Arbitrable Or Not – India At Crossroads?

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Arbitrable Or Not – India At Crossroads?

 

5 October 2020

 

As a rule, arbitral tribunals have been considered capable of adjudicating every civil or commercial dispute, which can be decided by a civil court, subject to: (i) the dispute being covered under the arbitration agreement; (ii) the party/ parties to the dispute referring the same to arbitration and (iii) the disputes being capable of adjudication and settlement by arbitration.
 

Having said that, the most contentious issue debated on arbitrability has been “subject-matter arbitrability” i.e. whether the disputes are capable of adjudication and settlement by arbitration. Historically, several disputes in India have been considered ‘non-arbitrable’ on the ground that the subject matter of the dispute is not capable of resolution by arbitration under the Indian law. This has largely been in line with the UNCITRAL Model Law, which permits domestic courts to set aside an arbitral award based on “subject-matter arbitrability”, under the domestic law[1].
 

In the absence of any provision in the Indian Arbitration Act, 1996, or any other legislation defining its scope, “subject-matter arbitrability” has relied heavily on the Indian judiciary to crystallise and settle contentious questions of arbitrability of disputes.
 

Through the ensuing period, Courts came to broadly recognise examples of non-arbitrable disputes as:
 

  • Criminal offences;
     

  • Matrimonial disputes and Guardianship matters;
     

  • Insolvency and winding up matters;
     

  • Testamentary matters;
     

  • Eviction or tenancy matters
     

  • Trust Deed and the Trust Act matters
     

  • Patent, trademarks and copyright
     

  • Anti-trust/competition laws
     

  • Bribery
     

The hanging sword of “subject-matter arbitrability” was first addressed by the Hon’ble Apex Court in its landmark decision of Booz Allen and Hamilaton v. SBI Home Finance Limited and others[2] (“Booz Allen”), where the Court laid down the “Test of arbitrability” and held disputes concerning: (i) rights in personam to be amenable to arbitration; and (ii) rights in rem to be adjudicated by courts and public tribunals.
 

While the test clearly compartmentalised arbitrability, it suffered from major lacunae. It was observed that a disgruntled party, attempting to circumvent arbitration in cases concerning personal rights, would intentionally try and bring its case within the purview of a right in rem and seek relief outside the purview of the arbitrator’s jurisdiction[3].
 

From the era of Booze Allen and N. Radhakrishnan v. Maestro Engineers & Ors.[4], where issues of public consequences and fraud were held non-arbitrable, there has been definitive progress towards a pro-arbitration regime. The Apex Court in Booz Allen cautioned against a strict application of the ‘rem – personam’ distinction by notably clarifying “This is not however a rigid or inflexible rule. Disputes relating to subordinate rights in personam, arising from rights in rem have always been considered to be arbitrable.” Thus, the seeds in favor of arbitration were sown in Booz Allen itself. It would not be wrong to say that despite the broad classification of non-arbitrable matters, progressive thought has been lent into widening the scope of disputes viz. arbitration, even for those having shades of a right in rem[5].
 

Arbitrating Rights in Rem – Widening scope?
 

Frauds
 

Delivering a pro-arbitration judgment, the Hon’ble Supreme Court of India recently in A Ayyasamy v. A Paramasivam & Ors[6] (“Ayyaswamy”), held that unless the fraud in question is of a serious and complicated nature, the jurisdiction of the arbitrator would not be ousted. Mere allegations of a simplicitor fraud would not take away arbitrability of a dispute where a valid arbitration agreement was in existence. Serious allegations of fraud would involve allegations, which would make a virtual case of criminal offence; allegations of fraud so complicated that it becomes essential that such complex issues be decided only by civil court on the appreciation of the voluminous evidence that needs to be produced; serious allegations of forgery/fabrication of documents in support of the plea of fraud; where fraud is alleged against the arbitration provision itself or is of such a nature that permeates the entire contract, including the agreement to arbitrate. The Supreme Court had further held that where there are simple allegations of fraud, touching upon the internal affairs of the parties inter se without any implication in the public domain, the arbitration clause need not be avoided and the parties can be relegated to arbitration.
 

However, while the Hon’ble Apex Court cleared the impasse over arbitrability of frauds, it has missed taming the dragon. Ayyasamy falls short of laying affirmative principles on what would constitute simple or serious allegations of fraud basis a clear litmus test analysis. A subsequent decision affirming Ayyasamy has tried laying down certain parameters over classification of fraud[7], however, the question of arbitrability of particular issues of fraud remains largely open to interpretation and determination by Courts.
 

Intellectual Property Disputes
 

While dealing with arbitrability of intellectual property disputes (“IP Disputes”), recent cases on traditionally “non-arbitrable disputes” reveal deep fault lines requiring redressal. The Bombay High Court in Eros International Media Limited v. Telemax Links India Pvt. Ltd. and Ors[8] held that while the overlying copyright is a ‘right in rem’ enforceable against the world at large, the specific contractual dispute over its infringement is a ‘right in personam’. Accordingly, the dispute was held to be arbitrable. However, in the case of Indian Performing Right Society Limited (IPRS) vEntertainment Network[9], a coordinate bench of Hon’ble High Court held that in cases of copyright infringement, the remedies of injunctions, damages, etc., may only be conferred by a Court, and are hence not arbitrable. Ayyasamy case created further confusion when the Supreme Court in its obiter declared patents, trademarks, and copyright disputes to be non-arbitrable.
 

