MAHARASHTRA NATIONAL LAW

UNIVERSITY AURANGABAD
B.A.LL.B. (HONS.)

SEMESTER - 5

PROJECT
FOR
Alternative Dispute Resolution-I

On the topic:

THE TEST OF ARBITRABILITY VIS-A-VIS BOOZ

ALLEN

BY: 1. Anubhav Mishra Submitted to:

17BALLB55 Ms. Sakshi Gupta
2. Devansh Kathuria Asst. professor of Law
17BALLB56
 INDEX

 Introduction……………………………………………………

 Facts of the case……………………………………………….

1. Issues Raised…………………………………..…………..

 Test of Booz Allen...………………………………………….

 Conclusion……………….......................................................
 INTRODUCTION

India has been making several policy changes to portray the country as a hub for
domestic and international arbitration. For instance, recently, the New Delhi International
Arbitration Centre Bill, 2018 and the Arbitration and Conciliation (Amendment) Act,
2018 [“2018 Amendment”] were passed by the Lok Sabha1, merely three years after the
last amendment. However, most such exercises at revamping the Arbitration and
Conciliation Act, 1996 [“Arbitration Act”] have completely skipped the jurisprudence
of arbitrability of disputes which has, time and again, choked arbitration in this country.

Internationally, arbitration is known to be a private proceeding with public consequences.

An arbitrator is empowered to do all that a civil court can, subject to the public policy
exception, which mandates that certain disputes cannot be resolved through arbitration
and that only the national courts will have jurisdiction over such disputes. Generally, a
dispute is arbitrable if it is “capable of settlement by arbitration”2. It is necessary to state
that the term arbitrability can mean different things i.e. (i) whether there is an arbitration
agreement, (ii) whether the dispute is beyond the scope of the arbitration agreement, and,
(iii) whether the subject matter of the dispute is arbitrable3. Therefore, questions of
arbitrability are usually procedural questions as to which forum shall exercise jurisdiction
rather than questions of applicability of substantive laws. This article refers to
arbitrability of disputes only in the last context i.e. whether an arbitral tribunal can
adjudicate over the subject-matter of the dispute, or is the subject matter such that it is
reserved for adjudication by the courts alone.

In India, the issue of arbitrability of disputes is not governed by statute but by case law.
This is because the only reference to arbitrability is contained in Section 2(3) of the
Arbitration Act which merely provides that “certain disputes may not be submitted to
arbitration”4, while not providing any category of cases that are non-arbitrable5. Further,
Sections 34(2)(b) and 48(2) of the Arbitration Act empower the courts to set aside an
award if the dispute was not capable of settlement by arbitration or if the award conflicts
with the public policy of India, thus, leaving the question of arbitrability with the courts.
It is pertinent to mention here that arbitrability and public policy are two separate grounds

1
PTI, Lok Sabha Passes Arbitration and Conciliation (Amendment) Bill 2018, THE NEW INDIAN
EXPRESS (Aug. 10, 2018), available at http://www.newindianexpress.com/nation/2018/aug/10/lok-sabha-
passes-arbitration-and-conciliation-bill-amendment-2018-1855978.html.
2
See The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards art. II(1)
and art. V(2)(a), June 7, 1959, 330 U.N.T.S. 38; United Nations Commission on International Trade Law
[UNCITRAL], Model Law on International Commercial Arbitration art. 34(2)(b) and 36(1)(b)(i), 1985
U.N.G.A. Res. 40/72 (Dec. 11, 1985), as amended by U.N.G.A. Res 61/33 (Dec. 18, 2006) [hereinafter
“UNCITRAL Model Law”].
3
Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd, AIR 2011 SC 2507 [hereinafter “Booz Allen”].
4
The Arbitration and Conciliation Act, No. 26 of 1996, § 2(3) [“This Part shall not affect any other law for
the time being in force by virtue of which certain disputes may not be submitted to arbitration”]
[hereinafter “Arbitration Act”].
5
A. Ayyasamy v. A Paramasivam, (2016) 10 SCC 386 [hereinafter “A. Ayyasamy”]; Aftab Singh v.
Emaar MGF Land Limited, 2017 SCC Online NCDRC 1614.
under the aforesaid sections. Nonetheless, arbitrability inextricably gets mixed with
public policy as it may not be in public interest that certain types of matters such as
criminal matters, succession etc. should be settled by arbitration, as they affect issues
such as national security, sovereignty, law and order, social objectives etc.

The question of arbitrability may arise at different stages i.e. (i) before a court of law
where the court has an obligation to refuse to hear the matter and refer it to arbitration
under Sections 8(1) or 45 of the Arbitration Act, unless there exist sufficient reasons for
not doing so; (ii) during an arbitration proceeding6 as a question of jurisdiction under the
principle of kompetenz-kompetenz; (iii) at the time of considering an application for
setting aside an award; or (iv) at the stage of enforcement of an award7. Usually, the
reasons for not honoring an agreement between the parties to have their dispute resolved
through arbitration include (i) public interest; (ii) public policy, and (iii) the need for
judicial protection. However, ouster of jurisdiction on account of non-arbitrability is not
something that should be assumed lightly, but must only be done in those limited cases
which are clearly non-arbitrable8.

