An arbitration clause cannot give a private tribunal jurisdiction over everything. Certain subjects are reserved to the courts or to specialised forums, and an award on them is liable to be set aside.
The governing test
Booz Allen & Hamilton v. SBI Home Finance (2011) drew the line between rights in rem, which bind the world and are for the courts, and rights in personam, which bind the parties and are arbitrable. Vidya Drolia v. Durga Trading (2021) refined this into a fourfold test: a dispute is non-arbitrable when it relates to actions in rem, when it affects third party rights and requires centralised adjudication, when it relates to the inalienable sovereign functions of the State, or when a statute expressly or by necessary implication makes it non-arbitrable.
Is your dispute arbitrable at all?
- A right in rem, binding the world? Generally not arbitrable. A right in personam between the parties generally is.
- Criminal offences? Not arbitrable, and a settlement does not end a prosecution.
- Matrimonial, guardianship, insolvency, winding up, probate and testamentary? Reserved to the courts and tribunals the statute names.
- Tenancy governed by a special rent statute conferring exclusive jurisdiction? Not arbitrable.
- Serious allegations of fraud going to the arbitration agreement itself? A live question, and the answer turns on whether the fraud vitiates the agreement or is merely alleged in the performance.
Commonly non-arbitrable
- Criminal offences. A settlement may affect a compoundable case, but guilt is never arbitrable.
- Matrimonial disputes: divorce, judicial separation, restitution of conjugal rights, and child custody.
- Guardianship matters.
- Insolvency and winding up.
- Testamentary matters, including grant of probate and letters of administration.
- Eviction or tenancy governed by a rent control statute that confers exclusive jurisdiction on a special court. Ordinary landlord and tenant disputes under the Transfer of Property Act were held arbitrable in Vidya Drolia.
- Disputes where a statute creates a dedicated forum, such as certain consumer, trust and NCLT matters. Note that a consumer can still choose to go to the consumer commission despite an arbitration clause, because that remedy is additional and cannot be ousted.
Three more that come up constantly in commercial practice. A petition alleging oppression and mismanagement belongs to the National Company Law Tribunal, and the reliefs it can grant, which affect the company and everyone in it, are not the sort a private tribunal can give, even where the shareholders' agreement has an arbitration clause; a claim for damages for breach of that same agreement between two shareholders may still be arbitrable. The grant and validity of a registered trade mark or patent engages a register that binds the world and is not arbitrable, while a dispute about royalties or the scope of a licence under that same right ordinarily is. And an industrial dispute that the Industrial Relations Code, 2020 routes through conciliation and the industrial tribunal is not converted into an arbitrable dispute by a clause in an appointment letter.
The traffic runs the other way as well. Some statutes push a dispute into arbitration rather than out of it: a micro or small enterprise that is not paid can refer the matter to the Micro and Small Enterprises Facilitation Council under Section 18 of the MSMED Act, 2006, and where conciliation fails the Council conducts or refers the dispute to arbitration, which then proceeds as an arbitration under the Arbitration and Conciliation Act, 1996. So the absence of an arbitration clause does not always mean the absence of an arbitration.
The old view that any allegation of fraud pushed the matter to the civil court has gone. Following Avitel Post Studioz (2020) and Vidya Drolia, allegations of fraud are arbitrable unless they are of such a nature that they vitiate the arbitration clause itself, or the allegation has a public flavour rather than being an inter-party dispute. Pleading fraud is no longer a route out of an arbitration clause.
Who decides arbitrability
Primarily the tribunal, under the principle of competence-competence in Section 16. A court at the Section 8 or Section 11 stage will only decline reference where the non-arbitrability is clear and obvious on the face of the record. So an argument about arbitrability usually has to be run before the tribunal first.
That has a consequence people are rarely warned about, and it is the single most important practical point on this subject. The plea must be raised not later than the submission of the statement of defence, though you are not shut out merely because you appointed or helped appoint an arbitrator. If the tribunal accepts the plea and holds it has no jurisdiction, that order is immediately appealable under Section 37. If the tribunal rejects it, there is no appeal at all: the section directs the tribunal to continue and make an award, and your remedy is to run the entire arbitration to its conclusion and then challenge the award. So a party told that its dispute is non-arbitrable, and disbelieved, has to fight the whole case before it can test the point. Budget for that, and put the objection on the record properly at the outset, because a plea that was never taken is very hard to raise for the first time in a challenge.
At the far end, non-arbitrability is a ground on which an award can be set aside, and it is one of the few grounds the court may take on its own finding rather than on proof by the applicant. The same is true when a foreign award is brought to India: enforcement may be refused where the subject matter is not capable of settlement by arbitration under Indian law. Our note on setting aside an arbitral award under Section 34 deals with how that ground is pleaded.
The lesson for drafting is simple enough. Where a contract is likely to throw up a mixture of claims, some arbitrable and some not, say what happens: which claims go to arbitration, which are reserved to the courts or to a statutory forum, and that the reference of one does not delay the other. Our note on disputes that cannot be referred to arbitration in India sets out the categories in full, and our guide to drafting an arbitration agreement covers the carve-out language that keeps the two tracks apart.