American Arbitration Association
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This article is written by Ria Chaudhary who is pursuing a Certificate Course in Introduction to Legal Drafting: Contracts, Petitions, Opinions & Articles from LawSikho.

Root of the Legacy- The Transfer of Property Act, 1882

A central legislation, the Transfer of Property Act, 1882 (‘TPA’) (see here) entails the general law governing transfer of property by the ‘acts of parties’. It is the main statute governing lease of immovable properties and various connotations related to tenancy. Inter alia, it specifies the rights and liabilities of landlord and tenant, in absence of a contract to the contrary. However, several states have enacted their own rent/tenancy laws (for e.g. The Maharashtra Rent Control Act, 1999 which states, that the Court of Small Causes shall have exclusive jurisdiction to address tenancy disputes) (see here).

These laws provide certain provisions for effectively handling various  situations which might arise in terms of contract between landlord and tenant and issues revolving around them. These special state laws (having an overriding effect over the general law under TPA) often exclude ordinary jurisdiction of civil courts. Instead, they confer exclusive jurisdiction to special courts to adjudicate specified disputes between landlord and tenant. 

This article first studies pertinent aspects of the Arbitration & Conciliation Act, 1996 (‘Act’) (see here) with respect to arbitrability and then analyses the tenancy controversy in light of the same.

Meaning & Analysis of ‘Arbitrability’

That an arbitral tribunal may not resolve disputes beyond its jurisdiction is a fundamental principle of arbitration. The arbitral tribunal’s power to consider and decide disputes concerning its own jurisdiction is a crucial aspect of establishing its competence. This doctrine, the fundamental object of which is to limit judicial interference in order to ensure that the arbitral process is not derailed at the very threshold, merely because a preliminary objection is posed by one of the parties. is codified in the Act, and has undergone amendment in 2015 and 2019 as well, so as to limit the excessive intervention of the Indian courts in matters relating to the jurisdiction of an arbitral tribunal. Following is an analysis of the relevant, and oft read together, sections of the Act discussing the principle of competence-competence in detail.

Section 16

This section contains two doctrinal foundations necessary to maintain the autonomy of the arbitral process: namely competence-competence and separability which provides a procedural basis for the arbitral tribunal’s exercise of its jurisdiction. Competence-competence and separability are complementary concepts. The separability doctrine allows the arbitration agreement to be treated as separable/separate as well as distinct from the main agreement (of which it may be a part) between the parties.

The Supreme Court of India has noted that the purpose of the separability doctrine is to ensure that the intention of the parties to settle the disputes by arbitration, does not evaporate into the thin air when any challenge to the legitimacy, validity, finality or violation of the underlying contract is made. Further, the courts have also established that an arbitral tribunal has the power to use the concept of the doctrine of competence-competence in order to decide the disputes relating to its own jurisdiction/ arbitrability of an issue. The doctrine essentially state that the arbitral tribunal has the jurisdiction to determine the ambit and scope of its own powers. (see here)

Section 8

Another important aspect of the arbitrability of a particular subject matter is enshrined in Section 8 of the Act. This section is pre-emptory in nature whereby it essentially the power to the judicial authorities or the courts, to refer the parties to arbitration. , which, after the 2015 amendment to the Act (see here) based on the 246th report of the law commission (see here), reads as follows: “A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists (emphasis added).” 

In the case of Emaar MGF Land Limited v. Aftab Singh, the apex court explained the effect of the amended section by stating that the said amendment aims to minimise the intervention of judicial authorities. Hence, the main function of the courts is to determine the valid existence of an arbitration agreement.’ 

The Court further states that it cannot refuse to refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists. The amended provision, thus, limits the intervention by judicial authority to only one aspect: absence of prima facie valid arbitration agreement. (see here)

Section 11

The 2015 amendment also made amendments to Section 11, but it did not completely reflect the recommendations of the law commission by incorporating Section 11(6A) into the Act. The amendment limited the reach of a court’s inquiry to ‘examining the existence of an arbitration arrangement’ but did not clarify whether the court could examine this existence, at the stage of appointment of arbitrators or the court should conduct a prima facie assessment or a full trial, so as to be able to decide upon the arbitrability of the subject matter of the dispute.

Hence, like in all similar circumstances, the courts of law stepped in to fill this gap and developed, as a result, a jurisprudence of their own. Herein, the same shall be analysed in light of tenancy/lease disputes in India. A number of judgments explained that the ‘validity’ and ‘existence’ of an arbitration arrangement were to be regarded as separate questions following the introduction of Section 11(6A) in the Act.