Currently, the jurisprudence on arbitrability stands overshadowed by the judgment of the

Honourable Supreme Court of India [the “Court”] in Booz Allen and Hamilton Inc. v.
SBI Home Finance Ltd. [“Booz Allen”] where the Court, while upholding public policy
in the face of arbitration clauses, propounded the test of „in rem and in personam‟ i.e.
rights against particular persons (in personam) are arbitrable but those against the world
at large (in rem) are not. The test has been criticized in subsequent judgments9, and is not
comprehensive enough to be the sole test for arbitrability of disputes. Some courts have
attempted to find alternatives, such as the test of relief sought by the parties i.e. whether
the tribunal can grant the relief prayed for, or the test of public policy i.e. where the
legislature has enacted a special legislation or special body for adjudication of disputes,
however, none of the tests are sufficient or comprehensive enough to be the litmus test
for determining whether a dispute is arbitrable. In fact, due to the lack of clear reasoning
in Booz Allen, courts have completely misinterpreted and misapplied the public policy
exception while determining arbitrability.

The first part of this paper states the facts and judgment of the Supreme Court in Booz
Allen. The second part examines the objective limits and the rationale of the public policy
exception. The third part discusses the inadequacies of the Booz Allen test and its lack of
clarity with respect to the public policy exception. The fourth part analyses subsequent

6
Eric A. Schwartz, The Domain of Arbitration and Issues of Arbitrability: The View from the ICC, 9(1)
ICSID REV. – FOREIGN INV. L. J. 17 (1994).
7
Arbitration Act, § 34(2)(b)(i)
8
Eros International Media Ltd v. Telemax Links India Pvt. Ltd., 2016 SCC Online Bom 2179, The
Respondent Counsel made this argument placing reliance on the decision of the Court in V.H. Patel &
Company and Ors. v. Hirubhai Himabhai Patel and Ors., (2000) 4 SCC 368.
9
Rakesh Malhotra v. Rajinder Kumar Malhotra, (2015) 192 Comp Cas 516. The court observed the
possibility of dressing up‟ reliefs which were in rem to avoid arbitration; Eros International, supra note 4, ¶
22; see also Arthad Kurlekar, A False start - Uncertainty in the Determination of Arbitrability in India,
KLUWER ARB. BLOG (June 16, 2016), available at
http://arbitrationblog.kluwerarbitration.com/2016/06/16/a-false-start-uncertainty-in-the-determination-of-
arbitrability-in-india/.
judgments which have referenced Booz Allen to demonstrate how the lack of clarity and
inadequacy of the Booz Allen test has led to misapplication and misinterpretation of the
test of in personam and in rem. Lastly, the paper concludes that the dictum in Booz Allen
has been misinterpreted and misapplied by the courts because the Court in Booz Allen
first reached a conclusion and then looked for justifications, thereby creating a vague and
undefined standard of public policy to determine arbitrability. Furthermore, the test of in
personam and in rem is grossly insufficient and renders most matters inarbitrable.
 FACTS OF THE CASE:
1. Capstone Investment Co. Pvt. Ltd. (second respondent herein, for short "Capstone") and Real
Value Appliances Pvt. Ltd. (respondent No.3 herein, for short "RV Appliances") are the owners
of flat No.9A and 9B respectively situated at "Brighton", Napien Sea Road, Mumbai. Capstone
and RV Appliances had borrowed loans from SBI Home Finance Ltd., (the first respondent
herein, for short "SBI") under two loan agreements dated 3.12.1994 by securing the said two
flats in favour of SBI.

2. Under two leave and license agreements dated 5.4.1996, Capstone and RV Appliances
permitted the appellant to use their respective flats, for the term 1.9.1996 to 31.8.1999. Each
license agreement was signed, in addition to the licensor and licensee, by the other flat owner
(that is RV Appliances in respect of agreement relating to 9A and Capstone in respect of
agreement relating to 9B) and SBI as confirming parties 1 and 2.

3. On the same day (5.4.1996) a tripartite deposit agreement was entered among RV Appliances
and Capstone as the first party, appellant as the second party and SBI as the third party. Under
the said agreement, the appellant paid a refundable security deposit of Rs.6.5 crores to Capstone
and RV Appliances (at the rate of Rs.3.25 crores for each flat). Clause (E) of the said agreement
confirmed that the appellant made the said deposit and Capstone and RV Appliances received the
said deposit on the basis of the terms and conditions recorded in the two leave and license
agreements and the deposit agreement; and that the three agreements together formed a single
integral transaction, inseparable, co-extensive and co-terminus in character. Out of the said
deposit of Rs.6.5 crores, a sum of Rs.5.5 crores was directly paid to SBI on the instructions of
Capstone and RV Appliances towards repayment of the loan taken by Capstone and Real Value
and the balance of Rs.1 crore accounted in the manner indicated therein. As a consequence, the
loan due by Capstone to SBI in regard to flat No.9A was cleared, but the loan taken by RV
Appliances remained due and outstanding.

