Arbitrability of Public Law Claims in India

Public law is the body of law dealing with the relationship between private individuals and the government. These claims arise when an individual has committed an act that is against the State, or the society it represents. In such cases, the government takes up the onus to prosecute the individual. Traditionally, these claims were considered to fall solely within the jurisdiction of the courts. This was more because courts were better equipped to conduct the proceedings, and examine the evidence in a fair manner. The existing public law claims include the acts of fraud, misrepresentation, labor law claims, as well as competition law claims.

These acts might be entirely private considering the nature of the affected party, but they were considered to be public law claims because they are against the conscience of the society. This meant that arbitration tribunals were not allowed to deal with questions on these matters. Public law usually involves mandatory rules that cannot be contracted out of by parties.[1] The apprehension was that the importance that party autonomy has in arbitration would give rise to a situation where a stronger party would coerce the weaker party to contract out of its rights. This would be against the object of public law claims as they are meant to promote justice.

The paradox is that arbitration was also designed to provide justice, albeit in a faster and more amicable manner. One perspective is that all laws that do not have their object as provision of justice must be arbitrated upon.[2] However, allowing arbitral tribunals to deal with all public law claims that have justice delivery as their prime objective in the existing Arbitration Law will raise numerous problems as well.

Problems in the Arbitrability of Public Law Claims

Arbitration is about dispute resolution. The resolution can be by way of an arbitral award, or by way of the parties reaching an agreement with the arbitrator’s help. However, as already pointed out, public law claims are mandatory rules. There can be no negotiation on the performance of such activities. A criminal cannot negotiate his way out of the punishment the State is trying to impose.

Moreover, the structure of arbitration requires each party to nominate an arbitrator. If the same liberty is allowed to the accused, it would give an apprehension of bias. Furthermore, not all accused persons can afford arbitration. The cost of arbitration will have to be borne by the parties. This will also increase the cost to the State exchequer. Apart from the cost of arbitration, the provision of mandatory appeal mechanisms will also be put in jeopardy, as Indian arbitration law does not envisage appeals from arbitral awards. Section 34 of the Arbitration and Conciliation Act, 1996 merely gives seven grounds to set aside the award, and any grievance against the award will have to come under these grounds.

A comparison with the United States of America would show that arbitration of public law claims is not entirely unheard of. The American Supreme Court has, of late, made a host of decisions which are pro-arbitration. These decisions promote the arbitration of certain public law claims. The American Supreme Court has allowed the arbitration of Anti-trust claims,[3] the arbitration of labor law claims,[4] as well as family law matters that do not involve the custody of children.[5]

Arbitrability of Public Law Claims in India

In India, a pro-arbitration stance is yet to cover public law claims as well. Section 8 of the Arbitration and Conciliation Act, 1996 is very generally worded and allows for all contracts that have an arbitration clause to be referred to arbitration. However, the exceptions to arbitrability arise out of other specific statutes. These are statutes that mandate all disputes of a particular subject go to a particular adjudicatory body.

Let us now examine a few important questions of arbitrability of subject matters that have specific statutes governing them, but have come into limelight after the Supreme Court rulings. The first, and probably one of the earliest questions, came up on the issue of fraud. Fraud, as per Section 19 of the Indian Contract Act, 1872, makes a contract voidable at the choice of one party. Fraud also allowed the party defrauded to sue the other party for compensation for the tort, or under various provisions of the Indian Penal Code, 1860. This inherently raises a doubt on the arbitrability of the issue of fraud by an Arbitral Tribunal. The trend had become one where parties who did not want to arbitrate were filing applications of fraud in courts of law and stalling the arbitration process.

The Supreme Court finally clarified matters. In Swiss Timing Ltd. v. Organizing Committee, Commonwealth Games, the Court held that such allegations are arbitrable in India.[6] This is a departure from the Supreme Court’s conservative judgment in N. Radhakrishnan v. Maestro Engineers & Ors., where the Court held that cases of fraud cannot be referred to arbitration.[7] However, the judgment in the Swiss Timing case does not expressly state that cases of fraud are arbitrable in India. The judgment only states that such matters can be referred to arbitration and the arbitral tribunal can then decide on its jurisdiction to deal with the matter. Regardless, it is a much welcomed decision. It cleared the way for arbitral proceedings to continue without waiting for courts to first decide on the allegation of fraud.  

