Non-arbitrability of disputes in light of landmark judgments
Arbitration has become the default mechanism for resolving commercial disputes in India. It allows parties to exercise a considerable degree of autonomy by allowing them to designate a neutral and flexible arbitration forum. However, the arbitrator's ability to arbitrate is always a primary consideration before courts and arbitral tribunals.
In the absence of a clear position under the Arbitration and Conciliation Act of India, 1996 ("A&C Act"), the Supreme Court has repeatedly stated several principles for determining whether a dispute whether or not to be arbitrated/resolved by arbitration. It is imperative to assess the admissibility of disputes because the UNCITRAL Model Law allows national courts to reserve an arbitral award if the subject matter of the dispute is deemed non-arbitrable under national law.
The conundrum surrounding the admissibility of disputes was first resolved by the Supreme Court in Booz Allen and Hamilton v. SBI Home Finance Limited et al. ("Booz Allen"), where the court sets out the "challenge test" and classifies it into two segments, namely (i) the in-person rights (rights against specific individuals) admissible before the arbitrator; and (ii) the real right (right against the world in general) to be heard by courts and tribunals. The award reflects the arbitral approach and aims to broaden the scope of the dispute. While the principles enunciated in the Booz Allen case have long guided the determination of the admissibility of litigation, the Apex Court, in its recent decision of Vidya Drolia et al. The case against the Durga Commercial Corporation ("Vidya Drolia") clarified the view on the complexities surrounding the possibility of arbitration on the matter. He established a four-part test to determine the admissibility of disputes.
Thus, under the new test, a dispute cannot be arbitrated if the cause of the action or the subject matter of the dispute:
i. relating to actions in rem or actions that are not subordinate to the individual but are derived from rights in rem;
ii. it affects the rights of third parties, in effect erga omnes, requiring a centralized decision and a joint decision would be neither appropriate nor enforceable;
iii. it concerns the inviolable functions of the State's sovereignty and public interest; and iv, expressly or by implication necessary not to arbitrate under the mandatory laws.
The Supreme Court clarified that the air test does not provide a “watertight division” of disputes but is intended to assist courts and arbitrators in determining whether a particular dispute is divisible under Indian law or not.
(This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, or Religion, Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts made to ensure the accuracy and correctness of the information published, White Code VIA Mediation and Arbitration Centre Foundation shall not be responsible for any errors caused due to human error or otherwise.)