# VIDYA DROLIA AND OTHERS v. DURGA TRADING CORPORATION

- **Citation:** [2020] 11 S.C.R. 1001
- **Court:** Supreme Court of India
- **Decided:** 2020-12-14
- **Case number:** Civil Appeal No. 2402 of 2019
- **Bench:** N.V. Ramana, Sanjiv Khanna, Krishna Murari
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/vidya-drolia-and-others-v-durga-trading-corporation-34496
- **Pages:** 180

## Headnote

Arbitration and Conciliation Act, 1996:
ss. 8 and 11 - Jurisdiction under - Judicial review - Scope
and ambit of - Held: Per Sanjiv Khanna, J. - Scope of judicial
review and jurisdiction of the Court u/s. 8 and 11 is identical, but
extremely limited and restricted - The court may interfere at the
stage of jurisdiction u/ss. 8 and 11, when it is manifestly and ex
facie certain that the arbitration agreement is non-existent, invalid
or the disputes are non-arbitrable - The court can not interfere
and refer the matter for arbitration when contentions relating to
non-arbitrability are plainly arguable; when consideration in
summary proceedings would be insufficient and inconclusive; when
facts are contested; and when the party opposing arbitration adopts
delaying tactics or impairs conduct of arbitration proceedings -
This is not the stage for the court to enter into a mini trial or elaborate
review so as to usurp the jurisdiction of the arbitral tribunal - At
this stage the court is required to affirm and uphold integrity and
efficacy of arbitration as an alternative dispute resolution mechanism
- Per Ramana, J. - Sections 8 and 11 have the same ambit i.e.
limited judicial interference at reference stage - Usually subject
matter arbitrability cannot be decided at the stage of ss. 8 and 11,
unless it's a clear case of deadwood - Unless a party has established
a prima facie case of non-existence of valid arbitration agreement,
the court has to refer the matter for arbitration or to appoint an
arbitrator as the case may be i.e. 'when in doubt, do refer' - The
scope of the court to examine the prima facie validity of an arbitration
agreement includes only (i) whether arbitration agreement was in
writing; (ii) whether such agreement was contained in exchange of
letters, telecommunication etc. (iii) whether the core contractual
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ingredients qua arbitration agreement were fulfilled; and (iv) on
rare occasions, whether the subject-matter of dispute is arbitrable.
Arbitration:
Landlord-tenant dispute - Governed by Transfer of Property
Act - Arbitrability of - Held: In order to determine whether the
subject-matter of a dispute in an arbitration agreement is not
arbitrable, the four-fold test is when cause of action and subject
matter of dispute (i) relates to action in rem that do not pertain to
subordinate rights in personam that arise from rights in rem; (ii)
affects third party rights, have erga omnes effect, require centralized
adjudication and mutual adjudication would not be appropriate
and enforceable; (iii) relates to inalienable sovereign and public
interest functions of the State and hence mutual adjudication would
be unenforceable;(iv) expressly or by necessary implication nonarbitrable as per mandatory statutes - However, these tests are not
watertight compartments - Landlord-tenant disputes governed by
Transfer of Property Act are arbitrable as per the tests
aforementioned - However, such disputes, if covered by rent control
legislation giving exclusive jurisdiction to specific court or forum,
would not arbitrable - Transfer of Property Act, 1882.
Deeds and Documents:
Arbitration agreement - Interpretation of - Held: The approach
as to interpretation of arbitration agreement would depend upon
various factors such as language, parties, nature of relationship,
factual background in which the agreement was entered, etc. - In
case of pure commercial disputes, more appropriate principle of
interpretation would be the one of liberal construction as there is
presumption in favour of one-stop adjudication.
Doctrines/Principles:
Principle of 'separation' and 'competence-competence' -
Applicability of - Discussed.
Doctrine of 'election' - Applicability of.
'Second look' principle - Applicability of.
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Judgment:
Judgment in rem and judgment in personam - Distinction
between - Discussed.
Words and Phrases:
'Agreement' - Meaning o

## Text

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VIDYA DROLIA AND OTHERS
v.
DURGA TRADING CORPORATION
(Civil Appeal No. 2402 of 2019 etc.)
DECEMBER 14, 2020
[N.V. RAMANA, SANJIV KHANNA AND
KRISHNA MURARI, JJ.]
