Not every dispute can be arbitrated in India, no matter what the contract says. An arbitration clause that covers a non-arbitrable subject is not a shortcut; it is a trap that costs its owner a year of jurisdictional litigation before the real fight even begins. The Supreme Court's Constitution-strength answer to what is and is not arbitrable came in Vidya Drolia v. Durga Trading Corporation (2021) 2 SCC 1, which laid down a fourfold test, and a line of decisions before and after it has mapped the specific territories: insolvency, criminal offences, matrimonial status, tenancy under special statutes, consumer claims, serious fraud, and, in a rule every energy business must tattoo somewhere, electricity disputes between licensees and generating companies, which belong exclusively to the regulator after Gujarat Urja. This guide draws the full map, explains the test behind it, and shows how to draft and litigate around the borders, in a month when the CJI himself reminded the profession that the Arbitration Council promised by the 2019 amendment still does not exist.
Key takeaway: arbitrability is not a drafting choice; it is a subject-matter question the law answers over your contract's head. Before you rely on an arbitration clause, or spend a year fighting one, ask the Vidya Drolia question: does this dispute involve rights against the whole world, sovereign functions, or a statute that gave the fight to a specific forum? If yes, the clause is decoration.
The doctrine: from Booz Allen to the Vidya Drolia fourfold test
The Arbitration and Conciliation Act, 1996 quietly assumes limits: Section 2(3) preserves laws that send certain disputes elsewhere, and Section 34(2)(b) lets an award be set aside where the subject matter is "not capable of settlement by arbitration". The content of those limits came from case law. Booz Allen & Hamilton v. SBI Home Finance, (2011) 5 SCC 532 drew the first modern line: disputes involving rights in rem, rights against the world at large, are for courts; disputes involving rights in personam, rights between the parties, are arbitrable, even when they flow from rights in rem.
Vidya Drolia refined that into a fourfold test. A dispute is non-arbitrable when:
- it relates to actions in rem that do not concern subordinate rights in personam;
- it affects third-party rights, or requires centralised adjudication where a private forum bound only by the parties would be inadequate;
- it concerns the inalienable sovereign and public-interest functions of the State; or
- a statute expressly or by necessary implication makes it non-arbitrable, having reserved it to a specific forum.
The fourth limb does the most work in commercial life, because Parliament keeps building specialist forums, and each one it builds carves territory out of arbitration.
The map: what cannot go to arbitration
| Territory | Status | Authority / reason |
|---|---|---|
| Criminal offences | Never arbitrable | Sovereign function; prosecution is the State's |
| Matrimonial status: divorce, custody, guardianship | Non-arbitrable | Rights in rem and status; family courts hold the field |
| Insolvency and winding up | Non-arbitrable once proceedings are in rem (e.g., admitted IBC petitions) | Centralised adjudication; Vidya Drolia; Indus Biotech guidance on the admission threshold |
| Testamentary matters: probate, succession | Non-arbitrable | Judgments in rem |
| Tenancy under rent-control statutes | Non-arbitrable where a special statute confers exclusive jurisdiction; ordinary Transfer of Property Act tenancies are arbitrable | Vidya Drolia, overruling the broader bar of Himangni Enterprises |
| Consumer disputes | Consumer can always choose the commission; an arbitration clause cannot oust the CPA | Emaar MGF v. Aftab Singh, (2019) 12 SCC 751 |
| Serious fraud | Mere allegations of fraud do not defeat arbitration; only fraud that vitiates the arbitration agreement itself or raises public-law questions does | A. Ayyasamy (2016); Avitel (2020); Vidya Drolia |
| Trust deed disputes under the Indian Trusts Act | Non-arbitrable | Vimal Kishor Shah, (2016) 8 SCC 788 |
| Electricity: licensee vs generating company | Non-arbitrable by private clause; the State regulator under Section 86(1)(f) decides or itself refers to arbitration | Gujarat Urja Vikas Nigam v. Essar Power, (2008) 4 SCC 755 |
| Debt Recovery Tribunal territory, telecom licensing, and other exclusive-forum statutes | Non-arbitrable to the extent of the statutory carve-out | Fourth Vidya Drolia limb |
The Gujarat Urja rule: why power contracts are different
Because this firm practises before KERC, one row of that table deserves its own section. In Gujarat Urja, the Supreme Court held that Section 86(1)(f) of the Electricity Act, 2003, which empowers the State Commission to "adjudicate upon the disputes between the licensees and generating companies and to refer any dispute for arbitration", is a special law that overrides the general Arbitration Act. The consequences for every PPA in the country:
- A licensee-generator dispute goes to the State Electricity Regulatory Commission, however beautifully the PPA's arbitration clause was drafted. If arbitration happens at all, it happens because the regulator refers it, and the regulator appoints.
- Clauses that ignore this do not just fail; they generate satellite litigation about where the fight belongs, while limitation and tariff cycles run.
- Disputes involving parties outside the licensee-generator pair (EPC contractors, O&M vendors, fuel suppliers) remain in ordinary arbitration territory, so energy projects routinely run a two-track dispute architecture, and the drafting must say so explicitly.
