“Arbitration
is the grease that helps economies flow and brings us benefits around the
world.”
—David W. Rivkin[1]
1.
Introduction
Arbitration
is a dynamic dispute resolution technique. An arbitrator’s 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 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]
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 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 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 decision‑making 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 Hon’ble 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
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 arbitrator’s powers normally derive from the arbitration
agreement. In general, arbitration is not part of the state’s 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.
[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
[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 Vehículos Industriales S.A.U., Audiencia
Provincial [2013] Appeal no. 66/2013
[29] Desputeaux v. Éditions 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]
[32] Supra note 30
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