Arbitration and Conciliation Act, 1996:
ss. 8 and 11 - Jurisdiction under - Judicial review - Scope
and ambit of - Held: Per Sanjiv Khanna, J. - Scope of judicial
review and jurisdiction of the Court u/s. 8 and 11 is identical, but
extremely limited and restricted - The court may interfere at the
stage of jurisdiction u/ss. 8 and 11, when it is manifestly and ex
facie certain that the arbitration agreement is non-existent, invalid
or the disputes are non-arbitrable - The court can not interfere
and refer the matter for arbitration when contentions relating to
non-arbitrability are plainly arguable; when consideration in
summary proceedings would be insufficient and inconclusive; when
facts are contested; and when the party opposing arbitration adopts
delaying tactics or impairs conduct of arbitration proceedings -
This is not the stage for the court to enter into a mini trial or elaborate
review so as to usurp the jurisdiction of the arbitral tribunal - At
this stage the court is required to affirm and uphold integrity and
efficacy of arbitration as an alternative dispute resolution mechanism
- Per Ramana, J. - Sections 8 and 11 have the same ambit i.e.
limited judicial interference at reference stage - Usually subject
matter arbitrability cannot be decided at the stage of ss. 8 and 11,
unless it's a clear case of deadwood - Unless a party has established
a prima facie case of non-existence of valid arbitration agreement,
the court has to refer the matter for arbitration or to appoint an
arbitrator as the case may be i.e. 'when in doubt, do refer' - The
scope of the court to examine the prima facie validity of an arbitration
agreement includes only (i) whether arbitration agreement was in
writing; (ii) whether such agreement was contained in exchange of
letters, telecommunication etc. (iii) whether the core contractual
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ingredients qua arbitration agreement were fulfilled; and (iv) on
rare occasions, whether the subject-matter of dispute is arbitrable.
Arbitration:
Landlord-tenant dispute - Governed by Transfer of Property
Act - Arbitrability of - Held: In order to determine whether the
subject-matter of a dispute in an arbitration agreement is not
arbitrable, the four-fold test is when cause of action and subject
matter of dispute (i) relates to action in rem that do not pertain to
subordinate rights in personam that arise from rights in rem; (ii)
affects third party rights, have erga omnes effect, require centralized
adjudication and mutual adjudication would not be appropriate
and enforceable; (iii) relates to inalienable sovereign and public
interest functions of the State and hence mutual adjudication would
be unenforceable;(iv) expressly or by necessary implication nonarbitrable as per mandatory statutes - However, these tests are not
watertight compartments - Landlord-tenant disputes governed by
Transfer of Property Act are arbitrable as per the tests
aforementioned - However, such disputes, if covered by rent control
legislation giving exclusive jurisdiction to specific court or forum,
would not arbitrable - Transfer of Property Act, 1882.
Deeds and Documents:
Arbitration agreement - Interpretation of - Held: The approach
as to interpretation of arbitration agreement would depend upon
various factors such as language, parties, nature of relationship,
factual background in which the agreement was entered, etc. - In
case of pure commercial disputes, more appropriate principle of
interpretation would be the one of liberal construction as there is
presumption in favour of one-stop adjudication.
Doctrines/Principles:
Principle of 'separation' and 'competence-competence' -
Applicability of - Discussed.
Doctrine of 'election' - Applicability of.
'Second look' principle - Applicability of.
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Judgment:
Judgment in rem and judgment in personam - Distinction
between - Discussed.
Words and Phrases:
'Agreement' - Meaning of.
'Arbitration agreement' - Meaning of.
'Legal relationship' - Meaning of.
'Arbitration agreement in writing' - Meaning of.
'Existence' - Meaning of.
'Examination' - Meaning of.
'Existence of an arbitration agreement' - Meaning of.
'Arbitrability' - Meaning of.
'Prima facie' - Meaning of.
Answering the referred questions and disposing of the
appeal and the SLPs, the Court
HELD:
Per SANJIV KHANNA, J. (for himself and KRISHNA
MURARI, J.):
1.1 Arbitration is a private dispute resolution mechanism
whereby two or more parties agree to resolve their current or
future disputes by an arbitral tribunal, as an alternative to
adjudication by the courts or a public forum established by law.
Parties by mutual agreement forgo their right in law to have their
disputes adjudicated in the courts/public forum. Arbitration
agreement gives contractual authority to the arbitral tribunal to
adjudicate the disputes and bind the parties. [Para 10][1047-GH]
1.2 The expression 'arbitration agreement' has been
defined in clause (b) of sub-section (1) of s. 2 of Arbitration and
Conciliation Act, 1996 (Arbitration Act) to mean an agreement
as defined in Section 7 of the Arbitration Act. The term
'agreement' is not defined in the Arbitration Act, albeit it is defined
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in Section 10 of the Contract Act, 1872 ('Contract Act'), as
contracts made by free consent of parties competent to contract,
for a lawful consideration and with a lawful object, and are not
thereby expressly declared to be void. An arbitration agreement
should satisfy the mandate of Section 10 of the Contract Act, in
addition to satisfying other requirements stipulated in the Section
7 of the Arbitration Act. [Paras 10 and 11][1048-A-H; 1049-A-B]
1.3 Section 28 of the Contract Act states that agreements
in restraint of legal proceedings are void, but Explanation (1)
specifically saves contracts by which two or more persons agree
that any dispute, or one which may arise between them, in respect
of any subject or class of subjects shall be referred to arbitration.
