Arbitrability in Arbitration: Understanding What Can—and Cannot—Be Referred to Arbitration

Arbitration has emerged as one of the most preferred methods of dispute resolution across the world. It is often praised for being faster, confidential, flexible, and less formal than traditional court litigation. Businesses increasingly rely on arbitration clauses in commercial contracts to avoid prolonged judicial proceedings. However, not every dispute can be resolved through arbitration. Before an arbitral tribunal can decide a dispute, one fundamental question must first be answered: Is the dispute arbitrable?

The doctrine of arbitrability determines whether the nature of a dispute permits it to be decided by a private arbitral tribunal or whether it must remain within the exclusive jurisdiction of courts or statutory authorities. While arbitration promotes party autonomy, that autonomy is not absolute. Certain disputes involve public rights, sovereign functions, or interests extending beyond the parties themselves, making them unsuitable for private adjudication.

Over the years, the Supreme Court of India has developed a structured jurisprudence on arbitrability through landmark decisions such as Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., Vidya Drolia v. Durga Trading Corporation, Deep Industries Ltd. v. ONGC, and Bhaven Construction v. Sardar Sarovar Narmada Nigam Ltd. Together, these decisions provide a coherent framework for determining when arbitration is appropriate and when judicial intervention becomes necessary.

This article examines the concept of arbitrability, the judicial tests governing it, the distinction between arbitrable and non-arbitrable disputes, and the position under international arbitration instruments.

Understanding Arbitrability

Simply put, arbitrability refers to the legal capability of a dispute to be resolved through arbitration instead of judicial proceedings.

The principle serves two important objectives. First, it protects the autonomy of contracting parties by allowing private dispute resolution wherever legally permissible. Second, it safeguards matters involving public interest, sovereign authority, or statutory rights that cannot be privately determined.

Arbitrability therefore acts as the gateway to arbitration. Even if parties voluntarily agree to arbitrate, their agreement cannot override statutory prohibitions or public policy.

For example, two companies may agree that every dispute arising from their contract will be referred to arbitration. However, that agreement cannot permit an arbitral tribunal to decide criminal liability, grant divorce, invalidate tax assessments, or determine insolvency proceedings because these matters involve rights and interests extending beyond private contractual relationships.

Rights in Personam versus Rights in Rem

One of the most important principles governing arbitrability is the distinction between rights in personam and rights in rem.

Rights in personam exist between identifiable individuals or entities. They impose obligations only upon the parties involved and therefore are generally suitable for arbitration.

Rights in rem, however, affect the world at large. Decisions concerning ownership of property, criminal guilt, marital status, insolvency, or taxation have consequences extending beyond the immediate parties. Such disputes ordinarily require adjudication by courts or statutory authorities.

This distinction explains why commercial contractual disputes are generally arbitrable while matters involving sovereign functions remain outside arbitration.

Consider a practical example.

Suppose a company receives a tax notice demanding ₹50 lakh because the tax department believes certain deductions were wrongly claimed. Even if both the taxpayer and the tax department agreed to arbitrate, the dispute cannot be referred to arbitration because taxation represents the State's sovereign power. Tax laws also provide specialised appellate forums, and any decision affects public revenue rather than merely private rights.

Contrast this with a contractual dispute between two companies over who should ultimately bear the GST liability under their agreement. Although the dispute concerns tax, the question is purely contractual. The tribunal can determine which party must reimburse the other under the contract, but it cannot invalidate or modify the tax assessment issued by the government. The arbitrator decides the contractual allocation of liability—not the legality of the tax demand itself.

This distinction illustrates that the subject matter, rather than the terminology of the dispute, determines arbitrability.

The Booz Allen Test: The Foundation of Indian Arbitrability Jurisprudence

The Supreme Court's decision in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. laid the modern foundation for determining arbitrability in India.

The Court observed that a dispute can be referred to arbitration only when three conditions are satisfied:

• the dispute is capable of settlement through arbitration;
• it falls within the scope of the arbitration agreement; and
• the parties have actually referred the dispute to arbitration.

More significantly, the Court identified categories of disputes that are generally non-arbitrable, including:

• criminal offences;
• matrimonial disputes such as divorce and child custody;
• guardianship matters;
• insolvency and winding-up proceedings;
• testamentary and probate matters; and
• eviction or tenancy disputes governed by special statutes providing statutory protection.

The reasoning behind this classification is straightforward. These disputes either determine public rights, affect third parties, or involve statutory mechanisms designed to protect broader societal interests.

Although Booz Allen established important principles, it did not provide an exhaustive framework for future cases. That clarification came a decade later through Vidya Drolia.

The Vidya Drolia Fourfold Test

The Supreme Court significantly refined the doctrine of arbitrability in Vidya Drolia v. Durga Trading Corporation.

Rather than merely listing categories of non-arbitrable disputes, the Court introduced a fourfold analytical test that examines the nature of the dispute itself.

