The decade-old uncertainty on the issue of arbitrability of tenancy disputes stands settled with the pronouncement of the judgment by the Hon'ble Supreme Court in, Vidya Drolia and Others v. Durga Trading Corporation1 ("Vidya Drolia II/Judgment"). The Judgment, overruling the earlier position laid down in Himangni Enterprises v. Kamaljeet Singh Ahluwalia2 ("Himangni Enterprises"), provides much-needed clarity on the nature of tenancy disputes that can be referred to arbitration. The Dovetail Test laid down by the Court can be relied upon in determining the non-arbitrability of disputes in general. The Judgment also attempts to clear the conundrum surrounding the issue as to which forum would decide the issue of non-arbitrability, Court or the Arbitral Tribunal?
Additionally, the Court also delved upon matters which do not fall within the scope of arbitrability and the stages at which the issue of non-arbitrability may be raised. The Judgment also analysed the scope, interpretation, and evolution of Section 8 & Section 11 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") which has been discussed in the latter part of this Article.
A reference was made by an Order of the Supreme Court Division Bench in Vidya Drolia and Others v. Durga Trading Corporation3 ("Vidya Drolia I"), to a larger bench, as it doubted the ratio laid down in Himangni Enterprises, wherein it was held that the tenancy disputes governed by the provisions of the Transfer of Property, 1882 ("TP Act") would not be arbitrable.
The reference was made by the Division Bench of the Court while considering an Appeal against the Order of Calcutta High Court, wherein the High Court allowing the Application filed by the landlord therein, under Section 11 of the Arbitration Act appointed an arbitrator in a dispute between the parties, i.e., landlord and tenant. Overruling many of its own as well as various High Courts' judgments the Apex Court in the case of Vidya Drolia II has put to rest the aspect of arbitrability of tenancy disputes and has set out the general principles on which arbitrability of disputes may be decided.
History of Controversy on Landlord Tenancy Disputes---The Pre Vidya Drolia II Era.
To understand the need for the reference to the larger bench, it becomes important for us to juxtapose the gamut of conflicting judgments of the Supreme Court. A slew of judgments referred by this Court to decide upon the reference are adumbrated below-
One of the earliest judgements on the landlord tenancy disputes dates back to 1981. In Natraj Studios (P) Ltd. v. Navrang Studios & Ors.4, the Supreme Court held that the tenancy was protected under The Bombay Rents, Hotel and Lodging House Rates Control Act, 1947 and that disputes between landlords and statutory tenants can be exclusively tried by the Small Causes Court and cannot be referred to arbitration.
In 2011, the Supreme Court in Booz Allen and Hamilton Inc. vs. SBI Home Finance Ltd. and Ors.5 observed that "eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes' are 'well-recognized examples of non-arbitrable disputes". The Court held that the TP Act does not negate arbitrability.
The deciding case--- Himangni Enterprises --- In 2017, the Supreme Court in Himangni Enterprises once again reaffirmed the non-arbitrability of disputes relating to tenancy and eviction. The Court held that though the tenancy is not protected under the Delhi Rent Control Act, 1958, even in cases where the tenancy was governed by the TP Act, it would be the Civil Court which would have jurisdiction to decide landlord-tenant disputes and not an arbitrator.
The judgment in Himangni Enterprises had put to rest the arbitrability of landlord and tenancy disputes until recently opposed in Vidya Drolia- I. After analysing aforesaid conflict in jurisprudence relating to landlord tenancy disputes, a Division Bench of the Supreme Court in the case of Vidya Drolia- I, observed that the above issue needs to be firmly decided by a larger bench. The ruling of the Supreme Court may be adumbrated as below.
Arbitrability of Landlord-tenant disputes
The Supreme Court in the case of Vidya Drolia II has overruled the decision of Himangni Enterprises and has held that the landlord-tenant disputes are arbitrable except when they are covered by specific forum created by rent control laws. The Court reasoned that landlord-tenant disputes governed by the TP Act are arbitrable as they are not actions in rem but pertain to subordinate rights in personam that arise from rights in rem. The provisions of the TP Act do not expressly or by necessary implication bar arbitration. The Court further held that an Award passed deciding tenancy disputes can be executed and enforced like a decree of the civil court.