Arbitration agreement must satisfy the objective mandates of the
law of contract to qualify as an agreement. Clauses (g) and (h) of
Section 2 of the Contract Act state that an agreement not
enforceable in law is void and an agreement enforceable in law is
a contract. As a sequitur, it follows that an arbitration agreement
that is not enforceable in law is void and not legally valid. [Para
11][1049-D-E]
1.4 Sub-section (1) to Section 7 of Arbitration Act ordains
that the arbitration agreement should be in respect of disputes
arising from a defined legal relationship, whether contractual or
not. The expression 'legal relationship', again not defined in the
Arbitration Act, means a relationship which gives rise to legal
obligations and duties and, therefore, confers a right. These
rights may be contractual or even non-contractual. Non-contractual
disputes would require a separate or submission arbitration
agreement based on the cause of action arising in tort, restitution,
breach of statutory duty or some other non-contractual cause of
action. [Para 12][1049-F-G; 1050-A]
Russell on Arbitration, 24th Edition # 2-004 - referred
to.
1.5 Sub-section (2) to Section 7 states that an arbitration
clause may be in the form of a separate agreement or form a part
of the underlying or another contract. Clause (3) of Section 7 of
the Arbitration Act states that the arbitration agreement shall be
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in writing, that is, the agreement should be evidenced in writing.
By clause (4) the term 'arbitration agreement in writing' would
include any agreement by exchange of letters, telegrams,
electronic mails or communications which provide a record of
the agreement or exchange of statements of claim and defence
in which one party claims the existence of the agreement and the
other party does not deny it. Sub-section (5) to Section 7 states
that reference in a contract to a document containing an arbitration
clause would constitute a valid arbitration agreement if the
contract is in writing and reference is made to the arbitration
clause that forms a part of the contract. [Para 13][1050-B-D]
1.6 Questions as to the existence of an arbitration agreement
also arise when a party opposing the reference raises plea of
novation of contract by entering into a new contract in substitution
of the original or 'accord and satisfaction' by acceptance of
modified obligations in discharge of the contract by performance
or simple termination by express or implied consent. Similar plea
of discharge can be raised opposing an application for reference
on the ground that the claim is long barred and dead or there are
no outstanding disputes as the parties have accepted part
performance or have absolved the other side from performance,
fully or partly, on account of frustration or otherwise. The
contention being that once the original contract stands
extinguished, abandoned, repudiated or substituted, the
arbitration clause in the underlying/original contract perishes with
it. [Para 14][1050-D-F]
1.7 Arbitration being a matter of contract, the parties are
entitled to fix boundaries as to confer and limit the jurisdiction
and legal authority of the arbitrator. An arbitration agreement
can be comprehensive and broad to include any dispute or could
be confined to specific disputes. The issue of scope of arbitrator's
jurisdiction invariably arises when the disputes that are arbitrable
are enumerated or the arbitration agreement provides for
exclusions as in case of 'excepted matters'. The arbitration
agreement may be valid, but the arbitral tribunal in view of the
will of the parties expressed in the arbitration agreement, may
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not have jurisdiction to adjudicate the dispute. The will of the
parties as to the scope of arbitration is a subjective act and
personal to the parties. [Para 15][1050-G-H; 1051-A]
1.8 A judgment is a formal expression of conclusive
adjudication of the rights and liabilities of the parties. The
judgment may operate in two ways, in rem or in personam. A
judgment in rem determines the status of a person or thing as
distinct from the particular interest in it of a party to the litigation;
and such a judgment is conclusive evidence for and against all
persons whether parties, privies or strangers of the matter
actually decided. Such a judgment "settles the destiny of the res
itself" and binds all persons claiming an interest in the property
inconsistent with the judgment even though pronounced in their
absence. By contrast, a judgment in personam, "although it may
concern a res, merely determines the rights of the litigants inter
se to the res". Distinction between judgments in rem and
judgments in personam turns on their power as res judicata, i.e.
judgment in rem would operate as res judicata against the world,
and judgment in personam would operate as res judicata only
against the parties in dispute. Use of expressions "rights in rem"
and "rights in personam" may not be correct for determining nonarbitrability because of the inter-play between rights in rem and
rights in personam. Many a times, a right in rem results in an
enforceable right in personam. [Para 30][1061-D-E; 1062-B-E]
G.C.Cheshire and P.M North, Private International Law
by North and Fawcett (London:Butterworth's) 1992
- referred to.
