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Abstract

This article attempts to establish a comprehensive explanation regarding the disputes which can be resolved through arbitration, focusing on the difference between rights in personam and rights in rem. It discusses important court cases like Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. and Vidya Drolia & Ors. v. Durga Trading Corporation, which identify types of disputes that cannot be arbitrated and set out a test to determine if a dispute qualifies for arbitration. The article also looks at the legal rules in the Arbitration and Conciliation Act, 1996, stressing why it's crucial to correctly decide if a dispute can go to arbitration to prevent legal challenges to arbitration decisions.

Keywords: Arbitration, Dispute, Contract, Obligation. 

Introduction

The purpose of Arbitration is to provide an alternative method of dispute resolution, which is speedy, cost effective, customizable and preserves the commercial relationship between parties involved for future transactions.. It acts as the one step solution to combat the loopholes of lengthy and complex litigation procedures.

Arbitrability of a dispute basically refers to the scope of resolving a particular dispute through Arbitration. The general rule is that, all disputes involving rights in personam are arbitrable, and those involving rights in rem are non-arbitrable or resolved by courts or tribunals.

For instance, if “A” agrees to buy the car of “B”, in this case “B” will only have right in personam against “A”, as far as fulfilling contractual obligations are concerned. Similarly, “A” will also have a right in personam against “B” to get the car upon fulfilling the agreed conditions. Now, after the sale is executed, “A” will have right in rem in that car. Now, if any person damages that car, the right in rem of “A” gets violated.

In the context of this illustration, if any dispute arises between “A” and “B” in connection to the contract of sale between them, such disputes will be arbitrable. In the later case however, the dispute between the alleged damager of the car and “A” will not be arbitrable.

An action brought before an appropriate authority to enforce a right in personam is called action in personam, and similar analogy applies to action in rem.

Distinction between right in personam and right in rem

A clear distinction between the meaning of these aforementioned terms was articulated by the Hon’ble Supreme Court in the landmark case of Booz Allen and Hamilton Inc. V SBI Home Finance Ltd & Ors1, where the court stated that - “A right in rem is a right exercisable against the world at large, as contrasted from a right in personam which is an interest protected solely against specific individuals. Actions in personam refer to actions determining the rights andinterests of the parties themselves in the subject-matter of the case, whereas actions in rem refer to actions determining the title to property and the rights of the parties, not merely amongthemselves but also against all persons at any time claiming an interest in that property”2.

It is pertinent to note that the Arbitration and Conciliation Act, 1996, does not expressly provide for any list on the arbitrability of disputes. Section 2(3) provides that certain disputes may not be submitted to arbitration. Further, Sections 34 (2) (b) and 48 (2) of the Act however make it clear that an arbitral award will 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.

As a result, significant portion of the jurisprudence relating to arbitrability of disputes has evolved through case laws.

1 (2011) 5 SCC 532

2 Para 23, supra.

Booz Allen’s six classes of non-arbitrable disputes

The Hon’ble Supreme Court of India in the case of Booz Allen and Hamilton Inc. V SBI HomeFinance Ltd & Ors3inter alia provided some light upon which disputes are non-arbitrable. The court provided a list of six categories of disputes which are non-arbitrable. Those are -

1. disputes relating to rights and liabilities which give rise to or arise out of criminal offences;

1. matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody;

2. guardianship matters;

1. insolvency and winding up matters;

1. testamentary matters (grant of probate, letters of administration and succession certificate); and

2. eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes4

In 2016, the Supreme Court added a seventh category to the list of disputes that could not be arbitrated – disputes arising out of a trust deed under the Indian Trust Act, 1882. The Supreme Court in Shri Vimal Kishor Shah v. Jayesh Dinesh Shah & Others5. The rational behind this is that, when exclusive jurisdiction is conferred upon specific or special forum under a legislation, it bars disputes from being resolved through arbitration.

The Four-Fold test of arbitrability

In the landmark judgement of Vidya Drolia & Ors. vs. Durga Trading Corporation6, the apex court of the land, while dealing with a reference made by a divisional bench of the Hon'ble Supreme Court of India, provided a four-fold test to determine, whether a particular dispute is arbitrable or not -

The Hon'ble Supreme court held that, disputes are not arbitrable, when the cause of action and/or subject matter of the dispute -

1. relates to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem,

2. effects third party rights, have erga omnes effect, require centralized adjudication, and mutual adjudication would not be appropriate,

3. relates to inalienable sovereign and public interest functions of the state, and

1. is expressly or by necessary implication non-arbitrable under a specific statute7.

The Hon’ble court also held that tenancy disputes under the purview of Transfer of Property Act, 1882, provided no exclusive jurisdiction is conferred upon a particular forum through a legislation (such as Trust Act confers exclusive jurisdiction upon the principle civil court) are arbitrable unless the legal relationship between the landlord and tenant is governed by some special act, such as the rent control act of a particular state.

