[Continued from Part I]
The Vidya Drolia Case: Redefining Arbitrability
In 2019, aiming to solve the conundrum and marking a significant milestone in Indian arbitration, the Supreme Court’s ruling in Vidya Drolia and Ors v. Durga Trading Corporation,[1] (“Vidya Drolia”) laid down the contours of arbitrability. While analysing thearbitrability of Landlord-Tenant disputes governed by the Transfer of Property Act, 1882 (“TPA”), the Supreme Court elucidated that the mere existence of a special statute dealing with certain disputes does not ipso facto render them non-arbitrable, thereby widening the scope of arbitrability and increasing the access to arbitration in complex legal contexts.
A fourfold test to determine non-arbitrability of disputes was laid down by the three-judge bench in Vidya Drolia:[2]
- 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.
- 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;
- 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
- When the subject matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s).
The Supreme Court stated that land tenancy matters governed by the TPA are subordinate rights in personam arising from rights in rem, which do not have an erga omnes affect and, therefore, are amenable to arbitration. It also stated that insolvency disputes, grant and registration of patents and trademarks, and matters relating to probate, testamentary matter, etc., confer monopoly rights having an erga omnes effect and are not amenable to arbitration. On the other hand, criminal offences that are offences against the State and matrimonial disputes also fall within the ambit of sovereign functions and are non-arbitrable.[3]
Latest Judicial Developments
By applying the aforesaid tests in Vidya Drolia, the Supreme Court went on to expressly overrule the following judicial pronouncements with an aim to foster a conducive environment for alternative dispute resolution:
In N. Radhakrishnan v. Maestro Engineers,[4] the Madras High Court noted that a civil court would be the competent authority to resolve matters involving serious allegations of fraud and malpractices. These do not warrant trial by an arbitral tribunal. The Apex Court in Vidya Drolia overruled the decision and observed that allegations of fraud can be made a subject matter of arbitration when they relate to a civil dispute subject to the caveat that fraud, which would vitiate and invalidate the arbitration clause, is an aspect relating to non-arbitrability.[5]
Thereafter, in HDFC Bank Ltd. v. Satpal Singh Bakshi,[6] the Delhi High Court applying the principle in Booz Allen,held that the matters within the scope and jurisdiction of Debt Recovery Tribunal are arbitrable, which simply replaces a civil court. Overruling the decision, the Apex Court in Vidya Drolia recorded that since disputes falling under the jurisdiction of the Debt Recovery Tribunal are created under the Banks & Financial Institutions Act, 1993, these are non-arbitrable as special powers are conferred upon the Tribunal.[7]
The Apex Court overruled the decision in Himangni Enterprises v. Kamaljeet Singh Ahluwalia[8] – that tenancy matters governed by the TPA are non-arbitrable – and held in Vidya Drolia that tenancy disputes under the TPA are arbitrable, unless exclusive jurisdiction vested in specific forums is applicable to decide any special rights and obligations forming part of landlord-tenant disputes, such as those governed by rent control legislations, which are non-arbitrable.[9]
Furthermore, the Court placed reliance on Vidya Drolia in the case of Suresh Shah v. Hipad Technology India Private Limited,[10] where the courts reiterated that special statutes that grant special protection against eviction to tenants in land tenancy matters bars the remedy of arbitration, giving exclusive jurisdiction to the forum specified under the statute.
Recently, in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited and Ors.,[11] the Supreme Court discussed theissue of arbitrability of a fraudulent invocation of a bank guarantee furnished under a substantive contract and citing Vidya Drolia. It held that an arbitral tribunal could adjudicate the civil aspect of fraud, coercion, undue influence, or misrepresentation in civil or commercial disputes, unless expressly barred.
Existence of a valid Arbitration Agreement
The existence of a valid arbitration agreement is the most essential pre-requisite for referring a matter to resolution by way of arbitration. Under Section 7 of the Arbitration and Conciliation Act 1996 (“The 1996 Act”), an arbitration agreement means a written agreement (which may be in the form of an arbitration clause) by the parties to submit to arbitration all or certain disputes that have arisen or may arise between them in respect of a defined legal relationship, whether or not contractual.[12] As stated in Vidya Drolia, an arbitration agreement exists only when it is legally valid, satisfying statutory requirements of both the 1996 Act and the Indian Contract Act, 1872.[13]
The question of “who decides arbitrability – court or arbitral tribunal?” is as crucial as defining what constitutes arbitrability and has been addressed extensively in Indian jurisprudence. Following the introduction of Section 11(6A) of the 1996 Act in 2015, the powers of the court have been confined to the examination of the existence of an arbitration agreement.[14] Prior to the 2015 amendment, the scope of powers of the court was considerably wider. The intention behind Section 11(6A) was to confine court powers to one aspect of arbitrability only, i.e., the existence of a valid arbitration agreement – nothing more, nothing less, thereby minimising judicial intervention.[15]
However, although a 2019 amendment resulted in the omission of Subsection (6A) of Section 11 of the 1996 Act,[16] this has not yet been notified in the 1996 Act.