1.9 Arbitration by necessary implication excludes actions
in rem. Exclusion of actions in rem from arbitration, exposits the
intrinsic limits of arbitration as a private dispute resolution
mechanism, which is only binding on 'the parties' to the arbitration
agreement. The courts established by law on the other hand enjoy
jurisdiction by default and do not require mutual agreement for
conferring jurisdiction. The arbitral tribunals not being courts of
law or established under the auspices of the State cannot act
judicially so as to affect those who are not bound by the arbitration
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clause. Arbitration is unsuitable when it has erga omnes effect,
that is, it affects the rights and liabilities of persons who are not
bound by the arbitration agreement. Equally arbitration as a
decentralized mode of dispute resolution is unsuitable when the
subject matter or a dispute in the factual background, requires
collective adjudication before one court or forum. Certain disputes
as a class, or sometimes the dispute in the given facts, can be
efficiently resolved only through collective litigation proceedings.
Contractual and consensual nature of arbitration underpins its
ambit and scope. Authority and power being derived from an
agreement cannot bind and is non-effective against nonsignatories. An arbitration agreement between two or more
parties would be limpid and inexpedient in situations when the
subject matter or dispute affects the rights and interests of third
parties or without presence of others, an effective and enforceable
award is not possible. Prime objective of arbitration to secure
just, fair and effective resolution of disputes, without unnecessary
delay and with least expense, is crippled and mutilated when the
rights and liabilities of persons who have not consented to
arbitration are affected or the collective resolution of the disputes
by including non-parties is required. Arbitration agreement as
an alternative to public fora should not be enforced when it is
futile, ineffective, and would be a no result exercise. [Para
31][1062-G; 1063-A-E]
Prof. Stavros Brekoulakis - 'On Arbitrability: Persisting
Misconceptions and New Areas of Concern' - referred
to.
1.10 Sovereign functions of the State being inalienable and
non-delegable are non-arbitrable as the State alone has the
exclusive right and duty to perform such functions. Correctness
and validity of the State or sovereign functions cannot be made a
direct subject matter of a private adjudicatory process. Sovereign
functions for the purpose of Arbitration Act would extend to
exercise of executive power in different fields including
commerce and economic, legislation in all forms, taxation, eminent
domain and police powers which includes maintenance of law and
order, internal security, grant of pardon etc., as distinguished from
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commercial activities, economic adventures and welfare
activities. Similarly, decisions and adjudicatory functions of the
State that have public interest element like the legitimacy of
marriage, citizenship, winding up of companies, grant of patents,
etc. are non-arbitrable, unless the statute in relation to a regulatory
or adjudicatory mechanism either expressly or by clear
implication permits arbitration. In these matters the State enjoys
monopoly in dispute resolution. [Para 32][1063-F-G; 1064-A-B]
Common Cause v. Union of India, (1999) 6 SCC 667:
[1999] 3 SCR 1279 ; Agricultural Produce Market
Committee v. Ashok Harikuni & Another (2000) 8 SCC
61: [2000] 3 Suppl. SCR 379 - relied on.
Ajar Raib - Defining Contours of the Public Policy
Exception - A New Test for Arbitrability - referred
to.
1.11 Implied legislative intention to exclude arbitration can
be seen if it appears that the statute creates a special right or a
liability and provides for determination of the right and liability
to be dealt with by the specified courts or the tribunals specially
constituted in that behalf and further lays down that all questions
about the said right and liability shall be determined by the court
or tribunals so empowered and vested with exclusive jurisdiction.
Therefore, mere creation of a specific forum as a substitute for
civil court or specifying the civil court, may not be enough to
accept the inference of implicit non-arbitrability. Conferment of
jurisdiction on a specific court or creation of a public forum though
eminently significant, may not be the decisive test to answer and
decide whether arbitrability is impliedly barred. Implicit nonarbitrability is established when by mandatory law the parties are
quintessentially barred from contracting out and waiving the
adjudication by the designated court or the specified public forum.
There is no choice. The person who insists on the remedy must
seek his remedy before the forum stated in the statute and before
no other forum. [Paras 33 and 34][1065-C-F]
Dhulabhai Etc. v. State of Madhya Pradesh and Another
[1968] 3 SCR 662 - relied on.
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Wolverhampton New Waterworks Co. v. Hawkesford 9
[1859] 6 C.B. (NS) 336 - referred to.
