Arbitrability: What Cannot Be Sent to Arbitration at All
Chapter Twenty-Four
Syllabus topic 2.1, "The Arbitration and Conciliation Act, 1996"
Pages 124 to 127 of 377
In one line
Some disputes cannot be arbitrated no matter what the parties agreed, because the law reserves them to the courts.
In exam wording: arbitrability is the question whether the subject matter of a dispute is capable of settlement by arbitration; section 2(3) of the Arbitration and Conciliation Act 1996 preserves any other law by virtue of which certain disputes may not be submitted to arbitration, and section 34(2)(b)(i) makes it a ground for setting aside an award that the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force.
Why party agreement is not enough
Everywhere else in this Module, the parties' agreement is what creates the arbitrator's power. Arbitrability is the limit on that. However clearly two people agree to arbitrate, some questions are not theirs to hand to a private tribunal.
The reason is that arbitration is private and binds only the parties. That is exactly what makes it attractive for a commercial dispute, and exactly what makes it unsuitable where an outcome must bind the world, or where the State has an interest beyond the two litigants, or where a statute has given a particular forum exclusive jurisdiction to protect a weaker party.
Where the Act deals with it, which is barely
The striking thing is how little the Act says. It nowhere lists non-arbitrable subjects. It deals with the question in three indirect places:
Section 2(3): this Part shall not affect any other law for the time being in force by virtue of which certain disputes may not be submitted to arbitration. So the Act defers to other laws rather than making its own list.
Section 8, as chapter 240 explains, is where the objection is first taken: a court asked to refer will not send the parties to arbitration on a dispute the law does not permit to be arbitrated.
Section 34(2)(b)(i): an award may be set aside if the court finds that the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force. Note that this is a ground the court may take on its own, unlike the grounds in section 34(2)(a) which a party must prove. The same appears for foreign awards in section 48(2)(a).
So the content of the doctrine is judge-made, and Booz Allen is where it was assembled.
Booz Allen: the categories, and the reasoning behind them
Booz Allen & Hamilton Inc v. SBI Home Finance Ltd, decided 15 April 2011.
The Court began from the position that where a dispute is inarbitrable, a court where a suit is pending will refuse to refer the parties to arbitration under section 8 even if the parties had agreed upon arbitration as the forum. It then set out what it called the well recognised examples of non-arbitrable disputes:
Arbitrability: What Cannot Be Sent to Arbitration at All
- (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 and child custody;
- (iii) guardianship matters;
- (iv) insolvency and winding up matters;
- (v) testamentary matters, meaning the grant of probate, letters of administration and succession certificates; and
- (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only specified courts have jurisdiction to grant eviction or decide the disputes.
The reasoning underneath the list is what an examiner is really testing, and it is worth learning in the Court's own terms.
A right in rem is a right exercisable against the world at large. A right in personam is an interest protected solely against specific individuals. An action in personam determines the rights and interests of the parties themselves in the subject matter; an action in rem determines title to property and the rights of the parties not merely among themselves but against all persons at any time claiming an interest in that property.
From that the Court drew the general rule: disputes relating to rights in personam are considered amenable to arbitration, and disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration.
And then the qualification that students leave out, which is where most of the marks are: this is not a rigid or inflexible rule. Disputes relating to subordinate rights in personam arising from rights in rem have always been considered to be arbitrable.
That last sentence is what makes the doctrine workable. A dispute about who owns a property is in rem and is for a court. A dispute about whether one party performed a contract concerning that property is a subordinate right in personam arising out of it, and can be arbitrated.
The later law: Vidya Drolia
The categories in Booz Allen were examples, not a test, and the Supreme Court returned to the subject in Vidya Drolia v. Durga Trading Corporation, decided 14 December 2020, which is generally cited for a fourfold test of non-arbitrability and for what a court may examine at the reference stage.
That judgment is in the queue in authorities/cases.json and has not been read for facts and holding. This book therefore does not state its test or its treatment of Booz Allen. Do not repeat a summary of it from a coaching note; read the judgment. What you can safely say is that the leading modern authority on arbitrability is Vidya Drolia, and that it revisited the tenancy category that Booz Allen had listed.
Arbitrability: What Cannot Be Sent to Arbitration at All
A worked example
A partnership deed between three partners contains an arbitration clause. The partnership breaks down and four things are in dispute.
