The Supreme Court recently overruled two of its previous judgments that precluded certain subject matters from falling under the ambit of arbitration, thereby limiting its scope. It overruled its judgment in the ‘N. Radhakrishnan’ case by making disputes involving serious allegations of fraud arbitrable. It secondly overruled its judgment in ‘Himangni Enterprises’ case by further expanding the scope of Arbitration by making landlord-tenant disputes under the Transfer of Property Act, 1882 arbitrable.The Court also laid a fourfold test, which has been discussed in this article, for determining whether a dispute can be referred for arbitration. Arbitration, which is governed by the Arbitration and Conciliation Act, 1996, is an alternate dispute resolution (ADR) mechanism for settling disputes outside the Courts through ‘Arbitrators’.
ARBITRATION IN INDIA
In India, Arbitration is codified under the Arbitration and Conciliation Act, 1966. It is an alternate dispute resolution (ADR) mechanism wherein the dispute is settled out of court through an arbitrator, who is usually appointed by the Court. The Arbitrator/Arbitrators conduct the Arbitration Proceeding outside the court and hears both the side before pronouncing the ‘Arbitral Award’, which has similar mandate and binding power as decree of the court, and is also enforceable by courts.
While entering into an agreement, the parties can prefer to have an Arbitration Clause in such agreement, which can be invoked by either of them in case of a dispute by moving an application in court under Section 8 of the Act. If the court where the suit was originally filed by the other party (who is subject to the arbitration clause), finds the Arbitration Clause valid, it can refer the parties for Arbitration by appointing arbitrators in accordance with the act. Despite having numerous advantages, the scope of arbitration remains limited in India on account of several instances. While on some instances the Court feels that any of the parties might get exploited during arbitration, on others it thinks that the Arbitrators might not be as competent as it to deal with certain subject matters.
On December 14, 2020, the Supreme Court had passed a judgment in the case of Vidya Drolia v. Durga Trading Corporation.[i] The reason why this particular judgment made it to the mainstream news was that it overruled two previous judgments of the Supreme Court in a sweep, and also because it is said to have immensely increased the scope of Arbitration in India. The judgment has now opened gates for settling certain disputes like those involving serious allegations of fraud and those involving relationship between landlords and tenant, which were earlier precluded, outside the courts through arbitration.
ALLEGATIONS OF FRAUD NOW ARBITRABLE
The three judge’s Bench comprising Justices N.V. Ramana, Sanjiv Khanna and Krishna Muraripassed the present judgment overruling its judgment in N. Radhakrishnan vs M/S. Mastero Engieers[ii](N. Radhakrishnan case) by holding that allegations of fraud can also be referred to arbitration by courts. Earlier, in the N. Krishnan case, the two-judge’s bench had precluded matters relating to allegations of fraud or manipulation of finances from being referred to arbitration, reasoning that an Arbitrator could not be competent to deal with such matters which involved an elaborate production of evidence to establish the claims relating to fraud and criminal misappropriation.
However, the Bench in the present case rejected the same by putting forward thesis that Arbitrators are in fact experts in their field and far more competent to decide the matter for which they are appointed. The Bench also observed that excluding arbitration from such matters would imply that it is a flawed and compromised dispute resolution mechanism that can be forgone when public interest or public policy demands the dispute should be tried and decided in the court of law. The Court emphasized numerous benefits of making the matter arbitrable.
The Court finally favoured arbitration by observing: “There is a general presumption in favour of arbitrability, which is not excluded simply because the dispute is permeated by applicability of mandatory law. Violation of public policy by the arbitrator could well result in setting aside the award on the ground of failure to follow the fundamental policy of law in India, but not on the ground that the subject matter of the dispute was non-arbitrable.”
LANDLORD-TENANT DISPUTES UNDER TPA NOW ARBITRABLE
Secondly, this judgment (i.e. Vidya Drolia v. Durga Trading Corporation) overruled the judgment passed in case of Himangni Enterprises v. Kamaljeet Singh Ahluwalia[iii] (Himangni Enterprises case) that precluded those matters from being arbitrable where Transfer of Property Act, 1882 (TPA) would apply between the landlord and the tenant. The Bench in the present case reasoned that since a dispute between landlord and tenant is an action in personam and not an action in rem, there is no reason for excluding them from the scope of arbitration.
However, those disputes which are governed by any rent control legislation would still continue to remain non-arbitrable because the legislation usually gives exclusive jurisdiction to a specific court or forum for applying and deciding special rights and obligations. The bench overruled the previous judgment by observing that,“the Transfer of Property Act does not forbid or foreclose arbitration. However, landlord-tenant disputes covered and governed by rent control legislation would not be arbitrable when specific court or forum has been given exclusive jurisdiction to apply and decide special rights and obligations. Such rights and obligations can only be adjudicated and enforced by the specified court/forum, and not through arbitration.”
FOURFOLD FORMULA DETERMINING WHETHER MATTER IS ARBITRABLE
Through this present judgment, the Court has also tried to establish a formula which would help other courts in future to decide whether a particular subject-matter should be put under the ambit of Arbitration. In the judgment, it has suggested a suggested this fourfold test for determining what all matters cannot be referred for arbitration. According to it, all matters except those under the following four categories are arbitrable:
1. When cause of action and subject matter of the dispute relates to actions in rem that do not pertain to subordinate rights in personam that arise from rights in rem(rights in rem are those rights which are sought from society as whole, while rights in personam are those which are sought from a specific individual).
2. When cause of action and subject matter of the dispute affects third party rights; have erga omnes effect; require centralized adjudication, and mutual adjudication would not be appropriate and enforceable;
3. When cause of action and subject matter of the dispute relates to inalienable sovereign and public interest functions of the State and hence mutual adjudication would be unenforceable; and
4. When the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s).
The Court also used this very test to clarify certain subject-matters which cannot be referred for arbitration. The Court relied on judgment in Booz Allen & Hamilton Inc.[iv]to illustrate the following types of cases which still remain exclusive to courts:
- disputes relating to rights and liabilities which give rise to or arise out of criminal offenses;
- matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody;
- guardianship matters;
- insolvency and winding-up matters;
- testamentary matters (grant of probate, letters of administration and succession certificate);
- 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.
The above development indicates that the Judiciary is acknowledging the growing burden on courts due to the overwhelming plethoraof cases and is realizing the importance of not just Arbitration, but alternate dispute resolution forums in general for attenuating such burden. As of 2019, theSupreme Court alone has over 59 thousand cases pending, while the number of cases pending atdistrict courts stand at a whopping 3.14 crores. With the population growing at an ever-expanding rate and new cases witnessing such drastic spurt, it is the need of the hour to constantly update these resolution forums as per the changingneeds of the time. It is a welcome move that the Supreme Court is cautiously studying thesechanging needs and making consistent efforts to increase the role of Arbitration in India, by showing faith in it and making such subject matters arbitrable which it earlier found Arbitrators incompetent to deal with.
- [i] CIVIL APPEAL NO. 2402 OF 2019.
- [ii] CIVIL APPEAL NO.7019 OF 2009.
- [iii] CIVIL APPEAL No. 16850 OF 2017.
- [iv] CIVIL APPEAL NO.5440 OF 2002.