1.12 Doctrine of election to select arbitration as a dispute
resolution mechanism by mutual agreement is available only if
the law accepts existence of arbitration as an alternative remedy
and freedom to choose is available. There should not be any
inconsistency or repugnancy between the provisions of the
mandatory law and arbitration as an alternative. Conversely and
in a given case when there is repugnancy and inconsistency, the
right of choice and election to arbitrate is denied. This requires
examining the "text of the statute, the legislative history, and
'inherent conflict' between arbitration and the statute's underlying
purpose" with reference to the nature and type of special rights
conferred and power and authority given to the courts or public
forum to effectuate and enforce these rights and the orders
passed. When arbitration cannot enforce and apply such rights
or the award cannot be implemented and enforced in the manner
as provided and mandated by law, the right of election to choose
arbitration in preference to the courts or public forum is either
completely denied or could be curtailed. In essence, it is
necessary to examine if the statute creates a special right or
liability and provides for the determination of each right or liability
by the specified court or the public forum so constituted, and
whether the remedies beyond the ordinary domain of the civil
courts are prescribed. When the answer is affirmative, arbitration
in the absence of special reason is contraindicated. The dispute
is non-arbitrable. [Para 34][1066-E-H; 1067-A-B]
Transcore v. Union of India and Another (2008) 1 SCC
125:[2006] 9 Suppl. SCR 785; M.D. Frozen Foods
Exports Private Limited and Others v. Hero Fincorp
Limited (2017) 16 SCC 741: [2017] 13 SCR 800;
Indiabulls Housing Finance Limited v. Deccan Chronicle
Holdings Limited and Others (2018) 14 SCC 783: [2018]
1 SCR 1096 - relied on.
HDFC Bank Ltd. v. Satpal Singh Bakshi, 2013 (134)
DRJ 566 (FB) - overruled
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Jennifer L. Peresie, Reducing the Presumption of
Arbitrability - referred to.
1.13 Section 34(2)(b) of the Arbitration Act consists of two
sub-clauses both accrediting the court with the power to set aside
an award. Under sub-clause (i) an award is liable to be set aside
when the subject matter is not capable of settlement by arbitration
under law for the time being in force. Under sub-clause (ii) an
award can be set aside if it is in conflict with the public policy of
India. As per Explanation No. 1, an award is in conflict with the
public policy of India only if it was induced or affected by fraud,
corruption, etc. or it is in contravention with the fundamental
policy of Indian law or is in conflict with the most basic notions of
morality or justice. Explanation 2 cautions the courts not to review
on the merits of the case while examining the question whether
an award is in contravention with the fundamental policy of law.
 Therefore, conflict with the public policy of India and a subject
matter of dispute not capable of settlement by arbitration, are
two separate and independent grounds on which the court can
set aside the award. [Para 39][1072-B-D]
1.14 Public policy in the context of non-arbitrability refers
to public policy as reflected in the enactment, that is, whether
the enactment confers exclusive jurisdiction to the specified court
or the special forum and prohibits recourse to arbitration. Public
policy in the context of sub-clause(ii) to Section 34(2)(b) refers
to the public policy of the enactment, defining and fixing rights
and obligations, and application of those rights and obligations
by the arbitrator. Statutes unfailingly have a public purpose or
policy which is the basis and purpose behind the legislation.
Application of mandatory law to the merits of the case do not
imply that the right to arbitrate is taken away. Mandatory law
may require a particular substantive rule to be applied, but this
would not preclude arbitration. Implied non-arbitrability requires
prohibition against waiver of jurisdiction, which happens when a
statute gives special rights or obligations and creates or stipulates
an exclusive forum for adjudication and enforcement. An
arbitrator, like the court, is equally bound by the public policy
behind the statute while examining the claim on merits. The public
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policy in case of non-arbitrability would relate to conferment of
exclusive jurisdiction on the court or the special forum set up by
law for decision making. Non-arbitrability question cannot be
answered by examining whether the statute has a public policy
objective which invariably every statue would have. 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. [Para
39][1072-E-H; 1073-A-B]
1.15 It would be grossly irrational and completely wrong to
mistrust and treat arbitration as flawed and inferior adjudication
procedure unfit to deal with the public policy aspects of a
legislation. Arbitrators, like the courts, are equally bound to
resolve and decide disputes in accordance with the public policy
of the law. Possibility of failure to abide by public policy
consideration in a legislation, which otherwise does not expressly
or by necessary implication exclude arbitration, cannot form the
basis to overwrite and nullify the arbitration agreement. This
would be contrary to and defeat the legislative intent reflected in
the public policy objective behind the Arbitration Act. Arbitration
has considerable advantages as it gives freedom to the parties to
choose an arbitrator of their choice, and it is informal, flexible
and quick. Simplicity, informality and expedition are hallmarks of
arbitration. Arbitrators are required to be impartial and
independent, adhere to natural justice, and follow a fair and just
procedure. Arbitrators are normally experts in the subject and
perform their tasks by referring to facts, evidence, and relevant
case law. Complexity is not sufficient to ward off arbitration. In
terms of the mandate of Section 89 of the Civil Procedure Code
and the object and purpose behind the Arbitration Act and the
mandatory language of Sections 8 and 11, the mutually agreed
arbitration clauses must be enforced. The language of Sections 8
and 11 of the Arbitration Act are peremptory in nature. Arbitration
Act has been enacted to promote arbitration as a transparent,
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fair, and just alternative to court adjudication. Public policy is to
encourage and strengthen arbitration to resolve and settle
economic, commercial and civil disputes. Amendments from time
to time have addressed the issues and corrected the inadequacies
and flaws in the arbitration procedure. It is for the stakeholders,
including the arbitrators, to assure that the arbitration is as
impartial, just, and fair as court adjudication. It is also the duty of
the courts at the post-award stage to selectively yet effectively
exercise the limited jurisdiction, within the four corners of Section
34(2)(b)(ii) read with Explanation 1 and 2 and check any conflict
with the fundamental policy of the applicable law. [Para 41][1074A-G]
1.16 A four-fold test for determining when the subject
matter of a dispute in an arbitration agreement is not arbitrable
is (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. (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; (4) When
the subject-matter of the dispute is expressly or by necessary
implication non-arbitrable as per mandatory statute(s). These tests
are not watertight compartments; they dovetail and overlap, albeit
when applied holistically and pragmatically will help and assist in
determining and ascertaining with great degree of certainty when
as per law in India, a dispute or subject matter is non-arbitrable.
