism and not a watertight test. In this case, the bench also made a mention of insolvency/intracompany disputes, registration of trademarks and grant and issue of patents to be non-arbitrable due to them being rights in rem and therefore being a sovereign function to regulate.

Delhi H.C. in Bina Modi vs. Lalit Kumar Modi[39], dealing with the issue of jurisdiction in an anti-arbitration injunction suit, ruled since all parties are Indian citizens and the situs of immovable assets of the trust are in India, the duty falls upon the courts and not the arbitral tribunal to ascertain whether the disputes are arbitrable and per se referrable to arbitration.


In China Petroleum Pipeline Bureau vs Indian Oil Corporation Limited[40], Delhi H.C. when looking into the factual matrix of the case held that a claim which hasn’t been notified as per the terms and conditions of the contract cannot be referred to arbitration due to existence of a clause barring such reference. The logic behind this reasoning was a simple contract law principle, Consensus ad idem i.e., meeting of minds.


[1] Laurence Shore, 'Part I Fundamental Observations and Applicable Law, Chapter 4 - The United States' Perspective on “Arbitrability”', in Loukas A. Mistelis and Stavros L. Brekoulakis (eds), Arbitrability: International and Comparative Perspectives, International Arbitration Law Library, Volume 19 © Kluwer Law International; Kluwer Law International 2009) pp. 69 – 84. [2] ILA Committee on International Commercial Arbitration, Public Policy as a Bar to the Enforcement of International Arbitral Awards, London Conference Report (2000), 2. The final Report was presented at the 2002 New Delhi conference and published in the 2002 Proceedings and at <www.ila-hq.org>. [3] Stavros L. Brekoulakis, 'Part I Fundamental Observations and Applicable Law, Chapter 2 - On Arbitrability: Persisting Misconceptions and New Areas of Concern', in Loukas A. Mistelis and Stavros L. Brekoulakis(eds), Arbitrability: International and Comparative Perspectives, International Arbitration Law Library, Volume 19 (© Kluwer Law International; Kluwer Law International 2009) pp. 19 - 46 [4]39 L.Ed.2d 147 (1974). The same view was preferred by the U.S. Supreme Court in Bernhardt v. Polygraphic Co., 100 L.Ed. 199 (1956) and in Wilko v. Swan, 346 U.S., at 435-437, 74 S Ct, at 186-188. [5] 417 U.S. 506 (U.S. Supreme Court 1974). [6] 473 U.S. 614 S Ct 3346 (1985) (U.S. Supreme Court, 2 July 1985). [7] 391 F. 2d 821 (2d Cir. 1968). [8] 699 F. 2d 846 (CA 1983) at 850-851. [9] For example, Switzerland, Federal Tribunal, 23 June 1992, Fincantieri- Cantieri Navali Italiiani and Oto Melara v. M and arbitration tribunal: “Arbitrability is a requirement for the validity of the arbitration agreements”. [10] Supra, at note 3. [11] Cf Cour de cassation, 18 May 1971, Impex v. P.A.Z. Produzione Lavorazione, (1972) Rev. Arb. at 3: Arbitral tribunals have exclusive jurisdiction to rule on disputes falling within the terms of the brief conferred upon them, subject to review by the courts hearing the application for an enforcement order [or to set the award aside…] if … a party claims that public policy has been contravened. [12] Gary B. Born, International Commercial Arbitration, pg. 949 (2nd. ed.), Kluwer Law International. [13] (2009) 1 SCC 267. [14] 2019 (5) SCC 362. [15] 2019 (8) SCC 714. [16] (2011) 5 SCC 532. [17] 2009 (13) SCALE 403. [18] (2016) 10 SCC 386. [19] 1962 AIR 406. [20] Premium Nafta Products Ltd. vs. Fily Shipping Co. Ltd. (2007) UKHL 40; Fiona Trust & Holding Corporation vs. Yuri Privalov (2007)1 AllER (Comm) 891. [21] (2019) 8 SCC 710. [22] (2017) 10 SCC 706. [23] 2016 (6) ARBLR 121 (BOM). [24] 2016 SCC OnLine Bom 5893. [25] (2017) 8 MLJ 385. [26] MANU/ DE/2053/2014. [27] 2013 (134) DRJ 566. [28] MANU/MP/0017/2020. [29] MANU/SC/0092/1998 [30] MANU/KE/0805/2020. [31] MANU/GJ/0255/2020. [32] MANU/SC/0601/2020. [33] International Commercial Arbitration by Gary B. Born 2nd Edn., Vol. I, p. 846. [34] MANU/SC/0516/2014. [35] MANU/SC/0599/2020. [36] (2016) 1 ATL 194 (DB) [37] (1999) 5 SCC 651. [38] MANU/SCOR/46012/2020. [39] MANU/DE/2305/2020. [40] MANU/DE/0080/2020.

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