Arbitrability Of Leases - A Needless Reference

For a dispute to be non-arbitrable, one of the three factors need to be established^[1]:

1. The dispute is not covered by an arbitration agreement;
2. The dispute does not fall within the scope of the arbitration agreement; and
3. The dispute is not capable of adjudication by arbitration.

While points no. 1 and 2 above are borne out of contract and the facts of the case point no. 3 is a legal bar to arbitrability by virtue of the nature of the dispute being incapable of being resolved by an arbitral tribunal.

The question therefore arises is what disputes that are 'incapable of being arbitrated' and whether a dispute under a lease deed is arbitrable or non-arbitrable.

Leases are primarily governed by the Transfer of Property Act, 1882 (TP Act) and disputes governing the TP Act fall for consideration before the courts having jurisdiction as per the Civil Procedure Code, 1908. In addition to the TP Act, the State rent control laws also regulate and govern certain categories of leases^[2]. The rent control legislations are welfare legislations and typically confer exclusive jurisdiction over matters arising under such legislations to certain specific courts, such as the small causes court etc.

One of the early cases that dealt with arbitrability of leases was Natraj Studios (P) Ltd. vs. Navrang Studios^[3] (Natraj Studios). This was a case where the property in question was within the ambit of the Bombay Rent, Hotel and lodging Houses Rates Control Act, 1947 (Bombay Rent Control Act). A suit was filed by the licensee before the Small Causes Court, Bombay for a declaration of tenancy under the Bombay Rent Control Act. In response the licensor, while challenging the suit before the Small Causes Court, Bombay, filed an application before the High Court of Bombay for appointment of an arbitrator to adjudicate the dispute between the licensor and licensee on the basis of an arbitration clause in the agreement. The question before the Supreme Court was whether 'the dispute between the parties could only be resolved by the court of Small Causes and that every other courts jurisdiction including that of an arbitrator was excluded'.

The Supreme Court after examining the provisions of the Bombay Rent Control Act and specifically Section 28 which prescribed and prohibits the jurisdiction of certain courts^[4] observed that the Bombay Rent Control Act is a welfare legislation and the scheme of the Act shows the conferment of exclusive jurisdiction on certain courts and therefore it was not open for parties to contract out of legislative mandate that required disputes to be settled by special courts. In light of the above the Supreme Court declared the arbitration clause in the agreement inoperative.

The above issue was dealt with in greater detail by the Supreme Court in the case of Booz Allen & Hamilton Inc. vs. SBI Home Finance Ltd^[5] (Booz Allen). The Supreme Court reiterated that certain categories of proceedings are reserved by the legislature exclusively for courts and tribunals as a matter of public policy and that there are other categories of cases, though not expressly reserved for adjudication by a courts and tribunals may by necessary implication stand excluded from arbitration. The court went on to list a few of the non-arbitrable disputes as being:

• disputes relating to rights and liabilities which give rise to or arise out of criminal offences;
• matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody;
• guardianship matters;
• insolvency and winding up matters;
• testamentary matters (grant of probate, letters of administration and succession certificate); and
• eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes."

The above categories of disputes have been held to be non-arbitrable on the basis that disputes dealing with 'rights in personam' viz., rights exercisable against a specific individual, are amenable to arbitration while those dealing with 'rights in rem' viz., rights exercisable against the world at large, are not suited for arbitration. The court however clarified that rights in rem vs rights in personam is not a rigid or inflexible rule and that disputes relating to sub-ordinate rights in personam arising from rights in rem can be arbitrable.

While the law governing arbitrability of leases was fairly settled and established in light of the above judgements, certain observations made by the Supreme Court in the case of Himangni Enterprises vs. Kamaljeet Singh Ahluwalia^[6] (Himangni Enterprises) resulted in reopening the debate on arbitrability of leases. The observations that caused the confusion are as under:

"4. The question, which arises for consideration in this appeal, is whether the two Courts below were justified in rejecting the application filed by the Appellant herein Under Section 8 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as "the Act") in a pending civil suit filed by the Respondent seeking Appellant's eviction from the premises in question and for claiming some ancillary reliefs therein (under an expired lease deed).

11. The Respondent opposed the application essentially on two grounds. First, the lease period initially fixed in the lease deed having come to an end by efflux of time, such lease deed was no longer enforceable by the Appellant and second, the disputes, which are subject matter of the civil suit, are incapable of being referred to an arbitrator. It was contended that the Respondent has, therefore, rightly filed the civil suit in Civil Court seeking Appellant's eviction from the suit premises and other ancillary reliefs arising therefrom and the same has to be tried by the Civil Court.

18. In our considered opinion, the question involved in the appeal remains no longer res integra and stands answered by two decisions of this Court in Natraj Studios (P) Ltd. vs Navrang Studios and Anr and Booz Allen & Hamilton Inc vs SBI Home Finance Ltd. and Ors against the Appellant and in favor of the Respondent.

24. Keeping in view the law laid down by this Court in aforementioned two decisions and applying the same to the facts of this case, we have no hesitation to hold that both the Courts below were right in dismissing the appellant's application filed under Section 8 of the Act and thereby were justified in holding that the civil suit filed by the respondent was maintainable for grant of reliefs claimed in the plaint despite parties agreeing to get the disputes arising therefrom to be decided by the arbitrator.

25. Learned counsel for the appellant, however, argued that the provisions of the Delhi Rent Act,1955 are not applicable to the premises by virtue of Section 3(c) of the Act and hence the law laid down in the aforementioned two cases would not apply. We do not agree.

