This Article is written by Ritisha Gupta, student researcher at Corp Comm Legal.
The arbitrability of tenancy agreements has always been an issue of debate in the court of law, therefore it came as a welcome surprise when the Hon’ble Supreme Court’s recent judgement via the Vidya Drolia & Ors. v. Durga Trading Corporation[i] (Vidya Drolia) settled the issue for good. A bench comprising of Hon’ble Justice N.V. Ramana, Justice Sanjiv Khanna and Justice Krishna Murari on 14 December 2020, has held that tenancy disputes are now arbitrable under the Arbitration & Conciliation Act 1996 (A&C Act), as the Transfer of Property Act of 1882 (ToP Act) does not bar the remedy of arbitration, unless the disputes are governed by rent control legislations where a specific court or forum has been given the exclusive jurisdiction to decide the special rights and obligations of the parties.
The Supreme Court’s pro-arbitration stance has overruled the ratio laid down in Himangni Enterprises v. Kamaljeet Singh Ahluwalia[ii] where tenancy disputes were held to be inarbitrable by the Apex Court. The judgement also elaborates on a number of important aspects of arbitration, which the author aims to discuss in this article.
Fact Pattern of the Case
In the Vidya Drolia case, the landlord (respondents) sought the tenants (appellants) to peacefully hand over possession of the vacant property that was the subject of a lease entered into between the parties. The lease included in it, an arbitration clause, invoking which the landlord filed a petition under Section 11 of the A&C Act with the Calcutta High Court seeking appointment of an arbitrator. The High Court rejected both the objections petition as well as the review application made by the tenants and thus, an appeal was made to the Supreme Court. The matter before the Court was two-fold:
- The categorization of subject-matter into arbitrable and non-arbitrable; and
- The question of “who decides” this, whether the court during the referral stage or the arbitral tribunal during the arbitration proceedings. This relates to the scope and jurisdictional limitations of the Court when the non-arbitrability of the subject-matter is brought under Section 8 or 11 applications under the ToP Act.
Arbitrability of Tenancy Disputes
The most significant aspect of the Vidya Drolia judgement was the Court’s affirmation on treating tenancy disputes as arbitrable. The court laid down a four-fold test to determine when the subject-matter of a dispute is non-arbitrable:
- When cause of action and subject-matter of dispute relates to actions in rem and not pertain to subordinate rights in personam that arise from rights in rem,
- When cause of action and subject-matter affects third party rights; have erga omnes effect, thus requiring centralized adjudication,
- When cause of action and subject-matter relates to inalienable sovereign and public interest functions of the State and hence mutual adjudication would be unenforceable,
- When subject-matter is expressly or by necessary implication non-arbitrable as per mandatory statutes(s).
It is pertinent to mention one of the most seminal judgements of the Apex Court in this regard, the Booz Allen & Hamilton Inc. V. SBI Home Finance Ltd.[iii], case, where rights in rem and rights in personam were well established and defined. It was observed that rights in rem are exercisable against the world at large and not amenable to arbitration, whereas for violation of rights in personam, interest is protected against a specific individual, and is referrable to arbitration. The Court had further observed that tenancy issues were related to public policy, i.e., having erga omnes effect, because tenants were considered a ‘class’ and therefore public forums had adjudication powers over them.
However the Division Bench in the Vidya Drolia case has rejected this argument that tenants form a ‘class’ under ToP Act due to the remedies provided to them under the Act. Thus, although ToP Act involves matters such as sale, mortgage, lease, etc that provide rights with respect to third parties and are thus rights in rem, the landlord-tenant relationship is a subordinate right in personam arising from rights in rem and can be referred to arbitration. The court applied the principles of the four-fold test and determined that tenancy issues are subordinate rights in personam and arbitration, not being barred by ToP Act, can be referred to by the parties.
