Arbitration has evolved as a default mechanism for adjudicating commercial disputes in India. It allows the parties to exercise a substantial degree of autonomy by enabling them to appoint a neutral and flexible forum of adjudication. However, the arbitrability of subject matter of the disputes has always been a key consideration before the courts and arbitral tribunals. In absence of clear position under the Indian Arbitration and Conciliation Act, 1996 (“A&C Act”), the Supreme Court has time and again propounded several principles to determine whether a dispute is capable of adjudication/settlement through arbitration. It is imperative to gauge the arbitrability of disputes because the UNCITRAL Model law allows domestic courts to set aside an arbitral award if the subject matter of the dispute is perceived to be non-arbitrable under domestic law.
The conundrum around arbitrability of disputes was first settled by the Supreme Court in Booz Allen and Hamilton v. SBI Home Finance Limited and Others (“Booz Allen”), where the court laid down the ‘test of arbitrability’ and categorized arbitrability into two segments, namely (i) rights in personam (right against specific individuals) to be amenable to arbitration; and (ii) rights in rem (rights against world at large) to be adjudicated by the courts and public tribunals. The judgement reflects a pro-arbitration approach and aims to widen the ambit of disputes. While the principles laid down in the Booz Allen case has been the guiding factor for an extended period of time to determine the arbitrability of disputes, the Apex Court in the recent judgment of Vidya Drolia and Others v. Durga Trading Corporation (“Vidya Drolia”) has significantly clarified the position on complexities surrounding subject-matter arbitrability. It laid down a four-fold test to determine the arbitrability of disputes. Hence, as per the new test a dispute is non-arbitrable when a cause of action or subject-matter of dispute:
- relates to actions in rem or actions that do not pertain to subordinate rights in personam that arise from rights in rem;
- it affects third party rights, has erga omnes effect, requires centralized adjudication, and mutual adjudication would not be appropriate and enforceable;
- it relates to the inalienable sovereign and public interest functions of the state; and
- it is expressly or by necessary implication non-arbitrable as per mandatory statute(s).
The Supreme Court clarified that the above test does not provide a “watertight compartmentalisation” of disputes rather it aims to assist the courts and tribunals to determine whether a particular dispute is arbitrable under the Indian law.
In light of the above discussion, this post aims to discuss arbitrability of contentious subject matters namely-(i) tenancy disputes, (ii) fraud, and (iii) consumer disputes through the lens of recent landmark Supreme Court rulings.
Arbitrability of Tenancy Disputes
The Apex Court’s decision in the Vidya Drolia case has cleared the air on the issue of arbitrability of landlord-tenant disputes under Transfer of Property Act, 1882 (“TP Act”). While evaluating the issue at hand, the court referred to a gamut of conflicting judgements and clarified the position on enforcing arbitration in tenancy disputes.
In the earlier case of Natraj Studio (P) Ltd. v. Navrang Studios & Ors., the Supreme Court upheld that tenancy disputes under Bombay Rents, Hotel and Lodging House Rates Control Act, 1947 must be exclusively tried by the small causes court and cannot be referred to arbitration. Subsequently, the Apex Court in the Booz Allen case carved out specific instances that would render the tenancy disputes to be non-arbitrable. It further observed that the TP Act does not negate arbitrability. Therefore, a landlord-tenant dispute will be barred from arbitration only in the event when:
- the eviction or tenancy matters are governed by special statutes;
- the tenant enjoys statutory protection against eviction; and
- only specified courts are conferred jurisdiction to grant eviction or decide the disputes.
Once again in 2017, in the case of Himangni Enterprises v. Kamaljeet Singh Ahluwalia (“Himangni Enterprises”), the Supreme Court re-affirmed the non-arbitrability of disputes with respect to tenancy and eviction. The court observed that even though the Delhi Rent Act, 1995 did not apply to leased premises, the dispute between landlord and tenant cannot be referred to arbitration. Such a dispute will fall under the purview of TP Act and therefore, must be decided by civil courts.
Finally, on account of conflicting interpretations over arbitrability of tenancy disputes, the issue has been firmly decided by a larger bench of Supreme Court in the Vidya Drolia case. The court overruled its decision of Himangni Enterprises by stating that the findings were not based on sound reasoning and merely because government could withdraw exemption with respect to leased premises under the Delhi Rent Act, 1995, it would not render tenancy dispute non-arbitrable. Further, the court explained that tenancy disputes governed by the TP Act are arbitrable as they relate to subordinate rights in personam that stems out from rights in rem and therefore such rights maybe ruled upon by an arbitrator. For instance, rights under a patent license may be arbitrable, however, the validity of the patent per se may not be adjudicated through arbitral proceedings.
Hence, upon careful analysis of Sections 111, 114 and 114A of the TP Act which specifically deals with rights and liabilities of landlord and tenants, the court upheld that TP Act does not necessarily bar adjudication of tenancy disputes by an arbitrator and an arbitral award deciding a tenancy dispute can be executed and will hold as good as a decree or an order passed by a civil court. Nonetheless, the court clarified that dispute governed by specific rent control legislations would not be arbitrable when specific courts or forums have been bestowed with exclusive jurisdiction to adjudicate upon special rights and obligations.
Arbitrability of Frauds
The position on arbitrability of frauds has been a grey area and largely remains open to judicial interpretation and is determined on a case-to-case basis. The Apex Court in the case of N. Radhakrishnan v. Maestro Engineers upheld that unless the fraud is of serious nature or it involves “serious allegations of fraud”, the jurisdiction of an arbitral tribunal to adjudicate the dispute will not be ousted. However, the judgment did not lay down clear parameters on what will constitute serious allegation of fraud and what determines a fraud to be of a “serious” nature.