4. Capstone however became a guarantor for repayment of the amount due by RV Appliances
and flat No.9A was secured in favour of SBI and a charge was created in the shares relating to
flat No.9A belonging to Capstone in favour of SBI, as security for repayment of the loan by R V
Appliances. We extract below the relevant portion of para 5A of the agreement:

"However, notwithstanding the repayment of the dues of Capstone Investment Co.

Pvt. Ltd., the share Nos.4001 to 4250 of the Society and Flat No.9A shall
continue to be available to the Party of the Third Part as security of the remaining
dues of Real Value Appliances Ltd., and in this connection it is agreed that upon
liquidating the dues of Capstone Investment Co.Pvt.Ltd., and in order to make
available the said shares Nos.4001 to 4250 and Flat No.9A as security, Capstone
Investment Co.Pvt.Ltd. shall become a Guarantor for repayment of dues of Real
Value Appliances Pvt.Ltd. The Parties of the Third Part are confirming that it has
no objection to the Party of the Second Part, its employee or officer occupying the
Flats and that as long as the balance of the principal amount and interest due
thereon is paid by the Parties of the First Part (or as per arrangement hereafter
recorded) by the Party of the Second Part to Party of the Third Part, the Parties of
 the Third Part shall not enforce the mortgage and will permit the Party of the
Second Part, its employee or officer to occupy the said Flats."

5. Clause (3) of the Deposit agreement gave an option to the appellant who opted to continue the
license in respect of the two flats for a further period of two years beyond 31.8.1999, by paying
an additional deposit of Rs.2 crores (at the rate of Rs.1 crore for each flat). Clause (11) enabled
the appellant to continue to use and occupy the flats so long as the amounts paid by it as security
deposit remained unpaid.

6. Clause (8) gave the option to the appellant to pay the amount due to the SBI on behalf of the
borrowers to safeguard its interest. Relevant portion of paragraph 8 is extracted below:

"If any default is made by the Parties of the First Part in paying any sum(s) due
from time to time by them to the Parties of the Third Part under the loan facility,
the Party of the Second Part shall, to safeguard its interest in retaining the right to
use and occupy the said Flats, have an option to pay the Parties of the Third Part
the sum(s) so becoming due and remaining unpaid by the Parties of the First Part,
on their behalf."

7. Clauses (9) and (10) provide that at the end of the license period, Capstone and R V
Appliances shall jointly and severally be liable to refund the deposit amount along with interest
thereon from the date of expiry of the license to date of actual payment Clause (16) of the deposit
agreement provided for arbitration and is extracted below:

"In case of any dispute with respect to creation and enforcement of charge over
the said shares and the said Flats and realization of sales proceeds therefrom,
application of sales proceeds towards discharge of liability of the Parties of the
First Part to the parties of the Second Part and exercise of the right of the Party of
the Second Part to continue to occupy the said Flats until entire dues as recorded
in Clause 9 and 10 hereinabove are realized by the party of the Second Part, shall
be referred to an Arbitrator who shall be retired Judge of Mumbai High Court and
if no such Judge is ready and willing to enter upon the reference, any Senior
Counsel practicing in Mumbai High Court shall be appointed as the Sole
Arbitrator. The Arbitrator will be required to cite reasons for giving the award.
The arbitration proceedings shall be governed by the Arbitration and Conciliation
Ordinance 1996 or the enactment, re-enactment or amendment thereof. The
arbitration proceedings shall be held at Mumbai."

8. In or about July 1997 a reference was made by RV Appliances to the Board of Industrial and
Financial Reconstruction (BIFR for short) under the Sick Industrial Companies (Special
Provisions) Act, 1985 and in pursuance of it, flat 9B was taken over by the official liquidator.

9. By letter dated 4.8.1999, appellant informed Capstone and RV Appliances that it was not
interested in exercising the option to renew the licenses on expiry of the leave and license
agreements on 31.8.1999 and called upon the licensors to refund the security deposit of Rs.6.5
crores, assuring that it would vacate and deliver up the licensed flats on receipt of the deposit
amount. The appellant informed SBI and BIFR about it by endorsing copies of the said letters to
them. As there was no confirmation from Capstone and RV Appliances that they would refund
the sum of Rs.6.5 crores, the appellant wrote a further letter dated 26.8.1999 stating that it would
continue to occupy the flats if the security deposit was not refunded.

10. As the loan amount due by RV Appliances was not repaid, SBI filed a mortgage suit (Suit
No.6397/1999) in the High Court of Bombay on 28.10.1999 against Capstone (first defendant),
appellant (second defendant), and RV Appliances (defendant No.3) in regard to the mortgaged
property (flat No.9A) for the following reliefs:

 ISSUES/RELIEFS:

