NATIONAL LAW UNIVERSITY,

JODHPUR

ARBITRATION IN INDIA:

SUBJECTIVITY AND UNCERTAINTY

Submitted by: Submitted to:
Arvind Kumar Dr. Nidhi Gupta
Roll No. 1311 Faculty of Law
Sec-A, UG-IX Sem. NLU, Jodhpur

INTRODUCTION

Parties choose arbitration for its finality, efficiency, and relative economy. The significance
of these considerations is amplified where, as in India, the judiciary is notoriously
backlogged and dispute resolution through traditional forums is infamously slow. The state’s
vital interest in equitable dispute resolution often comes into conflict with party autonomy
and the freedom to contract for arbitration as a dispute resolution mechanism. The balance
between these competing interests is reflected in the United States Commission on
International Trade Law (UNCITRAL) Model Laws and many nations’ arbitration statutes;
while parties are free to contractually supersede many of the gap-filling provisions of these
statutes, they include certain mandatory checks on the arbitration process that parties cannot
avoid with a carefully drafted contract. Whereas, India has deviated from the UNCITRAL
model, the act only talks about whether the agreement is valid or not. The arbitrability of a
dispute comes within issues that the court may and do not have to decide. The court could
decide it either on the basis of prima facie or conclusively. Ordinarily every civil or
commercial dispute whether based on contract or otherwise which is capable of being
decided by a civil court is in principle capable of being adjudicated upon and resolved by
arbitration subject to the dispute being governed by the arbitration agreement.1 However,
there are exceptions to this Rule. There are several scenarios and circumstances, which might
render the dispute non-arbitrable. Arbitrability has not been provided expressly in the
Arbitration and Conciliation Act, 1996. However, the concept can be found in UNCITRAL
Model Law, which permits the courts of the seat to set aside an arbitral awards on the
grounds that the subject matter of the dispute is not capable of resolution by arbitration under
the law of the State.2 Upheld the judgment in Booz Allen case. The Supreme Court also said
that their decision does not mean that all consumer disputes are non-arbitrable in nature. The
1
Hindustan Petroleum Corporation Ltd v Kamalkant Automobiles , 2017 (123) ALR 369
2
S 34.2, UNCITRAL Model Law on Arbitration
ratio is not to be meant that all consumer disputes are non- arbitrable but if a petition is filed
under COPRA then section 8 does not apply.

When a person chooses to file a dispute in the consumer forum, then he cannot be referred to
arbitration.

Consumer Disputes are not arbitrable in nature. However, they also say that a few consumer
disputes are arbitrable. The choice is thus to be left with the parties.

While the first two procedural requirements must be satisfied at the beginning of an arbitral
proceeding, the issue of the subject-matter arbitrability can arise when it comes to the
recognition and enforcement of a foreign arbitral award. A number of pronouncements have
been rendered laying down the scope of judicial intervention, in cases where there is an
arbitration clause, with clear and unambiguous message that in such an event judicial
intervention would be very limited and minimal. However, the Arbitration Act, 1996 contains
provisions for challenging the arbitral awards. These provisions are Section 34 and Section
48 of the Act. Section 34(2)(b) and Section 48(2) of the Act, inter alia, provide that an arbitral
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. Even when such a
provision is interpreted, what is to be shown is that there is a law which makes subject matter
of a dispute incapable of settlement by arbitration.3

In M/s Harsha Constructions v Union of India,4 the respondent authorities had raised an
objection relating to the arbitrability of the aforestated issue before the Arbitrator and yet the
Arbitrator had rendered his decision on the said excepted dispute. In the opinion of courts, the
Arbitrator could not have decided the said excepted dispute. Court, therefore, held that it was
not open to the Arbitrator to decide the issues, which were not arbitrable, and the award was
quashed.

