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Landlord-Tenant Disputes Under Transfer Of Property Act Arbitrable Except When Covered By Rent Control Laws : Supreme Court
LIVELAW NEWS NETWORK
15 Dec 2020 8:25 AM IST
The judgment on arbitration law decides several issues such as tests for arbitrability, who determines arbitrability, scope of enquiry under Sections 8/11, meaning of 'existence of arbitration agreement' etc.
In a landmark judgment delivered on Monday, the Supreme Court overruled its 2017 judgment in Himangni Enterprises case to hold that landlord-tenant disputes are arbitrable except when they are covered by specific forum created by rent control laws. A three-judge Bench headed by Justice NV Ramana observed, "Landlord-tenant disputes are arbitrable as the Transfer of Property Act does...
A three-judge Bench headed by Justice NV Ramana observed, "Landlord-tenant disputes are arbitrable as the Transfer of Property Act does not forbid or foreclose arbitration."
The Bench was answering a reference made by a Division Bench in 2019, while considering the appeal against Calcutta High Court order appointing an arbitrator in a dispute between landlord and tenant(Vidya Drolia and others v Durga Trading Corporation).
It was urged to determine the correctness of the judgment in Himangni Enterprises v. Kamaljeet Singh Ahluwalia, in which it was held that where the Transfer of Property Act, 1882 applied between landlord and tenant, disputes between the said parties would not be arbitrable.
The three judge bench overruled the dictum in Himangi Enterprises case to hold that tenancy related disputes under the Transfer of Property Act are arbitrable.
The three-Judge Bench, also comprising of Justices Sanjiv Khanna and Krishna Murari based its decision 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.
It further held that an award passed in such disputes can be executed and enforced like a decree of the civil 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 authored by Justice Khanna observed.
It however clarified that 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," the Court said.
"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"(Paragraph 48)
Four-fold test to determine arbitrabilitiy
The judgment laid down a four-fold test to determine arbitrability.
(1) when cause of action and subject matter of the dispute relates to actions in rem, that do not pertain tosubordinate rights in personam that arise from rightsin rem.
(2) 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;
(3) when 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; and
(4) when the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as permandatory statute(s).
The Court clarified 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.
Examples of non-arbitrable disputes.
In paragraph 46, the Court cited certain instances of non-arbitrable disputes :
- Insolvency or intra-company disputes,
- Grant and issue of patents and registration of trademarks
- Criminal cases
- Matrimonial disputes relating to the dissolution of marriage, restitution of conjugal rights etc.
- Probate, testamentary matter etc.
- 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.
- Disputes which are to be adjudicated by the DRT under the DRT Act.
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 Court also set aside the Full Bench decision of the Delhi High Court in the case of HDFC Bank Ltd v Satpal Singh Bakshi which holds that the disputes which are to be adjudicated by the DRT under the DRT Act are arbitrable. They are non-arbitrable(paragraph 47).
Who decides non-arbitrability?
The Court noted that the issue of non-arbitrability can be raised at three stages:
(i) 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;
(ii) before the arbitral tribunal during the course of the arbitration proceedings;
(iii) before the court at the stage of the challenge to the award or its enforcement.
Thus, the question which arose for consideration was "Who decides non-arbitrability?".
After a detailed discussion, applying the principle of severability and competence-competence, read with the Arbitration Act, the Bench concluded 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.
Justice N V Ramana penned a separate but concurring opinion.
Also read other reports based on the judgment :
Click here to read/download the judgment
