Landlord-Tenant disputes arbitrable under TP Act except when covered & governed by Rent Control Laws

SC helds Landlord-tenant disputes arbitrable under Transfer of Property Act except when covered and governed by Rent Control Laws.

VIDYA DROLIA AND OTHERS Vs DURGA TRADING CORPORATION

CIVIL APPEAL NO. 2402 OF 2019 WITH SPECIAL LEAVE PETITION (CIVIL) NOS. 5605-5606 OF 2019 AND SPECIAL LEAVE PETITION NO. 11877 OF 2020

DECEMBER 14, 2020.

Landlord-tenant disputes governed by the Transfer of Property Act are arbitrable as they are not actions in rem but pertain to subordinate rights in personam that arise from rights in rem. 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 enure and protect the tenants (Para.48).

The Hon’ble Supreme Court Justices N.V. RAMANA, SANJIV KHANNA and KRISHNA MURARI overruled the legal ratio expressed in Himangni Enterprises v. Kamaljeet Singh Ahluwalia which held that the landlord-tenant disputes governed by the provisions of the Transfer of Property Act, 1882 were not arbitrable as it would be contrary to public policy.

The issues to be decided were based on two aspects, namely:

(i) Meaning of non-arbitrability and when the subject matter of the dispute is not capable of being resolved through arbitration; and

(ii) The conundrum – “who decides” – whether the court at the reference stage or the arbitral tribunal in the arbitration proceedings would decide the question of non-arbitrability

The Court referred and discussed the decisions made in the following cases,

In Himangni Enterprises v. Kamaljeet Singh Ahluwalia, (2017) 10 SCC 706 the tenancy in question was not protected under the rent control legislation and the rights and obligations were governed by the Transfer of Property Act. It was held that, even in cases of tenancies governed by the Transfer of Property Act, the dispute would be triable by the civil court and not by the arbitrator. In the case of Natraj Studios (P) Ltd. v.

Navrang Studios, (1981) 1 SCC 523 wherein an application was dismissed as the tenancy was protected under the Bombay Rents, Hotel and Lodging Houses Rates Control Act, 1947, on broader consideration of public policy the Court observed that, the arbitrator lacked jurisdiction to decide the question whether the licensee-landlord was entitled to seek possession. In Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., 2011) 5 SCC 532, it was held that in eviction or tenancy matters governed by special statutes and where the tenant enjoys statutory protection, only the specified court has been conferred jurisdiction. In the said case, the exception in the form of non-arbitrable landlord-tenant disputes was said to be confined only to those cases/matters governed by: (i) special statues, (ii) where the tenant enjoys statutory protection and (iii) where only specific courts are conferred jurisdiction to decide disputes. In Olympus Superstructures Pvt. Ltd. v. Meena Vijay Khetan and Others, (1999) 5 SCC 651 it was held that there is no prohibition in the Specific Relief Act, 1963 for referring disputes relating to specific performance of contracts to arbitration.

Non-arbitrability was stated as the basic for arbitration as it relates to the very jurisdiction of the arbitral tribunal. Non-arbitrability has multiple meanings. The three facets of non-arbitrability was explained in Booz Allen & Hamilton Inc. v. SBI Home

Finance Ltd., 2011) 5 SCC 532. Understanding the facets of nonarbitrability was considered important as it would help to appreciate the consequences and It would assist in deciding whether the court or the arbitral tribunal has the jurisdiction to decide the particular facet of non-arbitrability.

Paragraph 36 of the judgment in Booz Allen & Hamilton Inc. refers to certain examples of non-arbitrable disputes and reads:

“36. The well-recognised examples of non-arbitrable disputes are: (i) disputes relating to rights and liabilities which give rise to or arise out of criminal offenses; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding-up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) 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.”(Para.21)

Four-fold test for determining arbitability was held as follow,

In view of the above discussion, we would like to propound a fourfold test for determining when the subject matter of a dispute in an arbitration agreement is not arbitrable:

(1) 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.

(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 per mandatory statute(s).

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.(Para.45)

Further, the Court held that the Issue of non-arbitrability can be raised at three stages. First, 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. Second, before the arbitral tribunal during the course of the arbitration proceedings and third, before the court at the stage of the challenge to the award or its enforcement.

The second issue of "Who decides the question of non-arbitrability?" Was observed to be depended on how much jurisdiction the enactment gives to the arbitrator to decide their own jurisdiction as well as the court’s jurisdiction at the reference stage and in the post-award proceedings. It was also stated to be depended upon the jurisdiction bestowed by the enactment, viz. the facet of non-arbitrability in question, the scope of the arbitration agreement and authority conferred on the arbitrator. The Court observed the following with regerd to the second issue:

Discussion under the heading ‘Who decides Arbitrability?’ can be crystallized as under:

(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 33 of 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 nonarbitrability 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 or 11 stage when it is manifestly and ex facie certain that the arbitration agreement is nonexistent, 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.(Para.96)

From the above observations, the Hon’ble Supreme Court held that Landlord-tenant disputes governed by the Transfer of Property Act are arbitrable as they are not actions in rem but pertain to subordinate rights in personam that arise from rights in rem.

In view of the aforesaid, 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.(Para.49)

Thus, the Court directed that the issue of arbitrability would be left to the Arbitral Tribunal to decide and come to a conclusion on the same. Further, the parties were held to be at liberty to execute or challenge the award in accordance with law. The direction that the award cannot be executed without applying for permission of the Court was vacated.

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