In over-ruling its own decision in the 2017 case of Himangni Enterprises v. Kamaljeet Singh Ahluwalia1, the Supreme Court of India (“Court“) has held in the recent case of Vidya Drolia v. Durga Trading Corporation2 that landlord-tenant disputes governed by the Transfer of Property Act, 1882 (“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 Court in this case has answered a reference from a two (2) Judge bench which raised questions as to the correctness of the dictum laid down in the case of Himangni Enterprises wherein it was held that landlord-tenant disputes governed by the TP Act would not be arbitrable as disputes arising under the TP Act constitute a right in rem and it would be contrary to public policy. The Court in the case of Vidya Drolia has clarified that the provisions of the TP Act do not expressly or by necessary implication bar arbitration. Like other Acts, the TP Act has a public purpose, which is to regulate landlord-tenant relationships and the arbitrator would be bound by the provisions, including provisions which enure and protect the tenants. However, the Court further clarifies that landlord-tenant disputes covered and governed by rent control legislation would not be arbitrable when a specific court or forum has been given exclusive jurisdiction to apply and decide special rights and obligations. In such case, such rights and obligations can only be adjudicated and enforced by the specified court/forum and not through arbitration.
Issues Before the Court
- The meaning of non-arbitrability and when the subject matter of the dispute is not capable of being resolved through arbitration; and
- Who decides the question of non-arbitrability.
Background and Reasoning
The case of Himangni Enterprises
The Court discusses and over-rules the case of Himangni Enterprises wherein the Court had upheld the decision of the lower courts in rejecting an application filed by the defendant-tenant under Section 8 of the Arbitration Act, 1996 (“Arbitration Act“) in a civil suit seeking its eviction from a shop in a commercial complex. In this case, the tenancy in question was protected under the TP Act and not under the rental control legislation. The Judges in the Himangni Enterprises case inter alia discussed the law laid down in the cases of Natraj Studios (P) Ltd. v. Navrang Studios3 and Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd.4 with respect to the issue of non-arbitrability. In Natraj Studios, an application under Section 8 of the Arbitration Act, 1940 was dismissed as the tenancy was protected under the Bombay Rents, Hotel and Lodging Houses Rates Control Act, 1947 and it was observed that on broader consideration of public policy, the arbitrator lacked jurisdiction to decide the question as to whether the landlord was entitled to seek possession. It was accordingly held that the dispute would be exclusively decided by the Court of Small Causes, which alone had jurisdiction. Further, in the case of Booz Allen, it was held that in cases of eviction or tenancy matters governed by special statutes and where the tenant enjoys statutory protection, only the specified court under such statute would have jurisdiction. Relying on the above ratios, the Court in Himangni Enterprises held that although the Delhi Rent Act was not applicable in the instant case, it did not mean that the Arbitration Act would be applicable so as to confer jurisdiction on the arbitrator. It was accordingly held that in cases of tenancies governed by the TP Act, the dispute would be triable by the civil court and not the arbitrator.
On the Issue of Non-Arbitrability
The Court delves into several case laws and propounds a four-fold test for determining when the subject matter of a dispute is not arbitrable:
- When the 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 the 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 the 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.
- When the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s).
However, the Court clarifies that these tests are not watertight compartments. When applied holistically and pragmatically they will help and assist in determining and ascertaining when a dispute or subject matter is non-arbitrable. Only when the answer is affirmative, the subject matter of the dispute would be non-arbitrable. In applying the above tests, the Court holds that insolvency or intracompany disputes have to be addressed by a centralized forum, be it the court or a special forum, which would be more efficient and have complete jurisdiction to efficaciously and fully dispose of the entire matter. They are also actions in rem. Similarly, grant and issue of patents and registration of trademarks are exclusive matters falling within the sovereign or government functions and have erga omnes effect. Such grants confer monopoly rights and are non-arbitrable. Similarly, criminal cases are not arbitrable as they relate to sovereign functions of the State.
The Court accordingly holds that landlord-tenant disputes are arbitrable as the TP Act does not forbid or foreclose arbitration. Further, landlord-tenant disputes do not relate to inalienable and sovereign functions of the State. However, landlord-tenant disputes covered and governed by rent control legislation would not be arbitrable when a 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.
On the Issue of Who Decides Non-Arbitrability
The Court states that the issue of non-arbitrability can be raised at three (3) stages which are:
- Before the court on an application for reference under Section 11 of the Arbitration Act or for stay of pending judicial proceedings and reference under Section 8 of the Arbitration Act; or
- Before the arbitral tribunal during the course of the arbitration proceedings; or
- Before the court at the stage of the challenge to the award or its enforcement.
The Court concludes that the arbitral tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. The courts have been conferred with the power to have a ‘second look’ on aspects of non-arbitrability post the award as per Section 34 of the Arbitration Act. The Court further states that as a demurrer the court may interfere at the Section 8 or Section 11 stage when it is manifestly and ex facie certain that the arbitration agreement is non-existent, invalid or the disputes are non-arbitrable. However, the nature and facet of non-arbitrability would, to some extent, determine the level and nature of judicial scrutiny. This restricted and limited review is only to check and protect parties from being forced to arbitrate when the matter is demonstrably ‘non-arbitrable’. The Court’s pro-arbitration stance in this case has helped in contributing more clarity in respect of when Statutes exclude arbitration by necessary implication and when they do not.
1 (2017) 10 SCC 706
2 Civil Appeal No. 2402 of 2019, Special Leave Petition (Civil) Nos. 5605-5606 of 2019 and Special Leave Petition No. 11877 of 2020 (Arising out of Diary No. 40679 of 2019)
3 (1981) 1 SCC 523
4 (2011) 5 SCC 532: (2011) 2 SCC (Civ) 781