ARBITRABILITY OF DISPUTES – HAS THE LINGERING QUANDARIES BEEN RESOLVED?
Updated: Sep 23, 2020
[Ritika Modee and Chandrakant Dawani are Practicing Advocates at Gujarat High Court]
Indubitably, the arbitration mechanism of India has become one of the most robust dispute resolution mechanisms, yet there existed some predicaments which were yet to be solved. Certain questions such as, Who has the power to decide the question of arbitrability of disputes - courts or the arbitrator? Whether disputes arising under special statutes are arbitrable or not? Whether any judgment in rem can be passed by the arbitrator?
Recently, the Hon’ble High Court of Delhi has passed a judgment in the case of Dharamvir Khosla v. Asian Hotels (North) Ltd, whereby the above-mentioned quandaries have been succinctly resolved. Notably, the court while dealing with the question of arbitrability of disputes determined the following aspects.
Need to make an application under Section 8 of the Arbitration and Conciliation Act, 1996 (Act) for referring the dispute to arbitration;
Scope of Section 11 of the Act vis-à-vis Section 8 of the Act;
Arbitrability of right in rem and right in personam;
Arbitrability of disputes under special statutes and;
Arbitrability of any claim pertaining to right or interest in the land.
Brief Facts of the case
The Plaintiffs in the present case were licensees and the Defendant was the licensor. The two parties entered into an agreement for a license to use premises/shops on 1st September, 1982. On 29th May 2020, the Defendant terminated the licenses via a notice. Consequently, the Plaintiffs claimed the revocation/termination of licenses to be illegal. The Plaintiffs then filed a suit seeking a declaration in respect of their status in the shops i.e. for a decree declaring them the owners, for the execution of the documents of ownership, or in the alternative, decree declaring the licence in favour of the plaintiffs as an irrevocable licence in perpetuity. Subsequently, the Counsel for the Defendant objected to the maintainability of the suits in view of the clause relating to reference of disputes to arbitration in the licence agreement.
The court observed that even if no separate application under Section 8 of the Act has been made by the Defendant, the dispute can still be referred to the arbitration so long as an objection was raised in the written statement that suit is not maintainable in view of the arbitration clause in the agreement between the parties. Further, the Court observed that for invoking an arbitration, a party need not file a formal application under Section 8 of the Act seeking a specific prayer for reference of the dispute to arbitration.
Furthermore, the Court observed that an application for arbitrability of the dispute cannot be made under Section 11 of the Act. In an application under Section 8 of the Act;
“Court is required to go into the issue whether the dispute between the parties is arbitrable or not and if the dispute falls in “excepted matters” or relates to specific or special remedies, then there can be no reference to the arbitration and the civil suit has to be proceeded.”
Thus, in circumstances where the parties make an application to the court for the appointment of an arbitrator under Section 11 of the Act, the court cannot delve into the question of arbitrability of the dispute. However, where an application is made under Section 8 of the Act to refer the dispute to the arbitration based on the arbitration agreement between the parties, the Court has the power to determine the arbitrability of the dispute and can proceed with the civil suit if a specific remedy is claimed under Act which if granted would result in a judgment in rem.
Notably, the court further held that:
“application under Section 8 being a judicial order, the Court in such cases will not only consider the existence of the arbitration agreement between the parties but also determine whether the subject matter of the dispute is capable of adjudication by a public forum and not by a special court or tribunal or relates to any additional/specific relief falling in the category of excepted matter resulting in a judgment in rem.”
It is imperative to note that the court further observed that the actions in rem (i.e. a right exercisable against the world at large) are not arbitrable and the disputes relating to subordinate rights in personam (i.e. a right which is an interest protected against specified individuals) arising from rights in rem may still be arbitrable depending upon facts and circumstances of each case. However, the rule is not inflexible yet it will be followed unless changed.
Notably, the Court observed that the Supreme Court has in its several judgments noted categories of disputes which are not arbitrable however the said is not exhaustive and each case will have to be decided on the basis of the facts. The placed reliance on several judgments. Some of which are as follows:
1. Booz Allen & Hamilton and Inc v. SBI Home Finance Limited & Others, where the Hon’ble Supreme Court court observed that the scope of Section 8 of the Act is much wider than the scope of Section 11 of the Act. When an application is made to the court under Section 11 of the Act, the court is concerned only with the appointment of the arbitrator. Once it is established that there is an arbitration agreement between or among the parties then court will not go into the question of the arbitrability of the dispute. The issue of arbitrability is thereafter left for the adjudication of the arbitral tribunal. However, once an application is made under Section 8 of the Act in a pending suit, the issue of the arbitrability has to be decided by the court and the question cannot be left to be decided by the arbitrator.
