What Disputes Cannot Go to Arbitration in India?

Which disputes can't be sent to arbitration in India?

A dispute stays out of arbitration when the law says private parties can't settle it between themselves. Usually there's one of three reasons behind that. The result may have to bind everyone, not just the two sides. Parliament may have handed the subject to a special forum. Or the dispute involves something only the State can do. An arbitration clause can't change any of that, and it makes no difference how carefully a lawyer drafted it or how clearly both sides signed up to it.

The main ones, in practice. Criminal prosecutions. Insolvency, winding up and anything else under the Insolvency and Bankruptcy Code. Divorce, restitution of conjugal rights, guardianship and custody. Probate, letters of administration and succession certificates. Disputes under trust deeds governed by the Indian Trusts Act. Eviction and rent disputes under rent control laws, where the tenant has statutory protection. Bank and financial institution claims that the Debts Recovery Tribunal has to decide. Consumer complaints, when the consumer picks the consumer commission. The grant and registration of patents and trade marks. And sovereign functions like taxation. Matters that belong to the Competition Commission, and oppression and mismanagement cases before the NCLT, usually go in the same bucket.

Nearly everything else that comes out of a commercial contract can be arbitrated. Unpaid invoices. Damages for breach. Construction claims, partnership and shareholder fights, distribution and franchise disputes, licence fees and most commercial lease disputes are all fair game. So are disputes where one side accuses the other of fraud.

What 'arbitrability' means, and where the Act deals with it

The word only asks whether the subject of a dispute is capable of settlement by arbitration. You won't find a list of non-arbitrable disputes anywhere in the Arbitration and Conciliation Act, 1996. What Section 2(3) does say is that Part I of the Act doesn't affect any other law under which certain disputes can't be sent to arbitration. So the real answers sit in other statutes, and in judgments.

The Act steps in at two points, both about what happens if you get it wrong. Section 34(2)(b)(i) says a court must set aside a domestic award if it finds the subject matter isn't capable of settlement by arbitration under the law for the time being in force. Section 48(2)(a) does the same job when a court is asked to enforce a foreign award. Watch the words 'the court finds'. They let the judge take the point on his or her own, even if the losing side never argued it before the tribunal.

Don't mix this up with two other questions: is there a valid arbitration agreement, and is this particular person bound by it? Those are separate issues. You can have a perfect clause between the right parties and still be unable to send a non-arbitrable dispute to arbitration. We've written about the mistakes people make in arbitration clauses, and about when someone who never signed is still bound by the clause.

How Indian courts decide it: the Vidya Drolia test

The case everyone cites is Vidya Drolia v. Durga Trading Corporation. A three-judge bench of the Supreme Court decided it on 14 December 2020. It built on Booz Allen and Hamilton v. SBI Home Finance (2011), which had listed six categories of non-arbitrable disputes. Booz Allen also drew the line we still work with. Rights in rem bind the whole world, while rights in personam bind only the parties.

Vidya Drolia laid down a four-part test. The Court said to apply it as a whole, with common sense, and not like a tick-box form. If any one limb applies, the dispute is out. The judgment settled other points too. It overruled Himangni Enterprises (2017), which had said tenancy disputes under the Transfer of Property Act couldn't be arbitrated. It held that claims falling within the DRT's jurisdiction under the Recovery of Debts and Bankruptcy Act can't go to arbitration. And it confirmed that fraud allegations in a civil dispute generally can.

Who gets to decide first? Ordinarily the arbitral tribunal, the Court said, with the court taking a 'second look' under Section 34. A court asked to refer parties under Section 8 or Section 11 should refuse only where non-arbitrability is plainly evident. After In re Interplay (2023) and SBI General Insurance v. Krish Spinning (2024), the Section 11 court only checks, prima facie, that an arbitration agreement exists. In practice that's pushed most arbitrability objections to the tribunal first.

The four Vidya Drolia tests, in plain words

• Rights against the whole world. If the fight is over a right in rem, one that binds everybody, it can't be arbitrated. A person's marital status is like that, and so is the validity of a will. The grant of a patent is the same. A smaller right in personam that flows out of such a right is different, though. A licence fee under a patent licence can go to an arbitrator.
• Effect on third parties and the need for one central forum. Some outcomes reach people who aren't in the room, and the law wants one forum deciding for all of them. Insolvency and winding up are the obvious cases. A private arbitration simply can't do that job.
• Sovereign and public functions. Taxation is the plainest example, though prosecuting crime and granting statutory licences belong here too. These are the State's own inalienable functions. Two parties can't hand them over to a private tribunal by signing a contract.
• A statute excludes it. Sometimes a mandatory law gives the dispute to a named court or tribunal, either in so many words or by necessary implication. Then it's non-arbitrable. Courts have accepted rent control laws, the DRT law and consumer protection law as examples.