Moving on, arbitrability can also be derived from statutes that expressly mandate that a particular adjudicatory body should deal with all disputes on a particular matter. The most recent debate involving such limitations on arbitrability is the issue of oppression and mismanagement by the directors of a company. The Companies Act, 1956, under Sections 397 and 398, mandates that all claims of oppression and mismanagement should go to the Company Law Board. However, questions regarding arbitrability arise when the directors allege that an arbitration clause is present in the Articles of Association, thereby mandating that even claims of oppression and mismanagement should be referred to an arbitral tribunal.

The Judiciary in India has not been welcoming to this argument, especially considering the express wording of Sections 397 and 398 of the Companies Act, 1956. However, the courts have given the leeway for Company Law Boards to allow parties to go for arbitration only when the party contesting the petition of oppression and mismanagement can show that the petition is filed with the primary objective of evading an arbitration agreement.[8]

Another important legal paradigm where limitations on arbitrability can be raised is Labor Law. Various labor laws provide for specific dispute resolution mechanisms. In situations where the matter can be dealt with only by the Tribunals under the Industrial Disputes Act or the Rent Control Act, the matter is deemed to be non-arbitrable.[9] There has also been liberty in allowing claims under the Recovery of Debts Due to Banks & Financial Institution Act, 1993.[10] The position of arbitrability was amply clarified in the case of Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. and Ors., wherein the court laid down three criteria that would determine the arbitrability of a particular matter. These are “i) Whether the disputes are capable of adjudication and settlement by arbitration?; ii) Whether the disputes are covered by the arbitration agreement?, and; iii) Whether the parties have referred the disputes to arbitration?”.[11] Courts even now use these parameters to decide the arbitrability of various issues in India.

Conclusion

Public law claims, however, are still severely restricted from arbitration in India. For instance, Competition Law disputes are not arbitrable in India as Section 18 of the Competition Act, 2002 provides that the Competition Commission of India shall solely deal with disputes relating to Competition Law in India. The trend of arbitrability shows that the division on the grounds of rights in rem and rights in personam are still the guiding principles for arbitration in India.   

The problem with this approach is that it fails to recognize the potential of arbitration as a quick dispute resolution method for justice delivery. Arbitration rules and procedure can be amended to suit specific kinds of cases. For example, if arbitration is allowed for a criminal matter, the rules itself can be made such that party autonomy cannot contract out of certain evidentiary procedures required to ensure fairness. Arbitration is a justice delivery mechanism that was developed as a commercial tool. But it has now grown to become a generic dispute resolution mechanism. When a dispute is being resolved, the fact that the resolution is done in a fair manner gets higher priority than in which forum the dispute is resolved. Arbitral tribunals should not be barred from arbitrating public law claims as long as suitable mechanisms can be put in place to ensure fairness to parties.

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[1] Stephen J Ware, Default Rules from Mandatory Rules: Privatizing Law through Arbitration, 83 Minn. L. R. 3, (1999) at p.706.

[2] Stewart E. Sterk, Enforceability Of Agreements To Arbitrate: An Examination Of The Public Policy Defense, 2 Cardozo L. Rev. 481 1980 – 1981, at p. 483.

[3] Mitsubishi Motors Corp v. Soler Chrysler-Plymouth, Inc 105 S. Ct. 3346 (1985).

[4] Gilmer v. Interstate/ Johnson Lane Corp., 500 U.S. 20.

[5] Hirsch v. Hirsch, 37 N.Y.2d 312.

[6] Swiss Timing Ltd. v. Organizing Committee, Commonwealth Games AIR 2014 SC 3723.

[7] N. Radhakrishnan v. Maestro Engineers & Ors. 2009 (77) ALR 490.

[8] Rakesh Malhotra v. Rajinder Kumar Malhotra  (2015) 2 CompLJ 288 (Bom).

[9] HDFC Bank v. Satpal Singh Bakshi 193 (2012) DLT 203.

[10] Id.

[11] Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. and Ors. AIR 2011 SC 2507.