I
For a declaration that the 1st defendant as mortgagor was due in a sum of Rs.8,46,10,731/- with
further interest on the principal sum at the rate of Rs.16.5% per annum and additional interest for
delayed payment at the rate of 2% per month from 1st September, 1999 till payment or
realization;
II
For a declaration that the amount and interest mentioned in prayer (a) above is secured in favor
of the plaintiffs by a valid and subsisting mortgage of flat No.9A and three garages (suit
premises);
III
For a direction to the first defendant to pay to the plaintiff the amount and interest in prayer (a)
by such date as may be fixed by the Court for redemption of the mortgage and in the event of the
first defendant failing to make payment by that date, the suit premises be sold by and under the
orders and directions of the Court in enforcement and realization of the mortgage thereon and the
net realization thereof be paid over to the plaintiff in or towards satisfaction of its claim herein;
IV
For a personal decree against the first defendant to the extent of any deficiency in sale
realization;
V
The second defendant is ordered to vacate the suit premises and hand over possession thereof to
the plaintiff to enable the plaintiff effectively to enforce and realize its security thereon.
 THE TEST OF BOOZ ALLEN
In Booz Allen, the Supreme Court was called upon to consider the question of
arbitrability with respect to the enforcement of a bank mortgage by sale. While most of
the facts of the case had a purely inter partes effect i.e. the entire cause of action was
based on agreements being executed between the parties and the bank, the Court
proceeded to examine the question of arbitrability with the broad tests of (a) whether the
subject matter is capable of adjudication by a private forum; or (b) whether the relief
claimed can only be granted by a special court or tribunal.

The Court agreed that arbitration is a private forum chosen by parties and every dispute,
civil or otherwise, is capable of arbitration unless barred (a) expressly or (b) by necessary
implication. The rationale of the Court was that if a statute confers a right and provides a
remedy for its enforcement, then a party can only avail the exclusive remedy under that
statute. The Court then proceeded to list out examples of matters which are inarbitrable
i.e.,

i) criminal offences;

ii) matrimonial disputes;

iii) guardianship;

iv) insolvency and winding up;

v) tenancy governed by a special statute,

and held that the reason for these disputes being inarbitrable is that they are actions in
rem.

Thus, the Court used a rights-based analysis and set the test of public policy based on the
distinction between rights in personam i.e. rights against particular persons, and rights in
rem i.e. rights against the world at large10. Actions or disputes with respect to rights in
rem would be inarbitrable. However, the Court categorically cautioned that this was not
an inflexible rule and subordinate rights from actions in rem would be arbitrable, for
example, rights under a patent license agreement would be arbitrable but the validity of
the patent may not be arbitrable.

Ultimately, the Court held that a mortgage suit for sale was not arbitrable, being an action
in rem. The Court examined the nature of the proceedings and pointed out that since any
person having an interest or right of redemption may be interested in the proceedings, the
same cannot be sent to the private adjudicatory process of arbitration, as the Court has to
protect the interests of third-parties and also adjudicate upon their rights and liabilities.

10
P.J. FITZGERALD, SALMOND ON JURISPRUDENCE 235 (12th ed. 2009) [“My right to the
peaceable occupation of my farm is in rem, for all the world is a under a duty towards me not to interfere
with it. But if I grant a lease of the farm to a tenant, my right to receive the rent from him is in personam”].
Thus, the Court in effect reasoned that permitting an ouster of jurisdiction of a civil court
would extinguish the rights of third parties and that cannot be permitted on grounds of
public policy

To analyse and examine the effect of Booz Allen, it is necessary to first understand what
public policy is and why it is an accepted exception to the general rule of arbitrability of
disputes. Public policy pertains to “the most basic norms of morality and justice” of a
State, the violation of which “would be clearly injurious to the public good or, possibly . .
. would be wholly offensive to the ordinary reasonable and fully informed member[s] of
the public on whose behalf the powers of the State are exercised”. Explanation 1 to
Section 34(2)(b) and Section 48(2) of the Arbitration Act list out three instances of the
public policy exception i.e. (i) the award was induced by fraud or corruption; or (ii) the
award is in contravention with the fundamental policy of Indian law; or (iii) the award
conflicts with the most basic notions of morality or justice.
The Court, in setting out the test of arbitrability in Booz Allen, started with a public policy
analysis but did not set out its contours. Instead, it first listed examples of disputes which
were inarbitable and then, due to apparent confirmation bias, sought to reason that they
were so because they were in rem. Essentially, the Court reached a conclusion and then
searched for a reasoning instead of reaching a reasoned conclusion.

It is pertinent to note that arbitrability strikes at the root of procedural maintainability of a

proceeding, rather than determining the rights of the parties involved, as it is the first step
to determine whether the tribunal has jurisdiction to adjudicate on the subject matter. In
Booz Allen as well as in subsequent judgments, the courts in India have proceeded to
answer procedural questions by examining substantive laws of the dispute. The Court
stated that the adjudication of certain disputes has been exclusively reserved for the
courts by the legislature either expressly or by necessary implication, but did not analyse
why such a reservation has been made, or ought to be made. The possible areas for
reservation are where–

(a) an arbitrator is not competent or is incapable of deciding the dispute as it concerns

public policy; or

(b) the dispute is one which affects sovereign functions or state monopoly11, i.e.
inalienable functions of the State; or

(c) the parties freely alienating their rights to adjudication by public fora in favour of
arbitration need judicial protection as they cannot make an informed decision, or
the rights themselves are not alienable12; or

11
Union of India v. Competition Commission of India, AIR 2012 Del 66.
12
Agricultural Produce Market Committee v. Ashok Harikuni and Anr., (2000) 8 SCC 61, ¶ 32 [hereinafter
“Agricultural Produce Market Committee”].“Thus, various functions of the State, may be ramifications of
`sovereignty' but they all cannot be construed as primary inalienable functions. Broadly it is taxation,
eminent domain and police power which covers its field. It may cover its legislative functions,
administration of law, eminent domain, maintenance of law and order, internal and external security, grant
of pardon. So, the dichotomy between sovereign and non-sovereign function could be found by finding
 (d) The dispute has an erga omnes effect i.e. it effects the rights and liabilities of third
parties, and accordingly cannot be decided by a private forum.