In order to settle the position on arbitrability of frauds, the Supreme Court overruled N. Radhakrishnan v. Maestro Engineers judgment in the Vidya Drolia case and in light of its four-fold test upheld that a fraud can be a subject-matter of arbitration provided that the alleged fraud does not invalidate the arbitration clause in an agreement or raise allegations that are made against the state or its instrumentalities which require public enquiry.
Arbitrability of Consumer Disputes
As India moves towards truly creating a pro-arbitration regime, it is imperative to evaluate the possibility of adjudicating consumer disputes through arbitration. The Apex Court in the case of Emaar MGF Land Limited v. Aftab Singh and Others (“Emaar Case”) dealt with the issue of arbitrability of consumer disputes at length. The dispute arose on account of complaints filed by the homebuyers against the builder who failed to deliver possession of flats on the date agreed under the Flat Buyers Agreement (“Agreement”). When the homebuyers approached the National Consumer Disputes Redressal Commission (“NCDRC”), the builder, in response, filed an application under Section 8 of the A&C Act, referring the matter to arbitration as the Agreement contained an arbitration clause. The NCDRC upheld the consumer disputes to be non-arbitrable as the Consumer Protection Act, 1986 (“CPA”) is a special legislation to protect consumer rights and has its own dispute resolution mechanism. Furthermore, NCDRC stressed upon the fact that Section 2(3) of the A&C Act excludes certain categories of disputes which affects public interests at large (rights in rem)and hence they cannot be referred to arbitration.
On an appeal, the Supreme Court upheld the decision of NCDRC. It reiterated the rationale behind categorisation of disputes as rights in rem and rights in personam as explained in the Booz Allen case and subsequently held that remedy provided under special statutes, in this case, the CPA, is in addition to the provisions of other law for the time being in force. Therefore, if an individual chooses to file a complaint before the consumer forum in the first instance, such a complaint cannot be barred merely on account of filing an application under Section 8 of the A&C Act.
At this juncture of discussion, it is imperative to highlight the perspective of courts in respect of deciphering arbitrability of subject matter of dispute governed by social and welfare legislations. For instance, in the case of Premeir Automobiles Ltd. v. Kamlekar Shantaram Wadke of Bombay and Ors., the Apex Court upheld that the labour courts and tribunals constituted under the Industrial Disputes Act, 1947 (“ID Act”) are empowered to deal with industrial disputes involving rights of workmen and therefore, the ID Act completely ousts the jurisdiction of civil courts to try industrial disputes.
The aforementioned position was also discussed by the Supreme Court in the Vidya Drolia case. Hence, the intent of the courts is clear that the objective of social legislations i.e. the CPA and the ID Act is to protect the interests of consumers and workmen by conferring them with special rights. In no manner, can a consumer or a workman be compelled to waive their rights to approach statutory judicial forums by opting for arbitration.
While the judgment laid down by the Apex Court in the Emaar case is laudable as it provides discretion to a consumer to choose a forum for adjudication of dispute, it cannot be said to be a step towards creating an arbitration friendly environment in India. A large number of disputes fall back in the category of “inarbitrable disputes” even though they pertain to rights in personam. Further, a blanket categorisation of consumer disputes fails to address nature of rights in question. For instance, the CPA provides for two categories under which a consumer complaint can be filed. Firstly, Section 12 (1)(a) of the CPA enables individual consumer complaints to be filed in relation to goods sold or delivered or any services agreed to be provided. The disputes filed under this category are purely based on rights in personam. Secondly, Sections 12(1)(c) and 12 (1)(d) involve cases addressing larger consumer interest and enables consumers and government to initiate a representative suit. Hence, this category attracts rights in rem and cannot be adjudicated through arbitration. In light of the aforesaid discussion, an analogy can be drawn with the Vidya Drolia case wherein the Supreme Court categorized tenancy disputes under the TP Act to be arbitrable, similarly a test or parameters to enable arbitration of consumer disputes pertaining to rights in personam will aid in better understanding of the nature of the dispute in question and its effects on the rights of the parties.
The Consumer Protection Act, 2019 is indeed a step in right direction as it included mediation as a form of dispute resolution for consumer disputes and thereby reignited the discussion surrounding possibility of introducing arbitration to adjudicate consumer disputes. However, one can also not ignore the fact that arbitration is a costly affair. Therefore, proper standards must be laid down to understand the scope of arbitrability of consumer disputes. It must be carefully assessed to balance the interests of the consumers as well as the corporations.
Arbitrability of disputes have evolved significantly over the last decade through a slew of judicial pronouncements. Time and again the courts have adjudicated over arbitrability of subject matter of disputes and have taken a pro-arbitration approach. The Supreme Court’s ruling in the Vidya Drolia case has significantly clarified the position in respect of tenancy disputes, frauds and consumer disputes. It reflects progressive approach of the court and aims to enable efficient, autonomous and effective arbitration environment in India.
– Archana Balasubramanian (Partner), Lalit Munshi (Associate) and Vaishnavi Vyas (Associate Trainee)
 Article 34 (b) (i) UNCITRAL Model Law on International Commercial Arbitration (1985)
 (2011) 5 SCC 532
 2020 SCC OnLine SC 1018
 (1981) 1 SCC 523
 (2017) 10 SCC 706
 (2010) 1 SCC 72
 (2019) 12 SCC 751
 (1976) 1 SCC 496