Introduction:
An arbitration agreement reflects the mutual consent of parties to resolve disputes through arbitration rather than through traditional judicial proceedings. However, some agreements contain provisions that explicitly exclude certain disputes from arbitration, rendering them non-arbitrable. These exclusion clauses indicate the parties’ intention to resolve specific matters through alternative mechanisms such as litigation or other forms of dispute resolution. Courts consistently uphold the enforceability of such exclusions, emphasizing that arbitration is a consensual process, and the scope of arbitrable disputes is determined by the agreement.
Disputes related to public policy, statutory obligations, or personal relationships are often deemed non-arbitrable. These limitations are clarified when a contract explicitly excludes certain issues from arbitration. Courts have emphasized that an arbitration clause cannot override an exclusion clause unless there is clear evidence to the contrary. The enforcement of exclusion clauses ensures that the contracting parties’ intentions are respected and that arbitration is limited to disputes explicitly intended for resolution through this process.
The Punjab and Haryana High Court, in the case, M/s Ganpati Rice & General Mills v. Haryana State Cooperative Supply & Marketing Federation Limited[i], affirmed that when an agreement includes a specific exclusion clause, the matter should not be referred to arbitration.
Facts
The applicant filed an application under Section 11 of the Arbitration and Conciliation Act, 1996, seeking the appointment of an arbitrator, citing the arbitration clause in the Custom Milling Policy, 2018. The agreement includes an exclusion clause specifying that disputes involving allegations of fraud, theft, or misappropriation by the applicant are not arbitrable and must be resolved through legal proceedings.
The respondent filed a First Information Report (FIR) against the applicant, accusing them of misappropriating paddy. The matter is currently under trial, with charges yet to be framed.
Judicial Observation
The High Court observed that under Section 11 of the Arbitration and Conciliation Act, 1996, it is not the court’s role to decide whether a dispute is non-arbitrable. The court emphasized that mere allegations of misappropriation do not automatically make the dispute non-arbitrable, according to the established test for arbitrability.
The court stressed the importance of respecting exclusion clauses outlined in the agreement. It noted that disputes involving public policy or state functions are unsuitable for arbitration. In this case, the dispute concerned allegations of misappropriation of paddy, a public asset, with the applicant accused of breach of trust. Since the matter involves public funds, the court ruled that it should be adjudicated in court, not through arbitration.
Author: Hiteashi Rajan Desai, Associate at R&D Law Chambers LLP
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