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Kingshuk Banerjee and Ritvik Kulkarni
A division bench of the Supreme Court of India in Vidya Drolia & Others v Durga Trading Corporation [Civil Appeal No. 2402 of 2019] (Vidya Drolia) has referred the matter to a three-judge bench. The reference has primarily been made to reconsider the arbitrability of tenancy disputes, as decided in Himangni Enterprises v Kamaljeet Ahluwalia [(2017) 10 SCC 706] (Himangni Enterprises), in the context of eviction proceedings and proceedings for recovery of rent.
The appellant (Tenant) and respondent (Landlord) entered into a tenancy agreement (Tenancy Agreement) in respect of certain godowns and other structures (Premises). Under the Tenancy Agreement, the parties agreed to a maximum tenancy period of ten years; after which the Tenant was required to deliver vacant and peaceful possession of the Premises to the Landlord. Any disputes arising out of the Tenancy Agreement were agreed to be resolved by a three-member arbitral tribunal.
The Tenant did not deliver possession to the Landlord even after the expiry of the Tenancy Agreement. Accordingly, the Landlord requested the Calcutta High Court (High Court) to appoint an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 (Arbitration Act). The Tenant opposed the application on the ground that the dispute is not arbitrable. The High Court, however, rejected the Tenant’s objection.
During the pendency of the arbitration, on 12 October 2017, the Supreme Court delivered its judgment in Himangni Enterprises. In the aforesaid decision, the Supreme Court was required to determine the arbitrability of a tenancy dispute where questions of eviction and rent recovery were involved. It was held that even in a case where provisions of the Delhi Rent Act, 1995 (Delhi Rent Act) – which is a special legislation governing certain tenancy disputes – are not applicable to the premises, the mere non-applicability of this special law will not by itself make the Arbitration Act applicable. The Supreme Court further reasoned that in such situations, the rights of the parties would be governed by the Transfer of Property Act, 1882 (TP Act) and, accordingly, the appropriate recourse would be a civil suit in a civil court.
In light of the Supreme Court’s decision in Himangni Enterprises, even though the arbitration was ongoing and several sittings had already been held, the Tenant sought a review/ recall of the High Court’s order appointing an arbitrator. The High Court dismissed this application, which dismissal was assailed before the Supreme Court.
The Supreme Court commenced with revisiting the mandate under Section 11(6A) of the Arbitration Act. Given that Section 11(6A) allowed courts to examine only the ‘existence’ of an arbitration agreement, the Supreme Court opined that a larger bench needs to authoritatively decide whether judges may weed-out arbitration clauses which indicate that the subject-matter is incapable of arbitration to begin with.
The Supreme Court then proceeded to address the main issue at hand. The Tenant sought to impress upon the Supreme Court that tenancy disputes cannot be arbitrable as a class since they inherently involve issues of public policy. The Tenant attempted to argue that Sections 111, 114 and 114A of the TP Act reflect this purported policy of protecting tenants. In this regard, while acknowledging that a lease is tantamount to a transfer of interest in property, the Supreme Court observed that “there is nothing in the TP Act to show that a dispute as to the determination of a lease arising under Section 111 cannot be decided by arbitration”.
The Supreme Court also analysed the previous judicial treatment of Sections 114 and 114A of the TP Act to clarify that the provisions, in fact, balance the rights of landlord and tenant. This is because the Court will exercise its discretion under Section 114 to relieve the lessee from forfeiture only if the lessee pays or tenders to the lessor the rent in arrears, together with interest and the lessor’s full costs within a period of 15 days. Therefore, it was observed that Section 114 cannot be said to be a provision conceived for relief of tenants as a class as a matter of public policy. In sum, the Court observed that each of the grounds stated in Sections 111, 114 and 114A can be raised before an arbitrator to decide whether a lease stands determined.
The Supreme Court then discussed the two judgments relied upon in Himangni Enterprises to find that landlord-tenant disputes (involving rent and/or possession) are not arbitrable: (i) Booz Allen Hamilton Inc. v SBI Home Finance Limited and Others [(2011) 5 SCC 532] (Booz Allen) and (ii) Natraj Studios (P) Ltd v Navrang Studios [(1981) 1 SCC 523] (Natraj Studios).