The well recognized examples of non-arbitrable disputes are:

1. Testamentary matters (grant of probate, letters of administration and succession

certificate)
2. Eviction or tenancy matters governed by special statutes5

3
A AyyasamyVs A Paramasivam&Ors, AIR 2016 SC 4675
4
M/s Harsha Constructions v Union of India (2014) 9 SCC 246
5
https://efilablog.org/2017/12/20/the-concept-of-arbitrability-of-arbitration-agreements-in-india/#_ftn14
 3. Mortgage6
4. Cases arising out of Trust Deed and the Trust Act7
5. Patent, trademarks and copyright
6. Anti-trust/competition laws
7. Bribery
8. Fraud8

Courts are of the opinion that mere allegation of fraud simplicitor may not be a ground to
nullify the effect of arbitration agreement between the parties. It is only in those cases where
the Court, while dealing with Section 8 of the Act, find that here are very serious allegations
of fraud which make a virtual case of criminal offence or where allegations of fraud are so
complicated that it becomes absolutely essential that such complex issues can be decided
only by civil court on the appreciation of the voluminous evidence that needs to be produced,
the Court can sidetrack the agreement by dismissing application under Section 8 and proceed
with the suit on merits.

The Supreme Court has held, in N. Radhakrishnan v. M/S Maestro Engineers 9 that where
fraud and serious malpractices are alleged, the matter can only be settled by the court and
such a situation cannot be referred to an arbitrator. The Supreme Court also observed that
fraud, financial malpractice and collusion are allegations with criminal repercussions and as
an arbitrator is a creature of the contract, he has limited jurisdiction. The courts are more
equipped to adjudicate serious and complex allegations and are competent in offering a wider
range of reliefs to the parties in dispute.

In 2016, the Supreme Court in AAyyasamy v. A Paramasivam&Ors,10clarified that allegations

of fraud are arbitrable as long as it is in relation to simple fraud. In A Ayyasamy, the Supreme
Court held that: (a) allegations of fraud are arbitrable unless they are serious and complex in
nature; (b) unless fraud is alleged against the arbitration agreement, there is no impediment in
arbitrability of fraud; (c) the decision in Swiss Timing did not overrule Radhakrishnan. The
judgment differentiates between ‘fraud simpliciter’ and ‘serious fraud’, and concludes that
while ‘serious fraud’ is best left to be determined by the court, ‘fraud simpliciter’ can be

6
Ibid.
7
Ibid.
8
Ibid.
9
2010 (1) SCC 72
10
AAyyasamy v. A Paramasivam&Ors (2016) 10 SCC 386.
decided by the arbitral tribunal. In the same vein, the Supreme Court has held that an
appointed arbitrator can thoroughly examine the allegations regarding fraud.11

However, taking a completely different understanding, the Supreme Court in Swiss Timing
Limited v. Organizing Committee, Commonwealth Games 2010, Delhi12 and World Sport
Group (Mauritius) Ltd. v. MSM Satellite (Singapore) Pte. Ltd 13 held that allegations of fraud
are not a bar to refer parties to a foreign-seated arbitration and that the only exception to refer
parties to foreign seated arbitration are those which are specified in Section 45 of Act, i.e. in
cases where the arbitration agreement is either (i) null and void; or (ii) inoperative; or (iii)
incapable of being performed. Thus, it seemed that though allegations of fraud are not
arbitrable in ICAs with a seat in India, the same bar would not apply to ICAs with a foreign
seat.

INTELLECTUAL PROPERTY RIGHTS

In 2016, for the first time, IP rights as a subject matter of the dispute was allowed to be
resolved by way of arbitration by the Bombay High Court in Eros International v. Telemax
Links India.14 Eros International  is presently pending before the Supreme Court and this
decision can conclusively determine this issue of arbitrability. The High Court in Eros
International held that although IP rights are generally awarded to a creator to protect its
work from exploitation by the world at large, its enforcement is undertaken against select
individuals who have caused such breach. This, the Court held, was the correct
approach because a breach of the underlying agreement between the parties was to be
resolved and, thus, it was necessary to treat it like any other commercial transaction wherein
parties have themselves chosen to resort to arbitration to resolve disputes arising from the
agreement. This means that although a right in rem (in this case the issue of copyright) is the
underlying subject, the dispute arising is concerning a right in personam (in this case, the
breach of the agreement determining the usage of the copyright) and thus referring such
dispute to arbitration would be permissible.