Only when the answer is affirmative that the subject matter of
the dispute would be non-arbitrable. However, the aforesaid
principles have to be applied with care and caution. [Para 45][1077A-E]
1.17 Applying the above principles to determine nonarbitrability, it is apparent that insolvency or intra-company
disputes have to be addressed by a centralized forum, be the
court or a special forum, which would be more efficient and has
complete jurisdiction to efficaciously and fully dispose of the entire
matter. They are also actions in rem. Similarly, grant and issue of
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patents and registration of trademarks are exclusive matters
falling within the sovereign or government functions and have
erga omnes effect. Such grants confer monopoly rights. They are
non-arbitrable. Criminal cases again are not arbitrable as they
relate to sovereign functions of the State. Further, violations of
criminal law are offenses against the State and not just against
the victim. Matrimonial disputes relating to the dissolution of
marriage, restitution of conjugal rights etc. are not arbitrable as
they fall within the ambit of sovereign functions and do not have
any commercial and economic value. The decisions have erga
omnes effect. Matters relating to probate, testamentary matter
etc. are actions in rem and are a declaration to the world at large
and hence are non-arbitrable. [Para 46][1077-G-H; 1078-A-C]
1.18 Landlord-tenant disputes governed by the Transfer of
Property Act are arbitrable as they are not actions in rem but
pertain to subordinate rights in personam that arise from rights
in rem. Such actions normally would not affect third-party rights
or have erga omnes affect or require centralized adjudication. An
award passed deciding landlord-tenant disputes can be executed
and enforced like a decree of the civil court. Landlord-tenant
disputes do not relate to inalienable and sovereign functions of
the State. The provisions of the Transfer of Property Act do not
expressly or by necessary implication bar arbitration. Transfer
of Property Act, like all other Acts, has a public purpose, that is,
to regulate landlord-tenant relationships and the arbitrator would
be bound by the provisions, including provisions which enure
and protect the tenants. Therefore landlord-tenant disputes are
arbitrable as 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. [Paras 48 and
49][1078-E-H; 1079-A-B]
Chloro Controls India Private Ltd. v. Severn Trent Water
Purification Inc., (2013) 1 SCC 641: [2012] 13
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SCR 402; Natraj Studios (P) Ltd. v. Navrang Studios
(1981) 1 SCC 523: [1981] 2 SCR 466; Booz Allen &
Hamilton Inc. v. SBI Home Finance Ltd. (2011) 5 SCC
532; Olympus Superstructures Pvt. Ltd. v. Meena Vijay
Khetan and Others (1999) 5 SCC 651: [1999] 3 SCR
490; Vimal Kishor Shah and Others v. Jayesh Dinesh
Shah and Other (2016) 8 SCC 788: [2016]
7 SCR 102 ; Emaar MGF Land Limited v. Aftab Singh
(2019) 12 SCC 751:[2018] 14 SCR 791; A. Avyasamy
v. A. Paramasivam and Others (2016) 10 SCC 386 :
[2016] 11 SCR 521; Premier Automobiles Ltd. v.
Kamlekar Shantaram Wadke of Bombay and Others
(1976) 1 SCC 496 : [1976] 1 SCR 427; V.H. Patel &
Company and Others v. Hirubhai Himabhai Patel and
Others (2000) 4 SCC 368: [2000] 3 SCR 113; Abdul
Kadir Samshuddin Bubere v. Madhav Prabharkar Oak
and Another AIR 1962 SC 406: [1962] SCR 702 ; Avitel
Post Studioz Limited v. HSBC PI Holdings (Mauritius)
Limited 2021 (4) SCC 713; Rashid Raza v. Sadaf
Akhthar (2019) 8 SCC 710 - relied on.