Non-arbitrable disputes at a glance, and where each one goes

Does a fraud allegation or a criminal case stop the arbitration?

Usually, no. It's a very common move, though. Someone faces a money claim, so they allege fraud or walk into the police station with a complaint, hoping to drag the dispute into a criminal court or a civil suit. The Supreme Court hasn't let that tactic work. In A. Ayyasamy v. A. Paramasivam (2016) it said a bare allegation of fraud doesn't make a dispute non-arbitrable. Only serious, complicated allegations amounting to a criminal offence, or ones going to the arbitration agreement itself, might. Then Avitel Post Studioz v. HSBC PI Holdings (2020) cut that down further. Fraud takes a dispute out of arbitration only if it vitiates the arbitration agreement itself, or if it involves arbitrary, fraudulent or mala fide conduct by the State that calls for a public law remedy. Vidya Drolia confirmed the position. Fraud tied to a civil dispute can be arbitrated.

The criminal case and the arbitration can run at the same time. A prosecution for cheating or criminal breach of trust (now Sections 318 and 316 of the Bharatiya Nyaya Sanhita) goes to the criminal court. The money claim on the same facts goes to the arbitrator. Cheque bounce is no different. Your Section 138 complaint under the Negotiable Instruments Act carries on before the magistrate at Karkardooma or Saket, while the commercial claim behind the cheque is arbitrated.

Clients often get a fraud allegation thrown back the moment they ask for payment. Advocate B.K. Singh tells them to treat it as a defence they'll answer on facts before the tribunal. It isn't a reason to give up on arbitration. Most of the time the allegation is just part of the merits. The tribunal can weigh it on documents and evidence like any other issue.

What happens to the arbitration once insolvency starts?

Insolvency is the clearest non-arbitrable subject there is. Under the Insolvency and Bankruptcy Code, 2016 the NCLT has exclusive control of the corporate insolvency resolution process. Once a petition is admitted, the Section 14 moratorium bars anyone from starting or continuing proceedings against the corporate debtor. Arbitration included. Your pending arbitration against that company stops. You file your claim with the resolution professional instead.

Before admission, it's less clear-cut. A creditor can choose between arbitration and an IBC petition, and an arbitration clause won't block a financial creditor's Section 7 petition if a default is shown. Operational creditors face a different rule. A genuine pre-existing dispute is a ground to reject a Section 9 petition, and a pending arbitration can be evidence of one. Suppliers wondering which route suits them should read when an MSME can pick insolvency over the Council.

The bar cuts one way only. Arbitrations the corporate debtor has brought against others aren't stopped by the moratorium. The resolution professional can carry them on for the debtor's benefit.

Can bank and NBFC loan disputes be arbitrated?

Bank and financial institution claims of Rs 20 lakh and above fall under the Recovery of Debts and Bankruptcy Act, 1993. Vidya Drolia held they aren't arbitrable. The Debts Recovery Tribunal decides them. That's why banks rarely bother with arbitration clauses in loan agreements, and where they do, the clause won't keep the claim away from the DRT. Enforcing security under the SARFAESI Act, 2002 is a separate statutory remedy, before the DRT and the magistrate. For DRT and SARFAESI matters, start with our network site drtadvocates.com.

NBFCs are another story, if they aren't notified as financial institutions under the RDB Act. Their loan papers almost always carry an arbitration clause, and those disputes can be arbitrated. In M.D. Frozen Foods Exports v. Hero Fincorp (2017), the Supreme Court allowed an NBFC to take SARFAESI action, where that Act applies, while an arbitration was pending. The two remedies do different jobs.

If you're a borrower facing an NBFC arbitration, arbitrability usually isn't your strongest point. Look hard at who appointed the arbitrator. Plenty of NBFC agreements still let the lender name the sole arbitrator, and the Supreme Court has held that invalid. Our note on one-sided arbitrator appointments explains what you can do.

Are tenancy and lease disputes arbitrable?

That depends on which law governs the tenancy. Vidya Drolia held that landlord and tenant disputes under the Transfer of Property Act, 1882 can be arbitrated, because that Act sets up no special forum and gives the tenant nothing beyond the contract. Rent control laws are different. They give tenants special rights and a special forum. Disputes under them can't go to arbitration.