The Supreme Court revisited Booz Allen to note that tenancy matters are non-arbitrable only if they are governed by special statutes, as under these special statues the tenant enjoys special statutory protection and where specified courts are conferred jurisdiction. Further, it was clarified that the landlord-tenant dispute in Natraj Studios was held non-arbitrable because it was subject to the Bombay Rent Act, 1947, a special welfare legislation which confers exclusive jurisdiction on the Small Causes Court. Accordingly, the Apex Court observed that the question of arbitrability of disputes under the TP Act “cannot possibly be said to have been answered” by Booz Allen or Natraj Studios. Concluding that the TP Act is silent on and does not negate arbitrability, the Supreme Court felt that the judgment in Himangni Enterprises requires a relook by a bench of three judges of the Supreme Court.
The Supreme Court in Himangni Enterprises observed that the mere non-applicability of the Delhi Rent Act did not mean that the Arbitration Act will ipso facto become applicable. Instead, it was held that the dispute will be decided in accordance with the TP Act by civil courts having jurisdiction. On the other hand, the Supreme Court in Vidya Drolia, after analysing various provisions of the TP Act, has clearly observed that there is no provision under the TP Act which ipso jure calls for an exclusion of tenancy disputes from arbitrability.
Given the detailed discussion in Vidya Drolia, it would be interesting to see if the three-judge bench of the Supreme Court takes a different view.
Separately, in Himangni Enterprises and Vidya Drolia, the Supreme Court did not have the occasion to consider the effect of the Presidency Small Cause Courts Act, 1882 (Presidency Act) and Provincial Small Cause Courts Act, 1887 (Provincial Act) on the arbitrability of tenancy disputes.
Section 41 of the Presidency Act, as amended by the State of Maharashtra, reads as follows:
In Central Warehousing Corporation v Fortpoint Automotive Pvt. Ltd. [(2010) 1 Mh.L.J. 658](Central Warehousing), a three-judge bench of the Bombay High Court was required to decide the following issue:
“Whether section 5 of the [Arbitration] Act `would oust the jurisdiction of the Small Causes Court which is bestowed upon it by virtue of Section 41 of the [Presidency Small Cause Courts Act, 1882] to try all suits and proceedings between a Licensor and Licensee, to a landlord and tenant, relating to recovery of possession of any immoveable property situated in Greater Bombay, to relating to the recovery of the license fee or charges or rent.”
Relying on the Supreme Court’s decisions in Mansukhlal Dhanraj Jain v Eknath Ogale [(1995) 2 SCC 665] and Natraj Studios, the Bombay High Court found that the Presidency Act is a special law investing exclusive jurisdiction in the Court of Small Causes to entertain and try disputes under Section 41 of the Presidency Act. It was observed that arbitrability of such disputes must therefore be excluded due to Section 41 by necessary implication. Accordingly, as on date in the State of Maharashtra, the Court of Small Causes alone has jurisdiction over disputes relating to recovery of possession and/ or recovery of rent.
The reference in Vidya Drolia is expected to finally settle the law on this issue. To ensure that the issue is exhaustively reviewed, it is important that the Supreme Court addresses the independent effect of the jurisdictional provisions of the Presidency Act and Provincial Act on arbitrability of tenancy and license disputes, especially in the backdrop of the Bombay High Court’s decision in Central Warehousing.
If the larger bench decides the issue of arbitrability in the affirmative, albeit to a limited extent, it will also need to decide whether a court may examine the question of arbitrability in an application under Section 11 of the Arbitration Act. This question is likely to be answered in the negative. This is mainly because Section 11(6A) of the Arbitration Act circumscribes the court’s power to examine anything substantive beyond the existence of the arbitration agreement. As noted in Vidya Drolia, the Supreme Court has endorsed this view in Duro Fulguera v Gangavaram Port Ltd [(2017) 9 SCC 729].
For deciding the issue on determination of arbitrability under a Section 11 application, perhaps the larger bench can take a leaf out of a recent decision of the Supreme Court of the United States in Henry Schein, Inc., et al. v Archer & White Sales, Inc. [586 US (2019)]. The Supreme Court of the United States held that gateway issues of arbitrability must also be decided by the arbitral tribunal, and not a court; even if the dispute may appear to have been excluded from arbitration by the parties. Therefore, whether a particular tenancy dispute is arbitrable is a question best left to be decided by an arbitrator under Section 16 of the Arbitration Act.
In sum, the Supreme Court’s referral order is a welcome addition to India’s arbitration jurisprudence; and the resultant decision of the larger bench will be a key clarification for Indian stakeholders and dispute resolution fraternity.
About the Authors: The authors are lawyers working at Khaitan & Co.
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