The Hon’ble Supreme Court (“SC”) has in its judgment dated December 14, 2020 (“Judgement”) in the matter of Vidya Drolia and Others v. Durga Trading Corporation [Special Leave Petition (Civil) Nos. 5605-5606 of 2019], held that landlord-tenant disputes are arbitrable as the Transfer of Property Act, 1882 (“TPA”) does not forbid arbitration. However, the landlord-tenant disputes governed by rent control legislation would not be arbitrable since specific court or forum has been given exclusive jurisdiction to adjudicate such cases.

Facts

This Judgement decided the reference made by order dated February 28, 2019 in the case of Vidya Drolia and Others v. Durga Trading Corporation (“Vidya Drolia”) questioning the validity of the ratio laid down in Himangni Enterprises v. Kamaljeet Singh Ahluwalia [(2017) 10 SCC 706] (“Himangni Enterprises”) that landlord-tenant disputes governed by the provisions of TPA, are not arbitrable as this would contravene public policy.

In the instant case, in 2006, the tenants (“Appellants”) entered into a tenancy agreement with the predecessor title holder, with respect to certain buildings, with a pre-determined expiry on February 2, 2016. The agreement contained a clause for dispute resolution by arbitration. In 2012, the tenancy was transferred to Durga Trading Corporation (“Respondent”). Thereafter, the Appellants started paying monthly rent to the Respondent. The Respondent by letter dated August 24, 2015, sought vacant possession of the property. The Appellants however did not vacate. Subsequently, the Respondent filed a petition under Section 11 (Appointment of Arbitrators) of the Arbitration and Conciliation Act, 1996 (“Act”) before the Calcutta High Court, which passed an order in favour of the Respondent, by appointing an arbitrator. Aggrieved, the Appellants approached the SC, relying on the ratio of Himangni Enterprises.

The SC in the case of Himangni Enterprises held that though the Delhi Rent Act, 1995 was not applicable, the dispute would be governed by TPA and in cases governed by the TPA, the dispute would be triable by the civil court and not through arbitration.

However, the SC in Vidya Drolia observed that arbitration could be exempted only in cases governed by special statutes, where specific courts are conferred jurisdiction to decide disputes. The SC pointed out that there is no provision in the TPA that negates arbitrability of disputes governed by the Act. Hence it could not be concluded that disputes arising out of TPA are non-arbitrable. The SC was thus of the view that the principle laid down in Himangni Enterprises must be reviewed.

Issue

Whether tenancy disputes are capable of being resolved through arbitration.

Analysis and observations of the Supreme Court

The SC observed that the validity of the legal ratio in Himangni Enterprises cannot be decided without examining when a subject matter or dispute is non-arbitrable. The SC noted that in Booz Allenand Hamilton Inc v. SBI Home Finance Limited [(2011) 5 SCC 532] (“Booz Allen”), non-arbitrable landlord-tenant disputes were confined to those cases that are governed by special statutes where the tenant enjoys statutory protection against eviction and only specific courts are conferred jurisdiction to decide disputes.

Analyzing Booz Allen, which differentiated actions in rem from actions in personam, the SC noted that while rights in personam are amenable to arbitration, rights in rem are not, and noted that landlord-tenant disputes governed by rent control legislation, are not actions in rem, yet they are non-arbitrable.

The SC observed that generally non-arbitrability of the subject matter would relate to non-arbitrability in law. Arbitration by necessary implication excludes actions in rem and demonstrates the intrinsic limits of arbitration as a private dispute resolution mechanism, which is only binding on ‘the parties’ to the arbitration agreement. Arbitral tribunals not being courts of law established under the auspices of the State, cannot affect those who are not bound by the arbitration clause. Arbitration is unsuitable when it has ergaomnes effect, that is, it affects the rights and liabilities of persons who are not bound by the arbitration agreement.

The SC observed that in N. Radhakrishnan v. Maestro Engineers and Others [(2010) 1 SCC 72] (“N. Radhakrishnan”), the court had rejected the application for reference to arbitration under the Act on the ground that it would be in furtherance of justice that the allegations as to fraud and manipulation of finances in the partnership firm are tried in the court of law. In the said case, the court while accepting that the dispute may be arbitrable under the applicable mandatory law, held that the dispute would be non-arbitrable on public policy consideration if it relates to serious allegations of fraud.

The SC observed that violation of public policy by the arbitrator could result in setting aside the award on the ground of failure to follow the fundamental policy of law in India, but not on the ground that the subject matter of the dispute was non-arbitrable. Relying on Avitel Post Studioz Limited and Others v. HSBC PI Holdings (Mauritius) Limited [Civil Appeal No. 5145 of 2016 decided on August 19, 2020], the SC accepted that fraud can be a ground to refuse reference to arbitration only in a clear case where the arbitration clause or agreement itself cannot be said to exist due to the lack of consent of the defaulting party to arbitrate or if allegations of arbitrary, fraudulent, or mala fide conduct are made against the state or its instrumentalities which requires a public enquiry.

The SC propounded a four-fold test to determine non-arbitrability of the subject matter of a dispute:

• 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 ergaomnes effect, require centralized adjudication and when 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 statutes.

As a caveat, the SC stated that these tests are not watertight compartments, they overlap. However, when applied holistically and pragmatically, they will assist in determining with certainty when as per law in India, a dispute or subject matter is non-arbitrable. Only when the answer is affirmative, the subject matter of the dispute would be non-arbitrable.

It further observed that landlord-tenant disputes governed by the TPA 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 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 TPA do not expressly or by necessary implication bar arbitration. TPA, like all other acts, has a public purpose to regulate landlord-tenant relationships and the arbitrator would be bound by the provisions, including provisions which ensure and protect the tenants. In view of the aforesaid, the SC overruled the ratio laid down in Himangni Enterprises.

The SC further, laid down the scope of the Court to examine the prima facie validity of an arbitration agreement to include only:

• Whether the arbitration agreement was in writing.
• Whether the arbitration agreement was contained in exchange of letters, telecommunication etc.
• Whether the core contractual ingredients qua the arbitration agreement were fulfilled.
• On rare occasions, whether the subject matter of dispute is arbitrable.

Decision of the Supreme Court

The SC propounded a four-fold test for determining non-arbitrable cases with a caveat. The SC overruled the ratio in N. Radhakrishnan, inter alia, observing that allegations of fraud can be made a subject matter of arbitration when they relate to a civil dispute. This is subject to the caveat that fraud, which would vitiate and invalidate the arbitration clause, is an aspect relating to non- arbitrability. The SC overruled the ratio laid down in Himangni Enterprises and held that landlord-tenant disputes are arbitrable as the TPA does not forbid or foreclose 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.

Vaish Associates Advocates View:

The Judgement is a step in the right direction as it has dwelled into various crucial aspects of jurisprudence in arbitration in India and has resolved years of uncertainty. The principle of party autonomy goes hand in hand with the principle of limited court intervention, this is the fundamental principle underlying modern arbitration law. It upholds arbitrability of tenancy disputes, unless governed by special statutes.

In a pro-arbitration move, the SC, by this Judgement, elucidated that TPA does not oust the jurisdiction of arbitral tribunals under the Act in case of landlord-tenant disputes, overruling its own judgment in Himangni Enterprises. It also laid down a four-fold test to determine whether a dispute is arbitrable or not and concluded that the arbitral tribunal is the “preferred first authority” to determine and decide all questions of non-arbitrability.

For more information please write to Mr. Bomi Daruwala at [email protected]

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