In order to fully understand the public policy exception, each of these possibilities needs
to be examined in further detail.

A. Competence of Arbitrators

The origins of the public policy exception were, more or less, based on concerns
regarding arbitration as a process13. It was considered that (i) arbitrators cannot
appreciate evidence as well as courts, and thus, have limited fact-finding capability; (ii)
arbitrators may not be able to apply public policy considerations since arbitration is a
private mechanism; (iii) the resultant awards have no provision for appeal and limited
grounds for setting aside; and (iv) the proceedings are confidential. Therefore, the
judiciary in India has long held mistrust with respect to the competence of arbitrators and
their ability to effectively adjudicate disputes.

However, this mistrust may be misplaced. An arbitrator is empowered to do all that a

civil court can do14. Moreover, arbitrators are at times more qualified than the judges
deciding a dispute as they might be experts in the area. One of the advantages of
arbitration as a dispute resolution mechanism is the freedom of the parties to choose an
arbitrator of their choice, who can be an expert in a particular field. Also, the possibility
of having three or more arbitrators limits the possibility of adjudication being done by a
single judge with a preconceived notion about the dispute. Further, the possibility to
challenge an arbitrator’s bias or pre-judgment is greater than the possibility to challenge a
judge’s pre-disposition. Therefore, there is no reason to put arbitrators at a threshold
below the judges.

In many jurisdictions, there is case law which demonstrates that many regulatory and
public policies related disputes are now arbitrable. In Germany, antitrust disputes are
arbitrable as it is assumed that arbitrators would apply competition law in the same
manner as the courts would. In the United States, the Courts have taken a similar view
with respect to antitrust disputes15. The French Courts have also leaned in favour of
arbitrability with respect to disputes concerning Intellectual Property Rights16. Therefore,
the assumption that arbitrators cannot effectively apply public policy has no basis. Even
with respect to the ability to appreciate evidence and challenge of the award, all
necessary procedural safeguards have been built in, to ensure the sanctity of the award
such as notice of arbitration, right to challenge arbitrators on impartiality and

which of the functions of the State could be undertaken by any private person or body. The one which
could be undertaken cannot be sovereign function. In a given case even in subject on which the State has
the monopoly may also be non- sovereign in nature”.
13
On Arbitrability: Persisting Misconceptions and New Areas Of Concern, in ARBITRABILITY –
INTERNATIONAL AND COMPARATIVE PERSPECTIVES 21-25 (Loukas A. Mistelis & Stavros L
Brekoulakis eds., 2009).Stavros L Brekoulakis,
14
Eros International,
15
Mitsubishi v. Soler Chrysler-Plymouth, 437 U.S. 614 (1985) (U.S.).
16
Ste Hidravlika D v. SA Diebolt, JCP E 2008, 1582 (Fr.).
independence, adherence to principles of natural justice, right to challenge the award for
procedural unfairness or deviation from agreement of the parties etc.

Lastly, the assumptions as to the competence of arbitrators should not be used to oust the
jurisdiction of the arbitral tribunal, as such concerns strike at the very root of arbitration
as a dispute resolution mechanism. Permitting only certain disputes to be arbitrated and
not others, on the ground of limitations of the mechanism, runs afoul of the basic
principle that an arbitrator is empowered to do all that which a civil court can. Thus,
using the public policy exception to oust the jurisdiction of an arbitral tribunal should not
be based on a mistrust of the process of arbitration and the competence of arbitrators.
This mistrust cannot fall within the domain of the public policy exception.

B. Sovereign Function

The real question or test for the legislature reserving certain disputes exclusively for
adjudication by public fora should ideally be the test of sovereign function or State
monopoly i.e. functions which the State cannot alienate and has an exclusive right and
duty to perform. Since arbitrators are appointed by the parties and not the State17, there
exists an inherent danger that the interest of private parties may trump public interest.
Arbitrators want to be appointed again and again, and therefore, they have an interest in
ensuring that the party appointing them is happy with the result18.

Moreover, since the dispute relates to, or is connected with, the discharge of a sovereign
function, for e.g., grant of patents, licences, company incorporation, registration of
marriage, etc., the same would have an erga omnes effect and would be, as held in Booz
Allen19, an action in rem. Therefore, the same cannot be decided by a private adjudicatory
process. Furthermore, the power of the State to maintain law and order or discharge
sovereign functions would effectively be delegated into private hands if parties are
permitted to resolve disputes related to sovereign functions through arbitration.