According to the Court, a dispute is generally non-arbitrable when:

1. It involves rights in rem rather than subordinate rights in personam arising from them.
2. it affects third-party rights, produces an erga omnes effect, requires centralised adjudication, or cannot effectively be resolved through private adjudication. Insolvency proceedings provide a classic example because they determine the rights of all creditors, not merely two contracting parties.
3. the dispute concerns sovereign or public functions of the State, such as taxation or criminal prosecution, making private adjudication inappropriate.
4. A mandatory statute expressly or impliedly reserves jurisdiction exclusively for a specialised court or tribunal.

This framework shifted the focus away from rigid categories toward analysing the underlying legal character of each dispute.

Applying these principles, the Court concluded that landlord-tenant disputes under the Transfer of Property Act generally involve subordinate contractual rights and are therefore arbitrable. Conversely, matters involving patents, trademarks, insolvency, probate, criminal offences, and matrimonial disputes continue to remain outside the scope of arbitration because they affect public rights or require statutory adjudication.

The fourfold test now represents the principal standard governing arbitrability in India.

Can Fraud Be Arbitrated?

Fraud has historically been one of the most controversial questions in arbitration law.

Earlier judicial decisions often treated allegations of fraud as automatically excluding arbitration. However, modern jurisprudence adopts a more balanced approach.

Commercial or contractual fraud between private parties is generally arbitrable. For instance, allegations that one company induced another into entering a commercial agreement through misrepresentation or fraudulent statements can ordinarily be examined by an arbitral tribunal because the dispute concerns private contractual rights.

However, arbitration becomes inappropriate where the alleged fraud transcends private interests.

Fraud is generally non-arbitrable when:

• it affects rights in rem or public rights;
• it concerns sovereign or public-law functions;
• it amounts to criminal prosecution or offences reserved exclusively for courts; or
• it directly challenges the existence or validity of the arbitration agreement itself.

The distinction once again reflects the broader principle that arbitration remains appropriate only for disputes involving private rights between consenting parties.

Judicial Intervention: A Limited but Necessary Role

The Arbitration and Conciliation Act, 1996 seeks to minimise judicial interference. Nevertheless, courts continue to exercise constitutional powers under Articles 226 and 227 of the Constitution.

The Supreme Court has repeatedly cautioned that these extraordinary powers must be exercised with considerable restraint.

In Deep Industries Ltd. v. ONGC, the Court recognised that petitions under Article 227 remain legally maintainable even against certain arbitral orders. However, High Courts must interfere only in exceptional circumstances where the impugned order suffers from patent lack of jurisdiction. Routine judicial intervention would defeat the objective of speedy dispute resolution.

The same philosophy was reaffirmed in Bhaven Construction v. Sardar Sarovar Narmada Nigam Ltd., where the Supreme Court emphasised that arbitration constitutes a self-contained statutory framework. Constitutional remedies cannot become an alternative appellate mechanism merely because a party is dissatisfied with interim arbitral proceedings. Intervention should therefore remain confined to situations involving bad faith, absence of effective remedies, or manifest jurisdictional errors.

These decisions reinforce a central principle of modern arbitration law: judicial oversight exists to preserve legality, not to supervise every procedural step in arbitration.

The International Perspective: New York Convention and UNCITRAL Model Law

International arbitration follows a similar philosophy while respecting national legal systems.

Both the 1958 New York Convention and the UNCITRAL Model Law acknowledge that certain disputes may not be capable of settlement through arbitration.

The New York Convention permits courts to refuse referral to arbitration or decline enforcement of an arbitral award if the subject matter is considered non-arbitrable under the law of the country where recognition is sought.

Similarly, the UNCITRAL Model Law allows courts to refuse reference to arbitration where the arbitration agreement is invalid or incapable of performance and permits setting aside or refusing enforcement of awards involving non-arbitrable subject matters.

Importantly, neither instrument creates a universal definition of arbitrability. Instead, both defer to domestic law. Consequently, what is arbitrable in one jurisdiction may not necessarily be arbitrable in another.

For example, certain competition law or intellectual property disputes may be arbitrable in some countries while remaining subject to exclusive judicial determination elsewhere.

Thus, international arbitration recognises party autonomy but simultaneously preserves each nation's authority to define matters affecting its public policy and sovereign interests.

Conclusion

Arbitrability lies at the heart of arbitration law because it determines the boundary between private dispute resolution and public adjudication. While arbitration seeks to maximise party autonomy, that autonomy cannot extend into areas involving sovereign authority, public rights, or statutory protections.

The jurisprudence developed through Booz Allen and Vidya Drolia provides a principled framework for identifying arbitrable disputes by focusing on the nature of the rights involved rather than merely the subject matter. Subsequent decisions such as Deep Industries and Bhaven Construction further reinforce the limited role of judicial intervention, preserving arbitration as an efficient and self-contained dispute resolution mechanism.

From an international perspective, the New York Convention and the UNCITRAL Model Law adopt a similar philosophy by recognising arbitrability as a matter ultimately governed by domestic legal systems.

As arbitration continues to expand into new sectors, questions surrounding arbitrability will remain central to balancing contractual freedom with public interest. The evolving jurisprudence demonstrates that arbitration is not simply about respecting party choice; it is equally about recognising the constitutional and statutory limits within which that choice must operate. This balance ensures that arbitration remains both an effective mechanism for private dispute resolution and a legally accountable institution within the broader justice system.