In Delhi, a lot of landlords miss what follows. Under Section 3(c), the Delhi Rent Control Act, 1958 doesn't apply to premises let at more than Rs 3,500 a month. Hardly any commercial lease in Delhi today is below that figure. So your shop in Lajpat Nagar or your office in Nehru Place is almost certainly governed by the Transfer of Property Act, and the arbitration clause in the lease can be enforced for eviction, arrears, mesne profits and security deposit disputes. Old tenancies on low historic rents are different. They stay under the Rent Control Act and go to the Rent Controller.

Uttar Pradesh now has the Uttar Pradesh Regulation of Urban Premises Tenancy Act, 2021, with a Rent Authority and Rent Tribunal for the tenancies it covers. Haryana has its own rent law. If one of these applies and gives its forum exclusive jurisdiction, an arbitration clause will probably fail the fourth Vidya Drolia test. Find out which law governs your premises before you invoke arbitration. That goes double for property in Noida, Ghaziabad or Gurugram.

Can a builder or service provider force you into arbitration?

No. In Emaar MGF Land v. Aftab Singh (2018) the Supreme Court held that an arbitration clause in a builder-buyer agreement doesn't stop a consumer from going to the consumer commission under consumer protection law. The commission doesn't have to send the matter to arbitration either. It's a public remedy, there to protect the weaker side. The Consumer Protection Act, 2019 keeps the same approach.

As a consumer you can choose arbitration if you want it. The builder can't insist. Homebuyers can also go to the RERA authority in their state. Authorities generally haven't pushed allottees into arbitration because of a clause in the builder's agreement, but do check the current position in your state.

One limit. This protection is for consumers, meaning people who buy goods or services for their own use. A business buying for resale, or for commercial purposes, usually isn't a consumer. The arbitration clause binds it.

Family disputes, wills and trusts

Status and succession can't be arbitrated. Divorce, judicial separation, restitution of conjugal rights, child custody and guardianship belong to the family court. Probate, letters of administration and succession certificates go to the civil court or the High Court, because a probate binds the whole world and not just the people in the courtroom. Booz Allen (2011) listed these among its categories.

Trust deed disputes under the Indian Trusts Act, 1882 are out too. The Supreme Court said so in Vimal Kishor Shah v. Jayesh Dinesh Shah (2016). The Trusts Act has its own remedies through the civil court.

Money and business fights inside a family are a different thing. Think of partners in a family firm, or shareholders of a family company with a shareholders' agreement, or a quarrel over the commercial terms of a family settlement. All of these can generally be arbitrated, as long as nobody asks the arbitrator to decide status or grant probate. Plenty of Delhi family businesses pick arbitration for exactly this reason. It keeps the quarrel private.

Company, IP and competition disputes

Partly arbitrable. Shareholder disputes under a shareholders' agreement can be arbitrated, whether they're about share transfer obligations, put and call options, valuation or a broken non-compete. Oppression and mismanagement petitions under Sections 241 and 242 of the Companies Act, 2013 are another matter. They go to the NCLT, whose powers reach the company and every member, and they're generally treated as non-arbitrable. Courts have sometimes asked whether an oppression petition is really a contract claim in disguise, filed to dodge arbitration. The label alone won't decide it. For NCLT work, our network site ncltlawyers.in has more.

In IP, the grant, registration and validity of patents and trade marks are rights in rem. The Patent Office, the Trade Marks Registry and the High Court decide them. A fight between licensor and licensee over royalties, territory or breach of the licence is a right in personam, and it can be arbitrated. Infringement claims between contracting parties have gone to arbitration too. Validity stays with the statutory forums.

Competition questions go to the Competition Commission of India. That covers abuse of a dominant position and anti-competitive agreements under the Competition Act, 2002. A contract claim for damages between two companies can still be arbitrated, even if one side calls the other's conduct anti-competitive. But the arbitrator can't make findings only the Commission can make.

When to raise the objection, and who raises it

Either side can raise it, and timing matters a great deal. Say one party files a civil suit and the other applies under Section 8 for reference to arbitration. The court will refer unless non-arbitrability is plainly evident. At the Section 11 stage the court now looks only, prima facie, at whether an agreement exists. So the objection will usually be left for the tribunal. Our note on Section 11 petitions covers that stage.

