An overview on the SC judgment holding that tenancy disputes under the transfer of property act are 'arbitrable'
The Hon'ble Apex Court in Vidya Drolia vs. Durga Trading Corporation ("Judgment") has held that landlord-tenant disputes are arbitrable, save and except when they are covered by specific forum created by rent control laws.
The Apex Court, based its Judgment on the fact that landlord-tenant disputes are not actions in rem (action against the world at large), but pertain to subordinate rights in personam (action against a particular person) that arise from rights in rem. In other words, the court clarified that landlord – tenant disputes covered and governed by rent control legislation would not be arbitrable when a specific forum/court has been given exclusive jurisdiction to apply and decide special rights and obligations.
The Apex Court has further held that an award passed in such disputes can be executed and enforced like a decree of the civil court.
By the above Judgement, the Apex Court has overruled their dictum in the matter of Himangni Enterprises vs Kamaljeet Singh Ahluwalia, which had earlier held that disputes under the Transfer of Property Act, 1882 (\"TOPA\") are not arbitrable.
Key areas/observations addressed through this judgement
A) Landlord – tenant disputes arbitrable:
Landlord-tenant disputes do not have an erga omnes effect (erga omnes means rights or obligations which are owed towards public at large affect), or require centralised adjudication, hence arbitrable.
The provisions of TOPA do not expressly or by necessary implication bar arbitration. The only exception being such landlord-tenant disputes which are covered and governed by special rent control legislation (like in Mumbai for e.g. we have the Small Causes Court) would not be arbitrable, when specific court or forum has been given exclusive jurisdiction to apply and decide special rights and obligations.
B) Four-fold test to determine arbitrability of dispute:
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;
When cause of action and subject matter of the dispute affects third party rights; require centralized adjudication, and mutual adjudication would not be appropriate and enforceable;
- when cause of action and subject matter of the dispute relates to sovereign and public interest functions of the State and hence mutual adjudication would be unenforceable and
- When the subject-matter of the dispute is expressly, or by necessary implication non-arbitrable as per mandatory statute/s.
The Apex Court clarified that above 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 that 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.
C) Who decides arbitrability?
The Apex Court in the above Judgment has also ruled that following the doctrine of competence-competence (competence-competence doctrine means when an arbitral tribunal has jurisdiction to consider and decide any disputes regarding its own jurisdiction), it is the arbitral tribunal that is the preferred first authority to determine and decide all questions of non-arbitrability.
The second look on aspects of non-arbitrability, post the award in terms of the provisions of challenge to an award under the Arbitration Act, 1996 as amended (\"Act\") is with the court. The court as a thumb rule should refer a matter to arbitration, if the validity of the arbitration agreement cannot be determined, least to say when in doubt, do refer the matter to arbitration' – as a thumb rule as held in the Judgement.
D) Whether allegations of fraud arbitrable?
One of the other observations made in the above Judgement by the Apex Court is that allegations of fraud can be made a subject matter of arbitration when they relate to a civil dispute. Court reiterated its earlier position taken that is not open to a party to resist arbitration by taking bald pleas of fraud.
By this above judgement the Apex Court has also overruled the ratio laid down in N. Radhakrishnan v Maestro Engineers where it had held that where fraud is involved in any dispute the matter cannot be referred to arbitration.
E) Whether disputes under the debt recovery laws are arbitrable?
The Apex Court has held that disputes which are to be adjudicated by the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 ("DRT Act") Act are not arbitrable and thus setting aside the Full Bench decision in the case of HDFC Bank Ltd v Satpal Singh Bakshi, which had held that such disputes were arbitrable.
The above Judgement on the other hand, may also have some confusion on the arbitration mechanism available to banks and NBFCs as discussed below.
Judgement's impact on landlords and tenants
The above Judgment comes as a respite for both landlords and tenants, thus having the disputes adjudicated in a faster manner. This also ends the ambiguity which was caused by the Apex Court in its earlier judgment of Himangni Enterprises case, which had held that tenancy disputes can only be resolved in civil courts and not by way of arbitration. Disputes concerning the recovery of rent, sufficiency or refund of a security deposit, or anything specifically arising from action by both parties to a lease deed is now thus arbitrable.