The deeper regulatory landscape, including this summer's Karnataka captive-power upheaval, is mapped in our analysis of the High Court's KERC captive verification ruling.
Fraud, and the death of the reflex objection
For a decade, "the dispute involves fraud" was the reflex objection of every party avoiding its arbitration clause. That era is over. A. Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386 confined the fraud exception to serious cases; Avitel Post Studioz v. HSBC (2020) narrowed it further, and Vidya Drolia completed the demolition: fraud is arbitrable unless it either vitiates the arbitration agreement itself or raises questions belonging to the public law domain. Forgery of the contract containing the clause is a court question; fraudulent performance of that contract is an arbitrator's question. Parties still raise the objection; courts now dispose of it in paragraphs, not pages.
Who decides arbitrability, and when
Vidya Drolia also settled the sequencing. At the referral stage, under Sections 8 and 11, courts conduct only a prima facie review: refer unless the claim of non-arbitrability is manifest. The detailed examination belongs to the arbitral tribunal itself under the kompetenz-kompetenz principle in Section 16, with the court's full scrutiny reserved for the setting-aside stage under Section 34(2)(b). Practically: a party resisting arbitration on arbitrability grounds must show the defect on the face of the matter, or fight it before the tribunal first; and a party defending its clause should press for reference and let the tribunal rule.
Drafting around the borders
- Scope the clause honestly. In a power project, carve licensee-generator disputes to the regulator expressly and route the rest (EPC, O&M, supply) to institutional arbitration; in consumer-facing businesses, accept that the clause cannot bar the commission and design your escalation accordingly.
- Choose seat and institution deliberately for the disputes that are arbitrable; the seat decides the supervising courts, and an institution supplies the rules and appointments that ad hoc proceedings improvise. Section 9 interim relief remains available from courts either way, a subject covered in our standing guide to Section 9 interim relief in arbitration.
- Multi-forum contracts need traffic rules: where one transaction can generate regulator disputes, arbitrable disputes and criminal complaints simultaneously, the contract should say which findings bind which forum, and counsel should plan the sequence rather than discover it.
Common mistake: spending the first eighteen months of a dispute litigating where the dispute belongs. The cost of a wrongly scoped clause is not that you lose; it is that you pay for two proceedings, the jurisdictional one and then the real one, while the money you are fighting over depreciates. An afternoon of drafting against the Vidya Drolia map is the cheapest insurance in commercial law.
A practice note: the Council that still does not exist
The CJI's remark this month, that the Arbitration Council of India, created on paper by the 2019 amendment to accredit arbitrators and grade institutions, has never been constituted, is the honest backdrop to all of this. India has modern arbitration legislation running on thin institutional infrastructure, which means the quality of any given arbitration is decided almost entirely by the contract that created it: the scope, the seat, the institution, the appointment mechanism. Parties who draft as though the ecosystem will save them discover that nobody is contractually responsible for the process until a court is forced to step in. Draft the clause like it will be litigated, scope it against the non-arbitrability map, and Indian arbitration works considerably better than its reputation.
Frequently Asked Questions
Which disputes cannot be referred to arbitration in India?
Criminal offences, matrimonial status, insolvency and winding up once in rem, probate and succession, rent-control tenancies, trust deed disputes, licensee-generator electricity disputes, and any matter a statute reserves to a specific forum, per the Vidya Drolia fourfold test.
Can a consumer be forced into arbitration by a clause in the contract?
No. Since Emaar MGF v. Aftab Singh, an arbitration clause cannot oust the consumer commissions; the consumer chooses the forum.
Are fraud allegations enough to avoid arbitration?
No. Only fraud that vitiates the arbitration agreement itself or raises public-law questions defeats reference; ordinary fraud in performance is fully arbitrable after Ayyasamy, Avitel and Vidya Drolia.
Are tenancy disputes arbitrable?
Ordinary landlord-tenant disputes under the Transfer of Property Act are arbitrable after Vidya Drolia; tenancies governed by rent-control statutes that confer exclusive jurisdiction on special courts are not.
Why can't power purchase agreement disputes go to arbitration?
Because Gujarat Urja holds that Section 86(1)(f) of the Electricity Act gives State Commissions exclusive adjudicatory power over licensee-generator disputes, including the sole power to refer them to arbitration. Private clauses cannot bypass the regulator.
Who decides whether my dispute is arbitrable, the court or the arbitrator?
At the reference stage courts look only prima facie and refer unless non-arbitrability is manifest; the tribunal examines the question fully under Section 16, and courts have the last word at the Section 34 stage.
Is an arbitration clause covering a non-arbitrable dispute void entirely?
No; it is inoperative to the extent of the non-arbitrable subject. Severable arbitrable disputes under the same contract can still be referred, which is why scoping and severability language matter.
What is the Arbitration Council of India?
A statutory body created by the 2019 amendment to accredit arbitrators and grade institutions. As the CJI noted in July 2026, it has not been constituted six years on, which is why institutional choice in the clause remains the parties' own responsibility.
This article is for general informational purposes only and does not constitute legal advice. Specific situations need specific counsel.
