Arbitrability of Tenancy Disputes: A Step in the right Direction Overview

23/Dec/2020, 5:55 AM, Authored by Mr. Hiroo Advani & Tariq Khan

,[i] has overruled the ratio laid down in Himangni Enterprises v. Kamaljeet Singh Ahluwalia  (‘Himangi Enterprises’)[ii] and held that the tenancy disputes are now arbitrable as the Transfer of Property Act, 1882 (‘TP ACT’) does not foreclose arbitration, save and except for those tenancy disputes which are governed by rent control legislations as specific forums have been given exclusive jurisdiction to decide the special rights and obligations of the parties.

BACKGROUND

Back in 1981, the Supreme Court in the judgment of  Natraj Studios (P) Ltd vs Navrang Studios & Anr [iii] (‘Natraj Studios’) dismissed an application under Section 8 of the Arbitration and Conciliation Act, 1940 as the tenancy was protected under the Bombay Rents, Hotel & Lodging Houses Rates control, 1947 and ruled out arbitration of lease disputes as they were to be adjudicated under special legislation and undermined public policy. Thereafter, the same ruling was upheld in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd[iv] (‘Booz Allen’), wherein it was held that in eviction or tenancy matters which are governed by special statues and where tenant enjoys statutory protection as a ‘class’ is a matter of public interest and only the specified court has been conferred exclusive jurisdiction to adjudicate the same.

Later, in 2017, the issue regarding arbitrability of lease dispute was once again re-visited by the Supreme Court in the case of Himangi Enterprises and after relying on the said ratios of Booze Allen and Natraj Studios the court rejected the application filed by the tenant (defendant) under section 8 of the Arbitration and Conciliation Act, 1996 (‘Act’) in a civil suit seeking eviction from a shop in a commercial complex in New Delhi. The Court held that the suit was governed by the TP Act, and thus would be triable by the Civil Court and not by the arbitrator. The judgment effectively left no scope for arbitrating lease disputes in India irrespective of whether such disputes arose from special legislation.

ISSUES

After analysing the aforesaid jurisprudence, a coordinate bench of the Supreme Court in the case of Vidya Drolia v. Durga Trading Corpn,[v] (‘Vidya Drolia- I’)observed, some moot issues to be authoritatively decided by a larger three-judge bench in the instant case , which are stated below:

  1. Whether the reasoning supplied in Himangi Enterprises that landlord-tenant disputes governed by the provisions of the TP Act, are not arbitrable as this would be contrary to public policy? and;
  2. Secondly, whether the issue of ‘existence’ of an arbitration agreement, would include ‘validity’ and also- “whether the word “existence” would include weeding-out arbitration clauses in agreements which indicate that the subject-matter is incapable of arbitration”. (Para 64)

RULING OF THE VIDYA DROLIA-II JUDGMENT

  1. Arbitrability of Landlord-Tenant Disputes- The same is answered in affirmative as the Supreme Court in the instant case of Vidya Drolia -II has overturned the decisions of Himangi Enterprise and HDFC Bank Ltd v. Satpal Singh Bakshi [vi] to hold that the landlord-tenant disputes are arbitrable except when they are covered by specific forum created by rent control laws. The Court further held that:

Landlord-tenant disputes governed by the Transfer of Property Act are arbitrable as they are not actions in rem but pertain to subordinate rights in personam that arise from rights in rem. Such actions normally would not affect third-party rights or have erga omnes affect or require centralized adjudication. An award passed deciding landlord-tenant disputes can be executed and enforced like a decree of the civil court. Landlord-tenant disputes do not relate to inalienable and sovereign functions of the State. The provisions of the Transfer of Property Act do not expressly or by necessary implication bar arbitration. However, landlord-tenant disputes covered and governed by rent control legislation would not be arbitrable when specific court or forum has been given exclusive jurisdiction to apply and decide special rights and obligations. Such rights and obligations can only be adjudicated and enforced by the specified court/forum, and not through arbitration.

While dealing with the issue of arbitrability in the present case, the Apex Court also considered the Booz Alllen Case which marks the difference between right in rem and right in personam and held that the disputes  under the TP Act are arbitrable as they are not actions in rem but pertains to subordinate rights in personam which arises from rights in rem.

In view of the above interpretation, the Supreme Court laid own a four-fold test for determining when the subject matter of dispute in an arbitration agreement is not arbitrable:

  • when cause of action and subject matter of the dispute relates to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem.
  • when cause of action and subject matter of the dispute affects third party rights; have erga omnes effect; require centralized adjudication, and mutual adjudication would not be appropriate and enforceable;
  • when cause of action and subject matter of the dispute relates to inalienable sovereign and public interest functions of the State and hence mutual adjudication would be unenforceable; and
  • when the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s).

The Court clarified that these tests are not watertight compartments; they dovetail and overlap, albeit when applied holistically and pragmatically will help and assist in determining and ascertaining with great degree of certainty when as per law in India, a dispute or subject matter is non-arbitrable. Only when the answer is affirmative that the subject matter of the dispute would be non-arbitrable.

  1. ‘Existence’ and ‘Validity’ of an Arbitration Agreement- The Apex Court upon necessary deliberation held that the expression ‘existence of an arbitration agreement’ in section 11 would include aspect of ‘validity’ of an arbitration agreement, albeit the court at the referral stage would apply the prima facie The scope of the court to examine the prima facie validity of an arbitration agreement includes the following issues:
  2. Whether the arbitration agreement was in writing? or
  3. Whether the arbitration agreement was contained in exchange of letters, telecommunication etc?
  4. Whether the core contractual ingredients qua the arbitration agreement were fulfilled?
  5. On rare occasions, whether the subject matter of dispute is arbitrable?

The Court overruled the ratio laid down in SBP v. Patel engineering ltd[vii] and further opined that, examination by the Court on the subject of arbitrability may not be appropriate at the stage of section 8 of the Act keeping in mind the principles of severability and Kompetenz-kompetenz, which prefers the tribunal as the first authority to determine and decide on all questions of non-arbitrability and jurisdiction. However, the Court opined, in cases where the subject matter of arbitrability is clearly barred, the court can cut the deadwood to preserve the efficacy of the arbitral process.

CONCLUSION:

The judgment is a positive step in the right direction and has put an end to a long debate regarding arbitrability of the tenancy disputes in India. This Judgment ensures a pro-arbitration stance and provides shelter to many unanswered issues like in the case of Bina Modi v Lalit Modi decided on 3 March 2020  wherein arbitrability of disputes governed under the Trust Act remained unsolved.

In the coming future, this judgment might open up some debatable issues, for instance, it will be really interesting to see the impact of the judgment on the pending matters which are already filed in the court as parties may file section 8 applications requesting to refer the matter for arbitration. Lastly, by virtue of this landmark judgment,  rights of tenants would now be protected from a protracted litigation, keeping in mind the best interest of the countrymen.

[i] Civil Appeal No. 2402 of 2019

[ii] (2017) 10 SCC 706

[iii] (1981) 1 SCC 523

[iv] (2011) 5 SCC 532

[v] 2019 SCC OnLine SC 358

[vi] 2013 (134) DRJ 566 (FB)

[vii] (2005) 8 SCC 618