Himangni Enterprises v. Kamaljeet Singh Ahluwalia
(2017) 10 SCC 706: [2017] 10 SCR 139; N.
Radhakrishnan v. Maestro Engineers and Others, (2010)
1 SCC 72: [2009] 15 SCR 371 - overruled
Vidya Drolia and Others v. Durga Trading Corporation
2019 SCC OnLine SC 358; Sukanya Holdings (P) Ltd.
v. Jayesh H. Pandya and Another (2003) 5 SCC 531:
[2003] 3 SCR 558; Deccan Paper Mills Co. Ltd. v.
Regency Mahavir 2021 (4 ) SCC 786 - referred to.
TELUS Communications Inc. v. Avraham Wellman (2019)
SCC 19 (CanLII) Mitsubishi Motors Corp v. Soler
Chrysler Plymouth Inc, 473 U.S. 614 S Ct 3346 (1985)
(U.S. Supreme Court, 2 July 1985) - referred to
Vanderbilt Journal of Transnational Law, vol. 36, No.4,
October 2003, p. 1115-1136 'Who Decides the
Arbitrator's Jurisdiction? Separability and Competence-
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Competence in Transnational Perspective' by John J.
Barcelo III; Law and Practice of Commercial
Arbitration in England (2nd Ed. 1989) by Mustill and
Boyd; Redfer Hunteron International Arbitration and
Gary B. Bornin International Commercial Arbitration;
A Second Look at Arbitrability: Approaches to
Arbitration in the United States, Switzerland and
Germany by Patrick M. Baron and Stefan Liniger;
Conflict of Laws 98, 7th ed. 1974 by R.H. Graveson -
referred to.
2.1 Issue of non-arbitrability can be raised at three stages.
First, before the court on an application for reference under
Section 11 of the Arbitration Act or for stay of pending judicial
proceedings and reference under Section 8 of the Arbitration Act;
secondly, before the arbitral tribunal during the course of the
arbitration proceedings; or thirdly, before the court at the stage
of the challenge to the award or its enforcement. [Para 51][1079D-F]
2.2 Who decides the question of non-arbitrability? - a
jurisdictional question is a technical legal issue, and requires
clarity when applied to facts to avoid bootstrapping and confusion.
The doubt as to who has the jurisdiction to decide could hinder,
stray, and delay a many arbitration proceedings. To some extent,
the answer depends on how much jurisdiction the enactment gives
to the arbitrator to decide their own jurisdiction as well as the
court's jurisdiction at the reference stage and in the post-award
proceedings. It also depends upon the jurisdiction bestowed by
the enactment, viz. the facet of non-arbitrability in question, the
scope of the arbitration agreement and authority conferred on
the arbitrator. [Para 52][1079-F-H; 1080-A-B]
2.3 Under the Arbitration Act, 1940, the jurisdiction to settle
and decide non-arbitrability issues relating to existence, validity,
scope as well as whether the subject matter was capable of
arbitration, with possible exception in case of termination,
novation, frustration and 'accord and satisfaction' when contested
on facts, was determined and decided at the first or at the
reference stage by the courts. The principle being that the court
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should be satisfied about the existence of a valid arbitration
agreement and that the disputes have arisen with regard to the
subject matter of the arbitration agreement. At this stage, the
court would be, however, not concerned with the merits or
sustainability of the disputes. Despite best efforts to contain
obstructive tactics, adjudication and final decision of nonarbitrability issues at the reference stage would invariably stop,
derail and thwart the proceedings in the courts for years. [Para
53][1080-A-D]
2.4 The Arbitration Act based upon the UNCITRAL Model
Law introduced an entirely new regimen with the objective to
promote arbitration in commercial and economic matters as an
alternative dispute resolution mechanism that is fair, responsive
and efficient to contemporary requirements. One of the primary
objectives of the Arbitration Act is to reduce and minimize the
supervisory role of courts. Accordingly, the statutory powers of
the arbitral tribunal to deal with and decide jurisdictional issues
of non-arbitrability were amplified and the principles of separation
and competence-competence were incorporated, while the courts
retained some power to have a 'second look' in the post-award
challenge proceeding. On the jurisdiction of the court at the
referral stage, views of this Court have differed and there have
been statutory amendments to modify and obliterate the legal
effect of the court decisions. [Para 54][1080-D-F]
2.5 Clauses (a) and (b) to sub-section (1) to Section 16 of
the Arbitration Act, enact the principle of separation of the
arbitration agreement from the underlying or container contract.
Clause (a), by legal fiction, gives an independent status to an
arbitration clause as if it is a standalone agreement, even when it
is only a clause and an integral part of the underlying or container
contract. Clause (b) formulates a legal rule that a decision by the
arbitral tribunal holding that the main contract is null and void
shall not ipso jure entail invalidity of the arbitration clause.