Dovetail Test of "Non-Arbitrability"
The Court after examining and analysing the plethora of judgments crystalized the legal principles for determining non-arbitrability. In doing so the Court also distinguished the adjudication of actions in rem and adjudication of actions in personam. Accordingly, the Court after explaining the meaning of non-arbitrability of disputes laid down a four-fold formula to determine when a dispute is non-arbitrable. It was held that the disputes are not arbitrable when the cause of action and/or 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.
- affects third party rights; have erga omnes6 effect; require centralised adjudication, and mutual adjudication would not be appropriate and enforceable.
- relate to the inalienable sovereign and public functions of the State and, hence, mutual adjudication would be unenforceable; and
- is expressly or by necessary implication non-arbitrable as per mandatory statutes.
The Supreme Court explained that although these tests are not "watertight compartments" they would greatly help to determine when a particular subject would be non-arbitrable under Indian law.
Instances of Non-Arbitrable/Arbitrable disputes
The Court discussed matters which do not fall within the scope of arbitrability and held that the matters relating to insolvency or intra-company disputes, criminal cases, probate, testamentary etc. are actions in rem and are a declaration to the world at large and hence non-arbitrable.
Similarly, the grant and issue of patents and registration of trademarks, matrimonial disputes relating to the dissolution of marriage, restitution of conjugal rights etc. are not arbitrable as they are exclusive matters falling within the sovereign or government functions and have erga omnes effect. Overruling the decision of Delhi High Court in HDFC Bank Limited v. Satpal Singh Bakshi7, (which held that disputes governed by the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 were arbitrable), the Apex Court held that disputes that are to be adjudicated by the Debts Recovery Tribunal are not arbitrable.
Additionally, the Supreme Court disagreeing with the ruling in N. Radhakrishnan v. Maestro Engineers and Ors.8, (which held that matters of fraud were not arbitrable), has interalia, held that allegations of fraud are arbitrable, provided, they relate to a civil dispute.
Stages at which issue of Non-Arbitrability may be raised.
The Court before delving into the question as to which forum would decide the issue of non-arbitrability, discussed the various stages at which the issue can be raised. Accordingly, it was held that the issue of non-arbitrability can be raised at the following stages.
- Before the Court:
- On an application for reference under Section 11 or Section 8 of Arbitration Act or stay of pending judicial proceedings; and
- At the stage of the challenge to the Award under Section 34 of the Arbitration Act or its enforcement.
- Before the Arbitral Tribunal during the course of the arbitration proceedings.
Demystifying the forum conundrum
The Court has finally put the issue as to 'who decides the issue of non-arbitrability' to rest and has cleared the air. Following the general rule, statutory provisions, principle of severability and doctrine of kompetenz - kompetenz enshrined under Section 16 of the Arbitration Act, it has been held that the arbitral tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. The Court has been conferred the power of "second look" on aspects of non-arbitrability under the relevant clauses of Section 34 of the Arbitration Act.
The Court while deciding the question as to which forum would decide the issue of non-arbitrability also made a detailed analysis on scope, interpretation, and evolution of Section 8 and Section 11 of the Arbitration Act and held that the scope of judicial review and jurisdiction of the Court under both the sections is identical but extremely limited and restricted. It was further held that the rationale behind the restricted and limited review is to check and protect parties from being forced to arbitrate when the matter is demonstrably non-arbitrable. The courts by default have to refer the matter to arbitration, when the aspect of "non-arbitrability" is plainly arguable, when facts are contested when party contesting is approaching dilatory tactics and when consideration in summary proceedings would be insufficient and inconclusive.
The Court opined that where an action is brought before a judicial authority under Section 8 & 11 of the Arbitration Act and the opposing party brings to the notice of the Court, the existence of such arbitration agreement, the Court should exercise its limited power and refer the parties to the arbitration. However, the Court may interfere at Section 8 or 11 stage when it finds, prima facie that, the arbitration agreement is non-existent, invalid or the disputes are non-arbitrable.