Existence of a ‘Valid Agreement’ u/d Section 11
The issues raised in the Vidya Drolia case call for determining the arbitrability of subject-matter brought before the Court, more specifically, whether the Court has power to scrutinise the existence of a valid arbitration agreement brought under a Section 11 application. The Division Bench has observed that the expression ‘existence of arbitration agreement’ in Section 11 of the ToP Act would include the aspect of validity of the agreement as well.
An application that is brought under Section 8 of ToP Act, after the 2016 Amendment, enjoins the Court to undertake a prima facie examination as to the validity of the agreement. Justice Sanjiv Khanna in his judgement has explained the scope of this prima facie examination as not a “full review but a primary first review to weed out manifestly and ex facie non-existent and invalid arbitration agreements and non-arbitrable disputes.” Inconclusive matters were to be left for the arbitral tribunal to decide on during the arbitration stage.
Section 11(6A) which was inserted by the 2016 Amendment prescribed that the Court, at the referral stage, should only examine the existence of the arbitration agreement, however 6A has been omitted after the 2019 Amendment recommended by the Justice B N Srikrishna Commission which observed that “because appointment of arbitrators is to be done institutionally, the Courts do not need to determine the existence of the arbitration agreement”.
However, it is material to note Justice R. Nariman J.’s observation in the case of Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engineering Ltd.[iv] He opined that an agreement becomes a contract only if it is enforceable by law and this enforceability would be decided on the basis of Contract Law where a mere existence of agreement is not sufficient. The validity of the agreement has to be looked into and thus, this aspect is naturally covered under the scope of Section 11. Applying this observation, the Apex Court held that examination of validity of arbitration agreements at the referral stage would only incorporate a prima facie test, i.e., a preliminary examination of facts of the case, in order to prevent the parties from being forced into arbitration where disputes are clearly non-arbitrable.
The Court overruled the ratio in SBP v. Patel Engineering Ltd.[v] and held that as per the principles of severability and competence-competence, the arbitral tribunal is preferred as the first authority to determine on all questions of non-arbitrability and jurisdiction, however as an exception a party can approach the Court under Section 8 or 11 of ToP Act, if a prima facie case of non-existence of valid arbitration agreement is made out.
Public Welfare Legislations
The Apex Court had held in Natraj Studios (P) Ltd. v. Navrang Studios & Anr.[vi] that statutes governing rent and tenancy are public welfare legislations; therefore disputes arising from these statutes are non-arbitrable as special public forums have exclusive jurisdiction over these matters. However, the Court in the Emaar MGF Land limited v. Aftab Singh[vii] case that dealt with a dispute arising out of the Consumer Protection Act, 1986, also a public welfare legislation, observed that parties may opt for arbitration owing to the doctrine of election without prejudice to rights of consumers to approach the consumer forum.
The Division Bench in the Vidya Drolia case has however stated that “consumers can(not) waive their right to approach the statutory judicial forums by opting for arbitration.” The author believes this is erroneous on part of the Apex Court, to bar tenants who are protected by several rent control legislations, from exercising their right to opt for arbitration and without prejudice to remedy provided to them before civil courts by these legislations.
There is no doubt that the Vidya Drolia judgement is a big, positive step towards a pro-arbitration stance in India, making it more robust. The Court provides clear guidelines to determine the non-arbitrability of the subject-matter of disputes and also clearly marks out the scope of examination of arbitration agreements under Section 11 of the ToP Act. The judgement cannot be said to be entirely accurate as it omits an important aspect of arbitration, the doctrine of election by taking away the right of consumers protected under public welfare legislations to choose arbitration, however, the author believes this can be further debated upon by a larger bench in the future.
[i] Civil Appeal No. 2402 of 2019.
[ii] (2017) 10 SCC 706.
[iii] (2011) 5 SCC 532.
[iv] Civil Appeal No. 3631 of 2019.
[v] (2005) 8 SCC 618.
[vi] (1981) 1 SCC 523.
[vii] Review Petition (C) Nos. 2629-2630 of 2018.
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