What May Be Referred to Arbitration

In one line

Arbitrability asks whether a dispute may lawfully be referred to arbitration at all, and the Act answers it in two places only: section 2(3), which preserves any other law making a dispute non-arbitrable, and section 34(2)(b)(i), which makes an award liable to be set aside if the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force.

The two statutory hooks

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.

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.

Two features follow. The court may raise non-arbitrability of its own motion under section 34(2)(b), without a party pleading it. And the Act itself contains no list, so the categories are judge-made.

The classical test: rights in rem and rights in personam

The case. Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532.

Facts. A suit for the enforcement of a mortgage was sought to be referred to arbitration under an arbitration clause between the parties, and the question was whether a mortgage suit is arbitrable.

Held. The Court held that a right in rem is a right exercisable against the world at large, while a right in personam is an interest protected against specific individuals, and that disputes about rights in personam are ordinarily arbitrable while disputes about rights in rem are ordinarily not. A subordinate right in personam arising from a right in rem is arbitrable. A suit for the enforcement of a mortgage is an action in rem and is not arbitrable.

The judgment also gave the SIX WELL-RECOGNISED CATEGORIES of non-arbitrable disputes, and reciting them is the substance of the answer:

Criminal offences;

Matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights and child custody;

Guardianship matters;

Insolvency and winding up;

Testamentary matters, that is the grant of probate, letters of administration and succession certificates;

And eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection and only the specified court has jurisdiction.

The modern fourfold test

The case. Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1.

Facts. A landlord-tenant dispute under the Transfer of Property Act, 1882 was sought to be arbitrated, and the Court reconsidered when a dispute is non-arbitrable and who decides that question.

Held. A dispute is NOT arbitrable when the cause of action or the subject-matter (1) relates to actions IN REM that do not pertain to subordinate rights in personam arising from rights in rem; (2) affects THIRD PARTY RIGHTS, has erga omnes effect, requires centralised adjudication and would be inappropriate for mutual adjudication; (3) relates to the INALIENABLE SOVEREIGN AND PUBLIC INTEREST FUNCTIONS of the State; or (4) is expressly or by necessary implication NON-ARBITRABLE UNDER A STATUTE.