Landlord-Tenant Disputes are Arbitrable as the Transfer of Property Act does not Forbid or Foreclose Arbitration: SC

Landlord-tenant disputes are arbitrable as the Transfer of Property Act does not forbid or foreclose arbitration: SC

In a significant judgment, three judge bench of the Apex Court overruled its 2017 verdict in  Himangni Enterprises v. Kamaljeet Singh Ahluwalia to observe that,  Landlord-tenant disputes are arbitrable as the Transfer of Property Act does not forbid or foreclose arbitration but  with the exception of when they are covered by specific forum created by rent control laws.

“We overrule the ratio laid down in Himangni Enterprises and hold that landlord-tenant disputes are arbitrable as the Transfer of Property Act 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”

Himangni Enterprises case, it was noted that where the Transfer of Property Act, 1882 applied between landlord and tenant, disputes between the said parties would not be arbitrable.

The Apex Court was considering a appeal against Calcutta High Court order appointing an arbitrator in a dispute between landlord and tenant in the case of Vidya Drolia and others v Durga Trading Corporation.

The bench based its dictum on the fact that landlord-tenant disputes are not actions in rem but pertain to subordinate rights in personam that arise from rights in rem.

Observation made by the Court

  • Such actions normally would not affect third-party rights or have erga omnes affect 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 the Transfer of Property Act do not expressly or by necessary implication bar arbitration. Transfer of Property Act, like all other Acts, has a public purpose, that is, to regulate landlord-tenant relationships and the arbitrator would be bound by the provisions, including provisions which ensure and protect the tenants,” the judgment noted.
  • On the other hand make clear that landlord-tenant disputes covered and governed by rent control legislation would not be arbitrable. “Such rights and obligations can only be adjudicated and enforced by the specified court/forum, and not through arbitration,” the Court held.
  • The Court overruled the ratio in N.Radhakrishnan v Maestro Engineers and others (2010) 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 judgment laid down four-fold test to determine arbitrability
    • 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 the 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 permandatory statute(s).

However, the Court spell out that 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.

  • The Court noted that the issue of non-arbitrability can be raised at three stages:
    • before the court on an application for reference under Section 11 or for stay of pending judicial proceedings and reference under Section 8 of the Arbitration Act;
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    •  before the arbitral tribunal during the course of the arbitration proceedings;
    •  before the court at the stage of the challenge to the award or its enforcement.
  • Who decides non-arbitrability?

Answering this issue the Bench noted that arbitral tribunal is the “preferred first authority” to determine and decide all questions of non-arbitrability and the Court has the power of “second look” on aspects of non-arbitrability under relevant clauses of Section 34 (Application for setting aside arbitral award).

  • The principles on “Who decides arbitrability” were summarized in paragraph 96 as follows:

a) Ratio of the decision in Patel Engineering Ltd.on the scope of judicial review by the court while deciding an application under Sections 8 or 11 of the Arbitration Act, post the amendments by Act 3 of 2016(with retrospective effect from 23.10.2015) and even post the amendments vide Act 33 of 2019 (with effect from 09.08.2019), is no longer applicable.

(b)Scope of judicial review and jurisdiction of the court under Section 8 and 11 of the Arbitration Act is identical but extremely limited and restricted.

(c)The general rule and principle, in view of the legislative mandate clear from Act 3 of 2016 and Act 33of 2019, and the principle of severability and competence-competence, is that the arbitral tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. The court has been conferred power of “second look” on aspects of non-arbitrability post the award in terms of sub-clauses (i)(ii) or (iv) of Section 34(2)(a) or sub-clause (i) of Section 34(2)(b) of the Arbitration Act.

(d)Rarely as a demurrer the court may interfere at the Section 8 (Power to refer parties to arbitration) or Section 11 (Appointment of arbitrators) stage when it is manifestly and ex facie certain that the arbitration agreement is non-existent, invalid or the disputes are non-arbitrable, though the nature and facet of non-arbitrability would, to some extent, determine the level and nature of judicial scrutiny. The restricted and limited review is to check and protect parties from being forced to arbitrate when the matter is demonstrably ‘non-arbitrable’ and to cut off the deadwood.The court by default would refer the matter when contentions relating to non-arbitrability are plainly arguable; when consideration in summary proceedings would be insufficient and inconclusive;when facts are contested; when the party opposing arbitration adopts delaying tactics or impairs conduct of arbitration proceedings. This is not the stage for the court to enter into a mini trial or elaborate review so as to usurp the jurisdiction of the arbitral tribunal but to affirm and uphold integrity and efficacy of arbitration as an alternative dispute resolution mechanism.

The Court mentioned few examples of non-arbitrable disputes (paragraph 46) :

i. Insolvency or intra-company disputes,

ii. Grant and issue of patents and registration of trademarks

iii. Criminal cases

iv. Matrimonial disputes relating to the dissolution of marriage, restitution of conjugal rights etc

v. Probate, testamentary matter etc.

vi. 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.

vii. Disputes which are to be adjudicated by the DRT under the DRT Act.

Case Name: VIDYA DROLIA AND OTHERS V/S DURGA TRADING CORPORATION

Citation: SPECIAL LEAVE PETITION (CIVIL) NOS. 5605-5606 OF 2019 AND SPECIAL LEAVE PETITION NO. 11877 OF 2020

Coram: Justices NV Ramana, Krishna Murari and Sanjiv Khanna

Landlord-tenant disputes are arbitrable as the Transfer of Property Act does not forbid or foreclose arbitration: SC

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