Arbitrability, in general, determines whether the subject matter in dispute is to be resolved via arbitration or whether it exclusively falls under the domain of courts. Certain categories of disputes that have been kept out of arbitration involve Patents and trademark disputes, Anti-trust laws, Insolvency, and fraud, etc. The arbitrability of tenancy is one of the matters that have always been the major concern before the Court. However, the Supreme Court in the case of Vidya Drolia v. Durga Trading Corporation” (“Vidya Drolia”) has finally resolved this dispute and held that the matters involving tenancy are now arbitrable except those matters that fall under the special forum like rent-control laws.
In the year 1981, the Supreme Court in the Natraj Studioz Ltd. vs. Navrang Stuioz & Anr. (“Natraj Studioz”) judgment held the dispute concerning tenancy matters as non-arbitrable. The Court reasoned that the tenancy matter was governed under the special legislation of Bombay Rents Hotel and Lodging House Rates Control, 1947 and if these matters are decided before the arbitral tribunal, it would affect the public policy at large. Hence, the application under Section 8 of the A&C act was rejected by the court. Later, the same ratio was laid down in the landmark case of Booz Allen & Hamilton Inc. vs. SBI Home Finance Limited & Ors. (“Booz Allen”).
In this case, the enforcement of mortgages was placed under the special statutes and was mentioned under those matters that attract public interest at large (right in rem). Hence, the specific statutory courts and forums were only given exclusive jurisdiction to handle these matters. Similarly, in the year 2017, when the Apex Court faced matters concerning the arbitrability of tenancy in Himangni Enterprises, the court applied the reasoning provided in afore-mentioned cases and held the matters involving lease disputes to be non-arbitrable.
In the present case, the tenants (appellants) and landlord (respondent) entered into the tenancy agreement that consists of an arbitration clause. As the lease period was reaching the date of expiration, the respondent sent the notice to the appellant to vacate the premises. However, as the appellants did not vacate the premises, the respondent invoked the arbitration clause and filed a petition before the Calcutta High Court for the appointment of an arbitrator. The HC dismissed the petition and appointed the arbitrator. While the matter was pending, the Himangni Enterprises judgment was passed which held the tenancy matters to be non-arbitrable.
The aggrieved appellant, relying on the decision of the above-mentioned case challenged the arbitrability of the tenancy matter before the Supreme Court. The two-judge bench of the Court differed the present matter which involves the dispute governed by Transfer of Property Act (“TPA”), 1882- with that of Natraj Studioz and Booz Allen as the former falls under the Bombay Rent Act and the latter was a case involving mortgage that involved public interest. Further, the court did not appreciate the reasoning provided within the Himangni Enterprises case, therefore the matter was sent before the larger bench of the Supreme Court in Vidya Drolia to settle the dispute.
Two central issues within the case are provided below:
- Whether the matters of the tenancy as have been laid down in Himangi Enterprises, are non-arbitrable and contrary to the public policy of India?
- At which stage, the court can decide on the dispute concerning arbitrability?
Through the Vidya Drolia case, the Apex Court overruled the ratio laid down in Himangi Enterprises case and held the matters of the tenancy as arbitrable except those matters which fall under the special rent-control laws. The Court relied on the difference provided in Booz Allen Case and held that the tenancy disputes which fall under the TPA are not actions in rem but they are only subordinate rights in personam which arises out of rights in rem. These actions do not impact the rights of third party or would require central adjudication.
Further, if we analyse the provisions of TPA, it does not bar arbitration per se. Therefore, an award passed by the tribunal for the tenancy disputes is to be executed and enforced similar to the decree of the civil court. Therefore, except those matters which are covered under rent-control legislation and which require a special forum, all other landlord-tenant disputes can be resolved via arbitration.
The Court also provided a four-fold test for determining the non-arbitrability of the subject-matter dispute 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.”
The Court mentioned that these tests are not rigid and watertight; however, it can help in ascertaining to the great extent the arbitrability of the dispute.
On issue 2 i.e. at which stage the court would decide arbitrability. The Court interpreted the term “existence of arbitration agreement” mentioned under Section 11(6A) to include “validity of arbitration agreement” within its ambit. In this case, the court upheld the ratio laid down in the case of Garware Wall Ropes Ltd. vs. Coastal Marine Constructions and Engineering Ltd. i.e. an agreement when enforced by law amounts to contract. Thus, enforceability under Section 11(6A) would not merely mean existence but would also include the validity of the arbitration agreement. Nevertheless, the court at the stage of reference would apply firstly the test to decide the prima facie validity of the agreement. The court provided four tests to decide upon the initial validity of the arbitration agreement:
“(1) whether the arbitration agreement between the parties was in writing?
(2) whether the arbitration agreement was contained within letters and telecommunications?
(3) whether the contractual ingredients of the agreement were satisfied?
(4) whether the subject matter concerning disputes is arbitrable?”
The Court held that the question concerning the arbitrability of the matter is limited under Section 8 and Section 11. The principle of competence-competence which is inherited under Section 16 of the A&C act provided the arbitral tribunal – the first preferred authority to decide on the matters of arbitrability. However, the courts can determine at the stage of Section 8 and Section 11when the rare cases of prima-facie validity or non-existence of arbitration agreement arises.
The judgment brings to a halt the age-long altercations over the arbitrability of tenancy matters. It also set out four tests that will help in deciding the matters of arbitrability. The ratio set out in Vidya Drolia Judgment was applied in another three-judge bench decision of Suresh Shah v. Hipad Technology India Private Limited. This later judgment also held that tenancy matters are arbitrable except when they are protected under special statutes or forums. By bringing the “tenancy” within the ambit of arbitrability, the court is expanding the jurisdiction of the arbitral tribunal and consequently reducing the burden of courts. The above judgment reflects India’s success towards its goal of becoming an “arbitration-friendly” state.
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