“Arbitrability In India What Disputes Cannot Be Arbitrated Emerging Trends”

Abstract

The Indian arbitration landscape has undergone a seismic shift, propelled by a pro-arbitration judiciary and a legislative framework aligned with global best practices, most notably through the 2015 and 2019 amendments to the Arbitration and Conciliation Act, 1996. Despite this progressive trajectory, the foundational doctrine of arbitrability—which delineates the categories of disputes capable of being resolved through arbitration—remains a critical and complex frontier. This article provides a comprehensive analysis of the non-arbitrable disputes in India. It begins by elucidating the conceptual framework of arbitrability, tracing its jurisprudential evolution from the public policy-centric test in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. to the more nuanced "rights in rem vs. rights in personam" distinction and the "composite test" laid down in Vidya Drolia v. Durga Trading Corporation. The core of the article meticulously examines the established categories of non-arbitrable disputes, including: (i) criminal offences of a serious nature; (ii) matrimonial disputes involving status (divorce, annulment); (iii) insolvency and winding-up matters; (iv) disputes relating to guardianship and mental incompetence; (v) testamentary matters (grant of probate, letters of administration); (vi) eviction and tenancy matters governed by special statutes; and (vii) antitrust/competition law disputes. The article then transitions to the most dynamic aspect of this field: the emerging trends. It critically analyses the judicial recalibration that has brought certain disputes, such as fraud, partnership dissolution, and specific contractual disputes with the State, back within the ambit of arbitration. Furthermore, it explores the nascent but significant shift in sectors like competition law and intellectual property, where the boundaries of arbitrability are being tested. The article concludes by arguing that while the Indian judiciary has commendably narrowed the scope of non-arbitrability to foster a robust arbitration ecosystem, the doctrine continues to serve as an essential gatekeeper, ensuring that disputes imbued with significant public interest, sovereign function, or the need for adjudicative finality remain within the domain of public fora. The trajectory is unmistakably towards greater arbitrability, but this expansion is, and must remain, a carefully calibrated process.

1. Introduction: The Gateway Doctrine of Arbitrability

Arbitration, as a creature of consent, is predicated on the fundamental principle that parties can agree to submit their present or future disputes to a private forum for binding resolution. This principle of party autonomy, however, is not absolute. It operates within the overarching framework of national law, which reserves certain matters for the exclusive domain of state courts. The doctrine of arbitrability functions as the legal sieve that separates those disputes that can be legitimately diverted to private arbitration from those that must, as a matter of public policy, be adjudicated by national courts.

In India, the concept of arbitrability is not explicitly defined in the Arbitration and Conciliation Act, 1996 (the "Act"). Its contours have been almost entirely shaped and refined by the judiciary through a series of landmark pronouncements. The significance of this doctrine is multifold. Firstly, it acts as a jurisdictional threshold. If a dispute is non-arbitrable, an arbitral tribunal lacks the inherent jurisdiction to adjudicate upon it, and any award rendered would be unenforceable and liable to be set aside under Section 34 of the Act for being in conflict with the public policy of India. Secondly, it determines the competence of a court at the referral stage under Section 8 or Section 11 of the Act. A court is mandated to refuse referral to arbitration if it finds, prima facie, that the dispute is non-arbitrable.

The evolution of arbitrability in India tells a story of judicial transformation. From an era of cautious restraint, where courts were quick to retain jurisdiction over a wide array of disputes citing public policy, India has moved towards a more arbitration-friendly regime. This shift was catalysed by the 2015 Amendment to the Act, which sought to minimise judicial intervention and promote arbitration as an efficient and effective means of dispute resolution. The judiciary, led by the Supreme Court, has internalised this legislative intent, progressively narrowing the categories of non-arbitrable disputes. However, this narrowing is not an unprincipled expansion. It is guided by a consistent effort to balance the sanctity of party autonomy with the imperative of protecting public rights and interests.

This article delves deep into the heart of this dynamic legal doctrine. Part 2 traces the jurisprudential evolution of the tests for determining arbitrability. Part 3 provides a detailed, substantive analysis of the well-established categories of non-arbitrable disputes in India. Part 4 examines the emerging trends and the judicial expansion of the arbitrable domain. Finally, Part 5 offers a concluding perspective on the future trajectory of this critical doctrine in Indian arbitration law.

