Vidya Drolia v. Durga Trading
CA No. 2402 of 2019
- A Tenancy Agreement was entered into between the landlord's predecessor-in-title (Shree Bajrang Land & Trading Company) and the tenant (Appellants) on February 02, 2006 in respect of certain go- down and other structures.
- The subsequent landlord, after the expiry of the tenancy agreement, sent a notice asking the tenant to vacate the premises and the tenant refused to vacate the premises, the Respondent-Landlord filed an Application before the Calcutta High Court (HC) for appointment of an Arbitrator, as per the Tenancy Agreement.
- HC ruled in favor of the Respondent and appointed an Arbitrator and put down the issue of arbitrability raised by the Appellant. During the pendency of the above case before the HC, the SC passed an Order in the case of Himangni Enterprises v. Kamaljeet Singh Ahluwalia1, which held that Tenant-Landlord disputes are not arbitrable.
- SC doubted the view expressed by the Court in the case of Himangni Enterprises and therefore referred the same for decision and authoritative pronouncement by a larger bench.
Issues at hand?
- Issue 1: Whether disputes which are to be adjudicated by Debt Recovery Tribunal's (DRT) are arbitrable or not?
- Issue 2:
- Meaning of non-arbitrability and when is the subject matter of the dispute not capable of being resolved through arbitration?
- 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?
Decision of the Court
- SC overruled Delhi HC Judgment in HDFC Bank Ltd v. Satpal Singh Bakshi2 which held that decision of the DRT deciding a particular claim can never be 'right in rem' and is a 'right in personam' as it decides the individual case and claim before it with no elements of any public interest. The Court held that there is a prohibition against waiver of jurisdiction of the DRT by necessary implication while placing reliance on the judgements passed by the HC in the case of Himangni Enterprises and Transcore v. Union of India3. It was further held that it is a well settled fact that the DRT Act is a complete code by itself as far as recovery of debt is concerned and the doctrine of election to select arbitration as a dispute resolution mechanism by mutual agreement is available only if the law accepts existence of arbitration as an alternate remedy and freedom to choose is available.
- The SC while disagreeing with the HC ruling observed that the 'decision in HDFC Bank Ltd holds that only actions in rem are non-arbitrable, which as elucidated above is the correct legal position. However, non-arbitrability may arise in case the implicit prohibition in the statute, conferring and creating special rights to be adjudicated by the courts/public fora, which right including enforcement of order/provisions cannot be enforced and applied in case of arbitration. To hold that the claims of banks and financial institutions covered under the DRT Act are arbitrable would deprive and deny these institutions of the specific rights including the modes of recovery specified in the DRT Act. Therefore, the claims covered by the DRT Act are non-arbitrable as there is a prohibition against waiver of jurisdiction of the DRT by necessary implication. Disagreeing with the HC ruling, the Bench observed that there is a prohibition against waiver of jurisdiction of the DRT by necessary implication. The legislation has overwritten the contractual right to arbitration.'
- SC largely relied upon the landmark decision in the case of Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd & Ors4 and distinguished between issues which are arbitrable and which are not arbitrable on the basis of 'right in rem' and 'right in personam', as well as a third category, which is 'right in personam rising from right in rem'.
- In this case, 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, 1882. SC held that though the Delhi Rent Act is not applicable, it does not follow that the Arbitration Act would be applicable so as to confer jurisdiction on the Arbitrator. 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.
- SC in the present case observed 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. 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.'
- Basis the above, SC vide the present judgment overruled the ratio laid down in Himangni Enterprises and held 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.
- SC in this case laid down a four-fold test for determining when the subject matter of a dispute in an arbitration agreement is not arbitrable:
- 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, have erga omnes effect, require centralized adjudication and mutual adjudication would not be appropriate and enforceable.
- 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.
- When the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s).
- SC further stated 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.'
- SC vide this judgement also provided few instances of disputes which are non-arbitrable, such as:
- Insolvency or intra-company disputes which are to be adjudicated by the court or a special forum, which would be more efficient and has complete jurisdiction to efficaciously and fully dispose of the entire matter.
- Grant and issue of patents and registration of trademarks which are exclusive matters falling within the sovereign or government functions and have erga omnes effect.
- Criminal cases as they relate to sovereign functions of the State.
- Matrimonial disputes relating to the dissolution of marriage, restitution of conjugal rights etc. as they fall within the ambit of sovereign functions and do not have any commercial and economic value.
- Matters relating to probate, testamentary matter etc. are actions in rem and are a declaration to the world at large and hence are non-arbitrable.
- Further, SC vide this judgement has observed that the issue of non-arbitrability can be raised at three stages:
- Before the Court on an application for reference under Section 11 of the Arbitration and Conciliation Act or for stay of pending judicial proceedings and reference under Section 8 of the Arbitration and Conciliation Act.
- Before the arbitral tribunal during the course of the arbitration proceedings.
- Before the court at the stage of the challenge to the award or its enforcement.
- After a detailed discussion on the issue of who decides non-arbitrability, SC was of the view that the question 'Who decides Arbitrability?' can be crystallized as under:
- Ratio of the decision in Patel Engineering Ltd5 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 October 23, 2015) and even post the amendments vide Act 33 of 2019 (with effect from August 09, 2019), is no longer applicable.
- 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.
- 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 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.
- Rarely as a demurrer the court may interfere at the Sections 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.
- Accordingly, SC held that in view of the fact that the Arbitral Tribunal is hearing the matter, the issue of arbitrability is left to the Tribunal to decide and come to a conclusion on the same. SC further held that the parties are at liberty to execute or challenge the award in accordance with law.
The SC rightly held while overruling the full bench decision of the Delhi HC observed that the disputes which are to be adjudicated by the DRT under the DRT Act are non-arbitrable as the claims of banks and financial institutions covered under the DRT act are arbitrable would deprive and deny the institutions of the specific rights including the modes of recovery as specified in the DRT Act.
The Judgement authoritatively and wholesomely settles an age- old dispute and also lays down important legal principles, which can be applied in general whenever a question of arbitrability or non-arbitrability may arise for decision of Courts in future. The Judgement very succinctly holds the principles as well as the exceptions to same thereby affirming the view that no guidelines or tests are final in nature and they only throw light on the probabilities based on which a decision can be arrived at..
1. (2017) 10 SC 706
2. (2002) 4 SC 275
3. (2004) 4 SC 311
4. (2011) 5 SCC 532
5. AIR 2006 SC 4
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