India has been promoting itself as a pro-Arbitration jurisdiction – during the last decade itself, a number of high-stakes disputes have been resolved through Arbitration in India. The very purpose of the Arbitration and Conciliation Act, 1996 (the Act) is to provide an alternative redressal mechanism in India in order to enable the parties to opt for a speedy and effective resolution of their disputes. The Act also seeks to reduce the need for judicial involvement – in the form of the principle of Minimal Interference of Courts – which acts as the backbone for India’s pro-Arbitration stance.
However, there are certain issues that the Act does not address; for instance, it does not specify which conflicts that are arbitrable in India. The Courts have the discretion to decide and determine the arbitrability of disputes. One such area where the judiciary has, time and again, found itself at a crossroads with are Lease or Tenancy disputes. This article intends to delve into the change in the position of the Arbitrability of the Lease or Tenancy disputes, especially in light of the recent judgment in the case of Vidya Drolia & Ors. v. Durga Trading Corporation [2019 SCC Online SC 358] (Vidya Drolia Case).
BACKGROUND: ARBITRABILITY OF LEASE OR TENANCY DISPUTES
Issues pertaining to Lease and Tenancy Disputes and the arbitrability thereof have been prevailing since a long time. A quick perusal of a few important cases in this regard will help provide the necessary backdrop in order to recognize and fully understand the Judicial position of the Indian Courts with regards to the arbitrability of Lease or Tenancy Disputes.
In the case of Natraj Studios P. Ltd. vs. Navrang Studios & Anr. [(1981) 1 SCC 523] (Natraj Studios Case), the Supreme Court (SC) dismissed an Application under Section 8 of the Act, which pertains to the power of the Judicial Authority to refer the dispute to Arbitration based on the Arbitration Agreement between the parties. However, since Tenancy was protected under the Bombay Rents, Hotel & Lodging Houses Rates Control Act, 1947 (Bombay Act 1947), the SC ruled out Arbitration as the method of dispute resolution for Tenancy /Lease disputes as they were to be adjudicated under special legislation, viz. the Bombay Act 1947.
Thus, initially, the judicial position was that Tenancy/Lease disputes are not arbitrable as they are governed under the Bombay Act 1947 which, being a special legislation, superseded the applicability of the Act, which is a general legislation.
Thereafter, in the year of 2011, the SC pronounced a landmark judgment in the case of Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. and Ors. [(2011) 5 SCC 532] (Booz Allen Case), wherein the SC concluded that situations involving eviction or Tenancy issues which are adjudicated by special statutes are Non-Arbitrable in nature. The Court took the view that a Suit to enforce a mortgage is not arbitrable as enforcing a mortgage is the same as enforcing a right in remand that such right in remis not arbitrable, by its very nature, since it can be exercised against the society in general. A right in personam, on the other hand, protects interests against specific individuals and is arbitrable by nature. It was also stated, inter alia, that disputes resulting from rights in rem, relating to subordinate rights in personam, are arbitrable in nature.
Further, the SC went on to say that, in principle, any civil or commercial dispute that can be decided by a Court can be adjudicated and settled by Arbitration, unless it is – expressly (as a matter of Public Policy) or by necessary inference – excluded. It was also opined that disputes concerning rights in personamcould be decided by a Private Forum whereas the disputes related to rights in remcould only be taken up in a Court of Law.
In 2017, in the case of Himangni Enterprises v. Kamaljeet Singh Ahluwalia [(2017) 10 SCC 706] (Himangni Enterprises Case),the Delhi High Court (Delhi HC) was again confronted with the question as to whether Landlord-Tenant (Tenancy) disputes are arbitrable in nature. The Tenant filed an Application with the Civil Court under Section 8 of the Act, requesting that the matter be referred to Arbitration. The Landlord objected to the Application, claiming that the lawsuit’s subject matter was ineligible for Arbitration.
The Delhi Rent Act, 1995 (DR Act), governed the Landlord-Tenant conflicts in the jurisdiction under normal circumstances. The DR Act, however, did not apply to the leased premises because of Section 38, which specifically states that the concerned Chapter shall apply to all Hotels and Lodging Houses in the areas which the Central Government may, by notification in the Official Gazette, specifyand the leased premised in the present case did not come under the purview of the aforementioned Section 38.