2. The Jurisprudential Evolution of the Arbitrability Test

The Indian Supreme Court has progressively developed a sophisticated test to determine whether a dispute is arbitrable. This evolution reflects a journey from broad, policy-based exclusions to a more precise, principle-driven framework.

2.1. The Foundational Dichotomy: Rights in Rem vs. Rights in Personam

The cornerstone of the Indian law on arbitrability was laid down in the seminal case of Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. (2011). The Court, in this case, articulated a clear distinction:

» Rights in Rem: These are rights exercisable against the world at large. Disputes relating to such rights require a definitive judgment that is binding on everyone. Examples include disputes relating to ownership of property, matrimonial status, or insolvency. The Court held that such disputes are generally not amenable to arbitration.

» Rights in Personam: These are rights available against specific individuals. Most commercial disputes arising from contract, tort, or quasi-contract fall into this category. The Court affirmed that rights in personam are generally arbitrable.

The Booz Allen judgment also provided a non-exhaustive list of non-arbitrable disputes, which included (i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding-up matters; (v) testamentary matters (grant of probate, letters of administration); (vi) eviction or tenancy matters governed by special statutes; and (vii) disputes relating to trusts, trustees, and beneficiaries.

2.2. The Refinement: The Composite Test in Vidya Drolia

While the Booz Allen test was influential, it required further refinement to address borderline cases. The opportunity came in the case of Vidya Drolia v. Durga Trading Corporation (2021), where a three-judge bench of the Supreme Court, after reviewing a catena of precedents, laid down a "four-fold test" for determining arbitrability. The Court held that a dispute is non-arbitrable when:

• The cause of action and subject matter of the dispute relates to actions in rem, meaning that it requires an erga omnes (against all) effect.

• The dispute affects third-party rights, and the arbitration agreement does not bind them, making centralized adjudication necessary.

• The dispute relates to an area which is reserved exclusively for the exclusive domain of public forums/ courts by a mandatory statute, i.e., when the cause of action and subject matter of the dispute expressly or by necessary implication are non-arbitrable under a specific statute.

• The dispute is intrinsically incapable of adjudication through the private process of arbitration, which includes disputes relating to criminality, matrimony, insolvency, grant of patents, and copyrights.

• The Court in Vidya Drolia emphasized that this test is to be applied at the referral stage (Sections 8 and 11) in a "prima facie" manner. The court's role is not to undertake a mini-trial but to see if, on a plain reading, the dispute falls foul of the arbitrability criteria. This judgment signalled a significant pro-arbitration shift by narrowing the scope of judicial intervention at the pre-arbitral stage and reiterating the principle of "competence-competence" (the tribunal's power to rule on its own jurisdiction).

3. The Established Categories of Non-Arbitrable Disputes in India

Based on the jurisprudential tests, a well-defined, though contracting, universe of disputes is considered non-arbitrable in India.

3.1. Criminal Offences

This is a nuanced category. The general rule is that disputes involving the commission of serious criminal offences (e.g., murder, rape, theft, cheating) are non-arbitrable. Criminal law is designed to punish the offender and protect society, which is a sovereign function of the state. A private tribunal cannot conduct a criminal trial or impose penal consequences.

However, the intersection of civil and criminal law often arises in commercial disputes. For instance, a transaction may give rise to both a breach of contract claim (arbitrable) and a allegation of cheating (non-arbitrable). The Supreme Court, in cases like A. Ayyasamy v. A. Paramasivam (2016), has held that mere allegations of fraud are arbitrable. It is only when the allegations are so serious and complex that they would necessitate extensive evidence production and cross-examination, making the civil court a more appropriate forum, or when the fraud alleged is of a public nature, that the dispute would be rendered non-arbitrable. In practice, this is a very high threshold, and most allegations of fraud in commercial contracts are now considered arbitrable.

3.2. Matrimonial Disputes Relating to Status

Disputes that determine the personal status of individuals, such as divorce, nullity of marriage, judicial separation, and restitution of conjugal rights, are non-arbitrable. The rationale is that marriage is not merely a contract but a social institution, and its dissolution has profound societal implications. The state has a vital interest in ensuring that such matters are decided in accordance with statutory personal laws, with due regard for the welfare of the parties and any children involved.