Even if a dispute is found to arbitrable in accordance with its nature, still it could become non- arbitrable, because in the Booz Allen case it was held that – “A dispute, even if it is capable of being decided by arbitration and falling within the scope of arbitration agreement, will not be

`arbitrable' if it is not enumerated in the joint list of disputes referred to arbitration, or in the absence of such joint list of disputes, does not form part of the disputes raised in the pleadings before the arbitral tribunal”8.

When certain issues under a dispute are arbitrable

In the Booz Allen case, the Hon’ble Supreme Court held that “Even if some of the issues or questions in a mortgage suit (as pointed out by the appellant) are arbitrable or could be decided by a private forum, the issues in a mortgage suit cannot be divided”9. The Hon’ble Supreme Court relied on the judgement of the court in the case of Sukanya Holdings (P) Ltd. v. Jayesh H.Pandya10, where it held that -“If bifurcation of the subject matter of a suit was contemplated, the legislature would have used appropriate language to permit such a course. Since there is no such indication in the language, it follows that bifurcation of the subject matter of an action brought before a judicial authority is not allowed”.

Hence, it can be said that, if in a certain dispute, certain issues fall within the scope of being arbitrable, and other issues do not, then in that case, the entire dispute will be deemed “non- arbitrable”.

9para 29.

10 2003 (5) SCC 531.

Arbitration vis-a-vis the Code on Civil Procedure, 1908

Section 89 of CPC, 1908, as it exists now, was inserted by CPC (Amendment) Act, 1999, which came into effect on July 1, 2002. The Code did make a provision for ADR once. That provision was repealed by the Arbitration Act, 1940 (Act 10 of 1940) by Section 49 and Schedule 10, removing the old provision which dealt exclusively with the procedures for arbitration under the Second Schedule of the Code.

It was considered that the Arbitration Act, 1940 had sufficient consolidation of the law for the purposes of eliminating Section 89.

However, what came back was a much wider Section 89 with alternatives other than arbitration. The new Section 89 formed a part of the Code by virtue of Section 7 of the CPC Amendment Act, 1999, in order to bring about an extra adjudicatory mechanism for dispute resolution without having to resort to trial, at the behest of the Law Commission of India and the Malimath Committee report.

Additionally, Rule 1A of Order 10 gives power to the court to direct that the parties in a suit opt for any one of the processes of ADR after their admissions and denials are recorded. The court may order the parties to opt for one of the five processes of ADR developed under Section 89(1) and fix a date on which the parties shall appear before the forum or authority chosen by them.

Under Order 10 Rule 1B, it is provided for that, upon referral of suit for ADR under Rule 1A, the parties will appear before the forum or authority to which the suit has been referred for conciliation.

Inaction on failure of conciliation is provided for in Order 10 Rule 1C. If the Forum or authority is of the view that no further action is desirable in the interest of justice, it shall re-refer the case to the court. The latter shall pass an order for the parties to appear before it on a date fixed in this behalf.

It is important to categorically assert that the court cannot determine the settlement terms unless the presiding judge has discussed it elaborately with both parties. In this regard, it would be very Utopian and ineffective if the court was to set forth the conditions of settlement based on pleadings alone. In the case of Salem Advocate Bar Assn. v. Union of India (2005), while examining the aforesaid issue, the Supreme Court treated "terms of the settlement" as a "summary of disputes." It may be seen that courts are found to be on very tender ground while implementing the terms of Section 89 stipulating draft conditions of settlement by the judge.

Conclusion

The issue of arbitrability of a dispute is of crucial significance. If an award is passed, and later the nature of dispute is found to be non-arbitrable by the court, the award becomes qualified to be set aside u/s 34 of the Act. Further, there is waste of time, cost and other resources invested in such arbitration proceedings. Even in cases of International Commercial Arbitration, enforcement of a foreign award is liable to be refused if the subject-matter of differences between the parties is not capable of settlement by arbitration under the law of India.

Hence, it is important for the courts to apply the four-fold test enumerated by the Hon’ble Supreme Court of India, in Vidya Drolia Case, while dealing with application u/s 8 or 11 of the Act.

The ultimate aim of adjudicating authorities is to determine the rights and liabilities of the parties to a dispute are settled justly and in accordance with applicable provisions of law. In order to ensure that such purpose is duly followed, it is more appropriate for the courts to determine the arbitrability of dispute, before referring the matter to arbitration.

In actuality, section 16 gives the arbitrator the power to decide whether a matter can be arbitrated. After being determined to be arbitrable, the case is then sent to the court under section 34 solely for a "second-look" at the arbitrability issue. When considering applications under sections 8 and 11, courts must limit their investigation to whether an arbitration agreement exists and must refrain from deciding whether the issue can be arbitrated. Despite the 2019 modification, the judicial precedents on section 11 from before the 2016 amendment are no longer valid.

It is pertinent to mention that in the Vidya Drolia case itself, the Hon’ble Supreme Court opined that “The court is not powerless and would not act beyond jurisdiction, if it rejects an application for reference, when the arbitration clause is admittedly or without doubt is with a minor, lunatic or the only claim seeks a probate of a will”11. This, by implication means that even if the court while examining an application u/s 8 of the Act, rejects it due to the non- arbitrability of the dispute, such a rejection will be legally valid.