Successful challenge to the existence or invalidity or rescission
of the main contract does not necessarily embrace an identical
finding as to the arbitration agreement, provided the court is
satisfied that the arbitration clause had been agreed upon. The
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arbitration agreement can be avoided only on the ground which
relates directly to the arbitration agreement. Notwithstanding the
challenge to the underlying or container contract, the arbitration
clause in the underlying or container contract survives for
determining the disputes. The principle prevents boot-strapping
as it is primarily for the arbitral tribunal and not for the court to
decide issues of existence, validity and rescission of the
underlying contract. Principle of separation authorises an arbitral
tribunal to rule and decide on the existence, validity or rescission
of the underlying contract without an earlier adjudication of the
questions by the referral court. [Para 81][1116-A-E]
Damodar Valley Corporation v. K.K. Kar, (1974) 1 SCC
141: [1974] 2 SCR 240 ; Union of India v. Kishorilal
Gupta & Bros., AIR 1959 SC 1362: [1960] SCR 49 -
referred to.
Fiona Trust and Holding Corpn. v. Privalov (2007) 1
All ER (Comm) 891:2007 Bus LR 686 (CA); Buckeye
Check Cashing Inc. v. Cardegna 163 L Ed 2d 1038: 46
US 440 (2006) : 2006 SCC OnLine US SC 14; Prima
Pain Corpn. v. Flood & Conklin Mfg. Co. L Ed 2nd
1270; 388 US 395 (1967):1967 SCC OnLine US SC
160; Southland Corpn. v. Keating, 1984 SCC OnLine
US SC 19 - referred to.
On Arbitrability: Persisting Misconceptions and New
Areas of Concern by Stavros Brekoulaki; Emmanuel
Gaillard and Yas Banifatemi in Negative Effect of
Competence-Competence: The Rule of Priority in
Favour of the Arbitrators; John J. Barcelo III, ;Paper
titled 'Who Decides the Arbitrator's Jurisdiction?
Separability
and
Competence-Competence
in
Transnational Perspective', by Prof. Stephen J. Ware in
Arbitration Law's Separability Doctrine After Buckeye
Check Cashing, Inc.- referred to.
2.6 Principles of competence-competence have positive and
negative connotations. As a positive implication, the arbitral
tribunals are declared competent and authorised by law to rule
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as to their jurisdiction and decide non-arbitrability questions. In
case of expressed negative effect, the statute would govern and
should be followed. Implied negative effect curtails and constrains
interference by the court at the referral stage by necessary
implication in order to allow the arbitral tribunal to rule as to
their jurisdiction and decide non-arbitrability questions. As per
the negative effect, courts at the referral stage are not to decide
on merits, except when permitted by the legislation either
expressly or by necessary implication, such questions of nonarbitrability. Such prioritisation of arbitral tribunal over the courts
can be partial and limited when the legislation provides for some
or restricted scrutiny at the 'first look' referral stage. [Para
83][1117-G-H; 1118-A-B]
2.7 Section 16(1) of the Arbitration Act accepts and
empowers the arbitral tribunal to rule on its own jurisdiction
including a ruling on the objections, with respect to all aspects of
non-arbitrability including validity of the arbitration agreement.
A party opposing arbitration, as per sub-section (2), should raise
the objection to jurisdiction of the tribunal before the arbitral
tribunal, not later than the submission of statement of defence.
However, participation in the appointment procedure or
appointing an arbitrator would not preclude and prejudice any
party from raising an objection to the jurisdiction. Obviously, the
intent is to curtail delay and expedite appointment of the arbitral
tribunal. The clause also indirectly accepts that appointment of
an arbitrator is different from the issue and question of jurisdiction
and non-arbitrability. As per sub-section (3), any objection that
the arbitral tribunal is exceeding the scope of its authority should
be raised as soon as the matter arises. However, the arbitral
tribunal, as per sub-section (4), is empowered to admit a plea
regarding lack of jurisdiction beyond the periods specified in subsection (2) and (3) if it considers that the delay is justified. As per
the mandate of sub-section (5) when objections to the jurisdiction
under sub-sections (2) and (3) are rejected, the arbitral tribunal
can continue with the proceedings and pass the arbitration
award. A party aggrieved is at liberty to file an application for
setting aside such arbitral award under Section 34 of the
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Arbitration Act. Sub-section (3) to Section 8 in specific terms
permits an arbitral tribunal to continue with the arbitration
proceeding and make an award, even when an application under
sub-section (1) to Section 8 is pending consideration of the court/
forum. Therefore, pendency of the judicial proceedings even
before the court is not by itself a bar for the arbitral tribunal to
proceed and make an award.