The Madras High Court through its decision in Lifestyle Equities CV v. QD Seatoman Designs Pvt. Ltd[10] has made an attempt to clarify the Ayyasamy’s squared approach. The Court has reasoned that the list of “non-arbitrable disputes” in the Ayyasamy judgment merely reiterates the Court’s scholarly opinion and does not constitute its ratio. The Court applied the Booz Allen caveat and held that disputes relating to patent use and infringement concern ‘rights in personam’, and therefore, are arbitrable. However, the larger question of arbitrability of IP Disputes as a class has been left open without any conclusive jurisprudence.
 

Tenancy Disputes
 

The anti-arbitral approach towards tenancy disputes as well was expressly conveyed in Booze Allen and was further cemented in the recent Supreme Court decision of Himangi Enterprises v. Kamaljeet Singh Ahluwalia[11] (“Himangi Enterprises”) where civil courts were held to have exclusive jurisdiction in cases of special rent legislation. However, in February 2019, Supreme Court once again threw open the question of arbitrability, while considering reference to arbitration under a tenancy agreement[12]. A coordinate bench of the Supreme Court disagreed with the reasoning supplied in Himangi Enterprises and referred the issue of arbitrability of landlord tenancy dispute to a three-judge bench of the Court. With the judgement in the matter pending pronouncement, eyes are gleamingly set on the Apex Court’s appreciation of party autonomy and future of Indian arbitral regime.
 

Addressing the Special Court Conundrum
 

Another aspect that has played a pivotal role is the special statutes vesting exclusive jurisdiction upon a particular court. This seems to have narrowed the scope of arbitrability. In such cases of special statutes, even rights in personam may not be open to arbitration[13]. Lately, this position has been reinforced by the Apex Court’s decisions in Ayyasamy and Hemangi Enterprises case. In Union of India v. Competition Commission of India[14], the Delhi High Court held that exclusive jurisdiction of the Competition Commission under the Competition Act, 2002, can be construed as excluding arbitrability of the competition law disputes.
 

Per contra, dealing with choppy waters, the Delhi High Court in HDFC Bank Limited v. Satpal Singh Bakshi[15], has held that disputes forming the subject-matter of jurisdiction of the debt recovery tribunals may be subject to arbitration. It has been held that the mere creation of a special forum for adjudication of disputes could not render such disputes non-arbitrable. Even in cases of public welfare legislation, it has been opined that the parties may opt-in for arbitration, without prejudice to the rights of the consumer to approach the consumer forum[16]. Disputes under the aegis of special legislation, the Electricity Act, 2003, have also been held to be arbitrable, albeit only in case of reference to arbitration made by the concerned regulatory commissions[17].
 

Evolving Global and Domestic Regime
 

There has been growing acceptance of arbitration, at least in the international circuit with commercial interest taking precedence over public policy limitations. As India grows into an economic powerhouse, with the ever-increasing inflow of capital and investments, there is need for efficient, autonomous and effective arbitrability of disputes, especially prominent in commercial spheres, in line with the view of foreign jurisdictions like the US, Singapore, EU and Australia. With questions on ‘subject-matter arbitrability’ pending before the Apex Court and various High Courts, India certainly is at the crossroads of determining an arbitration-friendly regime. It remains to be seen, which side would India’s dream of an arbitration hub flip, in the near future.

 

 

For further information, please contact:

 

Radhika Dubey, Partner, Cyril Amarchand Mangaldas

radhika.dubey@cyrilshroff.com

 

[1] Article 34 (b) (i) UNCITRAL Model Law on International Commercial Arbitration (1985)

[2] (2011) 5 SCC 532

[3] Rakesh Kumar Malhotra v. Rajinder Kumar Malhotra (2015) 2 CompLJ 288 (Bom)).

[4] 2009 (13) SCALE 403

[5] Swiss Timing v. Organizing Committee, Commonwealth Games (2014) 6 SCC 677

[6] (2016) 10 SCC 386

[7] Rashid Raza v. Sadaf Akhtar (2019) 8 SCC 710

[8] 2016 (6) ARBLR 121 (BOM)

[9] 2016 SCC OnLine Bom 5893

[10] (2017) 8 MLJ 385

[11] (2017) 10 SCC 706

[12] Vidya Drolia and Ors v. Durga Trading Corporation 2019 SCC OnLine SC 358

[13] Kingfisher Airlines Limited v. Prithvi Malhotra Instructor (2013) (1) AIR Bom R 255

[14] MANU/ DE/2053/2014

[15] 2013 (134) DRJ 566

[16] Emaar MGF Land Limited v. Aftab Singh Review Petition (C) Nos 2629-2630 of 2018 in Civil Appeal Nos 23512-23513 of 2017

[17] Gujarat Urja Vikas Nigam v. Essar Power Ltd (2008) 4 SCC 755