One: whether one partner took Rs. 40 lakhs out of the firm's account in breach of the deed. Arbitrable. This is a right in personam between the partners arising out of their contract.
Two: whether the firm should be wound up as insolvent. Not arbitrable. Insolvency and winding up are in Booz Allen's category (iv), and the reason is structural: winding up affects creditors and the world at large, not only these three.
Three: whether one partner forged a signature, and should be prosecuted. Not arbitrable. Category (i): rights and liabilities arising out of criminal offences. Note the boundary carefully. The prosecution is not arbitrable. A civil claim for the money lost, arising out of the same facts, is a right in personam and may well be.
Four: who owns the shop the firm traded from, the firm or one partner personally. This needs the in rem test. A declaration of title binding the world is in rem and is for a court. But if the real question is whether, as between these partners, one is contractually bound to transfer his interest, that is a subordinate right in personam arising from the right in rem, and Booz Allen says such disputes have always been considered arbitrable.
Where is the objection taken? If a suit is filed and a section 8 application made, the court will refuse to refer an inarbitrable dispute. If it goes to arbitration anyway and an award is made, section 34(2)(b)(i) lets the court set it aside on the ground that the subject matter was not capable of settlement by arbitration, and it may do so of its own motion.
What beginners get wrong
The Act contains no list of non-arbitrable disputes. Section 2(3) defers to other laws; the categories come from the case law.
"In rem is never arbitrable" is too strong. Booz Allen says the rule is not rigid, and subordinate rights in personam arising from rights in rem have always been arbitrable.
Criminal facts do not make a civil claim inarbitrable. What is inarbitrable is the criminal liability, not every claim arising from the same events.
Non-arbitrability is not waived by agreeing to arbitrate. That is the point of it, and section 34(2)(b)(i) lets the court act on its own.
Booz Allen's list is of examples, not a closed code, and Vidya Drolia is the modern authority.
Arbitrability: What Cannot Be Sent to Arbitration at All
Quick revision
- Arbitrability asks whether a subject matter is capable of settlement by arbitration.
- Section 2(3) preserves other laws that forbid submission to arbitration; section 34(2)(b)(i) makes non-arbitrability a ground for setting aside, which the court may take on its own; section 48(2)(a) is its counterpart for foreign awards.
- Booz Allen (15 April 2011), six examples: criminal; matrimonial (divorce, judicial separation, restitution of conjugal rights, child custody); guardianship; insolvency and winding up; testamentary (probate, letters of administration, succession certificate); and eviction or tenancy under special statutes with protected tenants and designated courts.
- The reason: rights in rem bind the world and belong to courts; rights in personam bind only the parties and are arbitrable. Not a rigid rule: subordinate rights in personam arising from rights in rem are arbitrable.
- Vidya Drolia (14 December 2020) is the modern authority. Unread here; do not state its test from memory.
Test yourself
1. Does the Arbitration and Conciliation Act list the disputes that cannot be arbitrated? No. Section 2(3) provides only that Part I shall not affect any other law by virtue of which certain disputes may not be submitted to arbitration. The categories are judge-made.
2. State Booz Allen's six examples of non-arbitrable disputes. Disputes arising out of criminal offences; matrimonial disputes as to divorce, judicial separation, restitution of conjugal rights and child custody; guardianship matters; insolvency and winding up; testamentary matters, that is probate, letters of administration and succession certificates; and eviction or tenancy matters governed by special statutes protecting the tenant where only specified courts have jurisdiction.
3. What is the difference between a right in rem and a right in personam, and why does it matter here? A right in rem is exercisable against the world at large; a right in personam is protected solely against specific persons. Generally, disputes about rights in personam are arbitrable and those about rights in rem are for the courts, because a private award binds only the parties. Booz Allen adds that the rule is not rigid and that subordinate rights in personam arising from rights in rem are arbitrable.
4. An award is made on a dispute that was never arbitrable, and neither party raised the point. Can it stand? No. Section 34(2)(b)(i) allows the court to set aside an award where it finds that the subject matter is not capable of settlement by arbitration under the law for the time being in force, and that ground does not depend on a party proving it.
5. Two partners dispute whether one must transfer his share in a shop to the other under their deed. Arbitrable? Very likely yes. A declaration of title binding the world would be in rem and for a court, but a claim that one partner is contractually bound as against the other is a subordinate right in personam arising from the right in rem, which Booz Allen says has always been considered arbitrable.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself for the same subject.