Concept of Arbitrability of Arbitration

Agreements in India
lawweb.in /2017/11/the-concept-of-arbitrability-of.html

Arbitration is the grease that helps economies flow and brings us benefits around the
world.
David W. Rivkin[1]
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1. Introduction
Arbitration is a dynamic dispute resolution technique. An arbitrators powers normally
derive from the arbitration agreement. With increasing number of cross border
transactions and international trade contracts, arbitrability of arbitration agreement
holds a prominent place in resolution of international and domestic arbitrations.
2. Effect given to an arbitration agreement by court
Traditionally the parties move to court when the dispute relating to an arbitration
agreement arises. So the question that needs to be dealt with is how does a court give
effect to an arbitration agreement? It can be dealt in parts.
2.1 Where one party wants to institute arbitration and another one is uncooperative,
court may pass order compelling arbitration.
2.2 Where litigation is initiated over a claim falling within the scope of arbitration
agreement, court may dismiss the suit on grounds of lack of jurisdiction.
2.3 Depending on the law of the seat, the Court may even have powers to support the
arbitral tribunal - witnesses, documents, opinions.[2]
However, question is when can parties approach court even in presence of an
arbitration agreement? In other words, what makes a dispute non-arbitrable?
3. The Golden Rule
The Golden Rule is that if the dispute is covered by an Arbitration agreement, the said
dispute should be resolved by Arbitration. 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.[3] However, there
are exceptions to this Rule. There are several scenarios and circumstances, which
might render the dispute non-arbitrable.
4. Arbitrability
Arbitrability 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.[4] The term
arbitrability has different meanings in different contexts. The three facets of arbitrability,
relating to the jurisdiction of the arbitral tribunal, are as under: [5]
4.1 Whether the disputes are capable of adjudication and settlement by arbitration?
That is, whether the disputes, having regard to their nature, could be resolved by a
private forum chosen by the parties (the arbitral tribunal) or whether they would
exclusively fall within the domain of public fora (courts).[6]
4.2 Whether the disputes are covered by the arbitration agreement?
That is, whether the disputes are enumerated or described in the arbitration agreement
as matters to be decided by arbitration or whether the disputes fall under the excepted
matters excluded from the purview of the arbitration agreement.[7]
4.3 Whether the parties have referred the disputes to arbitration?
That is, whether the disputes fall under the scope of the submission to the arbitral
tribunal, or whether they do not arise out of the statement of claim and the counter
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claim filed before the arbitral tribunal.[8]
5. Drawing a line
While deciding the issue of arbitrability courts are required to draw a line between
arbitrable and non-arbitrable disputes on the basis of two different policy objectives:
5.1 Ensuring that sensitive matters of public interest are debated and resolved before
national courts, and
5.2 Promoting arbitration as a vibrant system of dispute resolution for parties who
freely chose to arbitrate rather than litigate their differences.[9]
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.[10]
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.[11]
6. Which law makes a dispute non -arbitrable?
The Courts have held that certain kinds of disputes may not be capable of adjudication
through the means of arbitration. Disputes like criminal offences of a public nature,
disputes arising out of illegal agreements and disputes relating to status, such as
divorce, cannot be referred to arbitration.[12]
6.1 The well recognized examples of non-arbitrable disputes are :
6.1.1 Disputes relating to rights and liabilities which give rise to or arise out of
criminal offences;
6.1.2 Matrimonial disputes relating to divorce, judicial separation, restitution of
conjugal rights, child custody
6.1.3 Guardianship matters
6.1.4 Insolvency and winding up matters
6.1.5 Testamentary matters (grant of probate, letters of administration and
succession certificate)[13]
6.1.6 Eviction or tenancy matters governed by special statutes[14]
6.1.7 Mortgage[15]
6.1.8 Cases arising out of Trust Deed and the Trust Act[16]
6.1.9 Patent, trademarks and copyright
6.1.10 Anti-trust/competition laws
6.1.11 Bribery
6.1.12 Fraud[17]
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6.2 Would mere allegation of fraud make Commercial Dispute Non-Arbitrable?
More recently, commentators and courts have taken the position that a mere allegation
of illegality should not relieve a tribunal of jurisdiction to determine the dispute,
including the question of illegality.[18]
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[19], finds that there 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. It can be so done also in those cases where there are serious allegations of
forgery/fabrication of documents in support of the plea of fraud or 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, meaning thereby in those cases
where fraud goes to the validity of the contract itself of the entire contract which
contains the arbitration clause or the validity of the arbitration clause itself. Reverse
position thereof would be that where there are simple allegations of fraud touching
upon the internal affairs of the party inter se and it has no implication in the public
domain, the arbitration clause need not be avoided and the parties can be relegated to
arbitration. While dealing with such an issue in an application under Section 8 of the
Act[20], the focus of the Court has to be on the question as to whether jurisdiction of
the Court has been ousted instead of focusing on the issue as to whether the Court has
jurisdiction or not. It has to be kept in mind that insofar as the statutory scheme of the
Act is concerned, it does not specifically exclude any category of cases as non-
arbitrable. Such categories of non-arbitrable subjects are carved out by the Courts,
keeping in mind the principle of common law that certain disputes which are of public
nature, etc. are not capable of adjudication and settlement by arbitration and for
resolution of such disputes, Courts, i.e. public for a, are better suited than a private
forum of arbitration. Therefore, the inquiry of the Court, while dealing with an
application under Section 8 of the Act[21], should be on the aforesaid aspect, viz.
