Another Feather In The Hat: Matters of Tenancy Are Now Arbitrable

Recently, the three-judge bench of the Hon’ble Supreme Court in the case of “Vidya Drolia & Ors. v. Durga Trading Corporation”[1] looked over the matter concerning tenancy and held that the landlord-tenant disputes are arbitrable except when the matter falls under the special forum formed by rent-control laws. Arbitrability determines the fact as to which disputes are arbitrable in nature and which are to be decided by the courts. As the Arbitration and Conciliation (“A&C”) Act does not provide the list of arbitrable disputes, the Court has become the deciding factor on the issue of arbitrability.

In the present case, the appellants (tenants) entered into the tenancy agreement (comprising an arbitration clause) with the respondent (landlord). The respondent sent the notice to appellants asking him to vacate the premises as the lease period was about to expire. However, the appellants did not vacate. Therefore, the respondent invoked the Arbitration clause and filed petition u/s 11 for the appointment of the arbitrator before the Calcutta HC. The HC set aside the petition and appointed the arbitrator. Thereby, the appellant challenging the arbitrability approached the Supreme Court.

The case revolve around these two issues-(i) whether the tenancy matter comes under the term “non-arbitrability”, and (ii) At what stage would the court decide the matter or arbitrability?

Several conflicting judgments have been passed on the arbitrability of tenancy. In the Natraj Studioz (P) Ltd vs. Navrang Studioz & Anr [2] and Booz Allen case[3]the matters of tenancy were kept outside the ambit of arbitration on the ground of public policy and special statute protection respectively. The Court in Himangni Enterprises case[4], relied on these above-mentioned cases and held that as the suit was governed by the Transfer of Property Act (“TPA”), hence they are non-arbitrable and can be tried only before the Civil Court. However, in the present case (Vidya Drolia), the Court held that the tenancy disputes are arbitrable as the TPA when analysed does not expressly or impliedly bars arbitration. Further, the dispute between landlord and tenant is not action in rem but they are subordinate right in personam that arises out of right in rem. Therefore, the dispute would be arbitrable unless the dispute is controlled by rent control legislation. As then, the specific court would have exclusive jurisdiction and the rights and obligations would be governed by special forum, and not via arbitration.  

The Court also laid down four tests (which can overlap) to ascertain when the matter in question is not arbitrable i.e.  “when the cause of action and subject matter of the dispute-

  • Relates to action in rem, that do not pertain to subordinate rights in personam that arises out of right in rem;
  • Impacts the rights of the third party, have erga omnes effect, required centralized adjudication, and mutual adjudication would not be appropriate and enforceable;
  • By expressly or through necessary implication not arbitrable because of the mandatory statute;
  • Relates to the inalienable sovereign and public interest functions of the state and therefore mutual adjudication would be not enforceable”[5].

For issue 2 i.e. at which stage the court would decide arbitrability. The court interpreted Section 11(6A) where the “appointment of arbitrator” is restricted under Section 11(4) only to the “existence” of the arbitration agreement. The same principle was followed up in the Duro Felguera case[6] and Reckitt Benckiser case[7]. However, in the present case, the law laid down in the Garware case[8] was upheld. It was set out that the agreement when enforced by law turns into the contract. This enforceability is not to be based only on the existence but also on the validity of the agreement. Therefore, the existence of Section 11(6A) would also include the validity of the agreement, but the court at the referral stage would apply the prima facie test.

“The test to determine the prima facie validity of agreement would include-

(1) whether the arbitration agreement was in writing?,                    
(2) whether the arbitration agreement was contained in letters and telecommunications?,         
(3) whether the contractual ingredients of the agreement were satisfied?                                   
(4) Whether the subject matter of the dispute is arbitrable?”[9]

The Court held that the question of arbitrability may not be suitable at the stage of section 8, as the principle of competence (inherent within section 16) prioritise the arbitral tribunal to rule on jurisdiction and decide on arbitrability. Nevertheless, the court can decide under section 8 or section 11 of the act, when the prima facie non-existence of agreement is established.

By including the disputes of the tenancy and widening the term “arbitrability”, the court has resolved the long-disputed matter of tenancy within arbitration. The court also reiterated the Avitel decision [10] and clarified that the parties cannot altogether restrict arbitration on mere pleadings of fraud. The above judgment reflects that the Indian judiciary is now realising the burden of courts and consequently adopting positive approach to strengthen the arbitration mechanism in India.

[1] 2020 SCC OnLine SC 1018.

[2] (1981) 1 SCC 523.

[3] Booz Allen & Hamilton Inc. vs. Satpal Singh Bakshi, (2011) 5 SCC 532.

[4] Himangni Enterprises v. Kamaljeet Singh Ahluwalia, (2017) 10 SCC 706.

[5] Supra note 1.

[6] M/s Duro Felguera S.A.  vs. M/s Gangavaram Port Limited, (2017) 9 SCC 729.

[7] Reckitt Benckiser (India) Pvt. Ltd. vs. Reynders Label Printing India Pvt. Ltd., (2019) 7 SCC 62.

[8] Garware Wall Ropes Limited vs. Coastal Marine Constructions and Engineering Limited, (2019) 9 SCC 209.

[9] Supra note1.

[10]Avitel Post Studioz Ltd. vs. HSBC PI Holdings (Mauritius) Ltd., 2020 SCC OnLine SC 656.

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