Arbitrability in India: Booz Allen & Hamilton v SBI Home Finance: Part II

In the last post, we did a descriptive comment on the Booz Allen case. We are yet to deal with the crucial issue where the Supreme Court explicated the Indian law on Arbitrability. In this post, we’ll comment on what the Supreme Court had to say on Arbitrability. In subsequent posts on this topic, we'll do a critique of the decision.

Issue 4: Whether the subject matter of the suit is 'arbitrable'?

• There are three different conceptions of Arbitrability: (i) disputes capable of being adjudicated through arbitration, (ii) disputes covered by the arbitration agreement, and (iii) disputes that parties have referred to arbitration.
• In principle, any dispute that can be decided by a civil court can be resolved through arbitration.
• The legislature has reserved certain disputes to be decided exclusively by private fora.
• Apart from those reserved by the legislature, there are certain disputes the resolution of which can, by necessary implication, be only by public fora.
• Some examples are “(i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.”
• These cases above are actions in rem as opposed to actions in personam. Actions pertaining to rights which are exercisable against the world at large (rights in rem) are actions in rem. Actions in personam are actions pertaining to rights and interests of the parties between themselves. In the former, there is a determination of right not only as between the parties to the action but against the world itself (that is, any other person claiming an interest in the subject matter at any point of time). Consequently, a judgement in an action in personam is a judgement against a person while in an action in rem it is a judgement that determines the status or the condition of the property.
• The general rule is that all actions in rem are to be pursued in a court of law while other actions may be brought before a private forum. The exception is the case where the action pertains to rights (in the nature of rights in personam) subordinate to a right in rem.
• The Act does not specifically provide for non-arbitrable classes of disputes but Sections 34(2)(b) and 48(2) of the Act state that an arbitral award dealing with a non-arbitrable subject matter could be set aside.

[The court devoted a separate para no. (26) for referring to the previous Supreme Court decisions on Arbitrability. Each of the previous cases were analysed in sub-paragraphs (26.1-26.3). Although a minor thing, this practice is commendable and makes the judgement more structured and systematic.]

• The Supreme Court has, in previous instances, decided on the Arbitrability question- Haryana Telecom Ltd. v Sterlite Industries India Ltd. (1999) 5 SCC 688, Olympus Superstructures Pvt. Ltd. v. Meena Vijay Khetan & Ors. (1999) 5 SCC 651; Chiranjit Shrilal Goenka v Jasjit Singh (1993) 2 SCC 507.
• An agreement to sell or an agreement to mortgage does not involve a transfer of a right in rem but is in the nature of a right in personam. Therefore disputes pertaining to such agreements are arbitrable.
• On the other hand, a suit for mortgage is an action in rem for the enforcement of a right in rem. Therefore, such suits would have to be necessarily decided by courts and cannot be adjudicated in private fora. The scheme for adjudication of mortgage suits is contained in Order XXXIV of the Code of Civil Procedure It prescribes the procedure for adjudication of mortgage suits, rights of mortgagees and mortgagors, thereby implying that such disputes are to be adjudicated by civil courts alone. For instance, Rule 1 of the said Order provides that all persons having an interest in the mortgage security shall be joined as a party to the suit relating to the mortgage. The rationale for this provision is to eliminate chances of multiplicity of proceedings. Similarly, in the said proceedings, the court safeguards not only the interests of the mortgagor and the mortgage but also of other persons having an interest such as puisne/ mesne mortgagees, persons entitled to the equity of redemption, auction purchasers etc. [the court lists out certain other actions that a court can order and an arbitral tribunal cannot]
• A decree for sale of mortgaged property is akin to an order of winding up-it requires the court to protect the interests of persons other than the suit parties. Therefore, a suit for enforcement of mortgage is not arbitrable.
• There might be some questions pertaining to a mortgage suit such as the amount due to the morgtagee etc that a tribunal could decide. However, the issues in a mortgage suit cannot be divided and decided by two fora [Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya (2003) 5 SCC 531].

Therefore, the court upheld that decision to dismiss the application under Section 8 not for reasons provided by the lower courts but for the reason of non-arbitrability if the subject matter.