Dual Filter Test- The law as laid down earlier in the case of M/s Duro Felguera S.A. v. M/s Gangavaram9; restricted the examination by the courts on an Application under Section 11(4) of the Arbitration Act, to the 'existence of an arbitration agreement'. Interestingly, in the case of Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited10 ("Garware Wall Ropes") it was opined that an agreement becomes a contract only if it is enforceable by law. The enforceability by law would be decided based on contract law which allows the courts to delve into both the existence and the validity of an agreement. Placing reliance on the decision of Garware Wall Ropes, the Supreme Court in this case, after extensive deliberation held that the expression 'existence of an arbitration agreement' in Section 11 of the Arbitration Act would also include the aspect of 'validity' of an arbitration agreement, albeit the Court at the referral stage would apply the prima facie test.
Prime Facie Test--The Court in Vidya Drolia II has held that scope of the Court to examine the prima facie validity of an arbitration agreement includes the following issues:
- Whether the arbitration agreement was in writing?
- Whether the arbitration agreement was contained in an exchange of letters, telecommunication etc?
- Whether the core contractual ingredients qua the arbitration agreement were fulfilled?
- On rare occasions, whether the subject matter of the dispute is arbitrable?
The pro-arbitration view taken by the Supreme Court has brought the much-needed clarity on the arbitrability of landlord-tenancy disputes governed by the TP Act thereby reducing the burden of courts. The Judgment clears the fog of uncertainty and pulled the plug on the debate regarding arbitrability of landlord-tenancy disputes in India. The Judgment is a guiding light for all the stakeholders as it provides for all the factors that need to be taken into consideration at the time of submitting disputes to arbitration. It also enables the Court in determining the extent of their judicial intervention in cases where the parties have agreed to resolve their disputes through arbitration. The Apex Court in the Judgment has also determined that fraud is also arbitrable when it pertains to the subject matter of a civil dispute. However, in saying so, the Court has also rendered a much relevant observation and held that fraud can be non-arbitrable only when it would vitiate and invalidate the arbitration clause or raise questions which affect rights in rem and necessitate public enquiry.
The consequence of the Judgment on pending landlord-tenant disputes or fraud-related matters would be that the parties may file an Application under Section 8 of the Arbitration Act and request that the matter be referred to arbitration, saving them from the usual long litigations which were a norm in such cases. The Judgment has also expanded the scope of review under Section 11 of the Arbitration Act. It would be thus interesting to see how Section 11 applications are dealt with by the courts. The expanded scope under Section 11 may now reduce the number of appeals stemming from pre-arbitration decisions and will eventually enhance India's repute as an arbitration friendly jurisdiction.
[***It is also essential to mention that recently a three-judge bench of Supreme Court in the case M/s N.N Global Mercantile Pvt Ltd. v. M/s Indoo Unique Flame Ltd & Ors11, has doubted the correctness of the view taken in Paragraph 92 of Vidya Drolia II which has affirmed the judgment in Garware Wall Ropes holding that expression 'existence of an arbitration agreement' in Section 11 of the Arbitration Act would also include the aspect of 'validity' of an arbitration agreement'. In context with the same the three-judge bench has referred the findings in Vidya Drolia to a Constitution Bench of five judges, for an authoritative decision on the following question:
"Whether the statutory bar contained in Section 35 of the Indian Stamp Act, 1899 applicable to instruments chargeable to Stamp Duty under Section 3 read with the Schedule to the Act, would also render the arbitration agreement contained in such an instrument, which is not chargeable to payment of stamp duty, as being non-existent, unenforceable, or invalid, pending payment of stamp duty on the substantive contract/instrument?" ***]
1 2020 SCC OnLine SC 1018
2(2017) 10 SCC 706
3 2019 SCC OnLine SC 358
4 (1981) 1 SCC 523
5 (2011) 5 SCC 532
6 Erga omnes is a Latin phrase which means "towards all" or "towards everyone".
7 2013(134) DRJ 566 (FB)
8 (2010) 1 SCC 72
9 (2017) 9 SCC 729
10 (2019) 9 SCC 209
11 Civil Appeal Nos. 3802-3803/2020
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