whether the nature of dispute is such that it cannot be referred to arbitration, even if
there is an arbitration agreement between the parties. When the case of fraud is set up
by one of the parties and on that basis that party wants to wriggle out of that arbitration
agreement, a strict and meticulous inquiry into the allegations of fraud is needed and
only when the Court is satisfied that the allegations are of serious and complicated
nature that it would be more appropriate for the Court to deal with the subject matter
rather than relegating the parties to arbitration, then alone such an application under
Section 8 should be rejected.[22]
7. Whether Arbitrator can decide not arbitrable dispute?
If a non-arbitrable dispute is referred to an Arbitrator and even if an issue is framed by
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the Arbitrator in relation to such a dispute, there cannot be a presumption or a
conclusion to the effect that the parties had agreed to refer the issue to the Arbitrator.
There was a case where 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.[23]
8. Changing Scenario
Scenario on global level is changing. Increasingly, disputes involving antitrust laws,
which were formerly considered inappropriate for arbitration, are being arbitrated.
Securities issues are also arbitrable, at least in the United States.[24]
There has been seen the growing acceptance of arbitration, at least in the international
sphere, public policy limits to arbitrability are gradually disappearing. Arbitrators now
adjudicate disputes involving such public matters as intellectual property rights,
antitrust and competition, securities laws, bankruptcy, corporate law, taxation, and
allegations of fraud, corruption or bribery. [25]
8.1 Arbitration of competition law
Being regulatory law, it is foremost related to the governmental apparatus of
supervision over market practices purporting to prevent and/or sanction abusive
actions in the forms of antitrust agreements and abuse of dominant position, in broad
terms. Hence, competition law is primarily enforceable by designated regulatory
bodies. [26]
8.1.1 In spite of that, both doctrine and case law confirm that competition law may
be subject to private enforcement. US Supreme Court opined that where the Court
confirmed that obligations arising out of statutory rules would be arbitrable to the same
extent as contractual duties.[27] This constitutes private enforcement of competition
law since private claims are allowed to seek sanctions for breaches of statutory
competition rules (though private enforcement may lead only to a single remedy
compensation)
8.1.2 Spanish Court of Appeals also recently ruled on the arbitrability of
competititon law. The Court concluded that the EU law or Spanish law does not
preclude the arbitrability of the competition disputes as long as the relevant award
applied the mandatory competition rules. Therefore, competition law claims are
considered to be at free disposition of the parties.[28]
8.2 Arbitration of Copyright disputes
Canadian Supreme Court opined that In order to determine whether questions
relating to ownership of copyright fall outside arbitral jurisdiction, we must more clearly
define the concept of public order in the context of arbitration, where it may arise in a
number of forms, as it does here, for instance, in respect of circumscribing the
jurisdiction ratione materiae of the arbitration. Thus a matter may be excluded from the
field covered by arbitration because it is by nature a matter of public order. The concept
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also applies in order to define and, on occasion, restrict the scope of legal action that
may be undertaken by individuals, or of contractual liberty. The variable, shifting or
developing nature of the concept of public order sometimes makes it extremely difficult
to arrive at a precise or exhaustive definition of what it covers. The development and
application of the concept of public order allows for a considerable amount of judicial
discretion in defining the fundamental values and principles of a legal system. In
interpreting and applying this concept in the realm of consensual arbitration, we must
therefore have regard to the legislative policy that accepts this form of dispute
resolution and even seeks to promote its expansion. For that reason, in order to
preserve decisionmaking autonomy within the arbitration system, it is important that
we avoid extensive application of the concept by the courts. Such wide reliance on
public order in the realm of arbitration would jeopardize that autonomy, contrary to the
clear legislative approach and the judicial policy based on it.[29]
In these recent matters, even Bombay High Court opined that it is possible to lose sight
of the fact that in trademark and copyright disputes, we very often are confronted with
written agreements. In copyright matters, agreements are in fact a statutory
requirement for an assignment. There must be a written document. The law does not
say that the written document of assignment should have an arbitration clause. [30]
To quote Honble G.S. Justice Patel
What Mr. Dhond (counsel for plaintiff) suggests, in effect, is that in every one of these
cases, all these arbitration clauses must be treated as entirely null, void and otiose. No
law that I am aware of even remotely suggests anything of the kind. I think it would do
a very great violence not only to the language but to the purpose and ambit of the
Arbitration Act as also the Copyright Act, if I would have to read it in the manner Mr.
Dhond suggests. I find Mr. Dhond's protests, to the effect that the view I am inclined to
take would turn the entire edifice of intellectual property law on its head, needlessly
alarmist. It will do nothing of the kind. On the contrary, I believe an acceptance of Mr.
