Arbitrability of Disputes: Explained

The Author, Divyansh H Rathi is Managing Partner at Lexidem & Rathi, A Global Law Firm. He is Associate Member of Chartered Institute of Arbitrators.

Introduction:

Our world has manifestly shrunk and the modern communication systems have catalysed the commercial transactions between people from different backgrounds and cultures. While all this has led to remarkable economic development, it has also given rise to disputes among the trading partners governed by multilateral commercial agreements. To name a few, these disputes relate to “interpretation of contractual terms”, “legal implications of a contract”, “respective rights and obligations of the parties” and “non-performance of contractual obligations”.

Judicial forums of dispute resolution often lead to long protracted trials. Thus, the parties at loggerheads increasingly looking towards alternative means of resolution of their commercial disputes especially through arbitration.

While globally, arbitration is looked upon as an efficient way of resolution of disputes but on the other hand recognition and enforcement of arbitral awards is seen as one the important challenges the arbitration process faces. If an arbitral award is not recognized or enforced, the entire purpose of adjudication of disputes outside the judicial system would be defeated.

At the same time, arbitration laws and rules provide for protective measures against enforcement of arbitral awards under which the award debtor can challenge the arbitral award on various grounds such as “invalidity of arbitration agreement”, “arbitrability of dispute”, “non-adherence to due process”, and “ violation of public policy”. Each of these grounds is in itself vast field of research. Arbitrability of a dispute is a critical limb of arbitral process, as challenge to arbitrability of subject matter of dispute can be raised before, during and after completion of process of arbitration. For the sake of brevity and research purposes, this dissertation would be focussing on the arbitrability of the dispute.

1. Arbitrability of a Disputes

Before proceeding with the arbitration, every arbitral tribunal is obliged to look into the arbitration agreement. Arbitral tribunal considers whether dispute is arbitrable according to the national public policy of the seat of arbitration as they affect tribunal’s jurisdiction with respect to the dispute. National public policy varies considerably from one jurisdiction to the other based on the socio-economic structure of the society.

“New York Convention” provides for various exceptions to the general obligation contained in “Article II” to enforce written arbitration agreements. One of such exceptions, is contained in “Article II (1)” which provides for non-arbitrability of disputes, which are not capable of settlement by arbitration. Also, “Article V(2)(a)” provides that an arbitral award need not be recognized if the subject matter of the difference is not capable of settlement by Arbitration under the law of the country where recognition is sought.

National legislations often lay down the subject matter of disputes which are not capable of settlement by arbitration usually due to claims being considered to be of public importance or requiring the application of formal judicial procedures and protections.[1]

The term “arbitrability” of the disputes has been defined by scholars like Blackaby, Partasides, Redfern and Hunter, who have stated that arbitrability "involves determining which types of dispute may be resolved by arbitration and which belong exclusively to the domain of the Courts"[2]. While on the other hand, Gary Born explains the doctrine of non-arbitrability and states that, “Non-arbitrability doctrine rests on the notion that some matters so pervasively involve ‘public’ rights and concerns, or interests of third parties, which are the subjects of uniquely governmental authority, that agreements to resolve such disputes by ‘private’ arbitration should not be given effect”.[3]

Arbitrability can be further be divided into two types, which are as follows: When issue related to the capacity of the parties arise, it is called “subjective arbitrability or arbitrability rationae personae” and When subject-matter of the dispute cannot be arbitrated under a domestic law, it is called “objective arbitrability or arbitrability rationae materiae”.

It has been concluded by various authorities that the questions relating to arbitrability of disputes under Article II(1) and Article V(2)(a) of New York Convention are of similar nature. Thus, it means that if Arbitration of a dispute or a claim cannot proceed under Article II(1) due to non-arbitrability of the dispute, then the award pertaining the particular dispute is generally subject to non-recognition under Article V(2)(a) of New York Convention.

Some countries have created a list of disputes that can be submitted to arbitration like in the case of French Civil Code, Article 2060, states that: “One may not enter into arbitration agreements in matters of status and capacity of the persons, in those relating to divorce and judicial separation or on controversies concerning the public bodies, institutions and more generally in all matters which concern public policy.”

Article 2059 of “French Civil Code” simultaneously declares that “all persons can make arbitration agreements of rights that they may freely dispose”. This principle of differentiation has been followed by “Dutch Code of Civil Procedure”[4] and “Spanish Arbitration Act, 2003”.[5]

Germany follows a liberal approach with Section 1030 of “German Civil Procedure Code (CCP)” while defining arbitrability; it states that, “Any claim involving an economic interest can be the subject of an arbitration agreement. An arbitration agreement concerning claims not involving an economic interest shall have legal effect to the extent that the parties are entitled to conclude a settlement on the issue in dispute”. At the same time, it explicitly declares that the disputes relating to existence of a lease of residential accommodation are non-arbitrable (Section 1030(2), CCP). Section 1030(3) of “German Civil Procedure Code” further clarifies that the other laws may contain additional exceptions. Disputes in relation to antitrust law, competition law, and IP law are generally arbitrable under German arbitration regime.

2. Stages at which Question of Arbitrability of Disputes can be raised

The question of arbitrability of the dispute is invoked at multiple stages during the process of dispute resolution. Firstly, it can be raised by the parties before the national court at the stage of invocation of an arbitration agreement. Secondly, it can be raised, prior to commencement of arbitral proceedings as to whether dispute submitted for arbitration is capable of adjudication by arbitration and thirdly, during the arbitration proceedings when the arbitrator might need to decide on jurisdiction before entering into the merits and finally, at the stage of setting aside and challenging the enforcement of foreign arbitral award.

The “New York Convention” under Article II (3) provides that the national courts should refer the parties to arbitration provided that they have an arbitration agreement, but if the court finds that after the request of one of the parties, an arbitration agreement is null and void, inoperative or incapable of being performed, it should refuse enforcement of such arbitration agreement. If the national court is of the view that subject matter of dispute is such that national laws expressly prohibit its submission to arbitration, this constitutes as a ground for refusing enforcement of the arbitration agreement.

The decision taken by the arbitrators before commencement or during the arbitration proceedings, at the stage of deciding tribunal’s jurisdiction before proceeding to the merits is similar to the assessment undertaken by the national courts at the stage of enforcement of arbitration agreement. Arbitrators will have to examine in accordance with the applicable law, whether there is any prohibition to arbitrate the particular subject matter of dispute.

At the stage of setting aside of the award, the issue of arbitrability is generally raised by the losing party for annulment of the award on the ground of subject matter of the dispute being non-arbitrable.

Finally, at the stage of recognition and enforcement of the arbitral awards, arbitrability of dispute is provided for under Article V(2)(a) of “New York Convention”. At this stage, it is pertinent to note that challenge to non-arbitrability of the dispute becomes independent of request of the party. Further, the national court will refuse to recognize and enforce the award if the subject matter of dispute cannot be settled by arbitration under the law of country where the enforcement is being sought.

The number of decisions dealing with the challenge to requests for recognition and enforcement of awards on the grounds of arbitrability are relatively low because the issues relating to the arbitrability of the disputes generally arise and are resolved effectively at the stage of invocation of the arbitration agreement. The sense of arbitrability of dispute either at the beginning of the arbitration process or at the stage of recognition and enforcement is the same.   

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