Non-Arbitrability of Debt Recovery Disputes: The Need for Reconsideration

[Shagun Singhal and Khushbu Turki are third year students at National Law Institute University, Bhopal]

Since the Arbitration and Conciliation Act, 1996 fails to define the contours of subject-matter arbitrability, the same has remained a bone of contention despite repeated attempts by the courts to crystallise its scope. The issue was first addressed by the Supreme Court in of Booz Allen v. SBI Home Finance Limited, wherein the Court held that disputes arising out of rights in personam would be amenable to arbitration, whereas those relating to rights in rem would be adjudicated by courts and public tribunals. The Court further observed that certain categories of disputes could only be resolved through adjudication by public forums. The aforementioned proposition stems from the principle that if the legislature, on grounds of public policy, has conferred exclusive jurisdiction on public forums with respect to certain kinds of disputes, then such disputes cannot be settled through arbitration, irrespective of the nature of rights involved therein.

Hence, in cases involving adjudication upon a right in personam, the next step would be to ascertain whether arbitrability is barred by virtue of necessary implication. This may be undertaken by way of a two-pronged examination: first, whether the statute in question is a special statute and confers exclusive jurisdiction of deciding the matter upon another forum; and second, the intent of the legislature behind conferring the exclusive jurisdiction on the concerned forum.

The intent can thereafter be decoded by analysing the object as well as the broad scheme of the legislation. This may be done by evaluating – firstly, if the concerned statute is a welfare legislation; and secondly, if the statute creates special rights and obligations not pre-existing under common law, and provides for a distinct remedy and a specialized forum for adjudication of disputes involving such rights and obligations.

Beginning with the Booze Allen era, there has been definitive progress towards a pro-arbitration regime. Recently, a three-judge bench of the Supreme Court in Vidya Drolia v. Durga Trading Corporation propounded a four-fold test in order to conclusively determine the issue of arbitrability. Applying the tests, the Court came to the conclusion that the disputes in relation to debt recovery under special legislation cannot be resolved through arbitration. The authors contend that the Court’s approach as well as conclusion result in a great deal of incongruity.

Arbitrability of Disputes under the Debt Recovery Act

The issue of arbitrability of disputes under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (‘Debt Recovery Act’) came up in the case of HDFC Bank v. Satpal Singh Bakshi. The Delhi High Court had to decide whether disputes falling within the exclusive scope and jurisdiction of the debt recovery tribunals established under the Act were arbitrable.

The Court therein held that the principle of party autonomy cannot be curtailed by the tribunalization of justice. It further noted that the exclusive jurisdiction conferred upon a specialized forum by way of a legislation only ousts the jurisdiction of the civil courts, and does not automatically render the disputes arising under the statute as non-arbitrable. The Court also reiterated that any dispute devoid of the element of public interest, and arising out of a claim in personam, would be capable of settlement through arbitration.

This judgment of the High Court came under the Supreme Court’s scrutiny in the case of Vidya Drolia. The Court first proceeded to lay down a four-pronged test of arbitrability, and thereafter tested the judgment on the anvil of the stipulated principles. According to the Court, the subject matter of a dispute would not be arbitrable when: first, the dispute relates to actions in rem; second, the dispute affects third party rights and requires centralized adjudication; third the dispute relates to inalienable sovereign and public interest functions of the State; and fourth, the dispute is expressly or by necessary implication non-arbitrable under mandatory statutes.

After analysing HDFC Bank, the Court observed that the High Court had overlooked the fact that while disputes arising out of rights in personam could be arbitrated, the same would not hold true in cases where there exists an implicit prohibition in the statute which confers special rights to be adjudicated by the courts or public fora, whose enforcement would not be possible through arbitration.

Further, holding the claims of banks and financial institutions covered under the Debt Recovery Act as arbitrable would deprive those institutions of their specific rights and modes of recovery provided under the Act. The Court concluded that the text of the statute had overwritten the parties’ contractual right to arbitration and, therefore, the claims covered by the Debt Recovery Act would be non-arbitrable because of the prohibition against waiver of jurisdiction of the debt recovery tribunal by necessary implication.