Only the existence of arbitration agreement question being reviewable by the courts when appointing an arbitrator and all other threshold and preliminary issues to be determined by an arbitral tribunal. (see here) The legislative policy and intent was essentially to reduce the interference of the Court at the stage of appointing the arbitrator, and this goal should be respected as incorporated in Section 11(6A).

Finally, the 2019 amendment to the Act (see here) revised Section 11, struck at judicial interference at the stage of arbitrator appointment by enabling the courts to nominate arbitral institutions to discharge the role of arbitrator appointment. As a consequence, Section 11(6A) now stands deleted from the Act.

new legal draft

Historical Jurisprudence on Arbitrability of Tenancy Disputes

While the wrinkles with regard to the arbitrability of a dispute (and tenancy disputes to be specific) have been ironed out by the Vidya Drolia judgement [discussed in detail later], it is important to first consider the treatment that the judiciary has given to this long drawn issue. It is vital for us to juxtapose the Supreme Court’s selection of contradictory decisions in order to recognize the need for recourse to a larger bench. A series of judgments by the Supreme Court of India has further been discussed in reference to the arbitrability of tenancy disputes. 

One of the earliest rulings on disputes over landlord occupancy dates back to 1981. The Supreme Court held, in the case of Natraj Studios (P) Ltd. v. Navrang Studios & Ors., that the tenancy was covered under the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947, and that disputes between landlords and statutory tenants can be tried exclusively by the small causes court and therefore cannot be referred to arbitration. (see here)

In another notable 2011 judgement, in Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. and Ors., the Supreme Court noted that eviction or lease matters are regulated by special laws where the tenant enjoys statutory immunity from eviction and jurisdiction to grant eviction or decide disputes is bestowed on only the specified courts. These are well-known examples of non-arbitrable disputes. The court held that arbitrability is not negated by the TPA. (see here)

Finally, in the path-breaking decision under the Himangni Enterprises case of 2017, the apex court reaffirmed the non-arbitrability of lease and eviction disputes once again. The court held that even in cases where the tenancy was regulated by the TPA, and not covered under a special statute such as the Delhi Rent Control Act, 1958, in the present case, it would be the civil court which would have jurisdiction to deal with such a dispute and not an arbitrator to determine landlord-tenant disputes. (see here)

The court based its decision on the main premise that statutes that deal with rent and tenancy are inherently special statutes as well as public welfare legislations. It is believed that  TPA serves a two-fold purpose of protecting tenants from eviction as well as payment of unfair rent/exploitation due to inherently weaker bargaining power in the contractual relationship. Therefore, the disputes forming the subject matter of these legislations were held to be non-arbitrable.

In the landmark case of Vidya Drolia & Ors. v. Durga Trading Company, this controversy which has troubled the courts since long, has been laid to rest. (see here)

After the division bench in Vidya Drolia found it difficult to reason with the ratio of Himangini Judgment (same coram), it referred the matter to a larger bench. The Calcutta High Court’s division bench had approved the application submitted by a landlord, naming an arbitrator in the dispute between the parties, i.e. the landlord and the tenant, pursuant to Section 11 of the Act. 

By way of Vidya Drolia, the Supreme Court overruled many of its own as well as different judgments of several High Courts, put the aspect of arbitrability in general, and that of tenancy disputes specifically, to rest by defining certain general principles on which arbitrability of disputes may be decided. Pertinent aspects of the judgement and what the future course for these type of disputes might be has been discussed and analysed hereinafter.

Rationale & Analysis

The laws of a country may provide that certain forms of disputes are not arbitrable. For example, a court of law will typically have to decide child custody disputes, criminal matters, bankruptcy, the validity of trademarks or patents and other forms of disputes that will have an effect on third parties or have some kind of public domain implications. The most common forms of disputes arbitrated are those arising from contractual or commercial relationships that are deemed free to be resolved by the parties without the court’s supervision or intervention.

In general, any civil or commercial dispute that can be settled by a court is capable of being adjudicated and resolved by arbitration unless the jurisdiction of the arbitral tribunals is either specifically excluded or, by default, ruled out. For instance, the Indian Trusts Act, 1882 provides for a specific procedure and adequate remedy in disputes where the subject matter falls under the act, and hence, the jurisdiction of an arbitral tribunal in cases involving this act is barred by necessary implication. (see here

In effect, the Supreme Court of India in Vidya Drolia has ruled that landlord-tenant disputes are arbitrable unless they are protected by special forums established by rent control laws. The court determined that TPA-regulated landlord-tenant disputes are arbitrable because they are not actions in rem i.e. against the world but refer to personal subordinate rights arising from rights in rem.