Before the tribunal, it's a jurisdiction plea under Section 16. It has to be raised no later than your statement of defence. Raise it there. After the award, Section 34(2)(b)(i) lets the court set aside an award on a non-arbitrable subject, and since the provision talks about what the court finds, the point can be taken even if nobody argued it earlier. Still, if you kept quiet before the tribunal and bring up arbitrability for the first time in a Section 34 petition, expect the judge to ask why you waited. Our note on why courts set aside awards goes into this.

Claimants should read all that the other way round. An award on a non-arbitrable subject is a wasted award. Far better to find the right forum on day one than to discover the problem two years later, sitting in a Section 34 court.

Checking whether your dispute can be arbitrated

Go through these before you send a notice under Section 21, or reply to one.

1. Write down the relief you actually want

   Money, eviction, a declaration, cancelling a document, an injunction, a change in some public register. Put it on paper. The relief decides arbitrability far more than whatever label the dispute carries.

2. Ask who the result would bind

   If it would bind outsiders, or the world at large, the way a probate or a winding up does, arbitration probably isn't open to you.

3. Look for a special law and forum

   See whether a statute gives this dispute to a particular forum. Rent control, the RDB Act, consumer protection, the IBC, the Companies Act, the Competition Act and the Trusts Act are the usual suspects. If one does, read whether its jurisdiction is exclusive.

4. Look at who the parties are

   A consumer changes the answer. So does a protected tenant, or a bank under the RDB Act. A counterparty that's already in insolvency changes it too.

5. Split the arbitrable part from the rest

   One set of facts can throw up a criminal complaint, a cheque bounce case and an arbitrable money claim. Name each one and its forum.

6. Pick the route and watch limitation

   If arbitration is open, invoke it without delay, because the limitation clock keeps running while you think and our note on limitation for arbitration claims explains how it's counted. If it isn't open, go to the right forum. Don't sit and wait for the arbitration objection to be decided.

When a client brings Advocate B.K. Singh a dispute that has both an arbitration clause and a possible statutory forum, he starts by writing down the order the client would want at the very end. Then he works backwards to the forum that can actually pass it. That avoids a common mistake. People choose a forum first and only later find it can't give them the relief they need.

Papers to pull out before choosing a forum

• The contract, lease or agreement with the arbitration clause, plus every annexure and amendment you can find.
• For a lease, the monthly rent, the date it was let and where the premises are. That tells us which tenancy law applies.
• For a loan, who the lender is, and whether it's a bank, a notified financial institution or an NBFC.
• Anything you've received from the NCLT, a resolution professional or a liquidator about the other side.
• Any FIR, police complaint or cheque bounce complaint on the same facts.
• The emails, letters and WhatsApp messages that show how the dispute started and what each side has asked for.
• If you're a homebuyer or customer, the agreement, your payment receipts and any notice invoking arbitration.
• If the fight is between shareholders or directors, the articles and the shareholders' agreement.

When one dispute has arbitrable and non-arbitrable parts

It happens all the time, and courts are practical about it. If the arbitrable part can be separated, it goes to arbitration and the rest goes where it belongs. A supplier's claim for unpaid invoices can be arbitrated while a criminal complaint against the buyer's officers proceeds on its own. A licence fee claim can be arbitrated while the patent itself is challenged in the High Court.

When the parts can't sensibly be pulled apart, it turns on the facts. A party trying to avoid arbitration will often dress the whole dispute up around its non-arbitrable piece. Courts look past the dressing. A claim that's really about money doesn't become non-arbitrable because the plaint adds a prayer for a declaration or for cancelling a document. In Deccan Paper Mills v. Regency Mahavir Properties (2020), the Supreme Court held that a claim to cancel an instrument under the Specific Relief Act was a right in personam. Arbitrable, in other words.

Whether arbitration beats a commercial suit is a different question. It only comes up when both are legally open. Our note on arbitration or litigation for business disputes deals with that choice. For the court route, see the commercialcourtlawyer.com page on money recovery suits.

What to do in the next few days

If you're about to invoke arbitration, write down the relief you want and go through the steps above to make sure the subject can be arbitrated. If you've received a notice and think the dispute belongs somewhere else, reply in writing. Say what the objection is and name the right forum. Be ready to raise it again under Section 16 before the tribunal. With a lease, find the rent figure and the tenancy law that governs it before anything else. With a loan, work out what kind of lender you're dealing with. For the wider picture, see how arbitration works in India.

If you'd like your contract and notices checked for arbitrability before you pick a forum, or want to hear as courts refine these categories, send them to Advocate B.K. Singh's team through our contact page.