Arbitrability of disputes
Arbitrability of disputes under India's debt recovery laws
Criticism of Supreme Court's position on arbitrability of disputes under debt recovery laws
Comment
The arbitrability of disputes undoubtedly represents the largest segment of litigations arising out of the Arbitration and Conciliation Act 1996. The primary reason behind the arbitrability of disputes being such a common issue in the courts is the Act's lack of classification of disputes as arbitrable or non-arbitrable. However, the judiciary has stepped in to fill the gaps that were laid bare by the legislature in respect of the arbitrability of disputes on several occasions.
The first such attempt to set out broad guidelines on whether an issue would be arbitrable was made by the Supreme Court in Booz Allen v SBI Home Finance Limited.(1) In Booz Allen, the Court held that issues arising out of rights in personam and thus being of personal import and applicable to only the parties concerned would be arbitrable. On the other hand, issues pertaining to rights in rem and thus of general import and applicability to a wider section of the public would not be arbitrable.
However, the Court held that not all issues in personam would automatically become arbitrable; it must further be examined whether the Doctrine of Necessary Implication stands in the way of the arbitrability of such disputes. Additionally, the Court laid down that certain disputes can only be decided by public forums, thereby necessarily implying that certain issues are of a wider import and are even matters of public policy. For such matters pertaining to public policy, the jurisdiction is best vested exclusively on public forums in consonance with the wisdom and decision of the legislature.
Following the landmark decision in Booz Allen, the case law in the field of the arbitrability of disputes was recently reaffirmed in Vidya Drolia v Durga Trading Corporation.(2) The Supreme Court has set out a rather extensive test to determine the arbitrability of a dispute.
In Vidya Drolia, the Supreme Court introduced a "four-fold" test to determine the "subject-matter arbitrability" of disputes. As per this test, a dispute will not be arbitrable if its subject-matter:
- relates to actions in rem that do not pertain to a subordinate right in personam;
- affects third-party rights;
- involves an inalienable sovereign function; or
- is non-arbitrable (expressly or by necessary implication) under mandatory statutes.
Arbitrability of disputes under India's debt recovery laws
The Court applied this four-fold test to determine the arbitrability of disputes under India's debt recovery laws.(3) The Court relied on the fourth principle of the test and held that such disputes are not arbitrable because banks and financial institutions have specific rights (including distinct modes of recovery) under such laws. Thus, India's debt recovery laws are deemed mandatory statutes, and by necessary implication, their derogation through contractual election of arbitration is impermissible.
In doing so, the Supreme Court overruled the Delhi High Court's judgment in HDFC Bank v Satpal Singh Bakshi.(4) It held that the Delhi High Court had correctly characterised disputes under debt recovery laws as actions in personam; however, that does not make them ipso facto arbitrable. As stated, the Supreme Court held that the debt recovery laws implicitly prohibit the arbitration of disputes. The Supreme Court reached this conclusion in two steps:
- first, elaborating on what is meant by "necessary implication of non-arbitrability under mandatory statutes"; and
- second, assessing the performance of debt recovery laws on the findings under the first step.
In the first step, the Supreme Court held as follows:
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.
Thus, the creation of special statutory rights and obligations, as well as a specific forum with exclusive jurisdiction to deal with such rights and obligations, is required to prove legislatively intended and implied non-arbitrability of disputes.
The Supreme Court found these requirements for non-arbitrability to have been satisfied in respect of the debt recovery laws. The condition of special statutory rights and obligations was seen to be satisfied in respect of the different modes of recovery under the debt recovery laws, as well as their self-contained structure.(5) Moreover, the Court held that creation of a specific debt recovery tribunal (DRT) to exclusively give effect to such statutory rights of recovery shows that these disputes are non-arbitrable by necessary implication.(6)
Criticism of Supreme Court's position on arbitrability of disputes under debt recovery laws
Thus, the position on the arbitrability of disputes under the debt recovery laws is clear. However, the application of the four-fold test of arbitrability on the debt recovery laws in Vidya Drolia has received a lot of criticism. Some of the common critiques are set out below.
First, the Supreme Court concluded that the debt recovery laws necessarily imply the exclusion of arbitration without much evidence to that effect. The focus must lie on the text of the statute, its legislative history or any inherent conflict between arbitration and the statute's underlying purpose. However, no such conflicts were materially explored in Vidya Drolia. Moreover, the Debt Recovery Act came into existence before the Arbitration & Conciliation Act 1996, and therefore the legislature could not have intended to include any provision that could possibly imply its exclusion. Further, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002, which came after the Arbitration Act, contains no such exclusions either.
Second, the basis of the Supreme Court's determination was that, if arbitration is permitted, it would deprive banks and financial institutions of the benefits under the debt recovery laws. However, that does not mean that the laws are automatically non-derogable. Banks and financial institutions have regularly used arbitration to avail a lot of the same remedies as the DRT. Moreover, lenders must be permitted to elect arbitration over the debt recovery laws if they prefer the benefits of arbitration over the different modes of recovery under the debt recovery laws.
Third, the mandatory nature of these laws is not sufficiently proved, especially with regard to private law issues without any welfare implications. In Vidya Drolia, the Supreme Court itself noted that the creation of a special tribunal to merely substitute the functioning of civil courts does not imply non-arbitrability of the matters within its subject matter jurisdiction. Given the most important aspect of the debt recovery laws was to divert the case burden on civil courts, the election of arbitration should also be permissible.
Thus, there is a need to revisit the Supreme Court's application of the four-fold test on the debt recovery laws. The present position requires modifications; debt recovery is often time-sensitive and commercially significant, which are accepted advantages of arbitration. If the Supreme Court chooses not to deviate from Vidya Drolia, Parliament must step in with amendments to the debt recovery laws.
For further information on this topic please contact Vanita Bhargava, Shweta Kabra or Prerna Singh at Khaitan & Co by telephone (+91 22 6636 5000) or email ([email protected], [email protected] or [email protected]). The Khaitan & Co website can be accessed at www.khaitanco.com.
Endnotes
(1) Booz Allen & Hamilton Inc v SBI Home Finance Limited & Ors (2011) 5 SCC 532.
(2) Vidya Drolia v Durga Trading Corporation (2020) SCC OnLine SC 1018.
- the Recovery Of Debts And Bankruptcy Act 1993; and
- the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002.
(4) HDFC Bank v Satpal Singh Bakshi 2013 (134) DRJ 566 (FB).
(5) Transcore v Union of India (2008) 1 SCC 125.
(6) MD Frozen Foods Exports Private Limited and Others v Hero Fincorp Limited (2017) 16 SCC 741.