Dhond's view must result in widespread confusion and mayhem in commercial
transactions. We often have complex commercial documents and transactions that
routinely deal with intellectual property rights of various descriptions as part of the
overall transaction. This can be said of mergers, acquisitions, joint ventures, the setting
up of special purpose vehicles, technology transfer and sharing agreements, technical
tie-ups, licensing and so on. The range of fields of human activity that could possibly be
covered by any one or more of these is limited by nothing but our own imagination:
steel manufacturing, setting up of power plants, software, motor car manufacture,
computer hardware, music, films, books and literature, performances and even
services. If Mr. Dhond is correct, then in any of these cases, where intellectual property
rights are transferred or, for that matter, in any way dealt with, no dispute arising from
any such agreement or transactional document could ever be referred to arbitration,
and every single arbitration clause in any such document would actually, in his
formulation of it, be void and non-est ab initio. It would have to be so Sukanya
Holdings[31] will not allow a dispute relating to intellectual property rights to be
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segregated from other disputes. I do not think the world of domestic and international
commerce is prepared for the apocalyptic legal thermonuclear devastation that will
follow an acceptance of Mr. Dhond's submission.[32]
Therefore, it is safe to say that intellectual property dispute or at least copyrights
disputes are arbitrable.
9. Conclusion
Arbitration offers significant advantages for the resolution of many disputes. An
arbitrators powers normally derive from the arbitration agreement. In general,
arbitration is not part of the states 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. Therefore, initially
while negotiating national or international arbitration agreements it is necessary to look
at national laws and present issues with their arbitrability. It cannot be emphasized
enough that effective planning is very important in arbitration.
In cutting edge environment of international commercial arbitration, if India has to
emerge as a global hub for arbitration, national law and international law has a wide
role to play.

* Harshal Morwale, Final Year, B.A. LL.B. (5 Years), SNG Law College, Akola
[1] David W. Rivkin (Former President at the International Bar Association) (Quiet
Triumph : How Arbitration Changed The World)
[2] 'How does a Court give effect to arbitration agreements? ' (Law
Web) <http://www.lawweb.in/2017/09/how-does-court-give-effect-to.html> accessed 20
September 2017
[3] Hindustan Petroleum Corporation Ltd v Kamalkant Automobiles , 2017 (123) ALR
369 [High Court of Allahabad]
[4] Section 34.2. UNCITRAL Model Law, 1985
[5] Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd, (2011) 5 SCC 532 [Supreme
Court of India]
[6] Ibid
[7] Ibid

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[8] Ibid
[9] L. Yves Fortier, 'Arbitrability of Disputes' [2005] International Law, Commerce and
Dispute Resolution, 269-284
[10] Luljeta Plakolli-Kasumi, 'The Notion of Ordre Public: Arbitrability of Patent Law
Disputes' [2015] 1(1) Journal of Alternative Dispute Resolution in Kosovo, 12-24
[11] A Ayyasamy Vs A Paramasivam & Ors , AIR 2016 SC 4675 [Supreme Court of
India]
[12] Ibid
[13] 6.1.1 6.1.5 Supra note 5
[14] Supra note 5 - Where the tenant enjoys statutory protection against eviction and
only the specified courts are conferred jurisdiction to grant eviction or decide the
disputes.
[15] Supra note 5 - Under the Arbitration and Conciliation Act, 1996 only parties to the
arbitration agreement can refer their disputes to arbitration (being a right in personam).
Since the rights of a third party may be affected in a mortgage suit (being a right in
rem), such an action cannot be referred to arbitration under the Act.
[16] Shri Vimal Kishor Shah Vs Jayesh Dinesh Shah & Ors, (2016) 8 SCC 788,
[Supreme Court of India]
[17]6.1.9 6.1.12 - O.P. Malhotra on 'The Law & Practice of Arbitration and
Conciliation', (3rd edn)
[18] Margaret L. Moses, The Principles and Practice of International Commercial
Arbitration (3rd edn, Cambridge University Press 2017) pg. 35
[19] Section 8 - Power to refer parties to arbitration where there is an arbitration
agreement - THE ARBITRATION AND CONCILIATION ACT, 1996
[20] Ibid
[21] Ibid
[22] Supra note 11
[23] M/S Harsha Constructions v Union of India (2014) 9 SCC 246 [Supreme Court of
India]
[24] Supra Note 18
[25] Ibid
[26] Deyan Draguiev, 'Arbitrability of Competition Law Issues Reinforced', Kluwer
Arbitration Blog, January 10 2014,
[27] Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985)
[Supreme Court of United States]
[28] Camimalaga S.A.U. v. DAF Vehculos Industriales S.A.U., Audiencia Provincial
[2013] Appeal no. 66/2013
[29] Desputeaux v. ditions Chouett, [2003] 1 S.C.R. 178, [Supreme Court of Canada]
[30] Eros International Media Limited v. Telemax Links India, 2016 SCC OnLine Bom
2179, [High Court of Bombay]
[31] Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya (2003) 5 SCC 531) [Supreme
Court of India]
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[32] Supra note 30
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