It is necessary to clarify at this stage that the reason for criminal matters not being
arbitrable is not only that criminal, or penal, actions are actions in rem, but also because
they are within the exclusive domain of the State as violations of criminal law are
offences against the State and not just against the victim20. Very often, penal actions are
referred to as being inarbitrable as the arbitrator cannot grant reliefs as envisaged under
criminal law, thereby using a relief-based analysis to penal actions. However, the same is
erroneous.

The reason the arbitrator cannot grant relief in criminal proceedings is because the State
never granted that authority or right to an arbitrator. Further, there might be offences

17
Booz Allen, Supra note 3
18
Susan D. Franck, The ICSID Effect? Considering Potential Variations in Arbitration Awards, 51 VA. J.
INT‟L L. 977 (2011).
19
Booz Allen, supra note 3
20
Kumaravelu Chockalingam, Measures for Crime Victims in the Indian Criminal Justice System, U. N.
ASIA & FAR EAST ASIA INST. (Sep. 3, 2018), available at
https://www.unafei.or.jp/publications/pdf/RS_No81/No81_11VE_Chockalingam.pdf
which would affect national security, homeland security, drug abuse, etc. and would
consequently have ramifications in rem. More importantly, derogation from criminal law
is not permissible by consent between the accused and the State21. Also, there is no
agreement to arbitrate prior to the commission of the offence. Thus, criminal matters can
only be subject to arbitration by means of a submission agreement. Even if that was
hypothetically possible, as it is practically impossible, the accused would never agree on
any procedure to take away his/her right to life and liberty. Therefore, criminal matters
are inarbitrable for several reasons and not only because of the arbitral tribunal’s power
to punish and imprison the parties.

C. Inalienable Rights

Under Swiss and German laws, claims involving an economic interest or pecuniary
claims are arbitrable22 as such rights can be alienated, transferred, renounced, and traded.
However, certain rights by their very nature are inalienable. One cannot contract out of a
statute to the extent that the law stops applying to him or her, especially with respect to
matters related to criminal law, matrimony, insolvency, etc. i.e. public policy23. Thus,
where the statute makes a provision for individual benefit and the prohibition is not a
matter of public policy, only in such cases can the individual waive or derogate from a
statutory provision under the principle of quilibet palest renunci are juri prose introducto
i.e. anyone may renounce a law introduced for his own benefit24. Therefore, it is only
inalienable rights that cannot be adjudicated upon through arbitration.

D. Special Legislation

In certain disputes (such as consumer disputes, real estate disputes, labour disputes and
tenancy disputes) the rights per se are alienable, and accordingly parties should have the
freedom to enter into contract to have their disputes decided by arbitration. However, the
legislature, in public interest, or to correct a specific social problem, or to balance
unequal bargaining power, grants
special protection to individuals involved in certain kinds of disputes. This is done as the
concerned parties may not always make an informed choice when referring their dispute

21
The Indian Contract Act, No. 9 of 1872, § 23.
22
ZHENG SOPHIA TANG, JURISDICTION AND ARBITRATION AGREEMENTS IN
INTERNATIONAL 94 (1st ed. 2014); LOI FÉDÉRALE SUISSE SUR LE DROIT INTERNATIONAL
PRIVÉ [LDIP], FEDERAL CODE ON PRIVATE INTERNATIONAL LAW [CPIL] Dec. 18, 1987, art.
177(II)(1) (Switz.).
23
The Indian Contract Act, No. 9 of 1872, § 23.
24
Waman Shrinivas Kini v. Ratilal Bhagwandas and Co., [1959] Supp 2 SCR 217, 225-26; Murlidhar
Aggarwal v. State of Uttar Pradesh, (1975) I SCR 575 [The tenant waived his right to approach the civil
court under the UP (Temporary) Control of Rents and Eviction Act. The lease deed was declared illegal as
the provision was for the benefit of the public and could not be waived]; Indira Bai v. Nand Kishore, (1990)
4 SCC 668.
to arbitration. For example, consumers are usually unaware of arbitration as an alternative
forum for dispute resolution and they lack the understanding of the arbitral process.
Similarly, labour disputes and tenancy disputes also represent the unequal bargaining
power of the labourers or tenants. Therefore, even though such individuals or groups
have alienable rights, such rights require judicial protection because of a social objective.
Hence, they fall within the domain of the public policy exception by creation of special
laws i.e. Consumer Protection Act, 1986, Real Estate (Regulation and Development) Act,
2016, Industrial Disputes Act, 1947 etc.

In fact, the jurisprudence prior to Booz Allen was based primarily on the public policy
exception stemming from a special legislation. In Natraj Studios (P) Ltd. v. Navrang
Studios and Another25 the Supreme Court had rightly held that the Bombay Rent, Hotel
and Lodging House Rates Control Act, 1947 was a welfare legislation with the social
objective of protecting tenants from landlords and the scheme of the act clearly showed
that the exclusive jurisdiction was conferred on certain special courts such as those under
the Provincial Small Cause Courts Act, 1887 pursuant to such social objective.

E. Erga Omnes Effect

Arbitration is a private adjudicatory process by which parties agree to have their dispute
resolved by someone other than a court created by the laws of a country. The implication
being that arbitration can only take place where (a) the parties have clearly consented to
ousting the jurisdiction of a civil court in favour of arbitration; and (b) the dispute is one
where the rights and liabilities of third parties is not going to be affected by adjudication
of the dispute. Thus, the jurisdiction of the arbitral tribunal is ousted in cases where
arbitration proceedings would have an erga omnes effect as the arbitrator, whose powers
are derived from an agreement between the parties, cannot bind non-signatories to the
agreement26.