The Court decided that the mere fact that the DR Act did not apply to the leased premises did not make the matter arbitrable. Similarly, just because the premises are free from the applicability of the DR Act, it would not ipso facto mean that the dispute cannot be resolved through Arbitration. In this situation, the Transfer of Property Act, 1882 (TP Act) will apply and the case will be resolved by Civil Courts.Thus, the Delhi HC favoured the Landlord’s argument and denied the request for Arbitration.
The Vidya Drolia Case is a recent decision pertaining to the arbitrability of Tenancy disputes in India. In this case, a Lease Agreement was signed between the Landlord and the Tenant, concerning several godowns and other structures, with respect to which, the tenancy was for a maximum of ten years. This Agreement also included an Arbitration Clause.
Pursuant to this Agreement, the Tenant was ordered to evacuate the premises after the Lease expired. However, the Tenant did not do so, in pursuance of which the Landlord served an Arbitration Notice on the Tenant. The Landlord requested the appointment of an Arbitrator under Section 11 of the Act. The Tenant objected to the same; however, the Calcutta High Court (Cal HC) rejected the Tenant’s objections relating to the non-arbitrability of the dispute and referred the matter to Arbitration. In this decision, the Court took the view that a Tenancy dispute is arbitrable in nature.
Meanwhile, as mentioned above, the SC, in the Himangni Enterprises case, took the view that merely because the DR Act does not apply to certain premises, the same shall not, ipso facto, give the jurisdiction to the Arbitrator and that, in such cases, the disputes may be governed by the TP Act and not by Arbitration.
On this basis, a Review/Recall Application was filed before the Cal HC against the Arbitrator’s Appointment Order. This Review Application was denied by the Cal HC, and subsequently an Appeal was filed.
The SC took the view that TP Act governing any and every Landlord-Tenant dispute was never covered and/or postulated in the case of Natraj Studios or Booz Allen. Thus, the High Court disagreed with the conclusion in the Himangi Enterprises Case, and held the decision was not based on good logic.
The SC concluded that the TP Act would be applicable to the case if the DR Act became inapplicable. It was not satisfied, however, that an Arbitrator could not adjudicate upon Landlord-Tenant disputes governed by the TP Act. The Court further analyzed the provisions of the TP Act – Section 111, 114 and 114A – specifically pertaining to the rights and obligations associated with a Landlord-Tenant relationship.
Consequently, the SC determined that disputes under the TP Act can be resolved by an Arbitrator, and that there is nothing in the TP Act that hinders the arbitrability of such disputes. As a result of conflict, the SC referred the case to a larger Bench of three judges (the Bench), which resulted in the recent landmark decision in the Vidya Drolia Case.
The Bench then established a Four-Fold Test to assess the arbitrability of a dispute. It held that a dispute would not be 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, however, cautioned:
“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.”
Thus, the Bench ruled that there is nothing in the TP Act that overtly or implicitly prohibits Arbitration in the current case, citing Sections 111, 114, and 114A. These were actions in personamthat originated from rights in rem, not actions in remand, thus, had no erga omneseffect or affected third-party rights.
The Arbitrator would be constrained by the TP Act, as well as other Acts, and would have to resolve conflicts in accordance with the benefits and protections granted to tenants. The Bench went on to say that an Award in a Landlord-Tenant dispute is enforceable in the same way of that of a Civil Court, thus the Landlord-Tenant issues covered by the TP Act are arbitrable in nature.
The judgement in the Vidya Drolia Case marks a step in the right direction, since the SC has taken a pro-arbitration stance therein. This will further the process of making Arbitration more robust in India in the future. This decision also concludes the long discussion pertaining to the arbitrability of Tenancy disputes in India.
It can, however, be foreseen that this decision will spark discussion over whether the question of arbitrability of the subject-matter of the dispute should be decided at the stage of the appointment of the Arbitrator under Section 11 or under Section 16 of the Act which pertains to the Jurisdiction of the Arbitral Tribunal. Additionally, it will be interesting to examine how this decision affects cases that are currently pending before the Courts. Overall, decision in the Vidya Drolia Case upholds the current pro-Arbitration thrust in India while also substantially furthering the integrity and effectiveness of Arbitration as an Alternative Dispute Resolution (ADR) Mechanism in India.
– Team AMLEGALS, assisted by Ms. Akshita Mohilay (Intern)
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