However, ancillary matters arising from matrimonial disputes, such as the division of matrimonial property, alimony, or maintenance, can be the subject of arbitration if the parties agree, subsequent to the breakdown of the marriage. This is because these are essentially monetary claims arising from a personal relationship.

3.3. Insolvency and Winding-Up Matters

The proceedings for the insolvency of an individual under the Insolvency and Bankruptcy Code, 2016 (IBC) or the winding-up of a company are non-arbitrable. This is because insolvency is a collective proceeding that affects the rights of all creditors, not just the one who initiates the process. The IBC establishes a specialized forum, the National Company Law Tribunal (NCLT), with the exclusive jurisdiction to handle corporate insolvency. The primary objective is the resuscitation of the corporate debtor or its orderly winding-up, which is a process imbued with public interest.

A crucial distinction exists: a mere money claim or a dispute regarding a debt is arbitrable. However, the process of insolvency resolution itself is not. The Supreme Court in Indus Biotech Private Limited v. Kotak India Venture Fund (2021) clarified that when an application is filed under Section 7 or 9 of the IBC, the NCLT is not adjudicating a dispute; it is initiating a collective mechanism. Therefore, the existence of an arbitration agreement does not oust the jurisdiction of the NCLT to admit an insolvency petition, provided a default has occurred.

3.4. Guardianship and Custody Matters

Disputes concerning the appointment of a guardian for a minor or a person of unsound mind, or matters of child custody, are non-arbitrable. These decisions are based on the paramount consideration of the welfare of the vulnerable individual. Courts exercise their parens patriae (parent of the nation) jurisdiction in such matters, and this sovereign function cannot be delegated to a private arbitral tribunal.

3.5. Testamentary Matters

The grant of probate (for a will) or letters of administration (in case of intestacy) is a non-arbitrable proceeding. The Probate Court (typically the High Court) performs a specific function of verifying the validity and genuineness of a will. The grant of probate is a judgment in rem, which conclusively establishes the legal character of the executor and the validity of the will for all persons and for all purposes. This function, by its very nature, requires public adjudication.

However, disputes among legatees or beneficiaries concerning their respective shares or the interpretation of a will, after probate has been granted, can potentially be referred to arbitration, as they are essentially disputes over private property rights.

3.6. Eviction and Tenancy Matters Governed by Special Statutes

Tenancy and eviction disputes that are governed by special rent control statutes (like the Delhi Rent Control Act, the Bombay Rents, Hotel and Lodging House Rates Control Act, etc.) have traditionally been held as non-arbitrable. The rationale is that these statutes were enacted for a public purpose—to prevent exploitation of tenants and to control rampant eviction. They create rights and liabilities that are statutory in nature and provide for a specific forum for redressal.

The Supreme Court in Vidya Drolia revisited this category. While not overruling the general principle, the Court adopted a more nuanced approach. It held that tenancies governed by the Transfer of Property Act, 1882, where the parties are not protected by a special rent statute, are arbitrable. The non-arbitrability applies only to those tenancies that fall under the protective umbrella of a special statute, which creates rights and obligations in rem and provides for a specific public forum.

3.7. Antitrust/Competition Law Disputes

Traditionally, disputes arising from the Competition Act, 2002, particularly those involving allegations of anti-competitive agreements (Section 3) and abuse of dominant position (Section 4), were considered non-arbitrable. The Competition Commission of India (CCI) is a specialized regulator with suo motu powers to investigate and impose penalties. Its functions are regulatory and involve public law elements aimed at protecting market competition, which affects the public at large.

However, as we will explore in the emerging trends, this absolute position is now being challenged, particularly concerning "follow-on" actions for damages.

4. Emerging Trends: The Expanding Domain of Arbitrability

The most dynamic aspect of arbitrability in India is the judicial trend of re-evaluating and narrowing the categories of non-arbitrable disputes. This reflects a conscious policy choice to uphold party autonomy and promote India as an arbitration-friendly jurisdiction.

4.1. The Shrinking Ambit of the "Fraud" Exception

As alluded to earlier, the "fraud exception" to arbitrability has been significantly curtailed. The Supreme Court has moved away from the position that any allegation of fraud makes a dispute non-arbitrable. The current legal position, crystallised in A. Ayyasamy and affirmed in Vidya Drolia, is that only serious, complex fraud of a public nature is non-arbitrable. In most commercial contracts, allegations of fraud are intertwined with contractual claims and are perfectly capable of being adjudicated by an arbitral tribunal. This has prevented parties from easily derailing arbitration by merely levelling allegations of fraud.