Unfortunately, the Booz Allen test mixes up the issue of erga omnes effect with rights in
rem. For example, a right to property is a right in rem, however, a tenancy dispute is
purely between a landlord and a tenant and is, therefore, inter partes. It has no effect erga
omnes. Similarly, as impliedly affirmed in Booz Allen, validity of a patent is a declaration
to the world at large over the use and exclusivity of a process by a party, but an
infringement of the same under the terms of a license agreement is inter partes27.

Therefore, the public policy exception relating to the ouster of jurisdiction of an arbitral
tribunal should apply only in cases where the rights and liabilities of third parties i.e.
parties other than those who have consented to an arbitration agreement, will be affected
by the result of the arbitration, and not because the right involved is in rem.

25
Natraj Studios (P) Ltd. v. Navrang Studios and Anr., (1981) 1 SCC 523, ¶ 17
26
MARGARET L. MOSES, THE PRINCIPLES AND PRACTICE OF INTERNATIONAL
COMMERCIAL ARBITRATION 2 (2d ed. 2012)
27
Booz Allen, supra note 3, ¶ 35.
 CONCLUSION
The Inadequacies of Booz Allen

Given that the test to determine arbitrability in India was first laid down by the Court in Booz
Allen, the starting point of any analysis pertaining to arbitrability begins with the test of in rem
and in personam.28 Since the Court did not clearly set the contours of what would comprise
public policy, not surprisingly, the test is grossly inadequate to address the concerns which ought
to make a matter inarbitrable. The test of barring arbitration either expressly or impliedly by
referring to public policy, and the assumption that creation of specialized forums entails public
policy concerns, is grossly erroneous for the following reasons.

A. The Vague Standard of Public Policy

First and foremost, a dispute that involves public policy issues is not per se regarded to be
inarbitrable. If that were to be the test, nearly all disputes would become inarbitrable, since it is
very rare that a dispute would not involve a rule of public policy i.e. a law governing the
subject.29

Second, the standard of public policy is so vague that, without defining its proper limits, it
cannot be considered as a test for determining arbitrability. Third, inarbitrability operates only in
those spheres where courts have been given „mandatory‟ competence, and derogation by a
contractual agreement to oust that competence cannot be permitted. The public policy exception
does not mandate ouster of jurisdiction of the arbitral tribunal by the mere creation of a
specialized forum.30 It is only specific matters or specific legislations with a social or economic
objective that would fall within the public policy exception. In fact, while referring to tenancy
disputes as being inarbitrable, the Court in Booz Allen specifically added the words “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”. Thus, the
mere creation of specialized forums such as tribunals or commissions would not per se make the
subject matter inarbitrable. Hence, the Court while considering the jurisdiction of the arbitral
tribunal being barred by necessary implication failed to make the distinction between:

(a) special forums created only for efficiency and speedy justice i.e. mere alternatives to civil
courts without anything more;31 and
(b) special forums created under a special legislation with additional powers than those
exercisable by civil court,32 and hence not exercisable by the arbitrator.

The mere creation of a specialized forum does not ipso facto raise a presumption of public policy
in favour of ousting the jurisdiction of an arbitral tribunal and, more importantly, speaks nothing

28
Booz Allen, supra note 3, ¶ 35.
29
Antoine Kirry, Arbitrability: Current Trends in Europe, 12 ARB INT‟L 373, 390 (1996) [hereinafter “Antoine
Kirry”].
30
HDFC Bank v. Satpal Singh Bakshi, 2012 SCC Online Del 4815, ¶ 35
31
HDFC Bank, ¶ 14; A. Ayyasamy.
32
Booz Allen, ¶ 36.
of the nature of the dispute per se but only examines as to which authority is going to resolve
such a dispute.

B. Mere Forum Selection

Moreover, such an analysis misses the point that an individual has the right to select a judicial
forum of his/her choice under a particular legislation. Reference to arbitration, even in the
presence of an alternative forum where a remedy can be sought, does not take away or exclude
that remedy, it is just that the parties have agreed to go to a particular forum to seek that
remedy.33 The parties do not forgo the substantive protection provided by the statute, but only
trade the judicial procedure and opportunity of review by courts for the simplicity, informality,
and expedition of arbitration.

Only if a dispute relates to rights that may not be freely alienated, does the dispute become
inarbitrable.34 Innocent consumers cannot freely alienate or waive their rights due to the lack of
an informed decision. Accordingly, the Consumer Protection Act, 1986 [“CoPRA”]35, the Real
Estate (Regulation and Development) Act, 2016 [“RERA”] and rent control legislations afford
protection to such parties. Therefore, special legislations override contractual agreements as
these statutes creates special rights and obligations82 and special fora for enforcement of those
special rights.