26. The Delhi Rent Act, which deals with the cases relating to rent and eviction of the premises, is a special Act. Though it contains a provision (Section 3) by virtue of it, the provisions of the Act do not apply to certain premises but that does not mean that the Arbitration Act, ipso facto, would be applicable to such premises conferring jurisdiction on the arbitrator to decide the eviction/rent disputes. In such a situation, the rights of the parties and the demised premises would be governed by the Transfer of Property Act and the civil suit would be triable by the Civil Court and not by the arbitrator. In other words, though by virtue of Section 3 of the Act, the provisions of the Act are not applicable to certain premises but no sooner the exemption is withdrawn or ceased to have its application to a particular premises, the Act becomes applicable to such premises. In this view of the matter, it cannot be contended that the provisions of the Arbitration Act would, therefore, apply to such premises.

27. We have gone through the decisions cited by the learned counsel for the appellant in support of her contention. Having gone through the same, we are of the considered opinion that firstly, some decisions are rendered by the High Court; Secondly, remaining decisions are distinguishable on facts and lastly, in the light of two authoritative decisions of this Court, which are directly on the point and continue to hold the field, no reliance can be placed by the learned counsel for the appellant on any decision of the High Court. Indeed, any such decision of the High Court, which has taken view contrary to the view of this Court, the same stands overruled. Such is the case here."

These observations in the judgement appear to have created an impression / (mis) understanding that all leases and disputes arising under the TP Act, and not just those leases that are governed by the rent control laws, are non-arbitrable.

While lawyers began quoting Himangni Enterprises to argue that disputes pertaining to leases are non-arbitrable courts however continued to refer disputes pertaining to leases to arbitration by distinguishing the facts from Himangni Enterprises and relying on the law laid down in Booz Allen^[7]. The courts refused to accept that Himangni Enterprises declared eviction claims under TP Act as non-arbitrable and outside the scope of application of the Arbitration Act^[8].

Even the Supreme Court in the case of Vidya Drolia & Others Vs. Durga Trading Corporation^[9] ("Vidya Drolia"), reiterated that the TP Act does not negate arbitrability and observed that 'lease is a transfer of an interest in property, and therefore, a conveyance, in law, there is nothing in the Transfer of Property Act to show that a dispute as to determination of a lease arising Under Section 111 cannot be decided by arbitration. Thus, it is clear that every one of the grounds stated in Section 111, whether read with Section 114 and/or 114A, are grounds which can be raised before an arbitrator to decide as to whether a lease has or has not determined."

However, in light of the confusion created by the judgement of Himangni Enterprises Justice R F Nariman in order to bring a finality to the debate referred the question of arbitrability of leases to a three-judge bench on the reasoning that:

1. The observations at paragraph 18 of Himangni Enterprises that 'the question involved in the appeal remains no longer res integra and stands answered by two decisions of this Court in Natraj Studios and Booz Allen'
   is incorrect and that such a situation cannot possibly be said to have been answered by the two decisions; and

2. The observations and findings at paragraphs 25 and 26 do not take note of the provisions of the TP Act as none of the TP Act indicate that disputes under the TP Act only triable by the civil court and not by arbitration.

The question that arises however is whether such a reference was necessitated? Did Himangni Enterprises widen the scope of arbitrability of leases and state the law incorrectly?

In my view, the various paragraphs of Himangni Enterprises judgement may have contradicted each other and may at best be, with due respect, a case of poor drafting but cannot be said to have stated the law incorrectly.

The observations at paragraph 18 of Himangi Enterprise have to be read in the context of paragraph 4 and 11. Paragraph 4 and 11 read together raise the question 'whether the courts below were justified in rejecting the application under section 8 of the Arbitration Act when the lease deed has come to an end and is no longer enforceable'. While Natraj Studios only dealt with arbitrability of leases, Booz Allen in addition to arbitrability also dealt with the validity of an arbitration agreement. Read in this context Paragraph 18 of Himagni Enterprises does in fact answer the question that only when there is a valid arbitration agreement and the property or lease is not governed by a special legislation can the dispute be referred to arbitration.

Similarly, paragraph 25 and 26 cannot be read in isolation to the facts. The finding / observations that 'the provisions of the Act do not apply to certain premises but that does not mean that the Arbitration Act, ipso facto, would be applicable to such premises conferring jurisdiction on the arbitrator to decide the eviction/rent disputes' has to be understood in the context of the lease having expired and there not being a valid arbitration agreement in existence between the parties. Further, the court in the immediate next paragraph 27 reiterated that that the law as laid down by Natraj Studios and Booz Allen remains valid by stating 'lastly, in the light of two authoritative decisions of this Court, which are directly on the point and continue to hold the field'.

Reading Himangni Enterprises in the above manner also finds acceptance by the High Court of Delhi in Rani Suri vs. Swarantech Information Systems Pvt Ltd^[10] where the court has observed that all that Supreme Court has held in para 26 is 'in the absence of an arbitration agreement the parties cannot be referred to arbitration'.

The principles of reading any judgement is that all observations made must be read in the context in which they appear. Observations of judges are not to be read as Euclid's theorems and not as provisions of statutes. To interpret words, phrases and provisions of a statute, it may become necessary for judges to embark into lengthy discussions but the discussion is meant to explain and not to define^[11].

Justice R F Nariman in the case of BGS SGS Soma JV v. NHPC Ltd^[12] while clarifying the conflicting paragraphs of BALCO^[13] stated that a judgement must be read as a whole so that the conflicting parts may be harmonised to reveal the true rationale of the judgement. However, if this is not possible, and it is found that the internal conflicts within the judgement cannot be resolved, then the first endeavour that must be made is to see whether the ratio decidendi can be culled out without the conflicting portion.

Having come to a finding that 'there is nothing in the Transfer of Property Act to show that a dispute cannot be decided by arbitration' Justice R F Nariman could have harmonised the conflict paragraphs of Himagni Enterprises rather than referring it to a large bench^[14].