Vidya Drolia: A Controvertible Approach

The encapsulation of the four-fold test by the Supreme Court has been applauded by several legal practitioners. However, the authors contend that the same has been erroneously applied to debt recovery disputes. This can be inferred from the following.

First, arbitral tribunals lack the jurisdiction to adjudicate on matters of rem. In the instant case, the debt recovery tribunals are usually concerned with disputes that involve money being paid by a borrower to a monetary institution. Such transactions are evidently personal and thereby do not involve the public’s attention. It, therefore, falls within the ambit of disputes in personam, which the arbitral tribunals are capable of adjudicating.

Second, there is no evidence to suggest that the legislature, by necessary implication, intended to oust the jurisdiction of the arbitral tribunals. As mentioned above, necessary implication is determined by examining the text of the statute, its legislative history, or any inherent conflict between arbitration and the statute’s underlying purpose. Since the Debt Recovery Act came into existence before the Arbitration & Conciliation Act, 1996, the legislators could not have intended to include any provision that could possibly imply its exclusion. Moreover, since the arbitration mechanism is a private form of dispute resolution, there can be no underlying conflict between the two processes.

Third, as pointed out in the four-fold test of arbitrability, the arbitral tribunals cannot adjudicate on matters wherein the relevant legislation confers special rights on an affected party. These include, inter alia, legislations such as the Rent Control Act, which grants special statutory protection to the tenants. The Debt Recovery Act, however, as detailed in the report of the Narasimham Committee, was merely enacted to reduce the burden of the civil courts. Thus, it has not been conferred with any special rights over which the arbitral tribunals cannot exercise their jurisdiction.

Fourth, resort to arbitration is generally constrained in case of existing social welfare legislation. This is because judges perceive arbitrators to be unable to assess the economic disparity between the two parties. This exclusion has been elucidated by the courts while considering legislation like the Real Estate (Regulation and Development) Act, 2016. In the instant case, however, a preliminary reading of the Debt Recovery Act would indicate that the same cannot be perceived as a welfare legislation.

Lastly, the judicial powers conferred on the debt recovery tribunal and debt recovery appellate tribunal are conceivably narrow. These tribunals do not have the jurisdiction to adjudicate on matters involving issuance of receipts, KYC norms, which are ancillary to the debt recovery process. For such matters, the parties have to resort to the civil courts. In conjunction with such circumstances, it is pertinent to note that arbitration is presumed to be a replacement of the civil court. Thus, parties who have disputes that involve such ancillary matters should be given a relatively easier option to resort to one forum, instead of adjudication by two different forums.

Conclusion

Considering the aforementioned dispute, it is pertinent to note that any subject matter cannot be held to be non-arbitrable solely because a special tribunal has been created to adjudicate on those specific matters. This can be established by drawing a corollary to the competition law cases in India. The Competition Commission of India is a specialized forum that has been established for resolving the anti-trust disputes. Since its formation, the question of arbitrability has consistently been placed before the courts. However, till date, there is no direct precedent which suggests that such matters cannot be adjudicated upon by arbitral tribunals.

Moreover, to simplify such a circumstance, commentators suggest that the rule of parens patriae, or amicus curiae, as established by the courts in the U.S. and EU, can similarly be followed by the Indian judiciary. According to these rules, the specialized tribunals can take a second look at the rendered award to verify the questions of law to their own satisfaction. Furthermore, in any case, taking away the jurisdiction of the arbitral tribunals to resolve debt recovery matters will do more harm than good.

Statistics reveal that the debt recovery forums are swamped with cases. This is one of the major reasons behind parties resorting to the arbitral mechanism. If the same is barred, the parties will have to wait for long periods of time to get their disputes adjudicated. This would ultimately undermine the intention behind establishing a specialized tribunal in the first place. The authors, therefore, conclude that opinion rendered in Vidya Drolia is unfounded. Accordingly, the Supreme Court should reconsider the current decision and thereby give the arbitral tribunals the jurisdiction to adjudicate upon such matters. This will enable speedier and more effective disposal of debt recovery claims.

Shagun Singhal & Khushbu Turki

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