C. Special Rights

The real test for ouster of jurisdiction of the arbitral tribunal should be to see whether the
legislature intended to prohibit a waiver of adjudication by the courts. Such a bar by „necessary
implication‟ should be determined by examining the “text of the statute, its legislative history, or
an „inherent conflict‟ between arbitration and the statute‟s underlying purposes”.36 In essence, it
is necessary to examine if the statute creates a special right or liability and provides for the
determination of such right or liability by a tribunal so constituted, and whether remedies
ordinarily within the domain of the civil court are prescribed or not.

D. Inadequacy of the in rem and in personam Distinction

In an attempt to define public policy, the Court examined the well-recognised examples of non-
arbitrable disputes and took the view that they are inarbitrable because they relate to actions in
rem. However, even an action in personam, if reserved for adjudication by a public forum as a
matter of public policy, would become non-arbitrable.37 A closer examination of some of the
examples clearly brings out the errors in the reasoning of the Court.

33
Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974) (U.S.); Wilko v. Swan 346 U.S. 427 (1953) (U.S.)
cited in Patrick M. Baron
34
Emaar MGF Land Limited v. Aftab Singh, 2018 SCC Online SC 2771
35
Emaar MGF Land Ltd. v. Aftab Singh, Civil Appeal Nos. 23512-23513 of 2017, decided on 13-2-2018].
36
Jennifer L. Peresie, Reducing the Presumption of Arbitrability, 22(2) YALE L. & POL‟Y REV. 453
(2004).
37
Kingfisher Airlines Limited v. Prithvi Malhotra Instructor, 2013 (7) Bom C.R. 738.
Matrimonial disputes – a dispute between a husband and wife for judicial separation and divorce
is not per se in rem but strictly inter partes. It is the effect of dissolution of marriage which has
an effect in rem i.e. the world knows that the parties are no longer married and are free to marry
again. The reasons for the divorce and the allegations between the parties do not concern the
world at large. In fact, the Chennai High Court rejected the public policy argument, under the
erstwhile Arbitration Act, 1940, and held that there is no bar to matrimonial disputes being
resolved by arbitration, as a decree for restitution of conjugal rights can be enforced by a court.
Similarly, the terms of separation between a husband and wife can be referred to arbitration.38
The reason matrimonial disputes are inarbitrable is because matrimonial disputes are concerned
with the legal status of persons and conferment or revocation of a legal status is a sovereign
function.

Insolvency – it is incorrect to state that all matters relating to insolvency are inarbitrable. It needs
to be clarified that insolvency relates to (i) organizing the conduct of insolvency proceedings;
and (ii) permitting creditors to join the proceedings. It is at the stage of enforcement or
distribution of assets that the proceedings have an erga omnes effect39 i.e. third parties who have
an interest in the rights or liabilities of the person or entity being liquidated need to be provided
an opportunity for adjudication of their rights. The dispute between the parties i.e. the debtor and
the creditor and the determination of one party being insolvent is inter partes or in personam and
clearly a matter capable of being settled by arbitration. In fact, Section 41 of the Arbitration Act
specifically provides for such a possibility and states that a receiver can adopt the contract and
continue arbitration proceedings.

The Curse of Booz Allen

This is troublesome for three reasons:

first, as long as the dispute is inter partes and can be limited to having an inter omnes effect, the
mere fact that there might be an effect in rem cannot be a sufficient ground to override the
freedom of contract of the parties as it is very rare that a dispute would not involve a rule of
public policy i.e. a law governing the subject.40

Second, where the dispute is commercial and parties have consciously decided to refer the
dispute arising from a contract to an arbitral tribunal, one party is essentially seeking a specific
and particular relief against another particular, defined party, and not against the world at large.
Consequently, the dispute remains as in personam, notwithstanding its effect in rem.41 In fact, the
Court itself alluded to such a possibility and held that subordinate rights in personam arising out
of rights in rem are arbitrable. For example, claims of oppression and mismanagement arising
out of pure breach of contract should be arbitrable, even though the National Company Law
Tribunal has been created for adjudication of such rights.42 Similarly, a relief for injunction and
damages can be granted by an arbitrator for infringement of copyright even though it will have
an effect in rem.
38
Olympus Superstructures (P) Ltd. v. Meena Vijay Khetan, (1999) 5 SCC 651, ¶ 35.
39
Karl Zemanek, New Trends in the Enforcement of Erga Omnes Obligations, MAX PLANCK Y.B. U.N.
L. ONLINE (2000), available at http://www.mpil.de/files/pdf2/mpunyb_zemanek_4.pdf.
40
Antoine Kirry
41
Eros International, ¶ 19.
42
Fulham Football Club (1987) Ltd. v. Richards, [2011] EWCA (Civ.) 855 (Eng.).
Third, a party would deliberately seek reliefs which cannot be granted by the arbitral tribunal in
order to avoid arbitration43 i.e. “dressing up” the claim with vexatious, mala fide, and
mischievous petitions, to defeat an arbitration clause between the parties.44Thus, the test of
„relief sought‟ cannot be sufficient to adequately determine the arbitrability of a dispute.

43
Rakesh Malhotra v. Rajinder Kumar Malhotra, 2017 SCC Online SC 733.
44
Vimal Kishor Shah v. Jayesh Dinesh Shah (2016) 8 SCC 788