In Vidya Drolia, the court held that despite the deletion, Section 11(6A) of the 1996 Act continues to guide a court’s jurisdiction at the referral stage. The court’s role is limited to examining an arbitration agreement when it is manifestly and ex facie certain that the arbitrationagreement was non-existent or invalid, reinforcing the principle of competence-competence.[17] Subsequently, when the courts expanded on the view taken in Vidya Drolia in DLF Home Developers Ltd. v. Rajapura Homes Pvt. Ltd.[18], the Apex Court warned that courts should not act mechanically and must apply their mind within the framework of Section 11(6A) – the intention being not to usurp the arbitral tribunal’s jurisdiction but to streamline the process of arbitration. In 2023, NTPC Ltd. v. SPML Infra Ltd.[19] dealt with the eye-of-the-needle test, meaning the court’s jurisdiction under Section 11(6A), 1996, Act is narrow. Thereafter, the Court observed that as a general rule and a principle, the Arbitral Tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. As an exception to the rule, and rarely as a demurrer, the Referral Court may reject claims which are manifestly and ex facie non-arbitrable,[20] following from the decision in Vidya Drolia.
Thereafter, in Indian Oil Corpn. Ltd. v. NCC Ltd.,[21] the Supreme Court expressed that Section 11(6A) of the 1996 Act does not prohibit the court from ascertaining the arbitrability of disputes. The court submitted at Paragraph 93 of(2023) 2 SCC 539:
“We are of the opinion that though the Arbitral Tribunal may have jurisdiction and authority to decide the disputes including the question of jurisdiction and non-arbitrability, the same can also be considered by the Court at the stage of deciding Section 11 application if the facts are very clear and glaring and in view of the specific clauses in the agreement binding between the parties, whether the dispute is non-arbitrable and/or it falls within the excepted clause….”
Recently, in In re Interplay between Arbitration Agreements under the Arbitration & Conciliation Act, 1996 & the Indian Stamp Act, 1899, the Supreme Court tackled the question on arbitrability and clarified the position of law. The Apex Court held that since Section 11(6a) continues to remain in force, it must give true effect to the legislative intent. The extent of courts powers should be restricted to a prima facie determination of the existence of an arbitration agreement based on Section 7 of the 1996 Act, the same being non-binding, allowing the arbitral tribunal to examine the issue in depth.[22] This interpretation also gives true effect to the doctrine of competence-competence by leaving the issue of substantive existence and validity of an arbitration agreement to be decided by an arbitral tribunal under Section 16 of the 1996 Act.[23]
Conclusion
In conclusion, at this stage, it is safe to say that the Vidya Drolia case has sought to put an end to the conundrum surrounding the aspect of arbitrability. The fourfold test presents and promotes arbitration as a resilient mechanism for expeditious and effective dispute resolution, guided by fundamental principles of party autonomy, fairness, and enforceability. Unless a dispute necessitates judicial intervention for adjudication, it shall be amenable to resolution through arbitration and shall be decided on the facts and circumstances of each case. The decision in In re Interplay between Arbitration Agreements under the Arbitration & Conciliation Act, 1996 & the Indian Stamp Act, 1899,aims toresolve the tussle between who determines arbitrability by extending autonomy to arbitral tribunals, reducing judicial intervention, and re-emphasising on the principle of competence-competence. While there is an expanding body of jurisprudence concerning arbitrability, courts continue to adhere to a principles-based approach. The evolution of law in this area remains a topic of interest for future developments.
For further information, please contact:
Vikash Kumar Jha, Partner, Cyril Amarchand Mangaldas
vikashkumar.jha@cyrilshroff.com
[1] (2021) 2 SCC 1
[2] Para 76 of (2021) 2 SCC 1
[3] Para 46 of (2021) 2 SCC 1
[4] (2010) 1 SCC 72 [4] Para 78 of (2021) 2 SCC 1
[5] Para 78 of (2021) 2 SCC 1
[6] 2012 SCC OnLine Del 4815
[7] Para 58 of (2021) 2 SCC 1
[8] (2017) 10 SCC 706
[9] Para 80 of (2021) 2 SCC 1
[10] (2021) 1 SCC 529
[11] (2021) 4 SCC 379
[12] Arbitration and Conciliation Act 1996, Section 7
[13] Para 146 of (2021) 2 SCC 1
[14] Arbitration and Conciliation (Amendment) Act 2015, S. 6s: Amendment of Section 11
[15] Para 48 of Duro Felguera S.A. v. Gangavaram Port Limited, (2017) 9 SCC 729
[16] Arbitration and Conciliation (Amendment) Act 2019, S. 3: Amendment of Section 11
[17] Para 154.4 of (2021) 2 SCC 1
[18] (2021) 16 SCC 743
[19] (2023) 9 SCC 385
[20] Para 26 of (2023) 9 SCC 385
[21] (2023) 2 SCC 539
[22] Para 166 of (2023) SCC OnLine 1666
[23] Arbitration and Conciliation Act 1996, Section 16