India currently follows the test enumerated in Booz Allen Hamilton v. SBI Home Finance for
determining arbitrability of disputes. Therein the Supreme Court of India held that all

11
AmeetLalchand Shah v Rishabh Enterprises 2018
12
2014 (6) SCC 677
13
AIR 2014 SC 968
14
Eros International
disputes which concerned rights in rem (i.e. rights available against the world at large) were
non-arbitrable. Booz Allen was significant because it also provided an exhaustive list of
instances wherein disputes cannot be subjected to arbitration which included constitutional
issues, divorce proceedings, and the like. Interestingly, the said case did clarify that disputes
concerning in personam rights, although arising from rights in rem, would be arbitrable.

However, the Madras High Court in 2017 in Lifestyle Equities CV  v.  QDSeatoman Designs
(P) Ltd has more clearly dealt with the traditional in rem versus in personam debate, as
compared to Eros International. Herein, it was held that patent disputes can be arbitrable if
the dispute is about the licensing of a patent or infringement of a patent, but a dispute
challenging the validity of the patent will not be arbitrable.

The Supreme Court in M/s Emaar MGF Land Limited v Aftab Singh15 ruled that consumer
disputes are incapable of being submitted to arbitration. However, the Supreme Court also
stated that where an elected consumer fails to file a consumer complaint, the parties are not
barred from submitting the dispute to arbitration. However, at the end of the judgment, the
court made the observation that:

“In the event a person entitled to seek an additional special remedy provided under the
statutes does not opt for the additional/special remedy and he is a party to an arbitration
agreement, there is no inhibition in disputes being proceeded in arbitration.”

The prima facie  contradiction created by Emaar MGF's disclaimer may be interpreted in two
ways.

The more extreme interpretation, keeping in mind the broad wording of the Supreme Court in
its disclaimer, would be that the court has unknowingly created a situation where the
arbitrability of a subject is determined by the will of the parties to the dispute, as opposed to
its relation to a right in rem.

If such an interpretation were taken further, it could also be in the nature of an estoppel,
where a failure to raise an objection regarding arbitrability at the first instance, such as
Sections 8 or 11(6A) of the Arbitration and Conciliation Act, may estop a party from raising
it at the challenge stage. This would imply that a subject matter is non-arbitrable only if
parties effectively choose to pursue their remedies under special statutes, and not as a matter
of course. If so, Emaar MGF would be a direct contradiction of Section 34(2)(b)(i) of the act,
15
which allows arbitrability to be raised as a ground at the challenge stage, without any
condition precedents regarding earlier attempts to assert the same.

Arguably, such an interpretation could not have been the true intent of the judiciary. The
categories of dispute that were referenced in earlier judgments were inherently incapable of
being submitted to arbitration, such as criminal matters which necessarily involve the state or
matters such as insolvency or IP rights, which involve the rights of parties outside the
contract being disputed.

However, with consumer disputes, despite the legislation being special or beneficial, the
dispute remains inter se parties. Therefore, the true meaning of the court's disclaimer could
be that in the specific situation of an inter se consumer dispute, as was the case
in Emaar MGF, while a party is entitled to its remedies under special legislations in public
law, the option of arbitration remains open. This could also imply that if the parties opt to
submit to arbitration, they are estopped from raising the issue of arbitrability either as a
preliminary objection before a tribunal or in the challenge to the award.

TENANCY DISPUTES

A division bench of the Supreme Court of India in VidyaDrolia& Others v Durga Trading
Corporation [Civil Appeal No. 2402 of 2019] (VidyaDrolia) has referred the matter to a
three-judge bench. The reference has primarily been made to reconsider the arbitrability of
tenancy disputes, as decided in Himangni Enterprises v Kamaljeet Ahluwalia [(2017) 10 SCC
706] (Himangni Enterprises), in the context of eviction proceedings and proceedings for
recovery of rent. 