By now having the matter decided by an arbitrator, the process of adjudication can take anywhere between eighteen– twenty-four months, or less depending on the complexity of the case, unlike any civil suit which usually takes six – seven years for the final decision, subject to appeal etc. Once again the Apex Court has taken a pro-arbitration stance.
On one hand the Apex Court has widened the scope of tenancy disputes, certain kinds of tenancy disputes, however certain matters will still continue to remain outside the scope of arbitration and parties will have to approach a civil court for their adjudication, say for e.g., disputes affecting third party interest (like disputes in case of mortgage deeds etc) those disputes would still not be arbitrable.
The Apex Court in its more recent judgment of Suresh Shah Vs. Hipad Technology India Private Limited has also reiterated that the lease/tenancy matters which are not governed under the special statutes, but under TOPA, are arbitrable.
Impact on pending lawsuits and pending legal proceedings
In our view it will be really interesting to see the effect of the above Judgment, where in pending matters for landlord tenant disputes, or fraud related matters, where parties may file an application before the court/ and or any judicial authority and request that the matter be referred to arbitration.
The court/judicial authority will then have to apply the four-point test (which is not watertight compartments) as mentioned above and see, whether the arbitration agreement was in writing? Whether the arbitration agreement was contained in exchange of letters, telecommunication etc? Whether the core contractual ingredients, qua the arbitration agreement were fulfilled? On rare occasions, whether the subject-matter of dispute is arbitrable? If in doubt the court/ judicial authority, shall follow the thumb rule held in the Judgement, viz when in doubt refer the matter to arbitration.
Matters related to fraud and addressing issues related to fraud
The uncertainties regarding arbitrability of fraud claims before an arbitral tribunal has seen a long-drawn battle before the Apex Court and various other High Courts for quite some time now. For easy reference and quick recap for the readers we list down in a tabular format the most important "fraud arbitrability" related judgements and its journey so far: -
To sum up going forward courts/judicial authorities in order to address this issue will refuse to refer matters relating to fraud for arbitration only when:
- in a clear case where the arbitration clause, or agreement itself cannot be said to exist; or
- If allegations are made against the State, or its instrumentalities of arbitrary, fraudulent, or malafide conduct which requires a public enquiry.
In fact, on November 4, 2020 the President of India has also promulgated Arbitration and Conciliation (Amendment) Ordinance, 2020 to further amend the Act, wherein, the Ordinance ensures that all the stakeholders get an opportunity to seek unconditional stay of enforcement of arbitral awards where the underlying arbitration agreement, or making of the arbitral award is induced by fraud, or corruption.
An overview on of non-arbitrable disputes
Insolvency matters; guardianship matters; grant and issue of patents and registration of trademarks; criminal cases; matrimonial disputes relating to the dissolution of marriage, restitution of conjugal rights and probate, testamentary matters.
Impact of the judgement on matters related to banking, NBFCs and intra – company disputes
In its Judgement, the Apex Court found that banks and financial institutions covered under the DRT Act have specific rights including the modes of recovery specified in the DRT Act. Therefore, it has held that the claims covered by the DRT Act are non-arbitrable.
No doubt banks and NBFCs have been resorting to arbitration as it is a quicker form of dispute resolution. However, in our view, this ruling may see further litigations and may create confusion amongst banks and NBFC's, qua their rights under the arbitration regime.
Therefore, this issue of banks/NBFC's rights under arbitration regime may need some attention from the Apex Court going forward in order to avoid ambiguity in the pending arbitrations filed by Banks and NBFCs.
For intra-company disputes, the Judgement states that they are rights in rem. However, the Apex Court in its Judgement has with an all-encompassing brush, tried to make observations thereby, indirectly making the entire category of intra-company disputes non-arbitrable, this finding in our view may going forward have some amount of ambiguity as there could be certain subset of intra-company disputes which could be arbitrable.
Originally Published by LawStreetIndia
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