Further, the court in the said case observed that where the subject matter of the suit is such that it can be adjudicated only by a public forum or relief claimed can only be granted by a special court or Tribunal, even if the dispute is covered by an arbitration agreement the court will refuse to refer the parties to arbitration.
Some examples of non-arbitrable disputes which were identified by the Court in the said case are:
(i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences;
(ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody;
(iii) guardianship matters;
(iv) insolvency and winding-up matters;
(v) testamentary matters (grant of probate, letters of administration and succession certificate) and;
(vi) 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 disputes.
2. The court placed reliance on the judgment in Emaar MGF v. Aftab Singh, wherein it was held that;
“the amendment in Section 8 cannot be given such expansive meaning and intent so as to inundate entire regime of special legislations where such disputes were held to be not arbitrable. Something which legislation never intended cannot be accepted as side wind to override the settled law. 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. It is only the case where specific/special remedies are provided for and which are opted by an aggrieved person that judicial authority can refuse to relegate the parties to the arbitration.”
3. Furthermore, reliance was further placed on the case of Vimal Kishor Shah v. Jayesh Dinesh Shah, where the court had held that even if there is an arbitration agreement the disputes within the trust, trustees and beneficiaries are not arbitrable. It was held that the remedy provided under the Arbitration Act for deciding such disputes is barred by implication. The ratio laid down is fully applicable with regard to disputes raised in consumer forum.
4. Finally, the court relied on the judgment in Olympus Superstructures v. Meena Vijay, where the Hon’ble Supreme Court had held that;
“the relief of specific performance of an agreement can be awarded by an arbitrator. Thus, if the arbitrator can direct creation of an interest in a property, the arbitrator can also award declaration of the interest of the parties in the property”.
Further, as held in Booz Allen, an agreement to sell or an agreement to mortgage does not involved any transfer of right in rem but creates a personal obligation and, therefore, the claim for specific performance will be arbitrable contrary to a mortgage which is a transfer of a right in rem. Moreover, as noted in Vidya Drolia, there is nothing in the Transfer of Property Act or the Specific Relief Act which forbids the rights of the parties being decided by arbitration.”
Consequently, the Court while relying on the aforesaid judgments observed that the rights of plaintiffs as claimed by them in the present case at best are governed by the Transfer of Property Act or the Specific Relief Act, or under the Easements Act being an irrevocable licensee which can be decided by arbitration and parties were consequently directed to avail the remedy of arbitration.
Owing to the ratio of the Court this imminent case, it has become crystal clear that the scope of Section 11 of the Act is narrower as compared to Section 8 of the Act and the courts cannot determine the arbitrability of the dispute when an application under Section 11 of the Act is made to the court for appointment of an arbitrator. Further arbitrability is a question which cannot be decided by abiding strictly to a rule book and will always be influenced by the facts and circumstances of each case. A right in rem is not arbitrable as contrasted to a right in personam. However, it is not a rigid rule and any right in personam which is a subset of right in rem may still be arbitrable.
Subsequently, the question of whether a dispute is arbitrable or not under Section 8 of the Act has to be decided by courts and not by the arbitrator. While deciding the arbitrability of the dispute the court has to also decide whether the same is determinable by public fora or any other special court or tribunal. Section 8 of the Act, cannot be given such an expansive interpretation such that the entire regime of special laws as per which any disputes arising thereunder are not arbitrable are besieged.
Pertinently, the question of arbitrability is complex and cannot be hinged to a hard and fast rule. Each case is unique and arbitrability of the dispute has to be decided on a case to case basis depending upon the existence of arbitration agreement and nature of the rights claimed. Each right is special and hence rights emanating from different sources have to be treated differently. Hence, arbitrability of each matter is also an exclusive question for which there cannot be a universal formula. However, the above-discussed case of Dharamvir Khosla v. Asian Hotels (North) Ltd. has rightly discussed and resolved numerous existing quandaries which are a certain step towards making the Arbitration framework more robust.