4.2. Partnership Disputes: From Non-Arbitrable to Arbitrable

There was a time when disputes relating to the dissolution of a partnership firm were considered non-arbitrable, as the dissolution affects the legal status of the firm and has an impact on third-party creditors. However, the Supreme Court in V.H. Patel & Co. v. Hirubhai Himabhai Patel (2000) and subsequent cases has drawn a clear distinction. A dispute concerning the dissolution of the firm itself may have implications in rem, but the accounts and assets of a dissolved firm or disputes between partners during the subsistence of the partnership are rights in personam and are therefore arbitrable. Most partnership disputes today are considered arbitrable, especially when the partnership deed contains a broad arbitration clause.

4.3. Disputes with the State and Public Sector Undertakings

Historically, disputes involving the State or its instrumentalities, particularly those touching upon "public law" functions or involving questions of policy, were often considered non-arbitrable. However, the judiciary has drawn a clear line. Purely commercial contracts entered into by the State (e.g., a construction contract or a supply agreement) are arbitrable. The Supreme Court has consistently held that the State, when it enters into a commercial contract, sheds its sovereign character and is bound by the arbitration clause like any other private party.

The non-arbitrability would only kick in if the dispute pertains to a sovereign function, such as the award of a telecom license or a mining concession through a public auction, where the State's action is purely in the realm of public law.

4.4. The Nascent Trend: Arbitrability in Competition and Intellectual Property Law

This is the frontier where the most significant evolution is currently underway.

» Competition Law: The traditional view that all competition law disputes are non-arbitrable is being tested. The emerging global trend, which is finding resonance in India, is to distinguish between:

» Public Law/Regulatory Actions: Claims for injunction, penalty, and investigation by the CCI. These are non-arbitrable.

» Private Law/Follow-on Damages Actions: Claims for compensation by a party that has suffered loss due to an anti-competitive practice, after the CCI has established a contravention. There is a growing academic and judicial opinion that such follow-on damages claims, being essentially private monetary claims, should be arbitrable. While the Indian Supreme Court has not yet definitively ruled on this, the logic of Vidya Drolia supports this distinction.

» Intellectual Property (IP): The arbitrability of IP disputes is also evolving.

» Patents and Trademarks (Registration and Validity): Disputes that challenge the very validity of a patent or trademark grant, or seek its revocation, are generally considered non-arbitrable. This is because the grant of a patent or trademark is a sovereign act performed by a statutory authority (the Controller of Patents or the Registrar of Trademarks), and a challenge to it has an erga omnes effect.

» IP Infringement and Licensing Disputes: Disputes concerning the infringement of a patent, trademark, or copyright, or disputes arising from IP licensing agreements (e.g., royalty payments, scope of license), are increasingly being viewed as arbitrable. These are essentially private commercial disputes between identified parties concerning rights in personam. An arbitral tribunal can certainly decide whether a party's actions constitute infringement under the license agreement and award damages. The Delhi High Court, in several cases, has shown a inclination towards allowing arbitration in such contractual IP disputes.

5. Conclusion: A Calibrated Expansion

The journey of the arbitrability doctrine in India is a testament to a maturing arbitration jurisprudence. The judiciary has successfully transitioned from a posture of suspicion and intervention to one of deference and support for arbitration. The tests laid down in Booz Allen and refined in Vidya Drolia provide a principled and relatively predictable framework for courts and parties to navigate this complex area.

The list of non-arbitrable disputes, while still vital, is no longer a static monolith. It is a dynamic set of categories that is constantly being re-evaluated in light of the overarching principle of party autonomy. The emerging trends clearly indicate a trajectory of expansion—fraud is now mostly arbitrable, partnership disputes are arbitrable, and the doors are slowly opening for arbitration in certain facets of competition law and intellectual property.

However, this expansion is not a free-for-all. The judiciary has wisely retained the core non-arbitrable categories—those disputes that are fundamentally about sovereign functions, status, or third-party rights. The doctrine of arbitrability remains the essential constitutional and public policy valve that ensures the private system of arbitration does not encroach upon the state's responsibility to administer justice in matters of paramount public interest.