The Supreme Court in Himangni Enterprises observed that the mere non-applicability of the
Delhi Rent Act did not mean that the Arbitration Act will ipso facto become applicable.
Instead, it was held that the dispute will be decided in accordance with the TP Act by civil
courts having jurisdiction. On the other hand, the Supreme Court in VidyaDrolia, after
analysing various provisions of the TP Act, has clearly observed that there is no provision
under the TP Act which ipso jure calls for an exclusion of tenancy disputes from
arbitrability. Separately, in Himangni Enterprises and VidyaDrolia,  the Supreme Court did
not have the occasion to consider the effect of the Presidency Small Cause Courts Act, 1882
(Presidency Act) and Provincial Small Cause Courts Act, 1887 (Provincial Act) on the
arbitrability of tenancy disputes. 
In Central Warehousing Corporation v Fortpoint Automotive Pvt. Ltd. [(2010) 1 Mh.L.J.
658](Central Warehousing), a three-judge bench of the Bombay High Court was required to
decide the issue. Relying on the Supreme Court’s decisions in MansukhlalDhanraj Jain v
EknathOgale [(1995) 2 SCC 665] and Natraj Studios, the Bombay High Court found that the
Presidency Act is a special law investing exclusive jurisdiction in the Court of Small Causes
to entertain and try disputes under Section 41 of the Presidency Act. It was observed that
arbitrability of such disputes must therefore be excluded due to Section 41 by necessary
implication. Accordingly, as on date in the State of Maharashtra, the Court of Small Causes
alone has jurisdiction over disputes relating to recovery of possession and/ or recovery of
rent. 

If the larger bench decides the issue of arbitrability in the affirmative, albeit to a limited
extent, it will also need to decide whether a court may examine the question of arbitrability in
an application under Section 11 of the Arbitration Act. This question is likely to be answered
in the negative. This is mainly because Section 11(6A) of the Arbitration Act circumscribes
the court’s power to examine anything substantive beyond the existence of the arbitration
agreement. As noted in VidyaDrolia, the Supreme Court has endorsed this view
in DuroFulguera v Gangavaram Port Ltd16.

OPPRESSION AND MISMANAGEMENT

The Supreme Court in Rakesh Malhotra v Rajinder Malhotra17 held that the disputes
regarding oppression and mismanagement are non-arbitrable and need to be necessarly
adjudicated upon by judicial authority. The Bombay High Court in this case, stated that a
petition under S 397 and 398 of the Companies Act, 2013 may comprise of conduct of
clandestine non-contractual actions that result in the mismanagement of the company’s
affairs in a manner prejudicial to the interests of the minority shareholders and the public in
general. However, the Court has created a small window of exceptions, allowing arbitrability
of cases where the petition is found to be frivolous, mala-fide of vexatious.

16
[(2017) 9 SCC 729]
17
CONCLUSION

Arbitration offers significant advantages for the resolution of many disputes. An arbitrator’s
powers normally derive from the arbitration agreement. In general, arbitration is not part of
the state’s judicial system, although the state sometimes assigns powers or functions directly
to arbitrators. Nonetheless, arbitration is still, in a broader sense, a part of the dispute
resolution system the legitimacy of which is fully recognized by the legislative
authorities.The law establishes a mechanism for overseeing arbitral activity that is intended to
preserve certain values that are considered fundamental in a legal system, despite the freedom
that the parties are given in determining the methods of resolution of their disputes

Today, on global level most of the disputes are considered arbitrable. The Indian courts,
however, have taken a conservative approach with respect to “opening up” the Indian legal
framework to dispute resolution by arbitration. The Booz-Allen approach would appear to be
very restrictive in as much as it does not take into consideration the need for the law to evolve
with the modern times. Commercial disputes lie in the realm of inter-party autonomy and
hence they would be willing to resolve any disputes arising out of such private arrangement
by a reference to persons appointed by them. If India has to emerge as International hub for
international arbitration, the Courts have to liberalise the rigid and conservative boundaries
that render disputes non-arbitrable.