Author: Yugandhara Pawar Jha
Date: 23.05.2020
Introduction
In order to understand the captioned issue, it may be worthwhile to shed some light on the broad concept of ‘Arbitrability’. In the ordinary sense, arbitrability involves the issue of whether specific category of disputes can be barred from arbitration or whether it belongs exclusively to the domain of state courts. If the subject matter of the dispute is non-arbitrable, the parties cannot confer jurisdiction upon the Arbitral Tribunal vide an arbitration agreement or otherwise. In recent times, the trend towards expansion of arbitrability along with a host of other favourable factors have played a crucial role in making arbitration an attractive competitor to court based adjudication. Arbitrability has assumed varied significance under different national laws and in the United States, it is often given a broader connotation than the prevailing international understanding and includes the whole issue of tribunal’s jurisdiction. Arbitrability is further classified into ‘subjective’ rationae personae and ‘objective’ rationae materiae arbitrability where the former denotes the subjective capacity of a person or party to validly conclude a binding arbitration agreement and to be a party to arbitration proceedings, whereas the latter refers to limitations or restrictions on arbitrability based on subject matter of the dispute.
The issue of arbitrability and the law applicable thereto usually depends on what stage of the proceedings the said issue arises. The state courts may apply a different standard at the post award stage than the Arbitral Tribunal would at the pre-award stage. It could also be treated as a gateway problem or a threshold issue depending on when the question of arbitrability is raised. The international understanding of arbitrability is based on the provisions of the New York Convention and the Model Law, however both appear to be restricted to disputes ‘capable of settlement by arbitration’ and do not define arbitrability in precise terms nor does it encapsulate provisions prescribing any category of dispute as non-arbitrable. It is notable that the Model Law in Article 36(1)(b)(i), mirrors the approach adopted in Article V(2)(a) of the New York Convention and provides for issues of arbitrability to be determined by the laws of the state where recognition is sought. Commenting on the international limits on non-arbitrability doctrine, eminent scholar Gary Born, points out the existence of an ‘escape valve’ in the New York Convention despite the universally applicable choice-of-law rule provided in Article V(1)(a) of the Convention; since, Articles II(1) and V(2)(a) of the Convention envisages the application by Contracting States of their own law to refuse enforcement on the grounds of non-arbitrability only in exceptional circumstances, particularly when the arbitration agreement or the award is otherwise valid and binding.
According to the deans of international arbitration, the domain of arbitration as opposed to that of the local courts is established by national laws and each state based on its own political, social and economic policy decides which matters may or may not be capable of being resolved by arbitration.
Limits on Arbitrability & The Law Governing the Issue of Arbitrability
Most restrictions or limits on arbitrability of disputes are founded on public policy considerations and these evolve with time and often vary across jurisdictions. The restrictions may also be influenced by the state’s general attitude towards arbitration and whether the business community considers it an effective tool to promote trade and commerce. The notion of arbitrability might also differ for international transactions as compared to purely domestic ones.
As mentioned in the preceding section of this note, possible restrictions on arbitrability exists in two ways i.e. subjective and objective arbitrability restrictions.
Subjective arbitrability usually concerns deficiencies in contractual capacity and has a direct bearing on the validity of the arbitration agreement. It envisages allocation of rights to individual or legal entity’s right to enter into arbitration agreement and that such rights must hold ground under the applicable law. It is also reflected in Article V(1)(a) of the New York Convention. Some scholars endorse the view that generally restrictions that preclude state or public entities from settling dispute through arbitration does not apply to international arbitrations and some go a step further by asserting that it is no longer a real issue and that the specific impact of public entities involvement is in the determination of rules governing the merits of the dispute and in the enforcement of award rather than the arbitral proceedings. This argument has in many ways been reaffirmed by the evolution and success of investment arbitration.
Objective Arbitrability restrictions are based on the subject matter of the dispute. Interestingly, the issue of non-arbitrability of the subject matter of a dispute could also arise if the same is not stipulated in the contract and the Arbitral Tribunal entertaining such a dispute could be acting beyond the Terms of Reference, thereby, potentially rendering the awards amenable to challenge during the enforcement stage. The eminent commentator Bernard Hanotiau, in his incisive work on the law applicable to arbitrability states that “the interpretation of the scope of the arbitration agreement does not generally raise questions of applicable law. In most cases, it is a plain “common sense” process. And if the question arises as to which rule of interpretation is applicable in a particular case, it should be resolved in accordance with the law governing the arbitration clause, i.e., in a majority of cases the law governing the disputed contract.”
Most national arbitration laws do not necessarily regulate the law governing the issue of arbitrability but rather determine which disputes are arbitrable. Some national laws refer to broad notions of arbitrability while some are confined to a narrower concept. The substantive rules on objective arbitrability varies under different national laws depending on the approach adopted to arbitration by each state and whether the state intends to bring certain subjects within the exclusive domain of the state courts. Generally, the questions of arbitrability may arise for certain categories of disputes e.g. criminal cases and matters such as insolvency and bankruptcy, however, there are several other areas like Intellectual Property Rights, Competition laws, Securities transactions, Bribery and Corruption, etc. where the issue of arbitrability could arise and often exhibit an inconsistent treatment by different states either through legislation or case law.
An intricate review of both theory and practice of international arbitration suggests that the issue of what law governs arbitrability is a complex one, and that the answer to it may depend upon the stage at which it is raised. The issue of arbitrability may be raised at least at four distinct stages i.e. at the beginning of arbitration, before the arbitral tribunal; before a state court after being referred by a party to determine whether the arbitration agreement relates to a subject matter which is arbitrable; during setting aside proceedings and finally during the stage of recognition and enforcement of the award.
The law governing arbitrability depends on the stage and the forum i.e. when and where the issue is invoked by one of the parties.. However, if the parties have not invoked the issue, the arbitrator will invoke the issue ex officio only in case of a violation of international public policy, particularly of the country of the seat of the arbitration or when the applicable rule is mandatory in nature. When the question is raised before the Arbitral Tribunal, arbitrator usually determines the same by the application of the law governing the arbitration agreement but often the tribunal could also be tasked with determining whether a different threshold for arbitrability exists for international disputes and whether an issue of partial arbitrability also arises. Other relevant factor could be the occasional incidence of lex arbitri on arbitrability and foreign policy laws of the probable place of enforcement of the award.
The national court before which the matter has been concurrently brought deeming the dispute to be non-arbitrable would usually place reliance upon national law, in the absence of an applicable international convention. However, in the event of the forum state being party to an international convention where the dispute could be declared capable of arbitration, the principle of favour arbitrandum assumes great significance. Furthermore, when the courts are seized of the matter during a setting aside or enforcement proceeding, the court determines the same by considering the prevailing public policy by often confining it during enforcement stage to possible violation of the forum states most basic notions of morality and justice.
Concluding Remarks
The realm of arbitrability is expanding and the complexity surrounding questions of law applicable to arbitrability has been considerably settled by international conventions, national laws, judicial dicta and international best practices. However, a long line of incoherent court decisions has contributed to the vague standards of international public policy and uncertainty over notions of arbitrability despite global voices in favour of arbitration. An internationally concerted effort towards aligning the scope of public policy would go a long way in brining uniformity and predictability to the international arbitral process and its future.