The future will likely see further narrowing. Disputes that were once considered the exclusive domain of public fora will continue to be tested against the Vidya Drolia composite test. The key will be for courts to maintain this delicate balance: fostering a pro-arbitration environment that respects party autonomy, while vigilantly safeguarding the public interest and the integrity of the legal system. In doing so, India will continue to strengthen its position as a major hub for international and domestic arbitration.

Here are some questions and answers on the topic:

1. What is the core legal principle established in the Booz Allen case for determining non-arbitrable disputes?

The core legal principle established by the Supreme Court in the Booz Allen case is the fundamental distinction between rights in rem and rights in personam. Rights in rem are rights that are enforceable against the world at large, such as those concerning property ownership or personal status like marriage. The Court held that disputes involving such rights are generally not suitable for arbitration as they require a definitive judgment binding on everyone. In contrast, rights in personam are rights enforceable against specific individuals, which arise predominantly from contracts or torts. The Court affirmed that disputes concerning rights in personam are generally arbitrable, as they pertain to private parties and their private agreements.

2. How did the Vidya Drolia judgment refine the test for arbitrability in India?

The Vidya Drolia judgment refined the test for arbitrability by establishing a comprehensive "composite test." This four-fold test dictates that a dispute is non-arbitrable when the cause of action and subject matter of the dispute relates to actions in rem that affect third-party rights or are reserved exclusively for public forums by a mandatory statute. Furthermore, it includes disputes that are intrinsically incapable of adjudication through the private process of arbitration, such as those involving criminal law or matrimonial status. Crucially, this judgment emphasized that courts must apply this test only on a prima facie basis at the referral stage, thereby minimizing judicial intervention and reinforcing the arbitral tribunal's power to rule on its own jurisdiction.

3. Why are insolvency proceedings under the IBC considered non-arbitrable, and what is the key distinction regarding a mere debt claim?

Insolvency proceedings under the Insolvency and Bankruptcy Code are considered non-arbitrable because they are not merely about adjudicating a dispute between two parties. They are collective proceedings that affect the entire community of creditors and have the overarching public policy objectives of either resuscitating a distressed corporate entity or ensuring its orderly winding-up. This process, administered by the specialized National Company Law Tribunal, is imbued with public interest and is designed to have an erga omnes effect. The key distinction is that while the insolvency process itself is non-arbitrable, a mere debt claim or a dispute regarding the existence or default of a debt is arbitrable. The NCLT's role at the admission stage is not to adjudicate the debt but to ascertain if a default has occurred, a process which exists independently of any private arbitration agreement between the debtor and a single creditor.

4. What is the emerging judicial trend regarding the arbitrability of allegations of fraud in commercial contracts?

The emerging and now well-established judicial trend is to significantly narrow the scope of the "fraud exception" to arbitrability. The Supreme Court has moved away from the earlier position that any allegation of fraud would oust an arbitrator's jurisdiction. The current legal position, as clarified in cases like A. Ayyasamy and Vidya Drolia, is that only serious, complex, and specific allegations of fraud that are of a public nature are considered non-arbitrable. In the vast majority of commercial contracts, allegations of fraud are intertwined with breaches of contractual terms and are deemed perfectly capable of being adjudicated by a private arbitral tribunal. This trend prevents parties from easily derailing arbitration agreements by making bald allegations of fraud and upholds the principle of party autonomy.

5. How is the traditional view on the non-arbitrability of competition law disputes being challenged in modern jurisprudence?

The traditional view that all competition law disputes are non-arbitrable is being challenged through a nuanced distinction between the public law and private law elements of such disputes. The evolving global perspective, which is gaining traction in Indian jurisprudence, differentiates between public law or regulatory actions and private law or follow-on damages actions. Matters involving the Competition Commission of India's sovereign functions, such as conducting investigations, imposing penalties, and granting injunctions to curb anti-competitive practices, remain non-arbitrable as they directly protect public interest. However, subsequent claims for monetary compensation or damages by a private party who has suffered loss due to an anti-competitive practice, after the CCI has already established a contravention, are increasingly seen as arbitrable. These follow-on actions are essentially private claims for compensation arising from a civil wrong and are therefore considered suitable for resolution through arbitration.

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