Non-Arbitrability: Not every dispute, you can take to arbitration

Yes, you heard it right. You can’t force every kind of disputes to arbitration despite you and your counterparts have an arbitration agreement or agree to arbitration. For different – different reasons, various disputes are either incapable of or intrinsically inappropriate for arbitration. Such disputes are regarded as non-arbitrable.

What happens if an Arbitral Tribunal finds a dispute non-arbitrable? It’ll cease to proceed further for deciding the dispute for which it was constituted. The arbitral proceedings will end with an order by the Tribunal that the subject matter of the dispute is non-arbitrable. Consequently, there will be no award addressing the dispute. For the adjudication of such a dispute, parties will be left free to explore and pursue other legal remedies.

Understanding Non-Arbitrability through Examples

The Supreme Court exhaustively dealt with the issue of non-arbitrability in the case of Vidya Drolia vs. Durga Trading Corporation*. It laid down four principles to determine if a given dispute is non-arbitrable. To put this concept in perspective, let’s quickly look at some examples of non-arbitrable disputes before we turn to these principles:

• Consumer Disputes: Arbitration agreements between businesses and their clients, who are considered consumers under the Consumer Protection Act 1986 or the Consumer Protection Act 2019, won’t be effective. Consumer disputes are non-arbitrable, meaning businesses will have to defend themselves before consumer forums or commissions only. Arbitration cannot bypass these forums.
• Debt Recovery: For the recovery of debt covered by the Recovery of Debt & Bankruptcy Act 1993, lenders cannot resort to arbitration even if there is an arbitration clause in the loan agreement. The exception to this is multi-state cooperative societies, which can go for arbitration as the Multi State Cooperative Societies Act 2002 specifically provides for it.
• Landlord-Tenant Disputes: You can seek to arbitrate disputes with your landlord or tenant, as these are generally not considered non-arbitrable. Therefore, including an arbitration clause can be worthwhile. However, if the subject property is situated in a state where a specific statute governs landlord-tenant relationships, such disputes might be non-arbitrable depending on the statute.
• IPR Disputes: While disputes concerning the grant of patents, copyrights etc are non-arbitrable, you can surely depend on arbitration clause for adjudicating disputes arising from the licensing of IPRs.

Criteria to Adjudge Non-Arbitrability

Here are the four principles laid down by the Supreme Court authoritatively to determine non-arbitrability:

1. Statutory Bar: If the adjudication of the dispute is provided for by a statute that expressly or by necessary implication bars arbitration.
2. Rights in Rem: When the dispute concerns rights in rem (rights against the world at large), as opposed to subordinate rights in personam (rights against specific individuals) arising from rights in rem, which are surely excluded.
3. Third-Party Effects: When the cause of action giving rise to the dispute affects third parties and the decision on the dispute has an erga omnes (toward all) effect.
4. Sovereign Functions and Public Interest: When the cause of action and subject matter of the dispute relate to the sovereign functions of the State or its public interest duties.

With an arbitration clause in a contract, not all disputes arising out of the contract compulsorily go to arbitration. You can choose what disputes will go in arbitration and what disputes will not be submitted to arbitration. You need to specify so in the arbitration clause.

By understanding what disputes can and cannot be arbitrated, businesses can make more informed decisions when drafting contracts and resolving conflicts. Ensuring your agreements align with these legal principles can save time and resources, and prevent illegitimate legal proceedings.

If you're unsure about the arbitrability of your disputes or need assistance in drafting effective arbitration clauses, reach out to us for guidance. Protect your business interests by staying informed and prepared.

• (2021) 2 SCC 1

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