Once a contractual arrangement between the landlord-tenant has been established, their rights are enforceable only against each other, not against the world at large. Thus, the issue of TPA being a statute affecting public welfare, as established in the Himangni Enterprises Case (now overruled by the present judgement) does not hold water. The terms of the TPA do not explicitly or by default prohibit arbitration as required i.e.,  TPA is silent on the aspect of arbitrability of disputes of which it forms the subject matter. The Court also held that, like a civil court order, an award passed to decide tenancy disputes may be executed and enforced.

The court, while delving upon the issue of lack of credibility of an arbitration procedure as compared to a judicial court procedure, held that “it would be grossly irrational as well as wrong to mistrust and treat arbitration as a  flawed and inferior adjudication procedure.” The arbitrators that preside over an arbitral hearing are usually experts in the subject and give due regard to the facts, evidentiary information, and relevant case laws and mere complexity of procedure cannot negate the perks/validity of arbitration.

Another major issue which the court concerned itself with, while rendering the judgement is on the aspect of ‘who must decide issues of arbitrability, and to what extent.’ It was held that the issue of non-arbitrability of a dispute may be raised at three types of stages of dispute resolving, i.e:

  • Before a court/ judicial authority under Sections 8 or 11 of the Act (during the Referral Stage);
  • Before the arbitral tribunal (during the Arbitration Stage);
  • Before a court when an arbitral award is being challenged (during the Challenge Stage).

The court also determined that consumers can(not) waive their right to approach the statutory judicial forums by opting for arbitration, which essentially implies that a court of law will still have the power, under both Section 8 and 11, to determine the validity as well as existence of an arbitration agreement.

Way Forward – Dovetail Test of ‘Non-Arbitrability’

After studying the plethora of decisions and evaluating the same, the court crystallized the legal standards for assessing the non-arbitrability of a subject matter. In doing so, to decide whether a dispute is non-arbitrable, the court developed a four-pronged formula. It was established that the cause of action and/or subject matter of the conflict is not arbitrable when the conflict:

  • relates to an action in rem, that doesn’t pertain to subordinate rights in personam which flow from the rights in rem. For instance, actions arising out of disturbance to the peaceful enjoyment/possession/ownership of property by the rightful owner/possessor are actions in rem, i.e. it is a right that the individual exercises over the world at large (right in rem). However, an action arising out of a contract between two companies will be considered as exercise of a right in personam, which is available to the companies by virtue of the contract, and only against each other.
  • affects the rights of third party, have erga omnes effect, and therefore require centralised adjudication because mutual adjudication would not be appropriate/enforceable. This includes, but is not limited to disputes involving custody of children, intellectual property, etc.
  • relates to inalienable, sovereign and public functions of the State and therefore, mutual adjudication would be unenforceable. For example, it is the State’s prerogative to maintain law and order, and hence all criminal matters are considered non-arbitrable, crimes being a public wrong.
  • is expressly/by necessary implication non-arbitrable in light of mandatory statutes. Certain states have enacted special statutes which allow for only specific tribunals to exclusively deal with specific types of issues, hence making them non-amenable to arbitration. (see here)

Although these tests provide much-needed clarity and a comprehensive approach for future circumstances, these are not ‘watertight compartments’. They may be subject to reasonable and relevant changes, and as discussed earlier, there exist several exceptional situations where even when an issue of tenancy/lease is governed by the TPA, it will be considered non-arbitrable. These would significantly assist in deciding if under Indian law a specific subject matter/issue in question would be arbitrable/non-arbitrable.

References

  • Chapter 5: Jurisdiction of the Arbitral Tribunal, Arbitration in India (Dave, Hunter, Nariman, et al. (eds); Jan 2021) (Constantine Partasides; Manish Aggarwal).
  • https://www.barandbench.com/columns/vidya-drolia-dollop-of-nectar-few-poison-darts 
  • https://www.lexology.com/library/detail.aspx?g=f7d08505-b0d1-4093-95b2-2ead81ee5528
  • https://www.livelaw.in/columns/tenancy-disputes-arbitrability-supreme-court-vidya-drolia-ii-tp-act-167352 

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